Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
February 3, 1999 0-21845
Date of report (Date of earliest event reported) Commission File Number
Wilshire Financial Services Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 93-1223879
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification
Number)
1776 SW Madison Street, Portland, OR 97205
(Address of principal executive offices)(Zip
Code)
(503) 223-5600
Registrant's telephone number, including area code
Not Applicable
(Former name or former address, if changed since last report)
<PAGE>
Item 5. OTHER EVENT.
Wilshire Financial Services Group Inc. (the "Company") announced on
February 2, 1999 that it has initiated solicitation of its previously announced
restructuring plan. The Company sent its shareholders and noteholders a
Solicitation and Disclosure Statement to gain approval by its noteholders of a
prepackaged plan of reorganization.
The Company's notes, totaling approximately $184 million, consist of 13%
Notes due 2004 and 13% Series B Notes due 2004.
The restructuring will only affect the public parent company, Wilshire
Financial Services Group, and will not affect any of the daily operations of
the Company's subsidiaries, including Wilshire Funding Corporation, Wilshire
Servicing Corporation and Wilshire's European operations. The plan does not
change the payment terms for any creditors of the Wilshire companies other than
the noteholders and accordingly, payments to lenders and trade creditors will
continue in the ordinary course of business. The plan also resolves all
outstanding obligations between the Company and Wilshire Real Estate Investment
Trust Inc., a separate public company, and does not otherwise affect Wilshire
Real Estate Investment Trust in any manner.
The Company developed the plan with the support of an informal committee
of noteholders representing more than 50% of the outstanding principal amount of
the notes, their advisors Houlihan Lokey Howard & Zukin, and their attorneys,
Latham & Watkins. Under the plan, the noteholders of record as of January 20,
1999 will vote to exchange the notes into 100% of the common stock of the
reorganized company and to reallocate the noteholders' stock so that the current
shareholders may receive up to 0.5% of the outstanding shares of the new common
stock in lieu of their present stock. The plan also provides for the acquisition
of the loan servicing assets of Wilshire Credit Corporation, a private company.
The noteholders will be asked to return their ballots by March 1, 1999.
Details of the solicitation were provided to current holders of the Company's
common stock for their information only, as they do not need to vote on the
proposal.
The Company then expects to file the plan with the U.S. Bankruptcy Court
for the District of Delaware for approval by the end of the first quarter. The
Company expects to complete its restructuring by the end of the first quarter.
There can be no assurance, however, that the plan will be completed within that
time frame or on the proposed terms.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements so long as those statements are identified
as forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in such statements. All of the statements
contained in this release which are not identified as historical should be
considered forward-looking. In connection with certain forward-looking
statements contained in this release and those that may be made in the future by
or on behalf of the Company which are identified as forward-looking, the Company
notes that there are various factors that could cause actual results to differ
materially from those set forth in any such forward-looking statements. Such
factors include, but are not limited to, the real estate market, the
availability of pools of loans at acceptable prices, the availability and
conditions of financing for loan pool acquisitions and mortgage-backed
securities, interest rates and overseas expansion. Accordingly, there can be no
assurance that the forward-looking statements contained in this release will be
realized or that actual results will not be significantly higher or lower.
Readers of this release should consider these facts in evaluating the
information contained herein. The inclusion of the forward-looking statements
contained in this release should not be regarded as a representation by the
Company or any other person that the forward-looking statements contained in
this release will be achieved. In light of the foregoing, readers of this
release are cautioned not to place undue reliance on the forward-looking
statements contained herein.
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
The following exhibits are filed as part of this report:
99.1 Solicitation and Disclosure Statement Dated February 1, 1999
99.2 Form of Plan of Reorganization
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WILSHIRE FINANCIAL SERVICES
GROUP INC.
Date: February 3, 1999 By: /s/ Lawrence A. Mendelsohn
Lawrence A. Mendelsohn
President
By: /s/ Chris Tassos
Chris Tassos
Executive Vice President and
Chief Financial Officer
<PAGE>
SOLICITATION AND DISCLOSURE STATEMENT DATED FEBRUARY 1, 1999
NO BANKRUPTCY CASE HAS BEEN FILED AS OF THE DATE HEREOF
WILSHIRE FINANCIAL SERVICES GROUP INC.
Solicitation of Votes with Respect
to Prepackaged Plan of Reorganization (the "Plan") of
Wilshire Financial Services Group Inc.
Wilshire Financial Services Group Inc. ("WFSG" or the "Company") hereby
solicits votes with respect to the Plan which provides, among other things, for
the debt securities of WFSG to be exchanged for the consideration set forth
below (the "Solicitation"). The term "Reorganized WFSG" or the "Reorganized
Company" means Wilshire Financial Services Group Inc. from and after the
Effective Date (as defined below) of the Plan. Capitalized terms used herein,
but not defined herein, will have the meanings ascribed to such terms in the
Plan.
Each Holder of: Will Receive:
WFSG's 13% Notes due 2004 If WREP (as defined below) funds 100% of
(CUSIP 971867 AA4) (the "Notes") the DIP Facility (as defined below),
and WFSG's 13% Series B Notes each Holder (as defined below) will
due 2004 (CUSIP 971867 AE6) (the receive its Pro Rata portion (sharing
"Series B Notes" and, together with with all other such Holders) of shares
the Notes, the "Old Notes") of $0.01 par value common stock of
Reorganized WFSG (the "New Common
Stock") equivalent to 100.0% of the New
Common Stock to be outstanding on the
Effective Date (108.551 shares of New
Common Stock per $1,000 principal amount
of Old Notes), less the number of shares
(not in excess of 0.5% of such New
Common Stock) reallocated to Holders of
Interests represented by the outstanding
shares of common stock of the Company
pursuant to the Market Liquidity
Reallocation (as defined below) to
foster the development of, and improve
conditions in, the trading market for
the New Common Stock. If WREP does not
fund the full amount of the DIP
Facility, the shares of New Common Stock
to be distributed to Holders of the Old
Notes will be reduced, but in no event
will the shares of New Common Stock
available be less than 91.528% of the
New Common Stock to be outstanding on
the Effective Date (99.354 shares of New
Common per $1,000 principal amount of
Old Notes), less the number of shares
reallocated pursuant to the Market
Liquidity Reallocation. See "Description
of New Common Stock."
Outstanding shares of Common The Holders of Interests represented by
Stock, $0.01 par value, of WFSG the outstanding shares of the Old Common
(the "Old Common Stock") Stock will neither receive nor retain
any property under the Plan and are
therefore deemed to reject the Plan.
Pursuant to the Market Liquidity
Reallocation, however, such Holders will
receive Pro Rata a reallocated amount of
New Common Stock not in excess of 0.5%
of the New Common Stock outstanding on
the Effective Date which would have
otherwise been distributed to Holders of
the Old Notes who accept the Plan. The
maximum amount of New Common Stock to be
reallocated pursuant to the Market
Liquidity Reallocation described above
will be reduced if WREP does not fund
the full amount of the DIP Facility.
- --------------------------------------------------------------------------------
THE DEADLINE BY WHICH EACH HOLDER OF OLD NOTES MUST CAST ITS BALLOT FOR VOTING
ON THE PLAN IS 5:00 P.M., NEW YORK CITY TIME, ON MONDAY, MARCH 1, 1999, UNLESS
EXTENDED.
<PAGE>
WFSG believes that the Plan is in the best interests of Holders of the Old
Notes. Accordingly, Holders of the Old Notes are urged to vote in favor of the
Plan. Voting instructions are set forth on the Ballots accompanying this
Solicitation Statement. To be counted, your Ballot must be duly completed,
executed and actually received by the Information Agent (as defined below) no
later than 5:00 p.m., New York City time, on Monday, March 1, 1999 (the "Voting
Deadline"). The Holders of Old Notes are encouraged to read and consider
carefully this entire Solicitation Statement, including the Plan of
Reorganization attached hereto as Exhibit I and the matters described in this
Solicitation Statement under "Certain Risk Factors," prior to voting.
To the extent that the Solicitation is deemed to result in offers of new
securities that are not exempted by Section 1145(a) of the Bankruptcy Code (as
defined below), they are being made by the Company in reliance upon the
exemptions from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Sections 4(2) and 3(a)(9) thereof
and, to the extent applicable, Regulation D thereunder. The Company will not pay
any commission, or other remuneration to any broker, dealer, salesman or other
person for soliciting acceptances of the Plan. Regular employees of the Company,
who will not receive additional compensation therefor, may solicit acceptances
of the Plan.
If you are not an "accredited investor," as defined in Regulation D
promulgated under Section 4(2) of the Securities Act (an "Accredited Investor"),
a "purchaser representative," as defined in Regulation D, is being provided to
you, without expense to you, to assist you in evaluating the risks and merits of
the transactions contemplated by the Plan. Specifically, you may contact Black &
Company, Inc., which has agreed to act as "purchaser representative" to assist
Holders of Old Notes to evaluate the risks and merits of the transactions
contemplated by the Plan at the Company's expense and without charge to any
Holder of Old Notes. Black & Company, Inc. can be reached at One S.W. Columbia,
Suite 11200, Portland, Oregon 97258, Attention: Scott Baines, Telephone: (503)
248-9600, Facsimile: (503) 248-7500. Alternatively, you may retain a different
"purchaser representative" at your own expense.
BECAUSE NO CASE UNDER CHAPTER 11 OF THE BANKRUPTCY CODE HAS BEEN COMMENCED,
THIS SOLICITATION STATEMENT HAS NOT BEEN APPROVED BY ANY BANKRUPTCY COURT WITH
RESPECT TO WHETHER IT CONTAINS ADEQUATE INFORMATION WITHIN THE MEANING OF
SECTION 1125 OF THE BANKRUPTCY CODE. NONETHELESS, IF A REORGANIZATION CASE IS
SUBSEQUENTLY COMMENCED, WFSG EXPECTS TO SEEK PROMPTLY AN ORDER OF THE BANKRUPTCY
COURT FINDING THAT THE SOLICITATION OF VOTES ON THE PLAN BY MEANS OF THIS
SOLICITATION STATEMENT WAS IN COMPLIANCE WITH SECTION 1125 OR 1126(b) OF THE
BANKRUPTCY CODE AND TO SEEK CONFIRMATION OF THE PLAN AT A CONFIRMATION HEARING
PURSUANT TO SECTION 1129 OF THE BANKRUPTCY CODE. IF THE PLAN IS NOT ACCEPTED BY
THE HOLDERS OF OLD NOTES (CLASS 6) SOLICITED HEREBY, WFSG MAY ELECT NOT TO
COMMENCE THE REORGANIZATION CASE (AS DEFINED BELOW) OR, ALTERNATIVELY, MAY
COMMENCE A CASE UNDER CHAPTER 11 OF THE BANKRUPTCY CODE AND SEEK CONFIRMATION OF
THE PLAN NOTWITHSTANDING THE REJECTION OF THE DISSENTING CLASSES OR MAY PROPOSE
AN ALTERNATIVE PLAN.
WFSG has not commenced a case (a "Reorganization Case") under chapter 11
title 11, United States Code (the "Bankruptcy Code") at this time. This
Solicitation Statement constitutes a disclosure statement pursuant to Section
1125 or Section 1126(b) of the Bankruptcy Code. The Solicitation is being
conducted at this time in order to obtain a sufficient number of acceptances
before the filing of a voluntary petition for reorganization under chapter 11 of
the Bankruptcy Code by WFSG. WFSG anticipates that by conducting the
Solicitation in advance of such filing, the pendency of the bankruptcy
proceeding will be significantly shortened and its administration will be
significantly simplified and less costly. This Solicitation Statement solicits
acceptances of the Plan and contains information relevant to a decision to
accept or reject the Plan.
SEE "CERTAIN RISK FACTORS" HEREIN FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT DECISION.
The Plan has been developed in the course of negotiations with an informal
committee of Holders of the Old Notes (the "Unofficial Noteholders' Committee").
See "The Plan of Reorganization -- Introduction." The Unofficial
(ii)
<PAGE>
Noteholders' Committee consists of (i) Capital Research and Management Company,
on behalf of various funds, (ii) Capital Guardian Trust Company, on behalf of
various funds, (iii) American Express Financial Corporation, as investment
advisor to various mutual funds, and (iv) Ryback Management Corporation, which
collectively hold, manage or represent approximately 51.7% of the aggregate
principal amount outstanding of the Old Notes. The members of the Unofficial
Noteholders' Committee and Wilshire Real Estate Investment Trust Inc. ("WREIT")
have agreed to support the Plan and to cooperate to obtain confirmation and
consummation of the Plan and together hold, manage, or represent approximately
62.5% of the aggregate principal amount of the Old Notes outstanding.
THE BOARD OF DIRECTORS OF WFSG UNANIMOUSLY HAS APPROVED THE TERMS OF THE
PLAN AND RECOMMENDS THAT THE HOLDERS OF OLD NOTES VOTE TO ACCEPT THE PLAN. THE
MEMBERS OF THE UNOFFICIAL NOTEHOLDERS' COMMITTEE HAVE UNANIMOUSLY APPROVED THE
PLAN AND AGREED TO SUPPORT THE PLAN AND RECOMMEND THAT THE OTHER HOLDERS OF OLD
NOTES SUPPORT THE PLAN.
Questions and requests for assistance or additional copies of this
Solicitation Statement may be directed to the Information Agent, as set forth
herein under "The Plan of Reorganization -- Voting and Confirmation of the Plan
- -- Information Agent."
AVAILABLE INFORMATION
IMPORTANT - PLEASE READ
HOLDERS OF THE OLD NOTES AND THE OLD COMMON STOCK SHOULD NOT CONSTRUE THE
CONTENTS OF THIS SOLICITATION STATEMENT AS PROVIDING ANY LEGAL, BUSINESS,
FINANCIAL OR TAX ADVICE AND SHOULD CONSULT WITH THEIR OWN ADVISORS.
THIS OFFER OF NEW COMMON STOCK IN EXCHANGE FOR THE CANCELLATION OF CERTAIN
EXISTING DEBT SECURITIES PREVIOUSLY ISSUED BY WFSG HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OR SIMILAR STATE SECURITIES OR "BLUE SKY" LAWS. THE
SOLICITATION IS BEING MADE IN RELIANCE ON SECTION 1145(a) OF THE BANKRUPTCY
CODE. TO THE EXTENT THAT THE SOLICITATION IS DEEMED TO RESULT IN OFFERS OF NEW
SECURITIES THAT ARE NOT EXEMPTED BY SECTION 1145(a) OF THE BANKRUPTCY CODE, THEY
ARE BEING MADE BY THE COMPANY IN RELIANCE ON THE EXEMPTIONS FROM REGISTRATION
SPECIFIED IN SECTIONS 3(a)(9) AND 4(2) OF THE SECURITIES ACT AND TO THE EXTENT
APPLICABLE, REGULATION D THEREUNDER. THE COMPANY, THEREFORE, WILL NOT PAY ANY
COMMISSION OR OTHER REMUNERATION TO ANY BROKER, DEALER, SALESPERSON, AGENT OR
OTHER PERSON FOR SOLICITING TENDERS OF THE OLD NOTES. REGULAR EMPLOYEES OF THE
COMPANY, WHO WILL NOT RECEIVE ADDITIONAL COMPENSATION THEREFOR, MAY SOLICIT
EXCHANGES FROM HOLDERS OF THE OLD NOTES AND THE OLD COMMON STOCK. THE ISSUANCE
OF THE NEW COMMON STOCK WILL BE MADE PURSUANT TO SECTION 1145 OF THE BANKRUPTCY
CODE.
THE COMPANY HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY BROKER, SALESMAN
OR OTHER PERSON TO SOLICIT TENDERS OF THE OLD NOTES. NO PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THE OFFER OTHER THAN THOSE CONTAINED IN THIS SOLICITATION STATEMENT AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS SOLICITATION STATEMENT DOES
NOT CONSTITUTE AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN
WHICH THAT OFFER OR SOLICITATION WOULD BE UNLAWFUL AND THE COMPANY WILL NOT
ACCEPT VOTES ON THE PLAN FROM HOLDERS OF THE OLD NOTES IN ANY JURISDICTION IN
WHICH THE SOLICITATION OF THE PLAN WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR "BLUE SKY" LAWS OF SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
SOLICITATION STATEMENT NOR ANY DISTRIBUTION OF
(iii)
<PAGE>
SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
OR IN THE AFFAIRS OF WFSG SINCE THE DATE HEREOF. ANY ESTIMATES OF CLAIMS (AS
DEFINED IN THE PLAN) AND INTERESTS (AS DEFINED IN THE PLAN) SET FORTH IN THIS
SOLICITATION STATEMENT MAY VARY FROM THE FINAL AMOUNTS OF CLAIMS OR INTERESTS
ALLOWED BY THE BANKRUPTCY COURT.
THE NEW COMMON STOCK TO BE ISSUED ON THE EFFECTIVE DATE HAS NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR
BY ANY STATE SECURITIES COMMISSION OR SIMILAR PUBLIC, GOVERNMENTAL OR REGULATORY
AUTHORITY, AND NEITHER THE SEC NOR ANY SUCH AUTHORITY HAS PASSED UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS SOLICITATION STATEMENT
OR UPON THE MERITS OF THE PLAN. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The ballots being solicited hereby will not be used by WFSG for any purpose
other than as votes to accept or reject the Plan (and any permitted modified
version thereof) under chapter 11 of the Bankruptcy Code.
The statements contained in this Solicitation Statement are made as of the
date hereof or as of the date indicated, and neither the delivery of this
Solicitation Statement nor the distribution to be made pursuant to the Plan
will, under any circumstances, create any implication that the information
contained herein is correct at any time subsequent to such dates.
Any statement or other information which is contained in a document
incorporated by reference in this Solicitation Statement (and/or incorporated by
reference in any exhibit hereto) will be deemed to be modified or superseded for
purposes of the Solicitation to the extent a statement or other information
contained in this Solicitation Statement (and/or any exhibit hereto) or
subsequent filing modifies, supersedes or replaces such statement or
information. Any such statements or information modified or superseded will not,
except as so modified or superseded, be deemed to constitute a part of this
Solicitation Statement.
WFSG is subject to the informational and reporting 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 SEC. Such reports, statements and other information, may be
inspected and copied at the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, and also should be available for
inspection and copying at the regional offices of the SEC located at World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any part of such materials may
be obtained from any such office upon payment of the fees prescribed by the SEC.
The SEC maintains an Internet Web Site that contains reports, proxy and
information statements, and other information regarding WFSG and other
registrants that file electronically with the SEC. The address of such site is:
http://www.sec.gov.
The following summarizes the treatment for creditors of WFSG under the
Plan. Estimated recoveries for Class 4 Claims are based on principal and accrued
and unpaid interest or the amount due as of an assumed Filing Date of March 3,
1999. For a complete explanation, please refer to the discussion in this
Solicitation Statement entitled "The Plan of Reorganization" and to the Plan
itself which is attached hereto as Exhibit I.
(iv)
<PAGE>
CLAIMS AGAINST AND INTERESTS IN WFSG
Estimated
Class Description Treatment Recovery
- ----- ----------- --------- ---------
N/A Administrative Claims Each Holder will be paid Cash 100%
(Unclassified) equal to the full amount of its
Claim on, or as soon as
practicable after, the later of
the Effective Date and the day
on which such Claim becomes an
Allowed Claim, unless (i) the
Holder and the Company agree to
other treatment, or (ii) an
order of the Bankruptcy Court
provides for other terms.
N/A Priority Tax Claims Each Holder will receive, at 100%
(Unclassified) the sole option of Reorganized
WFSG (i) Cash equal to the
unpaid portion of such Holder's
Claim, or (ii) equal quarterly
cash payments in an aggregate
amount equal to such Claim,
together with interest at a
fixed annual rate to be
determined by the Bankruptcy
Court or otherwise agreed to by
the Holder and Reorganized WFSG
over a period through the sixth
anniversary of the date of
assessment of such Claim, or
upon other terms approved by
the Bankruptcy Court.
1 Lender Secured Claims Unimpaired. Each Holder will be 100%
treated as follows: (a) the legal,
equitable and contractual
rights of the Holder shall be
left unaltered; or (b) (i) WFSG
shall cure any default with
respect to such Claim that
occurred before or after the
Filing Date (other than a
default of a kind specified in
Section 365(b)(2) of the
Bankruptcy Code), (ii) the
maturity of such Claim shall be
Reinstated as such maturity
existed before any such
default, (iii) the Holder shall
be compensated for any damages
incurred as a result of any
reasonable reliance by the
Holder on any right to
accelerate its Claim (as may be
determined by order of the
Bankruptcy Court) and (iv) the
legal, equitable and
contractual rights of such
Holder will not otherwise be
altered; or (c) the Claim shall
receive such other treatment to
which the Holder consents.
Class 1 is Unimpaired and,
accordingly, is not entitled to
vote on the Plan.
(v)
<PAGE>
Estimated
Class Description Treatment Recovery
- ----- ----------- --------- ---------
2 Other Secured Claims Unimpaired. Each Holder will be 100%
(other than Lender treted as follows: (a) the legal,
Secured Claims in equitable and contractual
Class 1 rights of the Holder shall be
left unaltered; or (b) (i) WFSG
shall cure any default with
respect to such Claim that
occurred before or after the
Filing Date (other than a
default of a kind specified in
Section 365(b)(2) of the
Bankruptcy Code), (ii) the
maturity of such Claim shall be
Reinstated as such maturity
existed before any such
default, (iii) the Holder shall
be compensated for any damages
incurred as a result of any
reasonable reliance by the
Holder on any right to
accelerate its Claim (as may be
determined by order of the
Bankruptcy Court) and (iv) the
legal, equitable and
contractual rights of such
Holder will not otherwise be
altered; or (c) the Claim shall
receive such other treatment to
which the Holder consents.
Class 2 is Unimpaired and
accordingly, is not entitled to
vote on the Plan.
3 Priority Claims Unimpaired. Each Holder shall 100%
be entitled to receive (a) Cash
equal to the amount of such
Claim, unless the Holder of
such Claim and Reorganized WFSG
agree to a different treatment,
on the latest of (i) the
Effective Date or as soon as
practicable thereafter, (ii)
the date such Claim becomes an
Allowed Priority Claim and
(iii) the date that such Claim
would be paid in accordance
with any terms and conditions
of any agreements or
understandings relating thereto
between WFSG and the Holder,
and/or (b) such other
treatment, as determined by the
Bankruptcy Court, required to
render such Claim Unimpaired.
Class 3 is Unimpaired and,
accordingly, is not entitled to
vote on the Plan.
(vi)
<PAGE>
Estimated
Class Description Treatment Recovery
- ----- ----------- --------- ---------
4 Noteholder Claims Impaired. If WREP funds 100% of 37% to
the DIP Facility, each Holder 42% of
will receive its Pro Rata Claim
portion of 100.0% of the New
Common Stock (i.e., 108.551 (40% to
shares of New Common Stock for 45% of
each $1,000 of principal amount principal
of Old Notes) to be issued by amount)
Reorganized WFSG on the
Effective Date, less the number
of shares (not in excess of
0.5% of such New Common Stock)
reallocated to Holders of
Interests represented by the
outstanding shares of Old
Common Stock of the Company
pursuant to the Market
Liquidity Reallocation to
foster the development of, and
improve conditions in, the
trading market for the New
Common Stock. If WREP does not
fund the full amount of the DIP
Facility, the shares of New
Common Stock to be distributed
to Holders of the Old Notes
will be reduced, but in no
event less than 91.528% of the
New Common Stock to be
outstanding on the Effective
Date (i.e., 99.354 shares of
New Common Stock for each
$1,000 of principal amount of
Old Notes), less the number of
shares reallocated pursuant to
the Market Liquidity
Reallocation, and the Holder of
the Compromised WREIT/WREP
Claim will be treated pari
passu with the Noteholder
Claims in proportion to which
the DIP Facility is not funded.
Class 4 is Impaired and,
accordingly, Holders of such
Claims will be entitled to vote
on the Plan.
5 General Unsecured Claims Unimpaired. Such Claims 100%
(other than the Unsecured (including the Compromised MLMC
Claims in Class 4) Claim and the Compromised
WREIT/WREP Claim) shall be paid
in full in Cash (with interest
to the extent required by order
of the Bankruptcy Court) on the
latest of (a) the Effective
Date, (b) the date such a Claim
becomes an Allowed Claim, (c)
the date such a Claim becomes
due and payable in the ordinary
course of WFSG's business
consistent with WFSG's ordinary
payment practices or pursuant
to any agreement between WFSG
and the Holder or (d) on such
other date as may be or have
been agreed to between WFSG and
the Holder of such Claim. Class
5 is Unimpaired and,
accordingly, is not entitled to
vote on the Plan.
(vii)
<PAGE>
Estimated
Class Description Treatment Recovery
- ----- ----------- --------- ---------
6 Interests of Holders of Impaired. Holders of Interests 0%
Old Common Stock in Class 6 will neither receive
nor retain any property under
the Plan and are therefore
deemed to reject the Plan.
Accordingly, Class 6 is not
entitled to vote on the Plan.
Pursuant to the Market
Liquidity Reallocation,
however, such Holders will
receive Pro Rata a reallocated
amount of New Common Stock, not
in excess of 0.5% of the New
Common Stock outstanding on the
Effective Date, which would
have otherwise been distributed
to the Holders of the Old Notes
who accept the Plan. The
maximum amount of New Common
Stock to be reallocated
pursuant to the Market
Liquidity Reallocation
described above will be reduced
if WREP does not fund the full
amount of the DIP Facility.
(viii)
<PAGE>
TABLE OF CONTENTS
Page
SOLICITATION STATEMENT SUMMARY...............................................1
The Company............................................................1
Recent Events..........................................................1
The Plan of Reorganization.............................................3
CERTAIN RISK FACTORS........................................................12
Highly Leveraged Position.............................................12
Risks Relating to Liquidity...........................................13
Need for Additional Financing.........................................14
Risks Related to Acquired Pools of Loans..............................14
Risks Relating to the DIP Facility....................................15
Risks Relating to the WCC Restructuring...............................16
Risks Relating to the Projections.....................................16
Assumptions Regarding Value of WFSG's and WCC's Assets................16
Disruption of Operations Relating to Bankruptcy Filing................17
Risks Related to Regulatory Matters...................................17
Substantial Variations in Quarterly Results...........................18
Investment Limitations as a Result of the Formation of WREIT..........18
Risks Related to International Servicing Operations...................18
Dependence on WCC.....................................................18
Interest Rate Sensitivity.............................................18
Business and Competition..............................................19
Nature of Mortgages...................................................19
Environmental Risks...................................................20
Certain Federal Income Tax Considerations; Reduction and Limitation
of Corporate Tax Benefits ............................................20
Certain Risks of Non-Confirmation.....................................21
Noncomparability of Historical Financial Information..................21
The Company's Employees...............................................21
Restrictions on Resale of Securities of the Reorganized Company.......21
Lack of Trading Market; Volatility....................................22
THE PLAN OF REORGANIZATION..................................................22
Introduction..........................................................22
Overview of the Plan .................................................25
Treatment of Claims and Interests Under the Plan .....................28
Classified Claims Against and Interests In WFSG ......................30
Cramdown..............................................................33
Sources of Cash to Make Plan Distributions ...........................33
Conditions Precedent to Confirmation and Consummation of the Plan ....33
Waiver of Conditions to Confirmation and Effective Date ..............34
Modification or Revocation of the Plan; Severability .................34
The Reorganized Company ..............................................35
Directors and Management of Reorganized WFSG .........................35
Certain Corporate Governance Matters .................................36
Description of WCC Restructuring......................................36
Potential Equity Investment...........................................40
Ownership Of Stock By Certain Stockholders ...........................40
Securities to be Issued and Transferred Under the Plan ...............40
Offering of New Common Stock .........................................41
Issuance of New Common Stock .........................................42
(ix)
<PAGE>
Distributions Under the Plan .........................................44
Timing and Methods of Transfer of New Common Stock ...................44
Continued Corporate Existence; Vesting of Assets in Reorganized WFSG..49
Cancellation of Old Notes and Related Agreements .....................50
Preservation of Rights of Action Held by WFSG or Reorganized WFSG.....50
Discharge of Claims and Termination of Interests; Related Injunction..50
Releases..............................................................51
Brokerage Firms, Banks and Other Nominees ............................51
Securities Clearing Systems...........................................52
Voting Deadline and Extensions........................................52
Withdrawal of Votes on the Plan.......................................52
Acceptance or Cramdown................................................53
Chapter 7 Liquidation Analysis........................................54
Alternatives if the Plan is Not Confirmed and Consummated.............61
Recommendation and Conclusion.........................................61
SELECTED HISTORICAL FINANCIAL INFORMATION...................................62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................67
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS....................88
PROJECTED FINANCIAL INFORMATION.............................................89
PRICE RANGE OF COMMON STOCK ................................................96
BUSINESS....................................................................97
DESCRIPTION OF WCC.........................................................111
MANAGEMENT.................................................................119
DESCRIPTION OF INDEBTEDNESS................................................130
DESCRIPTION OF OLD EQUITY SECURITIES.......................................134
DESCRIPTION OF NEW COMMON STOCK............................................135
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS..................................136
INDEX TO THE FINANCIAL STATEMENTS..........................................F-1
(x)
<PAGE>
EXHIBIT
Exhibit I Plan of Reorganization of Wilshire Financial Services Group Inc.
Under chapter 11 of the Bankruptcy Code
(xi)
<PAGE>
SOLICITATION STATEMENT SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto), appearing elsewhere in this
Solicitation Statement.
The summaries of the Plan and other documents contained in this
Solicitation Statement are qualified in their entirety by reference to the Plan
itself, the exhibits thereto, and all documents described herein and therein.
The information contained in this Solicitation Statement, including the
information regarding the history, businesses and operations of WFSG, the
projected financial information of WFSG (including the projected results of
operations of the Reorganized Company, which include the operations previously
conducted by WCC), and the liquidation analysis relating to WFSG, is included
herein for purposes of soliciting acceptances of the Plan. As to contested
matters, however, such information is not to be construed as admissions or
stipulations, but rather as statements made in settlement negotiations.
Throughout this Solicitation Statement, the Company has assumed March 3,
1999 to be the date of the filing of the petition commencing the Reorganization
Case (the "Filing Date") and April 12, 1999 to be the effective date of the Plan
(the "Effective Date"). The Company intends to move as quickly as possible to
solicit acceptances of the Plan prior to the Filing Date and to obtain
Confirmation of the Plan as soon as possible after the Filing Date. The actual
Filing Date and the actual Effective Date may be different than the dates
assumed herein.
This Solicitation Statement hereby incorporates by reference all existing
reports filed by the Company pursuant to the Exchange Act prior to the date of
this Solicitation Statement. All existing reports and definitive proxy or
information statements filed by the Company pursuant to Sections 13(a), 13(c),
14 and 15(d) of the Exchange Act subsequent to the date of this Solicitation
Statement shall also be deemed to be incorporated by reference. Any statement or
other information which is contained in a document incorporated by reference in
this Solicitation Statement (and/or incorporated by reference in any exhibit
hereto) will be deemed to be modified or superseded for purposes of the
Solicitation to the extent a statement or other information contained in this
Solicitation Statement (and/or any exhibit hereto) or subsequent filing
modifies, supersedes or replaces such statement or information. Any such
statements or information modified or superseded will not, except as so modified
or superseded, be deemed to constitute a part of this Solicitation Statement.
The Company
WFSG is a diversified financial services company. The Company conducts
business in the U.S. and Europe, specializing in acquisitions of loan portfolios
and mortgage-backed securities, securitization, correspondent lending and
servicing. The Company offers wholesale banking through its subsidiary, First
Bank of Beverly Hills, F.S.B. ("First Bank"). First Bank is a federally
chartered savings institution regulated by the Office of Thrift Supervision
("OTS") with one branch and a merchant bankcard processing center in Southern
California. WFSG's common stock is listed on the Nasdaq Stock Market.
Administrative headquarters of the Company and First Bank are located at 1776
S.W. Madison, Portland, Oregon 97205. The Company's telephone number is (503)
223-5600.
Recent Events
Beginning in August 1998, and more significantly since October 12, 1998,
and continuing to the present, the Company has been significantly and negatively
impacted by various market factors. These factors, which are discussed further
below, resulted in a dramatic reduction in market valuations (as determined by
the Company's lenders) for certain of the Company's mortgage-backed securities
and other assets, as well as a reduction in the availability of borrowings for
those assets and certain of the Company's loan assets, thereby reducing the
Company's liquidity.
1
<PAGE>
Turmoil in the Russian financial markets, following a prolonged period of
uncertainty in Asian financial markets, caused investors to reassess their risk
tolerance. This resulted in a dramatic movement of liquidity toward less risky
assets (e.g., U.S. Treasury instruments) and away from higher risk assets,
including most non-investment grade assets and commercial and other
mortgage-backed and asset-backed securities. This movement toward higher quality
investments dramatically reduced available liquidity to non-investment grade
assets. Without available funding sources and as a result of collateral calls,
many investors in these assets, including several well-known hedge funds, were
forced to liquidate holdings at reduced prices. With greater sales pressure and
supply outpacing demand, prices continued to fall as more lenders made
collateral calls, demanding additional collateral for their loan positions. Many
companies were rapidly depleting available cash reserves.
On October 12, 1998, another large, well-known hedge fund was liquidated.
This event triggered further collateral calls, forcing additional companies to
sell assets to cover collateral calls, and continuing the downward spiral in
prices. On October 15, 1998, the Federal Reserve lowered interest rates, largely
in response to this liquidity crisis.
During October and continuing into the month of November 1998, the Company
sold a significant amount of assets in response to the above conditions to meet
collateral calls by lenders, primarily certain affiliates of Salomon Smith
Barney, Inc, and to increase liquidity. The downward pressure on prices and the
Company's need to sell assets to meet these collateral calls resulted in the
Company disposing of certain assets for proceeds which resulted in significant
losses for the quarter and nine months ended September 30, 1998. Beginning
during the week of October 12, 1998, the Company sold, primarily as a result of
collateral calls, Discounted Loans with a carrying value of $211.8 million,
Non-Discounted Loans with a carrying value of $232.5 million and mortgage-backed
securities with carrying value of $63.3 million. Had the Company not been forced
to sell these assets, but rather held these assets until market conditions
stabilized, management believes the Company's losses would have been far less
severe. Following these asset sales and mark-to-market of certain of WFSG's
assets to reflect current market prices, WFSG had total assets and total
liabilities at October 31, 1998, of approximately $1.243 billion and $1.248
billion (including deposits at First Bank at October 31, 1998 of $523.0
million), respectively, and negative shareholders' equity of approximately $5
million.
In response to these events, the Company initiated a corporate
restructuring to improve its competitive position and its ability to execute its
business strategy in a more difficult external environment. During October 1998,
the Company made a strategic decision to eliminate its retail residential
mortgage and manufactured housing mortgage origination operations and to focus
its origination strategy on wholesale residential and commercial mortgage
origination at its thrift subsidiary. As a result of this action, the Company
has written-off approximately $1.2 million of goodwill originally established
upon acquisition of certain residential mortgage origination branches. From
August 31, 1998 through January 15, 1999, the Company reduced its workforce from
514 to 296, a significant portion of which related to the discontinued
origination activities.
While these asset sales and corporate restructuring have improved the
liquidity position and financial condition of WFSG, management concluded that
WFSG's diminished equity base was insufficient to obtain prior levels of
profitability. Further, certain of the Company's lenders have expressed concern
about continued lending given market conditions and recent losses incurred by
the Company. In order to address these liquidity concerns and improve the
Company's financial condition, management entered into discussions with the
Unofficial Noteholders' Committee which holds a majority of the Company's $184.2
million principal amount of outstanding publicly issued notes and their
financial advisors, Houlihan Lokey Howard & Zukin, Inc., and legal counselors,
Latham & Watkins, concerning a restructuring of the Company's obligations under
the notes. On November 23, 1998, following extensive discussions, the Company
and the Unofficial Noteholders' Committee agreed to a restructuring of the
Company through a prepackaged chapter 11 bankruptcy filing with a view to
enabling the Reorganized Company to continue as a going concern with adequate
capitalization. The pro forma shareholders' equity, after giving effect to the
Restructuring (as defined below) and the transfer of servicing to a subsidiary
of WFSG pursuant to the WCC Restructuring, is estimated by WFSG to be $91.5
million.
2
<PAGE>
Following the losses incurred by the Company in October and November of
1998, the Company also began discussions with a number of potential new equity
investors in order to strengthen its diminished equity base and obtain
additional capital to operate and develop the business. The Company is currently
in discussions with a number of potential investors concerning possible equity
investments in the Company. Such discussions are expected to continue during the
solicitation and the pendency of the prepackaged bankruptcy case. It is
currently anticipated that any such investments will be made after the Effective
Date and in any event would result in no less favorable treatment to the
Noteholders as compared to the Plan. There can be no assurance, however, that
any such investments will be made. See "The Plan of Reorganization -- Potential
Equity Investment."
The recent dramatic events in the financial markets has also had a
significant adverse impact on the Company's liquidity position. The significant
losses incurred by the Company and continued volatility in the mortgage-backed
securities market have resulted in the Company's lenders being reluctant to
provide new financing and many of the Company's traditional sources of liquidity
are not available to it. In the near term and during the pendency of the
bankruptcy case, the Company is expecting to finance its liquidity needs from
operations, the Interim Facility and the DIP Facility described below and from a
tax receivable resulting from the recently incurred losses. There can be no
assurance that cash flow from operations together with such facilities and the
tax receivable will be sufficient to fund operations (including collateral
calls) or that such facilities will be funded or that the tax receivable will be
received. At October 31, 1998, the Company's cash balances totaled approximately
$26.7 million and as of January 27, 1999, was $18.3 million. However, a
significant portion of this balance was held at First Bank and is generally
available for use only by First Bank; excluding balances held at First Bank and
restricted cash balances, the Company's cash balances totaled approximately $2.1
million and $5.1 million as of October 31, 1998 and January 27, 1999,
respectively.
The Plan of Reorganization
As further described elsewhere herein, the Company's management has
concluded, in light of recent market events and the Company's liquidity and
capital needs, that the best alternative for recapitalizing the Company over the
long-term and maximizing the recovery of creditors of the Company is through a
restructuring under the Plan (the "Restructuring"). As more fully set forth
below, the Plan, the principal terms of which were disclosed in WFSG's Form 10-Q
filed with the SEC on November 23, 1998, provides that (i) the holders of Old
Notes (the "Noteholders") would exchange the Old Notes for new common stock in
the Company (the "New Common Stock"); (ii) the existing equity securities of the
Company (including options, warrants or similar rights) would be extinguished;
(iii) the Noteholders would reallocate a portion of the New Common Stock (not in
excess of 0.5% thereof) to Holders of Old Common Stock to foster the development
of, and improve conditions in, the trading market for New Common Stock; and (iv)
pending consummation of the Plan, the Noteholders would forbear from declaring
certain defaults under the indentures governing the Old Notes. As a part of the
Restructuring, the Company and the Unofficial Noteholders' Committee anticipate
incorporation of servicing functions currently performed by Wilshire Credit
Corporation ("WCC"), a company owned by Andrew A. Wiederhorn and Lawrence A.
Mendelsohn in their individual capacity, into a new subsidiary of WFSG. Other
creditors, including trade creditors and secured creditors, are not expected to
be adversely affected by the Restructuring. For additional information, see "The
Plan of Reorganization -- Introduction."
The purpose of the Plan is to effect a reorganization of the capital
structure of WFSG through a prepackaged chapter 11 bankruptcy filing with a view
to enabling the Reorganized Company to continue as a going concern with adequate
capitalization. WFSG believes that the Restructuring will significantly improve
the Company's financial position and liquidity by eliminating the indebtedness
under the Old Notes by $198.8 million (including accrued interest through the
estimated Filing Date), the ongoing interest cost associated with that
indebtedness, thereby significantly increasing the Company's equity account and
by providing up to $10 million of liquidity in the aggregate under the Interim
Facility and the DIP Facility, respectively. WFSG also believes that its
creditors and equity interest holders will derive greater benefit from its
continued operation following the reorganization proposed herein than from a
liquidation or orderly sale of its businesses or assets. See "The Plan of
Reorganization -- Chapter 7 Liquidation Analysis."
3
<PAGE>
Accordingly, the Plan is designed to ensure the Reorganized Company's long-term
financial stability and economic viability for the benefit of the Company's
creditors and equity interest holders.
As of October 31, 1998, the Company had total indebtedness outstanding of
$1.216 billion, including deposits at First Bank as of October 31, 1998 of
$523.0 million. As a result of the Plan, a portion of this debt will be
impaired. If the Plan is consummated, debt with a principal balance at October
31, 1998 of $184.2 million will be converted to New Common Stock.
The Company proposes the basis of the Plan be a complete conversion to
common equity of the Old Notes and the extinguishment of the Old Common Stock.
The Plan includes a provision for reallocating to Holders of Old Common Stock
0.5% (or 1/200th) of the New Common Stock otherwise to be distributed to Holders
of Old Notes who accept the Plan (the "Market Liquidity Reallocation"). The
purpose of the Market Liquidity Reallocation is to foster the development of and
improve trading conditions in the market for New Common Stock. The Company and
the Unofficial Noteholders' Committee believe the Market Liquidity Reallocation
is in the best interests of the Holders of Old Notes.
In addition, as part of the Plan, the servicing of the Company's assets is
to be conducted by a newly formed subsidiary of the Company and not by a company
outside the corporate group. The Company's assets are currently serviced by WCC,
a company owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn, the
Company's principal shareholders (the "Principal Shareholders"). WCC was also
adversely affected by the recent market events. Accordingly, the Company entered
into concurrent negotiations with the owners of WCC and the principal creditor
of WCC, Capital Consultants, Inc., for itself and as agent for various investors
("CCI"), to incorporate the servicing operations of WCC into the WFSG group as
part of the Restructuring and resolve WCC's debt burden in a manner acceptable
to all parties. After extensive negotiations among the Company, CCI, WCC's
owners, the Unofficial Noteholders' Committee and certain other parties, on
November 23, 1998 the parties entered into a restructuring agreement dated as of
November 23, 1998 which was amended and restated as of January 19, 1999 (the
"WCC Restructuring Agreement") which provides for the restructuring of WCC's
indebtedness and the transfer of its servicing operations to a subsidiary of
WFSG. See "The Plan of Reorganization -- Description of WCC Restructuring."
In addition, prior to the solicitation the Company and the Unofficial
Noteholders Committee negotiated a compromise and settlement of a claim (the
"Compromised WREIT/WREP Claim") held by WREIT on its behalf and on behalf of its
subsidiary, Wilshire Real Estate Partnership ("WREP"), of approximately $18.4
million. Under this compromise and settlement, the Holder of the Compromised
WREIT/WREP Claim will receive new 6.00% PIK Notes due 2006 of the Reorganized
Company (the "New 6% Notes") having a principal amount equal to such claim only
to the extent WREP fully funds the DIP Facility. To the extent WREP does not
fund or only funds a portion of the DIP Facility, a proportionate amount of the
Compromised WREIT/WREP Claim will be treated pari passu with the Old Notes and
the amount of the New 6% Notes will be proportionately reduced. This compromise
and settlement was only reached after the Company had approached several well
known debtor-in-possession lenders, all of whom declined to provide such
financing on comparable terms. See "The Plan of Reorganization."
Prior to the solicitation, the Company also negotiated a compromise and
settlement of a claim by Merrill Lynch Mortgage Capital Inc. ("MLMC") of
approximately $2.6 million. The claim by MLMC (the "Compromised MLMC Claim")
arose out of WFSG's obligation to indemnify MLMC for any losses relating to a
deposit made by WFSG and funded in part by MLMC in connection with a proposed
acquisition of mortgage loans in Europe. As a result of a dispute with the
seller of such mortgage loans, such seller retained the deposit and WFSG is
pursuing its legal remedies against the seller. Under this compromise and
settlement, MLMC will receive a promissory note which provides for a series of
equal monthly cash payments of $250,000 in the aggregate equal to the amount of
such Claims (i.e. approximately $2.6 million), together with interest at 10% per
annum on the then outstanding principal amount. See "The Plan of
Reorganization."
4
<PAGE>
Other material features of the Plan are summarized below.
Interim Financing .......... In January 1999, Wilshire Acquisitions Corporation
("WAC"), a wholly-owned subsidiary of the Company,
entered into a secured interim credit facility
with WREP to borrow $5.0 million under an interim
facility to finance the Company's operations and
other general corporate purposes (the "Interim
Facility"). Subject to Bankruptcy Court approval,
the first advance under the DIP Facility referred
to below shall be used to repay the Interim
Facility together with accrued and unpaid
interest. The funding of the remainder of the
Interim Facility is subject to a number of
conditions, including WREP having sufficient
available funds to make disbursements under the
Interim Facility. There can be no assurance that
the Interim Facility will be fully funded. For
additional information with respect to the Interim
Facility, see "Existing Company Indebtedness --
Interim Facility."
Debtor in Possession
Financing ................. The Company has requested and received a
commitment for debtor in possession financing (the
"DIP Facility") in the aggregate amount of up to
$10 million from WREP. Subject to the approval of
the Bankruptcy Court, the Company will use the
funds provided by WREP under the DIP Facility to
repay the loan from WAC, which shall in turn repay
all amounts outstanding under the Interim
Facility, and to operate its business during the
pendency of the reorganization. The WREP
commitment is subject to the terms and conditions
set forth in the amended and restated letter
agreement dated as of January 19, 1999 among WREP,
WFSG and WAC (including conditions related to
WREP's liquidity and its ability to fund the DIP
Facility) and to the negotiation and execution of
definitive documentation with respect to the DIP
Facility. There can be no assurance that such
conditions will be met and that such facility will
be funded. For additional information with respect
to the DIP Facility, see "Reorganized Company
Indebtedness -- DIP Facility."
Old Notes .................. Assuming that WREP funds 100% of the DIP Facility,
and therefore that the Compromised WREIT/WREP
Claim receives the most favorable treatment
possible under the Plan, the Old Notes (including
principal and accrued interest) will be converted
into each Noteholder's Pro Rata portion (sharing
with all other such Holders) of shares of New
Common Stock equivalent to 100% of the New Common
Stock to be outstanding on the Effective Date
(i.e., 108.551 shares of New Common per $1,000
principal amount of Notes) less shares reallocated
pursuant to the Market Liquidity Reallocation. See
"Description of New Common Stock." Assuming that
WREP does not fund any portion of the DIP
Facility, and therefore that the Compromised
WREIT/WREP Claim receives the least favorable
treatment possible under the Plan, each Holder of
Old Notes will receive a Pro Rata portion of
91.528% of the New Common Stock (i.e., 99.354
shares of New Common Stock for each $1,000 of
principal amount of Old Notes) to be issued by
Reorganized WFSG on the Effective Date less shares
reallocated pursuant to the Market Liquidity
Reallocation, and the Holder of the Compromised
WREIT/WREP Claim will be treated pari passu with
the Noteholder Claims. The final number of shares
distributed to Holders of the Old Notes (subject
to the Market Liquidity Reallocation) shall vary
proportionately between the foregoing amounts
based on the percentage of the DIP Facility
provided by WREP.
Old Common Stock ........... The Holders of Interests represented by the
outstanding shares of the Old Common Stock will
neither receive nor retain any property under the
Plan and therefore are
5
<PAGE>
deemed to reject the Plan. Accordingly, Class 6
will not be entitled to vote on the Plan. All of
the Company's Old Common Stock (including options,
warrants and similar rights) shall be extinguished
under the Plan. Pursuant to the Market Liquidity
Reallocation, however, such Holders of Interests
shall receive Pro Rata a reallocated amount of New
Common Stock which would have otherwise been
distributed to the Holders of Old Notes who accept
the Plan, not to exceed 0.5% of such otherwise
distributable New Common Stock pursuant to the
Market Liquidity Reallocation. Under the Market
Liquidity Reallocation, each Holder of an Interest
in Class 6 shall receive (assuming that WREP funds
100% of the DIP Facility, and therefore that the
Compromised WREIT/WREP Claim receives the most
favorable treatment possible under the Plan), Pro
Rata a reallocated amount which would otherwise
have been distributed to Holders of the Old Notes
who accept this Plan, not in excess of 0.5% of the
New Common Stock to be outstanding on the
Effective Date. The maximum amount of New Common
Stock to be reallocated pursuant to the Market
Liquidity Reallocation described above will be
reduced in the same proportion as the New Common
Stock deliverable to Noteholders is reduced if
WREP does not fund the full amount of the DIP
Facility. The final maximum amount of shares
(subject to the Market Liquidity Reallocation)
shall vary proportionately between the foregoing
amounts based on the percentage of the DIP
Facility provided by WREP. See "Description of the
New Common Stock".
Each Holder will Receive Under the
For Each $1,000 Principal Amount Plan and Without Giving Effect to the
or per 100 Shares, as Applicable, of Market Liquidity Reallocation:
- ------------------------------------- -------------------------------------
Old Notes............................ Assuming that WREP funds 100% of the
DIP Facility, 108.551 shares of New
Common Stock. Assuming that WREP does
not fund any portion of the DIP
Facility, 99.354 shares of New Common
Stock.
Old Common Stock .................... Nothing.
Each Holder will Receive Under the
For Each $1,000 Principal Amount Plan and After Giving Full Effect to
or per 100 Shares, as Applicable, of: the Market Liquidity Reallocation:
- ------------------------------------- -------------------------------------
Old Notes............................ Assuming that WREP funds 100% of the
DIP Facility, 108.008 shares of New
Common Stock. Assuming that WREP does
not fund any portion of the DIP
Facility, 98.899 shares of New Common
Stock.
Old Common Stock .................... Assuming that WREP funds 100% of the
DIP Facility, 0.916 shares of New
Common Stock. Assuming that WREP does
not fund any portion of the DIP
Facility, 0.841 shares of New Common
Stock.
6
<PAGE>
Other Terms of the Plan
The Class of Holders of Old Common Stock will neither receive or retain any
property under the Plan and are therefore deemed to have rejected the Plan.
Accordingly WFSG will request that the Bankruptcy Court confirm the Plan under
the "cramdown" provision of the Bankruptcy Code. The two principal shareholders
of WFSG, Andrew A. Wiederhorn and Lawrence A. Mendelsohn, who together own
approximately 4.6 million shares or approximately 42% of the Old Common Stock
and have agreed to the extinguishment of their holdings of Old Common Stock. See
"The Plan of Reorganization - Voting and Confirmation of the Plan - Cramdown."
Under the Plan, Lender Secured Claims, other Secured Claims and General
Unsecured Claims (including the Compromised WREIT/WREP Claim and the Compromised
MLMC Claim and excluding Claims based upon the Old Notes) are Unimpaired and, to
the extent not paid during the pendency of the Reorganization Case, will receive
treatment that the Bankruptcy Court determines to constitute unimpairment. Upon
filing for relief under chapter 11 of the Bankruptcy Code, WFSG intends to seek
an order permitting WFSG to pay currently the Claims of those Trade Creditors
who continue to provide WFSG with customary trade terms. For more information
concerning the treatment and definition of Trade Claims, see "The Plan of
Reorganization - Overview of the Plan."
Also as part of the Plan, it is anticipated that the Board of Directors of
Reorganized WFSG will consist of seven members. The Company has been advised by
the Unofficial Noteholders' Committee that the initial directors will be
identified and their biographical information provided at or prior to the
hearing on Confirmation of the Plan. Officers, directors, shareholders,
employees and certain advisors will receive broad releases and indemnification
under the Plan.
WFSG presently intends to seek to consummate the Plan and to cause the
Effective Date to occur on or about April 12, 1999. There can be no assurance,
however, as to when the Effective Date actually will occur. Procedures for the
distribution of New Common Stock pursuant to the Plan, including matters that
are expected to affect the timing of the receipt of distributions by Holders of
Claims and that could affect the amount of distributions ultimately received by
such Holders, are described in "The Plan of Reorganization--Distributions Under
the Plan."
Except as set forth in this paragraph, none of the directors, executive
officers or affiliates of WFSG or Holders of 5% or more of the Old Common Stock,
to the knowledge of the Company, hold any Old Notes. Andrew A. Wiederhorn owns
approximately 3,272,152 shares, or 30.06% of the outstanding Old Common Stock.
Lawrence A. Mendelsohn owns approximately 1,299,831 shares or approximately
11.94% of the outstanding Old Common Stock. Collectively, the Company's other
officers and directors own approximately 68.248 shares, or approximately .63% of
the outstanding Old Common Stock. No single officer or director (other than
Andrew A. Wiederhorn and Lawrence A. Mendelsohn) in the Company owns more than
12,222 shares, or .11% of the outstanding Old Common Stock. To the best of the
Company's knowledge, WREIT, a company managed by one of WFSG's subsidiaries,
owns approximately $20.0 million principal amount of Series B Notes and intends
to vote in favor of the Plan.
In making investment decisions, the Holders of Old Notes must rely on their
own examination of WFSG and the terms of the Restructuring, including the merits
and risks involved. Each Holder of Old Notes should consult with its own legal,
business, financial and tax advisors with respect to any such matters concerning
this Solicitation Statement, this Solicitation, the Plan and the transactions
contemplated hereby and thereby.
The Boards of Directors of WFSG did not seek or obtain an opinion with
respect to the Plan from any financial advisor.
See "The Plan of Reorganization -- Introduction" for information concerning
discussions between the Company's management and their advisors with
representatives of the Unofficial Noteholders' Committee.
7
<PAGE>
For information concerning the New Common Stock, see "Description of New
Common Stock."
Certain Risk Factors
Prior to deciding whether to vote in favor of the Plan, Holders of Claims
in the Holders of Old Notes should consider carefully all of the information
contained in this Solicitation Statement, especially the factors mentioned in
the following paragraph and more fully described in "Certain Risk Factors."
Holders should consider that: (i) the Company is now highly leveraged and,
although completion of the Restructuring proposed herein will reduce the
Company's debt obligations, the Company still will have a substantial amount of
secured indebtedness after the reorganization; (ii) the recent adverse
conditions in the market for mortgage-backed securities and mortgage loans may
recur; (iii) consummation of the DIP Facility to provide financing during the
pendency of the Reorganization Case is subject to material conditions, including
the availability of sufficient funds to the lender and the negotiation of
definitive agreements; (iv) the projections contained herein are forward-looking
and, as such, are inherently uncertain and, although considered reasonable by
management as of the date hereof, are subject to significant risks that could
cause actual results to differ materially from those projected; (v) although the
projections contained herein assume the Reorganized Company will generate funds
sufficient to meet its operating requirements needs for the foreseeable future,
the ability of the Reorganized Company to gain access to additional capital, if
needed, cannot be assured; (vi) there are several risks associated with the
commencement of the Reorganization Case, including, among others, disruption of
business operations, the loss of employees, and the risk of non-confirmation of
the Plan by the Bankruptcy Court; (vii) upon consummation of the Plan and the
transactions contemplated thereby, the financial conditions and operating
results of the Reorganized Company may not be comparable to that reflected in
the Company's historical financial statements; (viii) the Company's loan
origination, purchasing, sale and servicing operations are subject to
substantial competition from a variety of national, regional and local
companies, many of which have substantially greater financial resources than the
Company; (ix) the Company's loan origination, purchasing, sale and servicing
operations are subject to changes in interest rates, national, regional and
local economic conditions and demographic trends; (x) there is no existing
market for the New Common Stock and no assurance that one will develop following
the reorganization; (xi) the Company is highly regulated in each state in which
it does business and First Bank is regulated by the OTS and there can be no
assurance that the Company will be allowed to continue to do business in all
such states and that such regulation will not have an adverse impact on the
Company or its business; and (xii) there are various factors that could
adversely affect the value of the properties securing the mortgages held by the
Company including various environmental risks.
Solicitation
Record Date ......................... January 20, 1999 has been fixed as the
record date (the "Record Date") for
determining the Holders of Old Notes
entitled to vote on the Plan.
Voting Deadline ..................... The ballots must be received by
Bankruptcy Services LLC (the
"Information Agent") by 5:00 p.m., New
York City Time on Monday, March 1,
1999, unless the Voting Deadline is
extended, in which case the term
"Voting Deadline" shall mean the last
date to which the Solicitation is
extended. WFSG will notify the
Information Agent of any extension by
oral or written notice and will make a
public announcement thereof, prior to
9:00 a.m., New York City Time, on the
next business day after the previously
scheduled voting deadline. See "The
Plan of Reorganization--Voting and
Confirmation of the Plan."
8
<PAGE>
Holder .............................. The term "Holder" with respect to a
vote on the Plan means a beneficial
owner of Old Notes on the Record Date.
A "beneficial owner" is the person who
enjoys the benefits of ownership of
the securities (i.e., has a pecuniary
interest in the securities) even
though title of the securities may be
in another name. The term "Holder"
with respect to other Claims and
Interests means the person who holds
such Claim or Interest in such
Person's capacity as the holder of
such Claim or Interest.
Only beneficial owners (or their
authorized signatories) of the Old
Notes are eligible to vote on the
Plan. See "The Plan of Reorganization
--Voting and Confirmation of the Plan
--Voting Procedures."
General ............................. Requests for additional copies of
ballots and master ballots should be
directed to the Information Agent in
writing at the address or facsimile
number set forth on the back of this
Solicitation Statement. It is
important that all Holders of the Old
Notes vote to accept or reject the
Plan. The Bankruptcy Code provides
that only Holders of Old Notes who
vote will be counted for purposes of
determining whether the requisite
acceptances have been received.
Failure by a Holder of Old Notes to
deliver an original duly completed and
signed ballot will be deemed to
constitute an abstention by such
Holder and will not be counted as a
vote for or against the Plan.
Beneficial Owners of Old Notes ...... If you hold Old Notes in physical
certificated form that are registered
in your own name, you can vote on the
Plan by completing the information
requested on the ballot, signing,
dating, and indicating your vote on
the ballot and returning the completed
original ballot in the enclosed,
pre-addressed, postage-paid envelope
so that it is actually received by the
Information Agent before the Voting
Deadline.
Any beneficial owner holding Old Notes
in "street name" can vote on the Plan
in one of the two following ways:
If your ballot already has been signed
(or "prevalidated") by your nominee
(your broker, banker, bank, other
nominee or their agent): You can vote
on the Plan by completing the
information requested on the ballot,
indicating your vote on the ballot,
and returning the completed original
ballot in the enclosed, preaddressed,
postage-paid envelope so that it is
actually received by the Information
Agent before the Voting Deadline.
If your ballot has NOT been signed (or
"prevalidated") by your nominee
(broker, bank, other nominee, or their
agent): You can vote on the Plan by
completing the information
9
<PAGE>
requested on the ballot, signing,
dating and indicating your vote on the
ballot, and returning the completed
original ballot to your nominee in
sufficient time for your nominee then
to forward your vote to the
Information Agent so that it is
actually received by the Information
Agent before the Voting Deadline.
Brokerage Firms, Banks and Other
Nominees ............................ If you are a brokerage firm,
commercial bank, trust company or
other nominee which is the registered
Holder of Old Notes, please forward a
copy of this Solicitation Statement,
the appropriate ballot or ballots, and
any other enclosed materials to each
beneficial owner, AND;
If you have signed (or "prevalidated")
the ballot, the ballot should be
completed by the beneficial owner and
returned by the beneficial owner
directly to the Information Agent so
that such ballot is actually received
by the Information Agent before the
Voting Deadline.
If you have NOT signed (or
"prevalidated") the ballot, you must
collect the ballot and complete the
master ballot, and deliver the
completed original master ballot to
the Information Agent so that it is
actually received by the Information
Agent before the Voting Deadline.
Securities Clearing System .......... Clearing Systems should arrange for
their respective participants to vote
by executing an omnibus proxy,
assignment letter form, or similar
document, in such participants' favor.
Purchaser Representative ............ Holders of Old Notes who are not
Accredited Investors may contact Black
& Company, Inc., which has been
retained by the Company as Purchaser
Representative, at Telephone: (503)
248-9600, Facsimile: (503) 248-7500,
attention: Scott Baines.
Further Information ................. For further information generally,
contact Houlihan Lokey Howard & Zukin,
Inc., 601 Second Avenue South, Suite
3250, Minneapolis, MN 55402.
Telephone: (612) 338-2910, Facsimile:
(612) 338-2938, Attention: Jonathan B.
Cleveland.
------------------------------
This Solicitation Statement contains projected financial information
regarding the Reorganized Company following the effectiveness of the Plan and
certain other forward-looking statements, all of which are based on various
estimates and assumptions believed by management to be reasonable. Such
information and statements are subject to inherent uncertainties and to a wide
variety of significant business, economic and competitive risks, including,
among others, those described herein. See "Certain Risk Factors." Consequently,
actual events, circumstances, effects and results may vary significantly from
those included in or contemplated by such projected financial information and
such other forward-looking statements. The projected financial information
contained herein, therefore, is not necessarily indicative of the future
financial condition or results of operations of the Reorganized Company, which
may vary significantly from those set forth in such projected financial
information. Consequently, the projected financial
10
<PAGE>
information contained herein should not be regarded as a representation by WFSG,
its advisors or any other person that the projected condition or results can or
will be achieved.
Forward-looking statements provided by WFSG herein pursuant to the safe
harbor established under the Private Securities Litigation Reform Act of 1995
should be evaluated in the context of the estimates, assumptions, uncertainties
and risks described herein.
11
<PAGE>
CERTAIN RISK FACTORS
The New Common Stock to be issued to Holders of Old Notes pursuant to the
Plan is subject to a number of material risks, including those enumerated below.
The risk factors enumerated below (other than those described in "--Risks
Relating to the DIP Facility" and "--Certain Risks of Non-Confirmation"),
generally assume the confirmation and consummation of the Plan and all
transactions contemplated thereby, and, except as indicated, do not generally
include matters that could prevent or delay confirmation. See "The Plan of
Reorganization-- Treatment of Claims and Interests Under the Plan--Conditions
Precedent to Confirmation and Consummation of the Plan" and "--Voting and
Confirmation of the Plan" for a discussion of such matters. Prior to deciding
whether and how to vote on the Plan, each Holder of the Old Notes should
carefully consider all of the information contained in this Solicitation
Statement, especially the factors mentioned in the following paragraphs.
This Solicitation Statement includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act. All of the statements
contained in this Solicitation Statement, 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, (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 these
forward-looking statements are reasonable, it can give no assurance that these
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 Solicitation Statement, 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 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 any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Highly Leveraged Position
The Company is now highly leveraged and although the reorganization will
reduce the Company's debt obligations, the Reorganized Company still will have
outstanding indebtedness and debt service requirements, both in absolute terms
and in relation to stockholders' equity. At October 31, 1998, the Company had
indebtedness of $1.216 billion including $523.0 million of deposits at First
Bank and a negative stockholders' equity of $5 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Business--General" and the Consolidated Statements of Financial Condition of
the Company and the accompanying notes thereto appearing elsewhere in this
Solicitation Statement.
The Company's management believes that, based on its forecasts, the
Reorganized Company will have sufficient operating cash flow from operations to
pay interest and scheduled amortization on its outstanding indebtedness, after
giving effect to the reorganization. See "Projected Financial Information."
However, even if the reorganization is completed, the Reorganized Company's
ability to meet its debt service obligations will depend on a number of factors,
including management's ability to maintain operating cash flow, and there can be
no assurance that targeted levels of operating cash flow actually will be
achieved. The Reorganized Company's ability to maintain or increase operating
cash flow will depend upon, among other things, interest rates, prevailing
economic conditions and other factors, many of which are beyond the control of
the Reorganized Company.
The Reorganized Company's leveraged position may limit its ability to
obtain additional financing in the future on terms and subject to conditions
deemed acceptable by the Reorganized Company's management. In addition, the
agreements governing the Reorganized Company's debt may impose significant
operating and financial restrictions on the Company. See "The Plan of
Reorganization," "Management's Discussion and Analysis of Financial Condition
and
12
<PAGE>
Results of Operations--Liquidity and Capital Resources" appearing elsewhere in
this Solicitation Statement. Certain of the Company's secured lenders have made
in the past collateral calls, of which approximately $11.9 million are
outstanding as of January 27, 1999. Such secured lenders have not sought to
enforce such collateral calls or call a default under the related lending
facilities, but are under no legal obligation to forbear from doing so.
Therefore, there can be no assurance that such lenders will not enforce such
calls or call a default.
The Company finances its acquisitions of pools of loans with secured
borrowings, which generally represent 95% of the purchase price for pools of
Non-Discounted Loans and 90% of the purchase price for pools of Discounted
Loans. While the highly leveraged nature of the Company's 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 and other lending
agreements, such a decline can result in collateral 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. The declines in the market for mortgage-backed securities and other
mortgage-related assets during the third and fourth quarters of 1998 prompted
collateral calls and asset sales, which resulted in losses and ultimately the
recapitalization of the Company pursuant to the Plan. This high degree of
leverage also makes the Company more vulnerable to a downturn in real estate
values or the economy generally. Although 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 affect 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.
Risks Relating to Liquidity
The recent dramatic events in the financial markets, which included a
significant reduction in valuations of, and liquidity for, mortgage-backed
securities, has had a significant adverse impact on the Company's liquidity and
financial condition. The decline in valuations resulted in collateral calls from
the Company's lenders, which reduced the Company's cash position and eventually
prompted asset sales at depressed prices to meet these calls and provide
liquidity. While these asset sales have in the short term improved the liquidity
position of the Company, the resulting significant losses and continued
volatility in the mortgage-backed securities market have resulted in the
Company's lenders being reluctant to provide new financing and many of the
Company's traditional sources of liquidity are not available to it. In the near
term and during the pendency of the Reorganization Case, the Company is
expecting to finance its liquidity needs from operations, a tax receivable
resulting from the recently incurred losses, the Interim Facility and the DIP
Facility. There can be no assurance that cash flow from operations together with
such tax receivable and DIP Facility will be sufficient to fund operations. In
addition, the Interim Facility and the DIP Facility are subject to certain
conditions and there can be no assurance that such conditions will be met and
such facilities funded. At October 31, 1998, the Company's cash balances totaled
approximately $26.7 million, and at January 27, 1999, was $18.3 million.
However, a significant portion of this balance was held at First Bank and is
generally available for use only by First Bank, excluding balances held at First
Bank and restricted cash balances, the Company's cash balances totaled
approximately $2.1 million and approximately $5.1 million at October 31, 1998
and January 27, 1999.
In order to address these liquidity concerns, the Company agreed to
restructure its indebtedness pursuant to the Restructuring Agreement and the
Plan and has entered into discussions with potential equity investors to obtain
additional capital to replenish the Company's equity base and develop the
business. See "The Plan of Reorganization -- Potential Equity Investment."
Management believes that the Restructuring, together with additional capital
from one or more equity investors, will significantly improve the Company's
financial position and liquidity by reducing indebtedness by $198.8 million
(including accrued interest), the interest cost associated with that
indebtedness, significantly increase the Company's equity account and provide
access to new funds to develop the business. The Restructuring is subject to a
number of conditions, including no material adverse change and negotiation of
definitive documents. Additional capital investment by new investors is
currently in the preliminary stages and is not expected to be completed, if at
all, until after the restructuring is completed. The ability of the Company to
grow and its long term
13
<PAGE>
prospects are dependent on the adequate resolution of the Company's near and
long term liquidity shortfall, as well as the successful consummation of the
reorganization described herein.
Need for Additional Financing
The Reorganized Company's business plan will result in the need for
additional equity and/or debt financing in the future, and there can be no
assurance that the Company will be able to obtain such financing on acceptable
terms. The Company's high degree of leverage may make it more difficult for the
Company to obtain additional financing for future working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes and may
cause the Company to dedicate a substantial portion of its cash flow from
operations to the payment of principal and interest on indebtedness, thereby
reducing the funds available for operations and future business opportunities.
To the extent the Company is unable to extend or replace its existing
facilities, securitize its loans or increase deposits at First Bank, the Company
may have to curtail its acquisition of pools of loans and newly-originated
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 and its
subsidiaries' financing sources include warehouse and repurchase facilities with
investment banking firms, brokered and wholesale deposits at First Bank, the
Company's savings bank subsidiary, funds from securitizations, proceeds from
sales of debt and equity securities and internally generated funds. At October
31, 1998, $508.8 million was outstanding under the Company's and its
subsidiaries' warehouse and repurchase financing facilities. Management does not
believe that additional amounts are available under these facilities during the
pendency of the Reorganization Case. Following the Effective Date, the Company
expects that these facilities will again become available to it. There can be no
assurance, however, that these facilities will be maintained. In addition, the
Company has outstanding collateral calls under certain of these facilities. See
"-- Risks Relating to Liquidity."
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.
Given the Company's current financial condition and market conditions in the
mortgage-backed securities market, the Company will not access the
securitization market for financing prior to the completion of the Restructuring
and may not be able to even after the Restructuring.
In the past, the Company has relied on the ability of First Bank to use
brokered and wholesale deposits as a significant source of funds. First Bank's
funding strategy had been to offer deposit rates above those customarily offered
by other banks and savings institutions. Because First Bank competes for
deposits primarily on the basis of rates, First Bank could experience
difficulties in attracting deposits to fund its operations if it could not
continue to offer deposit rates at levels above those of other banks and savings
institutions or if as a result of the Restructuring, First Bank is perceived as
a riskier source of such deposits. 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.
Risks Related to Acquired Pools of Loans
The Company purchases performing mortgage loans and distressed mortgage
loans. These distressed mortgage loans presently may 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 performing
mortgage loans and distressed 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
14
<PAGE>
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 October 31, 1998, approximately 37.0% of the Company's
Discounted Loan (as defined herein) portfolio was concentrated in New York, New
Jersey and Connecticut and approximately 29.5% of the Company's foreclosed real
estate was located in such states. In addition, approximately 50.0% of the
Company's Non-Discounted Loan (as defined herein) portfolio and approximately
19.4% of the Company's foreclosed real estate was located in California at
October 31, 1998. 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 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 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 and risk tolerances 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.
Risks Relating to the DIP Facility
Management of the Company believes that the DIP Facility is important to
the Company's operations during the pendency of the Reorganization Case and has
received a written commitment from WREP regarding the DIP Facility. However, the
commitment of WREP is subject to the negotiation of definitive documentation
with respect to such DIP Facility, the satisfaction of certain conditions,
including conditions related to WREP's liquidity and its ability to fund the DIP
Facility, including approval of such DIP Facility by the Bankruptcy Court and
consummation of the transactions contemplated thereby. There can be no assurance
that WREP has the ability to fund the DIP Facility, that the parties will be
able to negotiate such documentation successfully, that the Company will be able
to satisfy such conditions or that the parties will consummate such
transactions. The DIP Facility is expected to be secured by the capital stock of
First Bank and its holding company. The level of funding of the DIP Facility
will affect the treatment of the Compromised WREIT/WREP Claim under the Plan. To
the extent WREP does not fund the DIP Facility, a proportionate amount of the
Compromised WREIT/WREP Claim will be treated pari passu with the Old Notes, and
therefore, Holders of Old Notes will receive fewer shares of New Common Stock as
a result and the amount of the New 6% Notes to be issued to the Holder of the
Compromised WREIT/WREP Claim will be proportionately reduced. The Company is
unaware of any other potential source of DIP financing other than the DIP
Facility.
15
<PAGE>
Risks Relating to the WCC Restructuring
A condition precedent to the effectiveness of the Plan is that the
servicing of the Company's assets be conducted by one of the Company's
subsidiaries and not by a company outside the corporate group. The Company's
assets are currently serviced by WCC, a company owned by Andrew A. Wiederhorn
and Lawrence A. Mendelsohn, the Company's principal shareholders. WCC was also
adversely affected by the recent market events and is currently restructuring
its indebtedness. Pursuant to the WCC Restructuring Agreement, the Company, WCC,
WCC's owners and WCC's principal creditor agreed to restructure WCC's
indebtedness and to transfer the servicing operations of WCC into the WFSG
group. See "The Plan of Reorganization -- Description of WCC Restructuring."
This agreement is subject to a number of conditions and contingencies and there
can be no assurance that this agreement will be implemented. In addition, as
contemplated by the WCC restructuring, a newly formed subsidiary of WFSG ("New
Servicer") will issue new Class B Common Stock representing a 49.99% economic
interest therein (the "Class B Common Stock") to a successor to WCC in exchange
for certain assets and liabilities of WCC. Accordingly, a significant percentage
of the earnings and ownership of the New Servicer will not inure to the benefit
of Reorganized WFSG or its shareholders. In addition, the Class B Common Stock
will be convertible into New Common Stock of WFSG in certain circumstances,
which may dilute the interests of the holders of New Common Stock.
Risks Relating to the Projections
The management of WFSG have prepared the projected financial information
contained in this Solicitation Statement relating to the Reorganized Company
(the "Projections") in connection with the development of the Plan and in order
to present the anticipated effects of the Plan and the transactions contemplated
thereby. The Projections assume the Plan and the transactions contemplated
thereby will be implemented in accordance with their terms and represent
management's estimate of the results of the Reorganized Company's operations
following the Effective Date. The assumptions and estimates underlying such
Projections are forward-looking and, as such, are inherently uncertain and,
although considered reasonable by management as of the date hereof, are subject
to significant business, economic and competitive risks and uncertainties that
could cause actual results to differ materially from those projected, including,
among others, (1) the uncertain ability of the Reorganized Company to generate
sufficient funds or to gain access to additional capital, if needed, to meet its
capital expenditure and refinancing needs; (2) interest rate volatility; (3) the
possible effects that commencement of the Reorganization Case, even in
connection with the Plan, may have on the Company's relationship with its
customers, lenders, mortgage brokers and employees; (4) the successful execution
of loan sales or securitizations; (5) the ability of the Company to complete
initiatives to streamline operations and incorporate the servicing operations of
WCC into its business; (6) the ability of the Company to retain an adequate
number and mix of employees; (7) adverse economic conditions and competition;
and (8) the Company's ability to maintain the confidence of, among others,
investors, borrowers, correspondents, vendors, lenders, and mortgage bankers and
brokers. Accordingly, the Projections are not necessarily indicative of the
future financial condition or results of operations of the Reorganized Company.
Consequently, the projected financial information contained herein should not be
regarded as a representation by the Company, the Company's advisors or any other
person that the Projections can or will be achieved. "Projected Financial
Information" and "The Plan of Reorganization -- The Reorganized Company --
Projected Financial Information."
Assumptions Regarding Value of WFSG's and WCC's Assets
For financial reporting purposes, the fair value of the assets of WFSG and
WCC must be determined as of the Effective Date. Although such valuation is not
presently expected to result in values that are materially greater or less than
the values assumed in the preparation of such Pro Forma Projections, there can
be no assurance with respect thereto. At October 31, 1998, the Company had a tax
receivable (approximately $13.5 million) on its balance sheet $5.6 million of
which has been received already with the remainder expected to be received by
March 31, 1999. However, there is no assurance that such tax receivable actually
will be received by that time.
16
<PAGE>
Disruption of Operations Relating to Bankruptcy Filing
WFSG's Solicitation of acceptances of the Plan, or any subsequent
commencement of the Reorganization Case, even in connection with the Plan, could
adversely affect the Company's relationships with its warehouse and repurchase
lenders, mortgage brokers and bankers, investors and purchasers, joint venture,
partners, correspondents, lenders, vendors, owners of loans serviced by the
Company or WCC, and employees and its ability to originate new loans. Employees
of the Company generally are not parties to employment contracts. The Company
believes that, due to uncertainty about the Company's financial condition, it
may be difficult to retain or attract high quality employees. In addition,
owners of mortgage loans serviced by the Company may seek to terminate such
servicing given the Company's financial difficulties. Moreover, many states
require that companies post bonds to conduct servicing or mortgage operations in
their states and the Company's bonding companies have raised concerns about
providing such bonds given the Company's financial difficulties. If the
Company's relationship with borrowers, servicing customers, mortgage brokers and
employees is adversely affected, the Company's operations could be materially
affected. Weakened operating results could adversely affect WFSG's ability to
complete the Solicitation of acceptances of the Plan or, if such Solicitation is
successfully completed, to obtain confirmation of the Plan.
Risks Related to Regulatory Matters
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. First Bank is subject to
extensive regulation by the OTS. The recent financial difficulties of the
Company and pending bankruptcy filing may cause the OTS to review the Company's
situation. The OTS may re-evaluate the Company's ownership of First Bank and
could place First Bank in conservatorship or receivership or impose additional
regulatory requirements. Similarly, the OTS may require that First Bank's loans
be serviced by a non-Wilshire company. In October 1998, the OTS agreed to lift
the then existing cease and desist order against First Bank relating principally
to its operation which order was effective October 31, 1996 and modified on
October 28, 1997. On January 7, 1999, following certain transactions between
First Bank and other WFSG companies resulting from the market disruptions in the
Fall of 1998, the OTS issued a new cease and desist order against First Bank's
immediate holding company and WFSG, that limits the First Bank's ability to
enter into certain transactions with affiliates and requires written notice to
the OTS of the occurrence of any transactions with affiliates. A cease and
desist order indicates a heightened level of regulatory concern and could have
an adverse impact on the Company.
The Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act and Regulation
B, as amended, the Fair Credit Reporting Act of 1970, as amended, the Federal
Real Estate Settlement Procedures Act, and Regulation X, the Home Mortgage
Disclosure Act, the Federal Debt Collection Practices Act and the National
Housing Act of 1934, as well as other federal and state statutes and regulations
affecting the Company's activities. The Company is also subject to the rules and
regulations of, and examinations by, the Department of Housing and Urban
Development and state regulatory authorities with respect to originating,
purchasing, processing, underwriting, selling, securitizing and servicing loans.
These rules and regulations, among other things, impose licensing obligations on
the Company, establish eligibility criteria for mortgage loans, prohibit
discrimination, provide for inspections and appraisals of properties, require
credit reports on loan applicants, regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, mandate certain disclosures and notices to borrowers and, in
some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure
to comply with these requirements can lead to loss of approved status,
termination or suspension of servicing contracts without compensation to the
servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions. As a result of the Company's recent losses
and expected bankruptcy filing, federal and state regulatory authorities may
review the Company's situation and re-evaluate its licenses and ability to
purchase, originate or service loans.
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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 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 (as defined herein). 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.
Investment Limitations as a Result of the Formation of WREIT
The Company has granted a right of first refusal to WREIT, a real estate
investment trust managed by a subsidiary of WFSG, with respect to certain U.S.
commercial investments, mortgage-backed securities and international
investments. As a consequence, the opportunity for the Company to invest in such
assets would be limited to the extent WREIT takes advantage of such investment
opportunities. In deciding whether to invest in any assets, WREIT may consider,
among other factors, whether the assets are well-suited for WREIT and whether
WREIT is financially or strategically able to take advantage of the investment
opportunity.
Risks Related to International Servicing Operations
The Company established servicing operations in the United Kingdom and
France in late 1996. The Company's loan servicing operations in Western Europe
utilize WCC's servicing system, which has been adapted for servicing loans in
Western Europe. These servicing operations were not 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. 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 WCC
The Company currently relies on WCC to service its pools of loans in the
United States and is expected to continue to rely on WCC until the Effective
Date. WCC also provides certain administrative services to the Company. WCC is
significantly leveraged and its servicing rights are pledged to secure those
borrowings. Until the Effective Date, which at such time a newly formed
subsidiary of WFSG is expected to assume the servicing operations and
responsibilities of WCC, the loss of the services of WCC for any reason could
have a material adverse impact on the Company. It is a condition to the
effectiveness of the Plan that such transfer of servicing occur. See "The Plan
of Reorganization -- Description of WCC Restructuring."
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
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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 transactions may increase rather than mitigate the interest
risk. If there is a rise in short-term interest rates, the Company's borrowing
costs likely would rise faster than the yield on the Company's assets, which
would include both fixed and adjustable rate assets.
Business and Competition
The Company faces intense competition. Negative recent developments within
the Company have caused the Company to be competitively disadvantaged.
Competitors use information about the Company's losses and market valuation to
attract customers away from the Company. In addition, even following the
Effective Date, the Company's ability to attract business, including third party
servicing, may be affected by lingering negative perceptions relating to the
Company's prepackaged bankruptcy proceeding. Traditional competitors in the
financial services business include other mortgage banking companies, commercial
banks, credit unions, thrift institutions and finance companies. Many of these
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than WFSG.
Nature of Mortgages
There are several factors that could adversely affect the value of
properties securing the mortgages owned by the Company (the "Properties") such
that the outstanding balance of the related loans, together with senior
financing (if any) on the Properties, if applicable, would equal or exceed the
value of the Properties. Among the factors that could adversely affect the value
of the Properties are an overall decline in the residential real estate market
in the areas in which the Properties are located or a decline in the general
condition of the Properties as a result of the failure of borrowers to maintain
adequately the Properties or of natural disasters that are not necessarily
covered by insurance, such as earthquakes and floods. If such a decline occurs,
the actual rates of delinquencies, foreclosures and losses on all loans could be
higher than those currently experienced in the mortgage lending industry in
general.
Even assuming that the Properties provide adequate security for the loans,
substantial delays could be encountered in connection with the liquidation of
defaulted loans and corresponding delays in the receipt of related proceeds by
the Company could occur. An action to foreclose on a Property securing a loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a property. In the event of a default by a borrower, these restrictions,
among other things, may impede the ability of the party servicing the loan to
foreclose on or sell the Property or to obtain liquidation proceeds sufficient
to repay all amounts due on the related loan. In addition, the party servicing
the loan will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due on defaulted
loans and not yet repaid, including payments to senior lienholders, legal fees
and costs of legal action, real estate taxes and maintenance and preservation
expenses.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures and require licensing of certain originators and
servicers of loans. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the party servicing the loans
to collect all or part of the principal of or interest on the loans, may entitle
the borrower to a refund of amounts previously paid and, in addition, could
subject the party servicing the loans to damages and administrative sanctions.
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Environmental Risks
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect health, safety and the environment.
In certain circumstances, these laws and regulations impose obligations on
owners or operators of residential properties such as those subject to the
loans. The failure to comply with such laws and regulations may result in fines
and penalties.
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of addressing hazardous
substances on, in or beneath such property and related costs. Such liability
could exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous substances,
or arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are releases
or threatened releases of hazardous substances at such off-site locations.
Under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), contamination
of property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states, such a lien has priority over the lien of
an existing mortgage against such property.
Under the laws of some states, and under CERCLA and the federal Solid Waste
Disposal Act, there is a possibility that a lender may be held liable as an
"owner" or "operator" for costs of addressing releases or threatened releases of
hazardous substances at a property, or releases of petroleum from an underground
storage tink, under certain circumstances.
Certain Federal Income Tax Considerations; Reduction and Limitation of Corporate
Tax Benefits
Generally, Holders of Old Notes should not recognize any gain or loss for
federal income tax purposes upon their receipt of New Common Stock pursuant to
the Plan (except to the extent such New Common Stock is attributable to accrued
but unpaid interest, which generally will be treated as a payment of interest
includible in income in accordance with the Holder's method of accounting for
tax purposes). Though it is not free from doubt, Holders of Old Common Stock who
receive New Common Stock pursuant to the Market Liquidation Reallocation are
generally not expected to recognize any gain or loss for federal income tax
purposes. Holders of Old Common Stock are encouraged to consult their tax
advisors, as there can be no assurance as to their tax treatment.
The Company will not recognize any cancellation of indebtedness income upon
consummation of the Plan but will be required to reduce certain of WFSG's tax
attributes (including, to the extent applicable, net operating and capital
losses and loss carry-forward, tax credits and tax basis in assets) by the
amount of the cancellation of indebtedness income not recognized as taxable
income (subject to certain modifications). As a result, the Company believes
that most, if not all, of WFSG's net operating losses and loss carry-forward
(and certain other losses, credits and carryforward, if any) will be reduced
upon consummation of the Plan. In addition, Reorganized WFSG may be required to
reduce its tax basis in its assets as of the beginning of the taxable year
following consummation of the Plan (but not below the amount of liabilities
remaining immediately after the consummation of the Plan) to the extent that
WFSG's cancellation of indebtedness income exceeds the amount of net operating
losses and any other losses, credits and carry-overs so reduced (subject to
certain modifications). Moreover, consummation of the Plan will also trigger an
"ownership change" of the Company consolidated group for purposes of Section 382
of the Internal Revenue Code of 1986, as amended, so that, if the Reorganized
Company retains any pre-ownership change net operating losses and loss
carry-forward after the Effective Date, its use of such losses and carry-forward
will be limited annually to a statutorily prescribed amount. See "Certain
Federal Income Tax Considerations."
Following the Effective Date, the New Servicer (and its subsidiary WSC)
will not be consolidated for tax purposes. Accordingly, any gains or losses at
the New Servicer level will not be consolidated with the group.
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Certain Risks of Non-Confirmation
Even if the requisite acceptances are received, there can be no assurance
that the Bankruptcy Court will confirm the Plan. A non-accepting creditor of
WFSG or a stockholder of WFSG might challenge the Plan. Section 1129 of the
Bankruptcy Code sets forth the requirements for confirmation and requires, among
other things, a finding by the Bankruptcy Court that the confirmation of the
Plan is not likely to be followed by a liquidation or a need for further
financial reorganization and that the value of distributions to non-accepting
creditors and Interest Holders will not be less than the value of distributions
such creditors and Interest Holders would receive if WFSG were liquidated under
Chapter 7 of the Bankruptcy Code. While there can be no assurance that the
Bankruptcy Court will conclude that these requirements have been met, WFSG
believes that the Plan will not be followed by a need for further financial
reorganization and that non-accepting creditors and stockholders will receive
distributions at least as great as would be received following a liquidation
pursuant to Chapter 7 of the Bankruptcy Code. See "The Plan of
Reorganization--Chapter 7 Liquidation Analysis."
The confirmation and consummation of the Plan also are subject to certain
other conditions. See "The Plan of Reorganization--Treatment of Claims and
Interests Under the Plan--Conditions Precedent to Confirmation and Consummation
of the Plan."
If the Plan, or a plan determined not to require resolicitation of any
Classes by the Bankruptcy Court, were not to be confirmed, it is unclear whether
a reorganization could be implemented and what holders of Claims and Interests
would ultimately receive with respect to their Claims and Interests. If an
alternative reorganization could not be agreed to, it is possible that WFSG
would have to liquidate its assets, in which case it is likely that Holders of
Claims and Interests would receive less than they would have received pursuant
to the Plan. See "The Plan of Reorganization--Chapter 7 Liquidation Analysis."
Noncomparability of Historical Financial Information
As a result of the consummation of the Plan and the transactions
contemplated thereby, the financial condition and results of operations of the
Reorganized Company from and after the Effective Date may not be comparable to
the financial condition or results of operations reflected in the historical
financial statements of WFSG set forth elsewhere herein.
The Company's Employees
One of the Company's primary assets is its group of highly skilled
professionals who have the ability to leave the Company and so deprive it of
valuable skills and knowledge that contribute substantially to the Company's
business operations. No assurance can be given that the Company will be able to
retain its key personnel through the pendency of the Reorganization Case and if
not, that it will be able to replace such personnel with comparable personnel.
In addition, no assurance can be given that such key personnel will not leave
after consummation of the Plan and emergence from Chapter 11. Further attrition
may hinder the ability of the Company to operate efficiently which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business -- Employee Attrition."
Restrictions on Resale of Securities of the Reorganized Company
Any person (or group of persons who act in concert) who receives a
substantial amount of New Common Stock of the Reorganized Company pursuant to
the Plan may be deemed to be an "affiliate." Absent registration under the
Securities Act, any person deemed to be an affiliate of the Reorganized Company
or an underwriter would be subject to the resale restrictions imposed by the
Commission's Rule 144, under the Securities Act, which would allow affiliates
and underwriters to sell, exchange, transfer or otherwise dispose of only
specified limited quantities of securities of the Reorganized Company, and only
subject to compliance with the other requirements imposed on "affiliates" under
Rule 144.
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Lack of Trading Market; Volatility
The Market Liquidity Reallocation is intended to foster the development of,
and improve conditions in, the market for the New Common Stock following the
Effective Date. There can be no assurance however, that an active market for the
New Common Stock will develop or, if any such market does develop, that it will
continue to exist, or as to the degree of price volatility in any such market
that does develop. Accordingly, no assurance can be given as to the liquidity of
the market for any of the New Common Stock or the price at which any sales may
occur. The Company's Old Common Stock is currently listed on the Nasdaq Stock
Market. There can be no assurance that the New Common Stock will continue to be
accepted for listing on the Nasdaq Stock Market or any other exchange or market.
THE PLAN OF REORGANIZATION
Introduction
This Solicitation Statement relates to the Plan for WFSG. A copy of the
Plan is attached hereto as Exhibit I. For a description of WFSG's business, see
"Business."
Beginning in the third quarter of 1998 and continuing in the fourth
quarter, the market for mortgage-backed securities and, in particular,
subordinate credit related tranches of these securities, experienced
dramatically widening spreads. Liquidity problems affecting certain Wall Street
firms, hedge funds and other investors in financial instruments exacerbated this
market phenomenon through forced liquidations of their assets. This led to an
increased need for liquidity by the Company both to meet collateral calls and as
a preemptive measure to protect against continued spread distortions in the
market for mortgage-backed securities.
To address these liquidity concerns, commencing in October, the Company
sold certain real estate related assets and securities at their carrying value
to various unrelated third parties. The cash proceeds from these sales were used
primarily to repay principal and interest on the borrowings for which these
assets served as collateral. Through these asset sales, the Company reduced debt
and improved its liquidity position, enabling it to meet collateral calls.
However, these asset sales resulted in the Company recognizing a loss totaling
approximately $76.6 million during the four months ended October 31, 1998.
Following these assets sales and mark-to-market of certain of the Company's
assets to reflect current market prices, the Company had total assets and total
liabilities at October 31, 1998, of approximately $1.243 billion and $1.248
billion (including $523.0 million of deposits at First Bank as of October 31,
1998), respectively, and negative shareholders' equity of $5 million.
While these asset sales have improved the liquidity position and financial
condition of the Company, management concluded that the Company's diminished
equity base was insufficient to obtain prior levels of profitability. Further,
certain of the Company's lenders expressed concern about continued lending given
market conditions and recent losses incurred by the Company. In order to address
liquidity concerns and improve the Company's financial condition, the Company
entered into discussions with the Unofficial Noteholders' Committee in November
1998. This committee consists of Capital Research and Management Co., on behalf
of various funds, Capital Guardian Trust Company, on behalf of various funds,
American Express Financial Corporation, as investment advisor to various mutual
funds, and Ryback Management Company, which collectively hold, manage and
represent approximately 51.7% of the total principal amount outstanding of the
Old Notes. The members of the Unofficial Noteholders' Committee and WREIT have
agreed to support the Plan and to cooperate to obtain confirmation and
consummation of the Plan and together hold, manage or represent approximately
62.5% of the aggregate principal amount of the Old Notes outstanding. The
Unofficial Noteholders' Committee retained Latham & Watkins to serve as its
special legal counsel and Houlihan Lokey Howard & Zukin, Inc. to serve as its
financial advisors. Throughout October and November 1998, the Company engaged in
discussions and negotiations with the Unofficial Noteholders' Committee on the
terms of a proposed restructuring for the Company. The Company was assisted in
such discussions and negotiations by Proskauer Rose LLP (its restructuring and
securities counsel) and Stoel Rives LLP (its corporate counsel).
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After extensive negotiations among the Unofficial Noteholders' Committee
and the Company, the parties achieved agreement on the general terms of a
restructuring for the Company which formed the basis for the Plan. That
agreement was reflected in the Restructuring Agreement dated as of November 23,
1998 by and between WFSG and each member of the Unofficial Noteholders'
Committee, which agreement provided for, among other things, the support by the
members of the committee for a plan of reorganization embodying the agreed upon
terms. The Company agreed to reimburse the Unofficial Noteholders' Committee for
the reasonable fees and expenses of its counsel and financial advisors through
the Effective Date. The Company disclosed the terms of the Restructuring
Agreement to the public on November 23, 1998.
As part of these negotiations, the Unofficial Noteholders' Committee
indicated that it wanted the servicing of the Company's assets to be conducted
by one of the Company's subsidiaries and not by a company outside the corporate
group. The Company's assets are currently serviced by WCC, a company owned by
the Principal Shareholders. WCC was also adversely affected by the recent market
events. WCC services assets primarily for WFSG and its subsidiaries including
First Bank and for WREIT and as WFSG and WREIT sold assets in response to
collateral calls, such companies had less assets to service resulting in less
servicing fees for WCC. This decline in servicing revenues brought into question
WCC's ability to service and repay its existing indebtedness. Accordingly, the
Company entered into concurrent negotiations with the owners of WCC and the
principal creditor of WCC, Capital Consultants, Inc., for itself and as agent
for various investors ("CCI"), to move the servicing operations of WCC into the
WFSG group and resolve WCC's debt burden in a manner acceptable to all parties.
After extensive negotiations among the Company, CCI, WCC's owners and the
Unofficial Noteholders' Committee, on November 23, 1998 the Company, CCI and WCC
entered into a restructuring agreement dated as of November 23, 1998 (the "WCC
Restructuring Agreement") which provides for the restructuring of WCC's
indebtedness and the transfer of its servicing operations to a subsidiary of
WFSG. See "-- Description of WCC Restructuring."
Following agreement as to the general terms of the Restructuring Agreement
and the WCC Restructuring Agreement, the Company continued to work with the
Unofficial Noteholders' Committee, CCI and the other parties to such agreements
in December and January to develop a more detailed plan of restructuring and
implement the provisions of such agreements. On January 19, 1999, the Company
and the Unofficial Noteholders' Committee entered into an amended and restated
Restructuring Agreement (the "Amended and Restated Restructuring Agreement")
containing the principal terms of the Plan described herein. On of January 19,
1999, the Company also entered into an amended and restated WCC Restructuring
Agreement (the "Amended and Restated WCC Restructuring Agreement") containing
the principal terms for the restructuring of WCC's indebtedness and the transfer
of its servicing operations to a subsidiary of WFSG. See "-- Description of WCC
Restructuring."
The recent dramatic events in the financial markets have also had a
significant adverse impact on the Company's liquidity position. The significant
losses incurred by the Company and continued volatility in the mortgage-backed
securities market have resulted in the Company's lenders being reluctant to
provide new financing and many of the Company's traditional sources of liquidity
are not available to it. In the near term and during the pendency of the
bankruptcy case, the Company is expecting to finance its liquidity needs from
operations, from a tax receivable resulting from the recently incurred losses
and from the DIP Facility. There can be no assurance that cash flow from
operations together with such tax receivable and DIP Facility will be sufficient
to fund operations. The DIP Facility is subject to certain conditions (including
conditions related to WREP's liquidity and its ability to fund the DIP
Facility), and there can be no assurance that such conditions will be met and
that such facility will be funded. At October 31, 1998, the Company's cash
balances totaled approximately $26.7 million and as of January 27, 1999, was
$18.3 million. However, a significant portion of this balance was held at First
Bank and is generally available for use only by First Bank; excluding balances
held at First Bank and restricted cash balances, the Company's cash balances
totaled approximately $2.1 million and $5.1 million as of October 31, 1998 and
January 27, 1999, respectively.
In response to the recent market events, the Company initiated a corporate
restructuring to improve its competitive position and its ability to execute its
business strategy in a more difficult external environment. During October 1998,
the Company made a strategic decision to eliminate its retail residential
mortgage and manufactured housing mortgage origination operations and to focus
its origination strategy on wholesale residential and commercial
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mortgage origination at its thrift subsidiary. As a result of this action, the
Company has written off approximately $1.2 million of goodwill originally
established upon acquisition of certain residential mortgage origination
branches. From August 31, 1998 through January 15, 1999, the Company also
reduced its workforce from 514 to 296, a significant portion of which related to
the discontinued origination activities.
Following the losses incurred by the Company in October and November of
1998, the Company began discussions with a number of potential new equity
investors in order to strengthen its diminished equity base and obtain
additional capital to operate and develop the business. The Company and the
Unofficial Noteholders' Committee are currently in discussions with a number of
potential investors concerning possible equity investments in the Company. Such
discussions are expected to continue during the pendency of the prepackaged
bankruptcy case. It is currently anticipated that any such investments will be
made after the Effective Date and will result in no less favorable treatment to
the Noteholders as compared to the restructuring. There can be no assurance,
however, that any such investments will be made. See "--Potential Equity
Investment."
WFSG believes that the Plan is fair and equitable and in the best interests
of all creditors and equity interest holders, including Holders of the Old Notes
and Holders of the Old Common Stock.
WFSG submits this Solicitation Statement in connection with its
solicitation of acceptances of the Plan. The overall purpose of the Plan is to
provide for the reorganization of WFSG's liabilities in a manner designed to
maximize recoveries to all stakeholders. Specifically, the Plan is designed to
eliminate all of WFSG's existing obligations to Holders of the Old Notes by
exchanging such Allowed Claims for the New Common Stock and extinguishing the
Old Common Stock.
In general, the Plan provides for, among other things: (i) a cash
distribution to Holders of Administrative Claims and Priority Claims (to the
extent any of such claims are not paid in the ordinary course during the
pendency of the Reorganization Case); (ii) no impairment of General Unsecured
Claims (including the Compromised WREIT/WREP Claim and the Compromised MLMC
Claim); (iii) issuing and distributing the New Common Stock to Holders of Old
Notes; (iv) the existing equity securities of the Company (including options,
warrants or similar rights) would be extinguished; (v) reallocation of up to
0.5% of the New Common Stock from Holders of Old Notes who accept the Plan to
Holders of Old Common Stock pursuant to the Market Liquidity Allocation for the
purpose of fostering the development of, and improving conditions in, the market
for the New Common Stock; (vi) the transfer of servicing to the WFSG group and
(vii) assuming executory contracts and unexpired leases to which WFSG is a
party. See "Overview of the Plan," "Securities to be Issued and Transferred
Under the Plan," "Distributions Under the Plan" and "General Information
Concerning the Plan," together with the other information regarding the
foregoing and related matters contained elsewhere in this Solicitation
Statement.
WFSG INTENDS TO CONTINUE OPERATING ITS BUSINESSES IN CHAPTER 11 IN THE
ORDINARY COURSE AND TO SEEK TO OBTAIN THE NECESSARY RELIEF FROM THE BANKRUPTCY
COURT TO PAY ITS EMPLOYEES, TRADE AND CERTAIN OTHER CREDITORS IN FULL AND ON
TIME. SUCH CREDITORS ARE NOT IMPAIRED UNDER THE PLAN.
At this time, WFSG has not commenced the Reorganization Case, but is
soliciting acceptances of the Plan from the Holders of the Old Notes as the only
impaired class of Claims under the Plan. If sufficient votes for acceptance of
the Plan by Holders of Old Notes are received, WFSG expects to file the
Reorganization Case shortly after votes on the Plan have been tabulated and to
seek Confirmation of the Plan immediately following the Bankruptcy Court's
approval of a disclosure statement in substantially the same form as this
Solicitation Statement. See "General Information Concerning the Plan -- Actions
Intended to be Taken Concurrently with the Commencement of the Reorganization
Case." If WFSG does not receive the requisite acceptances by Holders of Old
Notes by the Voting Deadline (as set forth below), it will be forced to evaluate
its available options, including filing a non-prepackaged chapter 11 case.
THE BOARD OF DIRECTORS OF WFSG BELIEVES THAT THE PLAN IS IN THE BEST
INTERESTS OF ALL CREDITORS. ALL CREDITORS ENTITLED TO VOTE ARE URGED TO VOTE IN
FAVOR OF THE
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PLAN NOT LATER THAN THE VOTING DEADLINE OF MARCH 1, 1999. As described in
greater detail elsewhere in this Solicitation Statement, among the factors which
have led the Company and the Board of Directors of WFSG to conclude that the
Plan is preferable to all other alternatives and in the best interests of all
creditors and equity security holders, are the following: (i) the Plan
restructures the Company's balance sheet in a manner that will allow the Company
to go forward with a significantly lower debt load; (ii) the solicitation of
acceptances and rejections of the Plan prior to a bankruptcy filing minimizes
the time the Company must endure the costs and disruptions associated with
chapter 11 proceedings; (iii) the Plan provides for the maximum return for the
Company's creditors; (iv) the Plan reflects a consensual agreement between the
Company and representatives of a substantial majority of its noteholder
constituency; (v) further delay in the implementation of a restructuring plan is
likely to lead to further deterioration of the Company's financial condition and
enterprise value to the detriment of all creditors and equity security holders;
(vi) the Plan serves to minimize the disruption to the business and to help
maintain customer and vendor relations by leaving virtually all of the Company's
creditors (other than holders of public debt and equity securities) unimpaired;
and (vii) the Plan provides a greater recovery than that which the Company's
creditors would receive in a Chapter 7 liquidation, as set forth in more detail
in "The Plan of Reorganization -- Chapter 7 Liquidation Analysis." For
additional information see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
THE MEMBERS OF THE UNOFFICIAL NOTEHOLDERS' COMMITTEE HAVE UNANIMOUSLY
APPROVED THE PLAN AND HAVE AGREED TO VOTE IN FAVOR OF THE PLAN AND RECOMMEND
THAT HOLDERS OF OLD NOTES VOTE TO ACCEPT THE PLAN. However, neither the
Unofficial Noteholders' Committee, nor any member of such committee will be a
proponent of the Plan, and neither the Unofficial Noteholders' Committee nor any
member of such committee has solicited or will solicit any vote in favor of the
Plan by, or has offered to join in any offer of any securities to, any other
Holder of Old Notes, whether by this Solicitation Statement or any other means.
The Bankruptcy Code provides that only Holders who vote on the Plan will be
counted for purposes of determining whether the requisite acceptances of the
Classes of Claims have been received. Failure by a Holder of a Claim to deliver
a duly completed and signed ballot will constitute an abstention by such Holder
with respect to a vote on the Plan. Abstentions will not be counted as votes to
accept or reject the Plan and, therefore, will have no effect on the voting with
respect to the Plan. The requirements for confirmation of the Plan, including
the vote of creditors to accept the Plan and certain of the statutory findings
that must be made by the Bankruptcy Court, are described below under the caption
"Voting and Confirmation of the Plan."
Confirmation of the Plan and the occurrence of the Effective Date are
subject to a number of material conditions precedent, which are summarized in
"Treatment of Claims and Interests Under the Plan -- Conditions Precedent to
Confirmation and Consummation of the Plan." There can be no assurance that these
conditions will be satisfied or waived.
Overview of the Plan
Brief Explanation of chapter 11
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under chapter 11 of the Bankruptcy Code, a debtor is authorized
to reorganize its business for the benefit of itself and its creditors and
stockholders. In addition to permitting rehabilitation of the debtor, another
goal of chapter 11 is to promote equality of treatment of creditors and equity
security holders, respectively, who hold substantially similar claims or
interests with respect to the distribution of the value of a debtor's assets. In
furtherance of these two goals, upon the filing of a petition for relief under
chapter 11, Section 362 of the Bankruptcy Code generally provides for an
automatic stay of substantially all acts and proceedings against the debtor and
its property, including all attempts to collect claims or enforce liens that
arose prior to the commencement of the debtor's chapter 11 case.
The consummation of a plan of reorganization is the principal objective of
a chapter 11 case. A plan of reorganization sets forth the means for satisfying
claims against and interests in a debtor. Confirmation of a plan of
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reorganization by the Bankruptcy Court makes the plan binding upon the debtor,
any issuer of securities under the plan, any person or entity acquiring property
under the plan and any creditor of or equity security holder in the debtor,
whether or not such creditor or equity security holder (i) is impaired under or
has accepted the plan or (ii) receives or retains any property under the plan.
Subject to certain limited exceptions and other than as provided in the plan
itself or the confirmation order, the confirmation order discharges the debtor
from any debt that arose prior to the date of confirmation of the plan and
substitutes therefor the obligations specified under the confirmed plan.
The following is an overview of certain material provisions of the Plan of
WFSG, which is attached hereto as Exhibit I. The Plan (and related ballots,
master ballots and other related documents) contemplates the filing of the
Reorganization Case with the United States Bankruptcy Court for the District of
Delaware. WFSG, however, reserves the right to file the Reorganization Case in
any other jurisdiction determined by it to be appropriate and advisable (and, in
such case, to make any appropriate changes to the Plan, ballots, master ballots
and other related documents). The following summaries of the material provisions
of the Plan do not purport to be complete and are qualified in their entirety by
reference to all the provisions of the Plan, including all exhibits thereto, all
documents described therein and the definitions therein of certain terms used
below. Wherever defined terms of the Plan not otherwise defined in this
Solicitation Statement are used, such defined terms shall have the meanings
assigned to them in the Plan. For a description of certain other significant
terms and provisions of the Plan, see "Securities to be Issued and Transferred
Under the Plan," "General Information Concerning the Plan" and "Distributions
Under the Plan." See also "Certain Risk Factors" for a description of
significant risk factors related to the Plan.
Solicitation of Acceptances of the Plan
Under the Plan, all Claims and Interests have been separated into six
classes, and each Class has been determined to be either Impaired or Unimpaired
by the Plan's terms. See "Treatment of Claims and Interests Under the Plan," and
"Voting and Confirmation of the Plan." Except as discussed below under "Voting
and Confirmation of the Plan--Acceptance or Cramdown," as a condition to
confirmation, Section 1129(a)of the Bankruptcy Code requires that (i) each
impaired class of claims and interests that receives or retains property under a
plan of reorganization vote to accept the plan and (ii) the plan meets the other
requirements of Section 1129(a). Classes of claims and interests that do not
receive or retain any property under a plan on account of such claims and
interests are deemed to have rejected the plan and are not entitled to vote, and
classes of claims and interests that are not impaired under a plan are deemed to
have accepted the plan and are not entitled to vote. Under the Plan, acceptances
are being solicited only from Class 4, which is the only Impaired Class that is
receiving a distribution under the Plan. Class 4 will be deemed to have accepted
the Plan if it is accepted by Holders of at least two-thirds in dollar amount
and a majority in number of Claims in Class 4 held by Holders who cast timely
votes with respect to the Plan. Holders of Claims who fail to vote or who
abstain from voting on the Plan are not counted for purposes of determining
either acceptance or rejection of the Plan by Class 4 Claims. Therefore, the
Plan could be accepted by Class 4 Claims with the affirmative vote of
significantly less than two-thirds in dollar amount and a majority in number of
the entire Class.
Under the Plan, acceptances are not being solicited from holders of Old
Common Stock because such holders will not receive or retain any property or
interest under the Plan. Such Holders are therefore deemed to have rejected the
Plan. Accordingly, Class 6 will not be entitled to vote on the Plan. WFSG
believes that the Plan may be crammed down over the dissent of Class 6 in view
of the treatment proposed for such Class. The "cramdown" provisions of Section
1129(b) essentially provide that a plan may be confirmed over the rejection of
an impaired class of claims or interests if the plan "does not discriminate
unfairly" and is "fair and equitable" with respect to such rejecting impaired
class. WFSG believes that the treatment under the Plan of the Holders of Class 6
Interests will satisfy the "fair and equitable" test and "does not unfairly
discriminate" because, although no distribution will be made in respect of
Interests in such Class and, as a result, such Classes will be deemed, pursuant
to Section 1126 of the Bankruptcy Code, to have rejected the Plan, no Class
junior to any such non-accepting Class will receive or retain any property under
the Plan and the treatment of Class 6 is comparable to the treatment of classes
of equal rank. See "Voting and Confirmation of the Plan -- Acceptance or
Cramdown."
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General Information Concerning Treatment of Claims and Interests
The Plan provides for payment in full or other reinstatement of
Administrative Claims, Priority Tax Claims, Lender Secured Claims, Other Secured
Claims, Priority Claims, and General Unsecured Claims (or such other treatment
to which Holders of certain of such Claims may consent). The Plan also provides
for the Holders of Allowed Noteholder Claims to receive New Common Stock in
exchange for their Allowed Claims. See "Securities to be Issued and Transferred
Under the Plan" and "Description of New Common Stock" for a description of the
New Common Stock.
To allow WFSG to complete a financial restructuring in the manner that will
maximize its enterprise value, WFSG is soliciting prepetition acceptances of the
Plan from Holders of Claims in Class 4 prior to filing the Reorganization Case.
WFSG currently intends to seek to consummate the Plan and to cause the Effective
Date to occur as soon as practicable. There can be no assurance, however, as to
when the Effective Date will actually occur. Procedures for the distribution of
cash and securities pursuant to the Plan, including matters that are expected to
affect the timing of the receipt of distributions by Holders of Allowed Claims
and Interests in certain Classes, are described in "Distributions Under the
Plan."
Management of WFSG believes that the Plan provides consideration to Classes
of Claims and Interests reflecting an appropriate treatment of their Claims and
Interests, taking into account the differing nature and priority of such Claims
and Interests. The Bankruptcy Court must find, however, that a number of
statutory tests are met before it may confirm the Plan. See "Voting and
Confirmation of the Plan." Many of these tests are designed to protect the
interests of Holders of Claims or Interests who do not vote to accept the Plan,
but who will be bound by the provisions of the Plan if it is confirmed by the
Bankruptcy Court. The "cramdown" provisions of Section 1129(b) of the Bankruptcy
Code, for example, permit confirmation of a chapter 11 plan of reorganization in
certain circumstances even if a plan is not accepted by all impaired classes of
claims and interests. See "Voting and Confirmation of the Plan -- Acceptance or
Cramdown." As described above, WFSG will request confirmation pursuant to the
cramdown provisions of the Bankruptcy Code over the dissent of Class 6. WFSG
believes that the treatment under the Plan of the Holders of Class 6 Interests
will satisfy the "fair and equitable" test and "does not unfairly discriminate"
because, although no distribution will be made in respect of Interests in such
Class and, as a result, such Classes will be deemed, pursuant to Section 1126 of
the Bankruptcy Code, to have rejected the Plan, no Class junior to any such
non-accepting Class will receive or retain any property under the Plan and the
treatment of Class 6 is comparable to the treatment of classes of equal rank.
Although WFSG believes that the Plan can be confirmed under the cramdown
provisions of the Bankruptcy Code over the dissent of Class 6 Interests, there
can be no assurance that the requirements of such provisions would be satisfied.
Summary of Classes and Treatment of Claims and Interests
Section 1123 of the Bankruptcy Code provides that a plan of reorganization
shall classify the claims and interests of a debtor's creditors and equity
interest holders. In compliance therewith, the Plan divides Claims and Interests
into six Classes and sets forth the treatment for each Class. In accordance with
Section 1123(a)(1), Administrative Claims and Priority Tax Claims have not been
classified. WFSG also is required, under Section 1122 of the Bankruptcy Code, to
classify Claims against and Interests in WFSG into Classes that contain Claims
and Interests that are substantially similar to the other Claims and Interests
in such Classes. WFSG believes that the Plan has classified all Claims and
Interests in compliance with the provisions of Section 1122, but once the
Reorganization Case has been commenced, it is possible that a Holder of a Claim
or Interest may challenge the classification of Claims and Interests and that
the Bankruptcy Court may find that confirmation of the Plan requires a different
classification. In such event, WFSG intends, to the extent permitted by the
Bankruptcy Court and the Plan, to make such reasonable modifications of the
classifications under the Plan to permit Confirmation and to use the Plan
acceptances received in this solicitation for the purpose of obtaining the
approval of the reconstituted Class or Classes of which the accepting Holder
ultimately is deemed to be a member. Any such reclassification could adversely
affect the Class in which such Holder was initially a member, or any other Class
under the Plan, by changing the composition of such Class and the vote required
of that Class for approval of the Plan. Furthermore, a reclassification of a
Claim or Interest after approval of the Plan could necessitate a resolicitation
of acceptances of the Plan.
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The classification of Claims and Interests and the nature of distributions
to Holders of Impaired Claims or Impaired Interests in each Class are summarized
below. See "Securities to be Issued and Transferred Under the Plan" for a
description of the manner in which the number of shares of New Common Stock will
be determined and "Certain Risk Factors" for a discussion of various other
factors that could materially affect the value of the New Common Stock
distributed pursuant to the Plan.
In consideration for the distributions and other benefits provided under
the Plan, the provisions of the Plan will constitute a good faith compromise and
settlement of all claims or controversies relating to amounts and allowability
of Noteholder Claims (Class 4), and a good faith compromise and settlement of
all claims or controversies relating to the termination of all contractual,
legal, and equitable subordination rights that a Holder of a Claim or Interest
may have with respect to any Allowed Claim or Interest, or any distribution to
be made pursuant to the Plan on account of such Claim or Interest (including the
Compromised WREIT/WREP Claim and the Compromised MLMC Claim) and any Claims
relating to the WCC Restructuring. The entry of the Confirmation Order will
constitute the Bankruptcy Court's approval of the compromise or settlement of
all such Claims or controversies and the Bankruptcy Court's finding that such
compromise or settlement is in the best interests of the Company, Reorganized
WFSG and its property and Noteholders, and is fair, equitable and reasonable.
Except for Disputed Claims, distributions will be made on the Effective
Date or as soon as practicable thereafter. See "Distributions Under the Plan"
for a discussion of Plan provisions that may affect the timing of distributions
under the Plan. Distributions on account of Claims that become Allowed Claims
after the Effective Date will be made pursuant to the Plan. See "Distributions,
Disputed Claims -- Timing of Disbursement of Funds" and "Methods of
Distributions."
The treatment of Claims described below is subject to the Plan provisions
described in "The Plan of Reorganization -- Treatment of Claims and Interests
Under the Plan -- Additional Information Regarding Treatment of Certain Claims"
and "-- Treatment of Trade Creditors, Employees and Certain Professionals under
the Plan."
Treatment of Claims and Interests Under the Plan
Description of Claims or Interests
Unclassified Claims
Administrative Claims. An "Administrative Claim" is a claim for payment of
an administrative expense of a kind specified in Section 503(b) of the
Bankruptcy Code and referred to in Section 507(a)(1)of the Bankruptcy Code,
including, without limitation, the actual and necessary costs and expenses
incurred after the commencement of a chapter 11 case of preserving the estate or
operating the business of the company (including wages, salaries and commissions
for services), loans and advances to the Company made after the petition date,
compensation for legal and other services and reimbursement of expenses of
professionals retained by the Company or by a creditors committee awarded or
allowed under Section 330(a) or 331 of the Bankruptcy Code, certain retiree
benefits, certain reclamation claims, and all fees and charges against the
estate under Section 1930 of title 28, United States Code. Under the Plan, each
Holder of an Allowed Administrative Claim will receive on account of its
Administrative Claim and in full satisfaction thereof, Cash equal to the amount
of such Allowed Administrative Claim on or as soon as practicable after the
later of the Effective Date and the day on which such Claim becomes an Allowed
Claim, unless the Holder and WFSG or Reorganized WFSG, as the case may be, agree
or will have agreed to other treatment of such Claim, or an order of the
Bankruptcy Court provides for other terms; provided, that if incurred in the
ordinary course of business or otherwise assumed by WFSG pursuant to the Plan
(including Administrative Claims of governmental units for taxes), an Allowed
Administrative Claim will be assumed on the Effective Date and paid, performed
or settled by Reorganized WFSG when due in accordance with the terms and
conditions of the particular agreement(s) governing the obligation in the
absence of the Reorganization Case.
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Claims by Professionals. Other than professionals and certain other persons
engaged by the Company in the ordinary course of its business, professionals or
other Persons requesting compensation or reimbursement of expenses pursuant to
Section 327, 328, 330, 331, 503(b) or 1103 of the Bankruptcy Code for services
rendered on or before the Effective Date (including, without limitation, any
compensation requested by professionals retained by the official creditors
committee or compensation requested pursuant to Section 503(b)(4) of the
Bankruptcy Code by any professional or other entity for making a substantial
contribution in the Reorganization Case) shall file and serve on Reorganized
WFSG and its counsel an application for final allowance of compensation and
reimbursement of expenses no later than (i) 60 days after the Effective Date, or
(ii) such later date, if any, as the Bankruptcy Court orders upon application
made prior to the end of such 60-day period. Objections to applications of
professionals or other Persons for compensation or reimbursement of expenses
must be Filed and served on Reorganized WFSG, its counsel and the requesting
professional or other Person on or before the later of (x) ninety days after the
Effective Date and (y) thirty days after such date as the Bankruptcy Court
establishes as the deadline for Filing such applications.
Upon the commencement of the Reorganization Case, WFSG intends to seek
Bankruptcy Court approval to continue to make payments to certain parties in the
ordinary course of business. These payments include, among others, payments to
fund payroll obligations of Wilshire Leasing Limited (an affiliate of WFSG owned
by Andrew A. Wiederhorn and Lawrence A. Mendelsohn), which provides
administrative and day-to-day services to WFSG (which has no employees of its
own) and which will continue to do so during the pendency of the Reorganization
Case.
On or as soon as practicable after the Effective Date, Reorganized WFSG
shall pay the reasonable fees and expenses of counsel and financial advisors to
the Unofficial Noteholders' Committee incurred through and including the
Effective Date.
On or as soon as practicable after the Effective Date, Reorganized WFSG
will pay the contractual claims of the Indenture Trustee for its fees and
expenses including its reasonable attorneys' fees and expenses. Such payments to
the Indenture Trustee shall be in full satisfaction of any lien or other
priority in payment available to the Indenture Trustee pursuant to the Old
Indentures or applicable law for the payment of such fees and expenses
("Indenture Trustee Charging Lien"). To the extent, after being furnished with
normal supporting documents for such fees and expenses, Reorganized WFSG
disputes the reasonableness of any such fees and expenses, Reorganized WFSG will
pay such fees and expenses as are not disputed, and will submit to the Indenture
Trustee a written list of specific fees and expenses viewed by Reorganized WFSG
as not being reasonable. To the extent that Reorganized WFSG and the Indenture
Trustee are unable to resolve the dispute, the dispute will be resolved by the
Bankruptcy Court. The Indenture Trustee will not attach or set off any of its
fees and expenses against distributions to Holders of Old Notes and will not
otherwise withhold or delay any such distributions.
Priority Tax Claims. A Priority Tax Claim is a claim for an amount entitled
to priority under Section 507 (a)(8)of the Bankruptcy Code. Unless otherwise
agreed to by WFSG or Reorganized WFSG, as the case may be, and a Holder of a
Priority Tax Claim, each Holder of an Allowed Priority Tax Claim will receive,
at the sole option of Reorganized WFSG, (i) Cash equal to the unpaid portion of
such Allowed Priority Tax Claim on the later of the Effective Date and the date
on which such Claim becomes an Allowed Priority Tax Claim, or as soon thereafter
as is practicable, or (ii) equal quarterly cash payments in an aggregate amount
equal to such Allowed Priority Tax Claim, together with interest at a fixed
annual rate to be determined by the Bankruptcy Court or otherwise agreed to by
Reorganized WFSG and such Holder, over a period through the sixth anniversary of
the date of assessment of such Allowed Priority Tax Claim, or upon such other
terms determined by the Bankruptcy Court to provide the Holder of such Allowed
Priority Tax Claim deferred cash payments having a value, as of the Effective
Date, equal to such Allowed Priority Tax Claim. The foregoing treatment of
Allowed Priority Tax Claims is consistent with the provisions of Section
1129(a)(9)(C)of the Bankruptcy Code, and the Holders of Allowed Priority Tax
Claims are not entitled to vote on the Plan. Pursuant to Section 1123(a)(1)of
the Bankruptcy Code, Priority Tax Claims are not designated as a Class of Claims
for purposes of the Plan.
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Classified Claims Against and Interests In WFSG
Class 1 -- Lender Secured Claims. Class l consists of all Allowed Lender
Secured Claims against WFSG represented by, relating to, arising under or in
connection with the Repurchase Agreements. Each Allowed Lender Secured Claim
against WFSG will be treated as follows (a) the Plan shall leave unaltered the
legal, equitable and contractual rights to which such Claim entitles the Holder;
or (b) (i) WFSG shall cure any default with respect to such Claim that occurred
before or after the Filing Date (other than a default of a kind specified in
Section 365(b)(2) of the Bankruptcy Code), (ii) the maturity of such Claim shall
be Reinstated as such maturity existed before any such default, (iii) the Holder
of such Claim shall be compensated for any damages incurred as a result of any
reasonable reliance by the Holder on any right to accelerate its Claim (as may
be determined by the Bankruptcy Court) and (iv) the legal, equitable and
contractual rights of such Holder will not otherwise be altered; or (c) such
Claim shall receive such other treatment to which the Holder shall consent.
Class 1 Claims are Unimpaired and, accordingly, will be deemed to have accepted
the Plan. WFSG estimates that, as of the Filing Date, the aggregate amount of
Allowed Lender Secured Claims against WFSG (including accrued interest through
the Filing Date) will be approximately $11.0 million.
Under the Plan, Holders of Claims in Class l will not be required to file
proofs of Claim with the Bankruptcy Court and no deadline for filing proofs of
claims or interests (" Bar Date") will be enforced as to such Claims.
Class 2 -- Other Secured Claims. All Allowed Secured Claims against WFSG
that are not included in Class l (defined in the Plan as "Other Secured Claims")
are classified in Class 2. Class 2 consists of all Allowed Secured Claims
against the Debtor other than Lender Secured Claims in Class l. These primarily
include Claims represented by, relating to, arising under or in connection with
capital leases to which WFSG is a party. Each Allowed Other Secured Claim
against WFSG will be treated as follows (a) the Plan shall leave unaltered the
legal, equitable and contractual rights to which such Claim entitles the Holder;
or (b) (i) WFSG shall cure any default with respect to such Claim that occurred
before or after the Filing Date (other than a default of a kind specified in
Section 365(b)(2) of the Bankruptcy Code), (ii) the maturity of such Claim shall
be Reinstated as such maturity existed before any such default, (iii) the Holder
of such Claim shall be compensated for any damages incurred as a result of any
reasonable reliance by the Holder on any right to accelerate its Claim (as may
be determined by the Bankruptcy Court) and (iv) the legal, equitable and
contractual rights of such Holder will not otherwise be altered; or (c) such
Claim shall receive such other treatment to which the Holder shall consent.
Class 2 Claims are Unimpaired and, accordingly, will be deemed to have accepted
the Plan. WFSG estimates that, as of the Filing Date, the aggregate amount of
Allowed Other Secured Claims against WFSG (including accrued interest through
the Filing Date) will be approximately $2.0 million.
Under the Plan, Holders of Claims in Class 2 will not be required to file
proofs of Claim with the Bankruptcy Court and no Bar Date will be enforced as to
such Claims.
Class 3 -- Priority Claims. Class 3 Claims are Unimpaired. Class 3 consists
of the Allowed Priority Claims against WFSG. A Priority Claim is a Claim for an
amount entitled to priority under Sections 507(a)(3), 507(a)(4), 507(a)(5),
507(a)(6), 507(a)(7), or 507(a)(9) of the Bankruptcy Code and does not include
any Priority Tax Claim. The Debtor does not believe that there will be any
existing Priority Claim. However, in the event there are existing Priority
Claims, the Plan provides that each Holder of an Allowed Class 3 Priority Claim
shall be entitled to receive (a) Cash equal to the amount of such Claim, unless
the Holder of such Claim and Reorganized WFSG agree to a different treatment, on
the latest of (i) the Effective Date or as soon as practicable thereafter, (ii)
the date such Claim becomes an Allowed Priority Claim and (iii) the date that
such Claim would be paid in accordance with any terms and conditions of any
agreements or understandings relating thereto between the Debtor and the Holder
of such Claim, and/or (b) such other treatment, as determined by the Bankruptcy
Court, required to render such Claim Unimpaired. Class 3 Claims are Unimpaired
and, accordingly, will be deemed to have accepted the Plan.
Under the Plan, Holders of Claims in Class 3 will not be required to file
proofs of Claim with the Bankruptcy Court and no Bar Date will be enforced as to
such Claims.
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Class 4 -- Noteholder Claims. Class 4 consists of the Allowed Unsecured
Claims against WFSG of Holders of Old Notes (including all Claims and causes of
action arising therefrom or in connection therewith) including an aggregate
principal amount of $184.2 million and aggregate accrued and unpaid interest of
approximately $14.5 million through, but not including, the Filing Date
(assuming the Filing Date occurs on March 3, 1999) and related fees, costs and
expenses. The Claim of each Holder of Old Notes as of the Distribution Record
Date will be Allowed in the aggregate amount of the unpaid principal of such
Holder's Old Notes plus unpaid interest (calculated in accordance with the
provisions of the Old Indentures governing the Old Notes) which accrued prior to
the Filing Date. Class 4 Claims are Impaired and, accordingly, Holders of
Allowed Class 4 Claims are entitled to vote on the Plan. On the Effective Date,
the Old Notes will be terminated, canceled and annulled and extinguished. On the
Effective Date or as soon as practicable thereafter and assuming that WREP funds
100% of the DIP Facility, each Holder of an Allowed Class 4 Claim will receive
on account of such Allowed Claim a Pro Rata portion of 20.0 million shares of
New Common Stock, equal to 100% of the New Common Stock to be issued by
Reorganized WFSG on the Effective Date (i.e., 108.551 shares of New Common Stock
for each $1,000 of principal amount of Old Notes) less the number of shares (not
in excess of 0.5% of such New Common Stock) reallocated to Holders of Old Common
Stock pursuant to the Market Liquidity Reallocation. The purpose of the Market
Liquidity Reallocation is to foster the development of, and improve conditions
in, the trading market for New Common Stock. To the extent that WREP does not
fund the full amount of the DIP Facility, only a similar percentage of the
Compromised WREIT/WREP Claim (in dollar terms) will be treated as entitled to
receive the New 6.00% Note and the remaining percentage (in dollar terms) will
be treated the same as Holders of an Allowed Class 4 Claim. Assuming that WREP
does not fund any portion of the DIP Facility, the shares of New Common Stock
distributed to each Holder will be reduced, but in no event will the shares of
New Common Stock be less than 91.528% of the New Common Stock to be outstanding
on the Effective Date (i.e. 99.354 shares of New Common Stock for each $1,000 of
principal amount of Old Notes) less the number of shares reallocated pursuant to
the Market Liquidity Reallocation. As a result, the percentage ownership of (but
not the number of shares delivered to) Holders of Allowed Class 4 Claims will
vary according to the percentage of the DIP Facility funded. To the extent, if
any, that the classification and manner of satisfying Claims and Interests under
the Plan does not take into consideration all contractual, legal and equitable
subordination rights that Holders of Allowed Class 4 Claims may have against
Holders of Claims or Interests with respect to distributions made pursuant to
the Plan, each Holder of an Allowed Class 4 Claim will be deemed, upon the
Effective Date, to have waived all contractual, legal or equitable subordination
rights that such Holder might have including, without limitation, any such
rights arising out of the Old Notes, the Old Indentures governing such Old Notes
or otherwise and each Holder will be releasing WFSG, its officers, directors,
employees and agents from all claims. See "The Plan of Reorganization Releases."
The recovery for the Holders of Allowed Class 4 Claims depends
significantly on the value of the New Common Stock on the Effective Date. WFSG
estimates that Class 4 will receive New Common Stock valued at approximately
$3.73 - $4.13 per share on a fully diluted basis excluding certain management
stock options yielding an estimated recovery of approximately 37% - 42% of their
Claims (40% - 45% of principal amount). See "Description of New Common Stock"
and "Projected Financial Information."
Under the Plan, neither the Indenture Trustees nor the Holders of Claims in
Class 4 will be required to file proofs of Claim with the Bankruptcy Court and
no Bar Date will be established or enforced as to such Claims.
Class 5 -- General Unsecured Claims. Class 5 consists of all Allowed
General Unsecured Claims against WFSG (other than an Unsecured Claim in Class 4)
and includes, among others, the Compromised MLMC Claim, the Compromised
WREIT/WREP Claim, Guaranty Claims, Trade Claims, Intercompany Claims, and Claims
resulting from the rejection of leases or executory contracts.
The legal, equitable and contractual rights of each Holder of an Allowed
Class 5 Claim will not be altered by the Plan. All Allowed Class 5 Claims shall
be satisfied on the latest of (a) the Effective Date, (b) the date a Class 5
Claim becomes an Allowed Claim, (c) the date an Allowed Class 5 Claim becomes
due and payable in the ordinary course of WFSG's business consistent with WFSG's
ordinary payment practices or pursuant to any agreement between WFSG and the
Holder of an Allowed Class 5 Claim or (d) on such other date as may be agreed to
by WFSG and the Holder of such Allowed Class 5 Claim.
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The Compromised WREIT/WREP Claim consists of all debt owed to, plus any
other claims of, WREP or WREIT as of the close of business on January 14, 1999,
together with claims of WREP or WREIT thereafter outside the ordinary course of
business and not approved by the majority of the Noteholders (approximately
$18.4 million) and resulted from a negotiated compromise and settlement of a
claim held by WREIT/WREP. Under the compromise and settlement dated as of
January 19, 1999, WREP will receive the New 6% Notes having a principal amount
equal to such claim proportionally to the amount of the DIP Facility funded.
Under the compromise and settlement, the Compromised WREIT/WREP Claim receives
the more favorable treatment of the issuance of the New 6% Notes only to the
extent WREP funds the full amount of the DIP Facility. To the extent WREP does
not fund the full amount of the DIP Facility, a proportionate amount of the
Compromised WREIT/WREP Claim will be treated pari passu with the Old Notes. This
compromise and settlement was only reached after the Company had approached
several well known debtor-in-possession lenders, all of whom declined to provide
financing on comparable terms.
Prior to the Solicitation, the Company also negotiated a compromise and
settlement of a Claim by MLMC of approximately $2.6 million. The Compromised
MLMC Claim arose out of WFSG's obligation to indemnify MLMC for any losses
relating to a deposit made by WFSG and funded in part by MLMC in connection with
a proposed acquisition of real estate in Europe. As a result of a dispute with
the seller of such real estate, such seller retained the deposit and WFSG is
pursuing its legal remedies against the seller. Under this compromise and
settlement, MLMC will receive a promissory note which provides for a series of
equal monthly cash payments of $250,000 over the 11 months following the
Effective Date in the aggregate equal to the amount of such Claims (i.e.
approximately $2.6 million), together with interest at 10% per annum on the then
outstanding principal amount.
Class 5 also includes Trade Claims, Guaranty Claims and Intercompany
Claims. A "Trade Claim" is defined in the Plan as any Unsecured Claim arising
from the delivery of goods or services in the ordinary course of business. A
"Guaranty Claim" is defined in the Plan as a contingent Claim arising under or
relating to any guarantee under which WFSG is a guarantor, excluding any
guarantee by WFSG or its subsidiaries of the obligations of WCC to CCI which
have been compromised and will be settled under the WCC Restructuring (which
guarantee is to be released under the WCC Restructuring). See "Description of
WCC Restructuring." An "Intercompany Claim" is defined in the Plan as a Claim
held by WSC, Wilshire Funding Corporation ("WFC"), First Bank, Wilshire Funding
Corporation 1997-1, Wilshire Funding Corporation 1997-2 or other affiliates
against WFSG, WMFC 1997-1 Inc., WMFC 1998-2 Inc. excluding WREIT and WREP to the
extent of the Compromised WREIT/WREP Claim and claims related to the WCC
Restructuring. The amount of Intercompany Claims against WFSG currently totals
approximately $5.4 million. The Plan reflects WFSG's intention to treat Trade
Claims, Guaranty Claims and Intercompany Claims as if the Reorganization Case
had never been commenced. In particular, upon the commencement of the
Reorganization Case, WFSG intends to seek Bankruptcy Court approval to pay in
the ordinary course of business all outstanding Trade Claims to trade creditors
who continue to provide normal trade credit terms to WFSG or who have previously
agreed to compromise their Claims in a manner acceptable to WFSG.
Assuming the Bankruptcy Court authorizes WFSG to pay Holders of Trade
Claims in the ordinary course of business during and after the pendency of the
Reorganization Case and as and when such obligations become due and owing, WFSG
expects that there will be no Trade Claims against WFSG as of the Effective Date
except to the extent that trade payables were not payable by their terms until
after the Effective Date, in which case WFSG expects that such trade payables
would be minimal. If the Bankruptcy Court does not authorize WFSG to do so, WFSG
estimates that the allowed amount of Trade Claims against WFSG as of the
Effective Date, will be minimal, if any.
Class 5 Claims are Unimpaired and, accordingly, will be deemed to have
accepted the Plan. Holders of Claims in Class 5 will not be required to file
proofs of claim with the Bankruptcy Court and no Bar Date will be established or
enforced as to such Claims.
Class 6 -- Interests of Holders of Old Common Stock. Class 6 consists of
Allowed Interests (aggregating 10,885,000 shares) of issued and outstanding Old
Common Stock. As of the Effective Date, the Old Common Stock (or any other
equity interests) shall be terminated, canceled, annulled and extinguished and
the Holders of Old Common Stock will neither receive nor retain any property
under the Plan and therefore are deemed to reject the Plan.
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Accordingly, Class 6 will not be entitled to vote on the Plan. Pursuant to the
Market Liquidity Reallocation, however, such Holders will receive its Pro Rata a
reallocated amount of New Common Stock, not to exceed, not to exceed 0.5% of the
New Common Stock outstanding on the Effective Date, which would have otherwise
been distributed to the Holders of the Old Notes who accept the Plan. The
maximum amount of New Common Stock to be reallocated pursuant to the Market
Liquidity Reallocation described above will be reduced if WREP does not fund the
full amount of the DIP Facility.
Holders of Interests in Class 6 are not required to file proofs of
Interests unless they disagree with the number of shares set forth on WFSG's
stock register.
The Holders of Class 6 Interests will recover nothing under the Plan.
Cramdown
The so-called "cramdown" provisions of Section 1129(b) of the Bankruptcy
Code permit confirmation of a chapter 11 plan of reorganization in certain
circumstances even if the plan is not accepted by all impaired classes of claims
and interests. See "Voting and Confirmation of the Plan -- Acceptance or
Cramdown." In the event that at least one Impaired Class of Claims votes to
accept the Plan (and at least one Impaired Class either votes to reject the Plan
or is deemed to have rejected the Plan), WFSG will request that the Bankruptcy
Court confirm the Plan under the cramdown provisions of the Bankruptcy Code. In
that event, WFSG has reserved the right to modify the Plan to the extent, if
any, that Confirmation pursuant to Section 1129(b) of the Bankruptcy Code
requires or permits modification of the Plan.
Sources of Cash to Make Plan Distributions
Except as otherwise provided in the Plan or the Confirmation Order, all
cash necessary for Reorganized WFSG to make the payments pursuant to the Plan
will be obtained from Reorganized WFSG's cash balances, the operations of WFSG
or Reorganized WFSG, an anticipated tax refund or the DIP Facility.
Conditions Precedent to Confirmation and Consummation of the Plan
Conditions to Confirmation
Confirmation of the Plan cannot occur until the Bankruptcy Court finds that
all of the substantive confirmation requirements under the Bankruptcy Code have
been satisfied pursuant to Section 1129 of the Bankruptcy Code. In addition, the
Bankruptcy Court will not enter the Confirmation Order unless the Confirmation
Order is acceptable in form and substance to WFSG, and the Confirmation Order
expressly authorizes and directs WFSG and Reorganized WFSG to perform those
actions specified in the Plan. Finally, it will be a condition to Confirmation
that each of the events and actions required by the Plan to occur or to be taken
prior to Confirmation will have occurred or been taken, or WFSG or the party
whose obligations are conditioned upon such occurrences or actions, as
applicable, have waived such occurrences or actions and the Bankruptcy Court
confirms the Plan without such occurrence or action.
Conditions to Effective Date
The Effective Date will not occur and the Plan will not be consummated
unless and until each of the following conditions has been satisfied or waived
by WFSG with, where applicable under the Plan, the consent of the Unofficial
Noteholders' Committee:
(i) The Confirmation Date shall have occurred and the Confirmation
Order shall have become a Final Order.
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(ii) The Confirmation Order authorizes and directs that WFSG and
Reorganized WFSG take all actions necessary or appropriate to enter into,
implement and consummate the contracts, instruments, releases, leases,
indentures and other agreements or documents created in connection with the
Plan, including those actions set forth in Section V of the Plan.
(iii) The WCC Restructuring (as defined below) shall have been
effectuated including, without limitation, the release of the CCI Guaranty
Claims.
(iv) The Employment Agreements between Reorganized WFSG and Andrew A.
Wiederhorn and Lawrence A. Mendelsohn shall have been executed and
delivered prior to the Filing Date and remain in full force and effect as
of the Effective Date.
(v) All other actions and documents necessary to implement the
provisions of the Plan have been effected or executed or, if waivable,
waived by the Person or Persons entitled to the benefit thereof.
Waiver of Conditions to Confirmation and Effective Date
Each of the conditions to Confirmation and the Effective Date may be waived
in whole or in part by WFSG at any time, except those conditions to the
Effective Date identified in the Plan as requiring consent of the Unofficial
Noteholders' Committee without notice or an Order of the Bankruptcy Court. The
failure to satisfy or to waive any condition may be asserted by WFSG regardless
of the circumstances giving rise to the failure of such condition to be
satisfied (including any action or inaction by WFSG). The failure of WFSG to
exercise any of the foregoing rights will not be deemed a waiver of any other
rights and each such right will be deemed an ongoing right that may be asserted
at any time.
Modification or Revocation of the Plan; Severability
WFSG reserves the right to modify the Plan at any time prior to the
Confirmation Date in the manner provided for by Section 1127 of the Bankruptcy
Code or as otherwise permitted by law without additional disclosure pursuant to
Section 1125 of the Bankruptcy Code, except as the Bankruptcy Court may
otherwise order. The potential impact of any such amendment or modification on
the Holders of Claims and Interests cannot presently be foreseen, but may
include a change in the economic impact of the Plan on some or all of the
Classes or a change in the relative rights of such Classes. If any of the terms
of the Plan is modified prior to the Voting Deadline in a manner determined by
WFSG to constitute a material adverse change as to Holders of the Old Notes,
WFSG will promptly disclose any such modification in a manner reasonably
calculated to inform such Holders of the affected Voting Securities of such
modification and WFSG reserves the right to extend the solicitation period for
acceptances of the Plan for a period which WFSG in its discretion deems
appropriate, depending upon the significance of the modification and the manner
of disclosure to the Old Notes.
If, after receiving sufficient acceptances but prior to Confirmation of the
Plan, WFSG were to seek to modify the Plan, WFSG could only use such previously
solicited acceptances if (i) all adversely affected creditors accepted the
modifications in writing or (ii) the Bankruptcy Court determined, after notice
to official committees or other affected parties, that such modifications did
not adversely change the treatment of any affected creditors. WFSG reserves the
right to use acceptances of the Plan received in this solicitation to seek
Confirmation of the Plan under any other circumstances, including in connection
with a case under the Bankruptcy Code for WFSG commenced by the filing of an
involuntary petition, subject to approval of the Bankruptcy Court.
WFSG reserves the right after the Confirmation Date and before the
Effective Date to modify the terms of the Plan or waive any conditions to the
effectiveness thereof if and to the extent WFSG determines that such
modifications or waivers are necessary or desirable in order to consummate the
Plan. WFSG will give such Holders of Claims and Interests notice of such
modifications or waivers as may be required by applicable law and the Bankruptcy
Court, and any such modifications will be subject to the approval of the
Bankruptcy Court to the extent required by, and in
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accordance with, Section 1127 of the Bankruptcy Code. WFSG will give notice to
any Committee, the Unofficial Noteholders' Committee and any DIP Lenders of any
modification of the Plan.
If, prior to Confirmation, any term or provision of the Plan is held by the
Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy Court will
have the power, upon the request of WFSG, to alter and interpret such term or
provision to make it valid or enforceable to the maximum extent practicable,
consistent with the original purpose of the term or provision held to be
invalid, void or unenforceable, and such term or provision will then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of the
Plan will remain in full force and effect and will in no way be affected,
impaired or invalidated by such holding, alteration or interpretation. The
Confirmation Order will constitute a judicial determination and will provide
that each term and provision of the Plan as it may have been altered or
interpreted in accordance with the foregoing, is valid and enforceable pursuant
to its terms.
The Reorganized Company
A description of various matters relating to Reorganized WFSG including (i)
information relating to the business to be conducted by Reorganized WFSG
following the Effective Date, (ii) certain projected financial information,
(iii) the proposed management of Reorganized WFSG and proposed compensation and
other arrangements relating thereto, and (iv) certain corporate governance
matters, is set forth or referenced below.
Corporate Structure
On the Effective Date, WFSG will become Reorganized WFSG. As such,
Reorganized WFSG shall own interests in the same subsidiaries as are currently
owned by WFSG except that following the WCC Restructuring, WFSG will own 50.01%
of a new subsidiary which incorporates the servicing operations of WCC. See "The
Plan of Reorganization -- Introduction."
Business of the Reorganized Company
Following the Effective Date, Reorganized WFSG will continue to operate the
businesses presently operated by WFSG and such other lines of business as
Reorganized WFSG may determine. For a description of the Company's current
business operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." In addition, the Company
will begin servicing its own assets following the transfer of servicing
operations from WCC to a new subsidiary of the Company. See "Description of
WCC."
Projected Financial Information
For information relating to the Projections, see "Projected Financial
Information."
Directors and Management of Reorganized WFSG
Board of Directors
It is anticipated that the Board of Directors of Reorganized WFSG will
consist of seven members. The names and biographical information concerning the
appointees of the Unofficial Noteholders' Committee will be provided at or prior
to the hearing on confirmation of the Plan. Andrew A. Wiederhorn and Lawrence A.
Mendelsohn, currently the Chairman and Chief Executive Officer, and President,
respectively, of the Company also shall be members of the Board. In addition, at
the option of the Unofficial Noteholders' Committee, two additional Board seats
may be created and filled by current, independent directors of the Company.
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Executive Officers
The initial officers of Reorganized WFSG will be selected by the Board of
Directors of Reorganized WFSG. Existing management of the Company will remain
unchanged as of the Effective Date of the Plan. Mr. Wiederhorn will continue as
the Chief Executive Officer of Reorganized WFSG and Mr. Mendelsohn will continue
as President of Reorganized WFSG. Prior to the Filing Date, WFSG shall enter
into employment agreements with each of Andrew A. Wiederhorn and Lawrence A.
Mendelsohn. The compensation packages are expected to include a base salary and
incentive compensation, each in accordance with industry norms for similarly
situated companies. See "Management -- Directors and Executive Officers of
WFSG," "Executive Compensation -- Executive Officers' Compensation" and "--
Employment Agreements."
Certain Corporate Governance Matters
Reorganized WFSG Certificate of Incorporation and Reorganized WFSG Bylaws
The forms of the Reorganized WFSG Certificate of Incorporation and the
Reorganized WFSG Bylaws will be provided at or prior to the hearing on
confirmation of the Plan. The Certificate of Incorporation and the Bylaws shall
include a provision prohibiting the issuance of non-voting stock of Reorganized
WFSG as required by Section 1129(a)(i) of the Bankruptcy Code.
Description of WCC Restructuring
As a condition to the effectiveness of the Plan, the servicing of the
Company's assets must be conducted by the Company or one of its subsidiaries and
not by a company outside the corporate group. Pursuant to the Amended and
Restated WCC Restructuring Agreement, the Company, WCC, CCI and the other
parties thereto agreed that the servicing operations currently conducted by WCC
shall be transferred to a subsidiary of the Company on the Effective Date and
that WCC's indebtedness should be restructured (the "WCC Restructuring"). The
transfer of servicing to a subsidiary of WFSG and restructuring of indebtedness
is currently expected to be accomplished as follows:
CCI or its assigns, on behalf of or as assignee for the benefit of any
investors CCI represents (collectively referred to as the "Investors") or a
designee of CCI ("CCI Assignee"), shall form a corporation ("CCI Mergeco") which
shall in turn form a wholly-owned corporate subsidiary ("CCI Mergeco Sub"). CCI
Mergeco Sub shall merge into WCC with WCC to be the surviving entity, to be
renamed Capital Wilshire Holdings, Inc. ("CWH") with one percent (1%) of the
outstanding common stock of CCI Mergeco to be owned by a limited liability
company owned by the Principal Shareholders and ninety-nine percent (99%) of the
outstanding common stock of CCI Mergeco to be owned by CCI Assignee. WCC shall
have merged with Portland Servicing Corporation immediately prior thereto and
WCC shall be the surviving entity. CWH shall contribute all of its assets
(including, without limitation, the right to the name Wilshire Credit
Corporation and all rights to and under all insurance policies) to a newly
formed subsidiary of WFSG (the "New Servicer"), in exchange for the Class B
Common Stock described below and the assumption by New Servicer, of all of the
liabilities of CWH (other than obligations owing under certain loan agreements,
including without limitation the Master Loan and Security Agreement, as amended,
between CCI and each of WCC and Portland Servicing Corporation (collectively
referred to herein as the "WCC Loan Agreement") and any other Claims against WCC
or Portland Servicing Corporation). CCI shall release its lien on the assets of
CWH and Portland Servicing Corporation in exchange for the pledge by CWH of
Class B Common Stock (including the Liquidation Bond and the Exchange Rights as
described below). WFSG shall contribute assets or stock of Wilshire Servicing
Corporation to New Servicer for all of the Class A Common Stock of New Servicer.
New Servicer shall change its name to Wilshire Credit Corporation. As part of
the WCC Restructuring, the Company also negotiated a compromise and settlement
of an arguably secured claim by CCI against the Company, including a claim under
a disputed guarantee (the "WCC Guarantee") by the Company of certain WCC's
indebtedness in a maximum amount of $35 million. The Company originally provided
the WCC Guarantee in order to obtain certain financing for itself and affiliates
in October 1998 when the Company and its affiliates were experiencing a
liquidity crisis due to recent market events. The claim by CCI under the WCC
Guarantee arose out of the recent market events which also had a severe impact
on WCC. Under this compromise and
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settlement, CCI will receive (i) a $2.2 million non-interest bearing promissory
note which is payable in quarterly installments so as to amortize over 20 years
and which is payable in full five years after the completion of the WCC
Restructuring; (ii) a non-interest bearing, non-recourse obligation of WFSG, in
the form of a Liquidation Bond (as described below) with recourse limited to
certain servicing fees and other assets of WFSG and the New Servicer in which
CCI currently has a security interest for $19.3 million, but which is payable
only upon liquidation of New Servicer, (iii) a guarantee by the New Servicer of
such obligation; (iv) a non-interest bearing promissory note for $350,000 which
is payable in equal installments over the nine month period following the WCC
Restructuring; and (v) certain other consideration.
Pursuant to the WCC Restructuring Agreement, the "Class B Common Stock" is
expected to have the following terms:
a. The Class B Common Stock shall be non-voting and shall constitute all
of the outstanding class B common stock of New Servicer; all of the
class A common stock shall be owned, directly or indirectly, by WFSG;
b. New Servicer shall not declare or distribute any dividends or other
distributions on the class A common stock of New Servicer unless an
amount equal to 49.99% of the total dividends or distributions is
declared and distributed to the holders of the Class B Common Stock,
nor shall New Servicer declare or distribute any dividends or other
distributions on the Class B Common Stock unless an amount equal to
50.01% of the total dividends or distributions is declared and
distributed to the holders of the class A common stock of New
Servicer;
c. On liquidation, the Class B Common Stock shall receive distributions,
in preference to any distribution to the class A common shareholders
of New Servicer, in an amount equal to the greater of (i) $19.3
million (less all distributions made with respect to the Class B
Common Stock and any payments on the Liquidation Bond) or (ii) 49.99%
of all distributions;
d. Unless the Class B Common Stock has been otherwise converted or
exchanged, the holders at any time may convert one hundred percent
(100%) of the Class B Common Stock into an amount of class A common
stock representing 49.99% of the outstanding common stock of New
Servicer;
e. Unless the Class B Common Stock has been otherwise converted or
exchanged, the holders may, at the times contemplated in clause (g)
below, commencing twenty-four (24) months after the issuance of the
Class B Common Stock, exchange one hundred percent (100%) of the Class
B Common Stock into a number of shares of common stock of WFSG (the
"Exchange Rights") which New Servicer shall obtain from WFSG for the
benefit of the holders of the Class B Common Stock to include as part
of the Class B Common Stock equal to the Class B Common Stock Value
divided by the Determined Stock Price, computed as follows:
i. The "Class B Common Stock Value" shall be equal to the product of
the following formula:
90% x P/E x I x 49.99%
P= the average of the closing prices per share of WFSG
common stock for the consecutive ten (10) trading-day
period commencing on the first trading day immediately
following the fifth trading day after WFSG's first
public release (whether by filing with the Securities
and Exchange Commission pursuant to the Securities and
Exchange Act of 1934, or by a press release) of its
quarterly financial information (such 10-day period,
the "Trading Period")
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E= earnings, adjusting for extraordinary items (net after
tax, determined in accordance with generally accepted
accounting principles ("GAAP")), per share of common
stock of WFSG for the 12-month period ended as of the
most recent quarter for which earnings have been
reported
I= total earnings, adjusting for extraordinary items (net
after tax, determined in accordance with GAAP) of New
Servicer for the 12-month period ended as of the most
recent quarter for which earnings of WFSG have been
reported
ii. The "Determined Stock Price" shall be equal to the average of the
closing prices per share of WFSG common stock during the Trading
Period.
iii. Notwithstanding the foregoing, after giving effect to the
conversion or exchange, the Class B Common Stock shall be
convertible or exchangeable into a maximum of 42.75% of
Outstanding Common Stock of WFSG, taking into account the
issuance of the common stock upon conversion of the Class B
Common Stock. For purposes hereof, "Outstanding Common Stock of
WFSG" shall mean all outstanding stock at the time of conversion
or exchange, excluding any common stock of WFSG issued after the
date hereof except for common stock issued in exchange for the
Old Notes and common stock issued upon conversion or exchange of
the Class B Common Stock.
f. In the event a Merger or Change in Control (each as defined below) is
to occur prior to the expiration of the 36-month period following the
issuance of the Class B Common Stock, WFSG shall give reasonable prior
written notice to the holders of the Class B Common Stock and the
following shall apply:
i. The holders of the Class B Common Stock shall have the option
(exercisable for a reasonable period after such notice) to treat
such Merger or Change in Control as being subject to clause (h)
(including, but not limited to, the option to require redemption
of the holders of the Class B Common Stock) notwithstanding that
it occurred prior to the expiration of such period; or
ii. In the event the holders of the Class B Common Stock do not elect
the option in subclause (i), at any time commencing at the end of
such 36-month period, WFSG or such other person or entity in
control of WFSG's assets may require the exchange of the Class B
Common Stock by the holders thereof pursuant to the foregoing
clause (e) for cash equal to the Class B Common Stock Value.
g. The exchange contemplated in clause (e) or (f) above shall be
exercisable on any trading day occurring during a period commencing on
the first trading day after the end of each Trading Period and ending
on the close of business, Portland time, on the fifth trading day
after the end of such Trading Period.
h. Unless the Class B Common Stock has been otherwise converted or
exchanged, if, at any time commencing thirty-six (36) months after the
issuance of the Class B Common Stock, WFSG merges with or into, or
sells substantially all of its assets to, any third party (a "Merger")
or substantially all of the holders of common stock elect to sell
their common stock to a single third party (a "Change in Control"),
WFSG may require the holders to exchange the Class B Common Stock
pursuant to clause (e) above immediately prior to the effectiveness of
such Merger or Change in Control, as the case may be, and the holders
of the Class B Common Stock shall be entitled to "tag along" with
other shareholders and WFSG may "drag along" the holders of the Class
B Common Stock with other
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shareholders; provided, however, that WFSG shall be required to give
the holders of the Class B Common Stock at least twenty (20) days
prior written notice of such conversion or exchange.
i. Unless the Class B Common Stock has been otherwise converted or
exchanged, WFSG may require the holders of the Class B Common Stock to
exchange the Class B Common Stock for WFSG common stock pursuant to
clause (E) above if the Class B Common Stock Value is at least equal
to the sum of $150 million plus five percent (5%) per annum from
January 1, 1999, less all distributions made on the Class B Common
Stock.
j. If the common stock of WFSG is not publicly traded, the applicable
Class B Common Stock Value shall be determined on a quarterly basis,
on or before the thirtieth day after the end of each quarter, based
upon the financial statements for WFSG for such quarter. In such
event, (1) "P" shall be equal to the product of the following formula:
(12 x E) / O
O= number of outstanding shares of common stock of WFSG;
and (2) the "Determined Stock Price" shall equal "P" as computed under
this clause (K).
The calculation of the applicable Class B Common Stock Value shall be
otherwise determined as set forth above.
k. The Amended and Restated WCC Restructuring Agreement also provides
that WFSG will issue a "Liquidation Bond" which shall have the
following terms:
i. The Liquidation Bond shall be a non-interest bearing bond of WFSG
in the amount of $19.3 million, pursuant to which WFSG agrees, in
the event of a liquidation, to pay to the holders of the Class B
Common Stock an amount equal to $19.3 million less all
distributions made with respect to the Class B Common Stock
including such distributions in liquidation (the "Preferred
Amount");
ii. The Liquidation Bond shall be nonrecourse to WFSG, with recourse
limited to the security described below;
iii. The Liquidation Bond shall be secured by cash, cash equivalents,
stock, mortgage backed securities, mortgages, loans, the
servicing fees (the "Current Servicing Fees,") in which CCI
currently has a security interest and, at the option of New
Servicer, any servicing rights which it purchases in the future,
or other tangible personal or real property in which New Servicer
(or any affiliate of New Servicer making the pledge) has and at
all times maintains an equity market value of at least the
Preferred Amount, in the aggregate (the "Liquidation Bond
Collateral Account");
iv. Subject to certain restrictions, New Servicer may substitute
collateral for the collateral securing the Liquidation Bond.
v. Upon any conversion of the Class B Common Stock, the Liquidation
Bond will be redeemed and canceled in consideration of the stock
acquired in such conversion.
Under the Amended and Restated WCC Restructuring Agreement, the New Servicer has
agreed to certain limitations on indebtedness and certain limitations on the
transfer of servicing rights for the benefit of the holders of the New Preferred
Stock. Such agreement also provides that any dividends declared by WFSG during
the twenty-four month
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period in which Class B Common Stock may not be converted to WFSG common stock
in general will be shared pro rata (determined at the time of declaration as
though the Class B Common Stock had been converted to WFSG common stock) with
the holder of the Class B Common Stock. The Company has also agreed to provide
registration rights with respect to the New Common Stock issued on conversion of
the Class B Common Stock for a two year period following such conversion.
Potential Equity Investment
Following the losses incurred by the Company in October and November of
1998, the Company began discussions with a number of potential new equity
investors in order to strengthen its diminished equity base and obtain
additional capital to operate and develop the business. The Company is currently
in discussions with a number of potential investors concerning possible equity
investments in the Company. Such discussions are expected to continue during the
pendency of the prepackaged bankruptcy case. It is currently anticipated that
any such investments will be made after the Effective Date and that any such
investment will result in no less favorable treatment to the Noteholders as
compared to the Restructuring.
Ownership Of Stock By Certain Stockholders
For information relating to the amount of Old Common Stock held by
directors, executive officers and certain other stockholders of the Company, see
"Executive Compensation -- Security Ownership of Certain Beneficial Owners and
Management."
Securities to be Issued and Transferred Under the Plan
A description of the New Common Stock to be issued and transferred under
the Plan, including the applicability of federal and other securities laws, is
set forth or referenced below.
On the Effective Date or as soon as practicable thereafter, Reorganized
WFSG will, in accordance with the Plan, issue the New Common Stock to the
Holders of the Allowed Class 4 Claims. On the Effective Date, all securities,
instruments and agreements entered into pursuant to the Plan, including, without
limitation the New Common Stock, will become effective and binding in accordance
with their respective terms and conditions upon the parties thereto without
further act or action under applicable law, regulation, order or rule, and shall
be deemed to become effective simultaneously. See "-- Overview of the Plan --
Summary of Classes and Treatment of Claims and Interests" "-- Distributions
Under the Plan" and "Certain Risk Factors."
The New Common Stock and the New 6% Notes
For a description of the New Common Stock, see "Description of New Common
Stock" herein. For a description of the New 6% Notes and the MLMC Note; see
"Description of Indebtedness -- Reorganized Company Indebtedness."
Market and Trading Information
For information relating to the market for the New Common Stock, see
"Certain Risk Factors -- Lack of Trading Market; Volatility."
Applicability of Federal and Other Securities Laws
State Securities Laws Applicable to Offer of New Common Stock
State securities laws provide broad exemptions from securities registration
requirements for the sale of securities listed on a national exchange or traded
on the Nasdaq Stock Market. Such laws generally provide registration
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and qualification exemptions or exceptions by virtue of the definitions of
"offer" and "sale" contained in such laws, and also provide exemptions for
offers in connection with private placements to institutional investors. It is
expected that these exemptions or exceptions or the exemption from state
regulation provided pursuant to Section 18 of the Securities Act will apply to
the offer of the New Common Stock pursuant to this Solicitation.
Offering of New Common Stock
In reliance upon the exemption provided by Section 1145(a)(1)of the
Bankruptcy Code, the Company has not filed a registration statement under the
Securities Act or any other federal or state securities laws with respect to the
New Common Stock that may be deemed to be offered pursuant to the Solicitation.
To the extent that the Solicitation constitutes an offer of new securities not
exempt from registration under Section 1145 (a) (1), the Company is also relying
upon the exemptions from Securities Act registration provided by Section 3 (a)
(9) of the Securities Act and Section 4(2) of the Securities Act and Regulation
D promulgated thereunder.
Section 1145(a)(1). Section 1145(a)(l) exempts the offer or sale of
securities pursuant to a plan of reorganization from the registration
requirements of Section 5 of the Securities Act and from registration under
state and local securities laws if the following conditions are satisfied: (i)
the securities are issued by a debtor (or its affiliate or successor) under a
plan of reorganization; (ii) the recipients of the securities hold a claim
against, an interest in, or a claim for an administrative expense against, the
debtor; and (iii) the securities are issued in exchange for the recipients'
claims against or interests in the debtor, or principally in such exchange and
partly for cash or property. There is nothing in the Bankruptcy Code or its
legislative history to suggest that the Section 1145(a)(1) exemption from
Section 5 of the Securities Act registration does not apply to solicitations of
acceptances of a chapter 11 plan of reorganization that are made prior to the
filing of a chapter 11 petition. Accordingly, the Company believes that any
offer of New Common Stock deemed to result from the Solicitation qualifies for
the exemption from the registration requirements of Section 5 of the Securities
Act and state and local securities laws provided by Section 1145(a)(l).
Section 3(a)(9). To the extent that Section 1145 (a)(1) does not exempt
from registration any offers of new securities deemed to result from the
Solicitation, the Company is relying upon Section 3(a)(9)of the Securities Act.
Section 3 (a)(9) exempts from the registration requirements of the Securities
Act any security exchanged by the issuer with its existing security holders
exclusively where no commission or other remuneration is paid or given directly
or indirectly for soliciting such exchange. Although Section 3(a)(9) does not
apply to securities "exchanged" in a chapter 11 case, the Company believes that
such section exempts offers of securities that may be deemed to occur prior to
the commencement of a chapter 11 case. Accordingly, the Company will not pay any
commission or other remuneration to any broker, dealer, salesman or person for
soliciting acceptances of the Plan.
Section 4(2) and Regulation D. To the extent that Section 1145(a)(1) does
not exempt from registration offers of new securities deemed to result from the
Solicitation, the Company is also relying upon Section 4(2) of the Securities
Act and Regulation D promulgated thereunder. Section 4(2)exempts from the
registration requirements of the Securities Act any transaction by an issuer not
involving any public offering. Regulation D similarly exempts from the
registration provisions under the Securities Act limited offerings of securities
to "Accredited Investors," as such term is defined under Regulation D, and
"Qualified Non Accredited Investors." In order to be a "Qualified Non-Accredited
Investor," an investor that is not an Accredited Investor must represent that it
is otherwise qualified under Regulation D or under Section 4(2) to purchase
securities in an offering not involving a public offering or that it is an
investor represented by a qualified "purchaser representative" as such term is
defined in Regulation D. Black & Company, Inc. has agreed to act as "purchaser
representative" at the Company's expense and without charge to any Holder of Old
Notes that is not an Accredited Investor, to assist such Holder in evaluating
the risks and merits of approving the Plan and receiving New Common Stock. Black
& Company, Inc. can be reached at One S.W. Columbia, Suite 1200, Portland,
Oregon 97258, Attn: Scott Baines, Telephone: (503) 248-9600; Facsimile: (503)
248-7500. Black & Company, Inc. will not solicit acceptances of the Plan. In
addition, any Holder of Old Notes may retain, at his or her own expense, his or
her own qualified purchaser representative for the purposes deciding whether or
not to approve the Plan. Each ballot includes a certification that the Holder of
the Old Notes covered by such ballot has been provided with a "purchaser
representative," as set forth above, without affecting (i) such Holder's ability
to retain a different "purchaser
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representative" at his or her own expense, or (ii) such Holder's status as an
Accredited Investor, if applicable. As a result, the Company believes that the
Solicitation Statement does not constitute the solicitation of an offer to issue
or sell New Common Stock to any Holder of Old Notes that is not an Accredited
Investor or a Qualified Non-Accredited Investor and, therefore, that any offers
of New Common Stock deemed to result from the Solicitation qualify for the
exemptions from registration under the Securities Act provided by Section 4(2)
and for the exemptions from state law registration requirements provided by
similar state law provisions and may also qualify for the exemptions from such
registration provided by Regulation D and similar state law provisions.
Issuance of New Common Stock
With respect to the issuance of the New Common Stock to Holders of Old
Notes pursuant to the Plan, the Company intends to rely on the exemption from
registration requirements of Section 5 of the Securities Act (and of equivalent
state securities or blue sky laws) provided by Section 1145(a)(1), which is
described above. The Company believes that the New Common Stock issued in
exchange for the Old Notes pursuant to the Plan will satisfy the requirements of
Section 1145(a)(1).
Subsequent Transfers of New Common Stock Under Federal Securities Laws
The New Common Stock issued pursuant to the Plan including the New Common
Stock reallocated pursuant to the Market Liquidity Reallocation will not be
"restricted securities" within the meaning of Rule 144 under the Securities Act
and may be freely transferred by Holders of Allowed Class 4 Claims and Holders
of Allowed Class 6 Interests under the Securities Act and their successors and
assigns. With respect to subsequent transfers of New Common Stock under state
securities laws, see "Subsequent Transfers of New Common Stock Under State
Securities Laws." Accordingly, all resales and subsequent transactions in the
New Common Stock are exempt from registration under the Securities Act pursuant
to Section 4(1) of the Securities Act, unless the Holder is deemed to be an
"underwriter" with respect to such securities or an "affiliate" of an issuer.
Section 1145(b) of the Bankruptcy Code defines four types of "underwriters":
(i) persons who purchase a claim against, an interest in, or a claim
for administrative expense against the debtor with a view to distributing
any security received in exchange for such a claim or interest;
(ii) persons who offer to sell securities offered under a plan for the
holders of such securities;
(iii) persons who offer to buy securities from the holders of such
securities, if the offer to buy is (a) with a view to distributing such
securities and (b) made under a distribution agreement; and
(iv) a person who is an "issuer" with respect to the securities, as
the term "issuer" is defined in Section 2(11) of the Securities Act.
Under Section 2(11) of the Securities Act, an "issuer" includes any
"affiliate" of the issuer, which means any person directly or indirectly through
one or more intermediaries controlling, controlled by or under common control
with the issuer. Any Holder of an Allowed Claim or Interest (or group of Holders
of such Claims and/or Interests who act in concert) who receives a substantial
amount of New Common Stock pursuant to the Plan may be deemed to be an
"affiliate" of an issuer and therefore an "issuer" and therefore an
"underwriter" under the foregoing definitions.
Whether or not any particular person would be deemed to be an "underwriter"
or an "affiliate" with respect to any security to be issued pursuant to the Plan
would depend upon various facts and circumstances applicable to that person.
Accordingly, WFSG expresses no view as to whether any person would be an
"underwriter" or an "affiliate" with respect to any security to be issued
pursuant to the Plan. See "Certain Risk Factors -- Restrictions on Resale of
Securities of Reorganized WFSG."
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GIVEN THE COMPLEX NATURE OF THE QUESTION OF WHETHER A PARTICULAR PERSON MAY
BE AN UNDERWRITER OR AN AFFILIATE, WFSG MAKES NO REPRESENTATIONS CONCERNING THE
RIGHT OF ANY PERSON TO TRADE IN THE SECURITIES TO BE TRANSFERRED PURSUANT TO THE
PLAN. WFSG RECOMMENDS THAT HOLDERS OF ALLOWED CLAIMS AND ALLOWED INTERESTS
CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH
SECURITIES.
Rule 144A, promulgated under the Securities Act, provides a non-exclusive
safe harbor exemption from the registration requirements of the Securities Act
for resales to certain "qualified institutional buyers" of securities which are
"restricted securities" within the meaning of the Securities Act, irrespective
of whether the seller of such securities purchased its securities with a view
towards reselling such securities under the provisions of Rule 144A. Under Rule
144A, a "qualified institutional buyer" is defined to include, among other
persons (e. g., "dealers" registered as such pursuant to Section 15 of the
Exchange Act and "banks" as defined in Section 3(a)(2)of the Securities Act),
any entity which purchases securities for its own account or for the account of
another qualified institutional buyer and which (in the aggregate) owns and
invests on a discretionary basis at least $100 million in the securities of
unaffiliated issuers. Subject to certain qualifications, Rule 144A does not
exempt the offer or sale of securities which, at the time of their issuance,
were securities of the same class of securities then listed on a national
securities exchange (registered as such under Section 6 of the Exchange Act) or
quoted in a U. S. automated interdealer quotation system (e. g.. Nasdaq).
Holders of such securities who are deemed to be "underwriters" within the
meaning of Section 1145 (b)(1) of the Bankruptcy Code or who may otherwise be
deemed to be "underwriters" of, or to exercise "control" over, the Company
within the meaning of Rule 405 of Regulation C under the Securities Act should,
assuming that all other conditions of Rule 144A arc met, he entitled to avail
themselves of the safe harbor resale provisions thereof.
To the extent that Rule 144A is unavailable, holders may, under certain
circumstances, be able to sell their securities pursuant to the more limited
safe harbor resale provisions of Rule 144 under the Securities Act. Generally,
Rule 144 provides that if certain conditions are met (e. g., volume limitations,
manner of sale, availability of current information about the issuer, etc.), any
"affiliate" of the issuer of the securities sought to be resold will not be
deemed to be an "underwriter" as defined in Section 2(11) of the Securities Act.
Under paragraph (k) of Rule 144, the aforementioned conditions to resale will no
longer apply to restricted securities sold for the account of a holder who is
not an affiliate of the Company at the time of such resale and who has not been
such during the three-month period next preceding such resale, so long as a
period of at least two years has elapsed since the later of (i) the Effective
Date and (ii) the date on which such holder acquired his or its securities from
an affiliate of the Company.
No precise predictions can be made of the effect, if any, that market sales
of the New Common Stock or the availability of such securities for sale will
have on the market prices, if any, of such securities prevailing from time to
time. Nevertheless, sales of substantial amounts of the New Common Stock in the
public market or the perception that such sales could occur could adversely
affect the prevailing market prices of the New Common Stock and could impair
Reorganized WFSG's ability to raise capital at that time through the sale of
securities. See "Certain Risk Factors -- Lack of Trading Market; Volatility."
Subsequent Transfers of New Common Stock Under State Securities Laws
The state securities laws generally provide registration exemptions for
subsequent transfers by a bona fide owner for his or her own account and
subsequent transfers to institutional or accredited investors.
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Distributions Under the Plan
General
Except as otherwise provided in the Plan with respect to any particular
Class or Claim, property to be distributed under the Plan on account of Allowed
Claims in an Impaired Class (a) will be distributed on the Effective Date or as
soon as practicable thereafter to each Holder of an Allowed Claim in that Class
that is an Allowed Claim as of the Effective Date, and (b) will be distributed
to each Holder of an Allowed Claim of that Class that becomes an Allowed Claim
after the Effective Date, as soon as practicable after the Order of the
Bankruptcy Court allowing such Claim becomes a Final Order. Except as otherwise
provided in the Plan with respect to any particular Class or Claim, property to
be distributed under the Plan on account of Claims in a Class that are not
Impaired or on account of an Administrative Claim will be distributed on the
later of (i) the Effective Date or as soon as practicable thereafter, or if any
Claim is not an Allowed Claim as of the Effective Date, on the date the Order
allowing such Claim becomes a Final Order or as soon as practicable thereafter,
and (ii) the date on which the distribution to the Holder of the Claim would
have been due and payable in the ordinary course of business or under the terms
of the Claim.
Except as otherwise provided in the Plan or the Confirmation Order, all
cash necessary for Reorganized WFSG to make payments pursuant to the Plan will
be obtained from WFSG's existing cash balance, the operations of WFSG or
Reorganized WFSG, the DIP Facility, and proceeds of a receivable in respect of a
tax refund, as applicable. See "Overview of the Plan -- Summary of Classes and
Treatment of Claims and Interests" and "Overview of the Plan -- Sources of Cash
to Make Plan Distributions." Reorganized WFSG or such Person(s) as WFSG may
employ in its sole discretion, will serve as Disbursing Agent. The Disbursing
Agent will make all distributions of Cash and securities required to be
distributed under the applicable provisions of the Plan. Any Disbursing Agent
may employ or contract with other entities to assist in or make the
distributions required by the Plan. The Disbursing Agent will serve without
bond, and each Disbursing Agent, other than Reorganized WFSG, will receive,
without further Bankruptcy Court approval, reasonable compensation for
distribution services rendered pursuant to the Plan and reimbursement of
reasonable out-of-pocket expenses incurred in connection with such services from
Reorganized WFSG on terms acceptable to Reorganized WFSG.
Cash payments made pursuant to the Plan will be in U. S. dollars. Cash
payments to foreign creditors may be made, at the option of WFSG or Reorganized
WFSG, in such funds and by such means as are necessary or customary in a
particular foreign jurisdiction. Cash payments made pursuant to the Plan in the
form of checks issued by Reorganized WFSG will be null and void if not cashed
within 90 days of the date of the issuance thereof.
The Plan provides that the Disbursing Agent will make all distributions
required under the applicable provisions of the Plan. No distributions under the
Plan or pursuant to the Market Liquidity Reallocation will be made to or on
behalf of any Holders of Old Notes and Old Common Stock evidenced by the
instruments, securities or other documentation canceled pursuant to the Plan,
unless such Holder first tenders the applicable instruments, securities or other
documentation to the Disbursing Agent. See "Surrender of Canceled Voting
Securities and Exchange for New Securities."
Timing and Methods of Transfer of New Common Stock
Transfer of New Common Stock
Notwithstanding any other provision of the Plan, only whole numbers of
shares of New Common Stock will be issued or transferred, as the case may be,
pursuant to the Plan or the Market Liquidity Reallocation. When any distribution
on account of an Allowed Claim or Interest pursuant to the Plan or the Market
Liquidity Reallocation would otherwise result in the issuance or transfer of a
number of shares of New Common Stock that is not a whole number, the actual
distribution of such New Common Stock will be rounded to the next higher or
lower whole number as follows: (a) fractions of 1/2 or greater will be rounded
to the next higher whole number and (b) fractions of less than 1/2 will be
rounded to the next lower whole number. The total number of shares of New Common
Stock to be distributed
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to a Class of Claims or Interests pursuant to the Plan or the Market Liquidity
Reallocation will be adjusted as necessary to account for the rounding provided
for in the Plan. No consideration will be provided in lieu of fractional shares
that are rounded down.
Compliance With Tax Requirements
In connection with the Plan, to the extent applicable, the Disbursing Agent
must comply with all tax withholding and reporting requirements imposed on it by
any governmental unit, and all distributions pursuant to the Plan will be
subject to such withholding and reporting requirements. The Disbursing Agent
will be authorized to take any and all actions that may be necessary or
appropriate to comply with such withholding and reporting requirements.
Notwithstanding any other provision of the Plan (i) each Holder of an Allowed
Claim or Interest that is to receive a distribution of Cash or New Common Stock
pursuant to the Plan or the Market Liquidity Reallocation will have sole and
exclusive responsibility for the satisfaction and payment of any tax obligations
imposed by any governmental unit, including income, withholding and other to
obligations, on account of such distribution; and (ii) no distribution will be
made to or on behalf of such Holder pursuant to the Plan or the Market Liquidity
Reallocation unless and until such Holder has made arrangements reasonably
satisfactory to the Disbursing Agent for the payment and satisfaction of such
tax obligations. Any Cash or New Common Stock to be distributed pursuant to the
Plan or the Market Liquidity Reallocation will, pending the implementation of
such arrangements, be treated as an undeliverable distribution pursuant to the
Plan.
Distribution Record Date
As of the close of business on the Distribution Record Date, the transfer
registers for the Old Notes maintained by WFSG, or its agents, will be closed.
WFSG and its agents, the Disbursing Agent and its agents, and the Indenture
Trustee will have no obligation to recognize the transfer of the Old Notes
occurring after the Distribution Record Date, and will be entitled for all
purposes relating to the Plan to recognize and deal only with those Holders of
record as of the close of business on the Distribution Record Date.
Surrender of Canceled Old Notes and Exchange for New Common Stock
Tender of Old Notes and Old Common Stock
The mechanism by which Holders of Allowed Claims in Class 4 surrender and
exchange their Old Notes for New Common Stock under the Plan, and by which
Holders of Allowed Interests in Class 6 shall surrender and exchange their Old
Common Stock for New Common Stock under the Market Liquidity Reallocation will
be as set forth below.
As a condition precedent to receiving any distribution (i) pursuant to the
Plan on account of an Allowed Claim; or (ii) pursuant to the Market Liquidity
Reallocation of an account of an Allowed Interest (the "Canceled Instruments"),
the Holder of such Allowed Claim or Interest will tender such Canceled
Instruments evidencing such Allowed Claim or Interest to the Disbursing Agent.
Any Cash or New Common Stock to be distributed pursuant to this Plan on account
of any such Allowed Claim or Interest will, pending such surrender, be treated
as an undeliverable distribution pursuant to the Plan.
Except as provided in the Plan with respect to Old Notes and Old Common
Stock which have been lost, stolen, mutilated or destroyed, each Holder of an
Allowed Claim or Allowed Interest will tender such Canceled Instrument to the
Disbursing Agent, together with a letter of transmittal to be provided to such
Holders by the Disbursing Agent, as promptly as practicable on or following the
Effective Date. The letter of transmittal will include, among other provisions,
customary provisions with respect to the authority of the Holder of the Canceled
Instrument to act and the authenticity of any signatures required thereon. All
surrendered Canceled Instruments will be marked as canceled by the Disbursing
Agent, and delivered to Reorganized WFSG.
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In addition to any requirements under applicable law, any Holder of an
Allowed Claim or any Holder of an Allowed Interest evidenced by Old Notes, or
Old Common Stock that has been lost, stolen, mutilated or destroyed will, in
lieu of surrendering such Instrument, deliver to the Disbursing Agent (i)
evidence satisfactory to the Disbursing Agent of such loss, theft, mutilation or
destruction and (ii) such security or indemnity as may be required by the
Disbursing Agent to hold Reorganized WFSG and the Disbursing Agent harmless from
any damages, liabilities or costs incurred in treating such individual as a
Holder of a Claim or Interest. Upon compliance with these requirements by a
Holder of a Claim or Interest evidenced by such Instrument, such Holder will for
all purposes under this Plan be deemed to have surrendered such Instrument.
All questions as to the validity, form, eligibility (including time of
receipt), and acceptance of Letters of Transmittal and Canceled Instruments will
be resolved by the applicable Disbursing Agent, whose determination will be
final and binding, subject only to review by the Bankruptcy Court upon
application with due notice to any affected parties in interest. WFSG reserves
the right, on behalf of itself and the Disbursing Agent, to reject any and all
Letters of Transmittal and Canceled Instruments not in proper form, or Letters
of Transmittal and Canceled Instruments, the Disbursing Agent's acceptance of
which would, in the opinion of the Disbursing Agent or its counsel, be unlawful.
Delivery of New Common Stock in Exchange for the Old Notes
On the Effective Date or as soon as practicable thereafter, Reorganized
WFSG or the Disbursing Agent will issue and authenticate the New Common Stock
and will apply to The Depository Trust Company ("DTC") to make the New Common
Stock eligible for deposit at DTC. With respect to Holders of Old Notes or Old
Common Stock who hold such Old Notes or Old Common Stock through nominee
accounts at bank and broker participants in DTC, Euroclear and Cedel
(collectively, the "Clearing Systems"), the Disbursing Agent will deliver the
New Common Stock to DTC or to the registered address specified by the Clearing
Systems. The Clearing System (or its depositary) will return the applicable Old
Notes and Old Common Stock to the Disbursing Agent for cancellation. The
Disbursing Agent will request that DTC effect a mandatory exchange of the
applicable Old Notes or Old Common Stock for the applicable New Common Stock by
crediting the accounts of its participants with the New Securities in exchange
for the Old Notes. On the effective date of such exchange, each DTC participant
will effect a similar exchange for accounts of the beneficial owners holding Old
Notes and Old Common Stock through such firms. Neither Reorganized WFSG nor the
Disbursing Agent will have any responsibility or liability in connection with
the Clearing Systems or such participants effecting, or failure to effect, such
exchanges.
Holders of Old Notes or Old Common Stock outside a Clearing System will be
required to surrender their Old Notes or Old Common Stock by delivering them to
the Disbursing Agent, along with properly executed Letters of Transmittal (as
described above). The Disbursing Agent will forward applicable New Common Stock
on account of such Old Notes or Old Common Stock to such Holders.
Other Matters with Respect to the Surrender of Old Notes and Old Common
Stock
By participating in any of the above procedures, each Holder of Old Notes
or Old Common Stock will be representing and warranting (and the Letters of
Transmittal will so provide) that, among other things, the Holder has full power
and authority to tender, exchange, sell, assign and transfer the Old Notes or
Old Common Stock and that when such Old Notes or Old Common Stock are accepted
for exchange, WFSG or Reorganized WFSG will acquire good, marketable and
unencumbered title thereto, free and clear of all liens, restrictions, charges
and encumbrances and that the Old Notes or Old Common Stock are not subject to
any adverse claims or proxies. The Holder also agrees that he, she or it will,
upon request, execute and deliver any additional documents deemed by the
Disbursing Agent, WFSG or Reorganized WFSG to be necessary or desirable to
complete the exchange, sale, assignment and transfer of the Old Notes or Old
Common Stock exchanged. All authority conferred by participating in the above
procedures will survive the death or incapacity of the Holder, and all
obligations of the Holder will be binding upon the heirs, personal
representatives, successors and assigns of the Holder.
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The surrender of Old Notes or Old Common Stock pursuant to the procedures
described in this Solicitation Statement, upon WFSG's or Reorganized WFSG's
acceptance for exchange of such Old Notes or Old Common Stock, constitutes a
binding agreement between the Holder and WFSG or Reorganized WFSG upon the
terms, and subject to the conditions, of the Plan, including the Releases
described in more detail in "The Plan of Reorganization --"Releases".
Failure to Surrender Canceled Instrument
Any Holder of Old Notes or Old Common Stock holding such Old Notes or Old
Common Stock in physical, registered or certificated form who has not properly
completed and returned to the Disbursing Agent a Letter of Transmittal, together
with the applicable Canceled Instrument, within two years after the Effective
Date will have its claim for a distribution pursuant to the Plan or the Market
Liquidity Reallocation on account of such Instrument discharged and will be
forever barred from asserting any such Claim or Interest against Reorganized
WFSG or its properties. In such cases, any New Common Stock held for
distribution on account of such claim will be disposed of pursuant to the
applicable provisions of Common Stock the Plan.
Delivery of Distributions; Undeliverable or Unclaimed Distributions
Any Person that is entitled to receive a Cash distribution under the Plan
but that fails to cash a check with respect to such distribution within 90 days
of its issuance will not be entitled to receive any distribution under the Plan.
Subject to Bankruptcy Rule 9010, all distributions to any Holder of an
Allowed Claim or an Allowed Interest pursuant to the Plan or the Market
Liquidity Reallocation will be made to the address of such Holder on the books
and records of WFSG or its agents, unless WFSG or Reorganized WFSG, as
applicable, has been notified in writing of a change of address. If the
distribution to any Holder of an Allowed Claim or Interest pursuant to the Plan
or the Market Liquidity Reallocation is returned to a Disbursing Agent as
undeliverable, such Disbursing Agent will use reasonable efforts to determine
the current address of such Holder, but no distribution will be made to such
Holder unless and until the applicable Disbursing Agent has determined or is
notified in writing of such Holder's then-current address, at which time such
distribution will be made to such Holder without interest. Undeliverable
distributions will remain in the possession of Reorganized WFSG or the
Disbursing Agent pursuant to the Plan until such time as a distribution becomes
deliverable. Undeliverable Cash will be invested in a manner consistent with
WFSG's investment and deposit practices. Any interest paid, and any other
amounts earned, with respect to such undeliverable Cash pending its distribution
in accordance with the Plan shall be property of Reorganized WFSG.
Pending the distribution of any New Common Stock, pursuant to the Plan or
the Market Liquidity Reallocation, the Disbursing Agent will cause the New
Common Stock held by it in its capacity as Disbursing Agent to be (a)
represented in person or by proxy at each meeting of the stockholders of
Reorganized WFSG; and (b) voted with respect to any matter of Reorganized WFSG,
proportionally with the votes cast by other stockholders of Reorganized WFSG.
Procedures for Treating Disputed Claims
Holders of Claims and Interests need not file proofs of claim or proofs of
Interest with the Bankruptcy Court in order to receive the treatment provided in
the Plan and will be subject to Bankruptcy Court process only to the extent
provided in the Plan or by Order of the Bankruptcy Court. WFSG does not intend
to ask the Bankruptcy Court to set any deadlines for the filing of proofs of
Claims or Interest. On and after the Effective Date, except as otherwise
provided in the Plan, all Claims shall be paid in the ordinary course of
business of Reorganized WFSG. If WFSG disputes any Claim or Interest, such
dispute shall be determined, resolved or adjudicated, as the case may be, under
applicable law, and such Claim or Interest shall survive the Effective Date to
the extent that such Claim or Interest has not been Allowed and has not received
the treatment afforded the Class of Claims or Interests in which such Claim or
Interest is classified under the Plan on or before the Effective Date.
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Except insofar as a Claim or Interest is Allowed under the Plan,
Reorganized WFSG will be entitled and reserves the right to object to Claims and
Interests. Except as otherwise provided in the Plan and except as may otherwise
be ordered by the Bankruptcy Court, objections to any Claim or Interest,
including, without limitation, Administrative Claims, will be Filed and served
upon the Holder of such Claim or Interest no later than the later of (a) 60 days
after the Effective Date, and (b) 60 days after a proof of Claim, request for
payment of such Claim or proof of Interest is Filed, unless such period is
extended by the Bankruptcy Court, which extension may be granted on an ex parte
basis without notice or hearing. After the Confirmation Date, only WFSG and
Reorganized WFSG will have the authority to File, settle, compromise, withdraw
or litigate to judgment objections to Claims and Interests. From and after the
Confirmation Date, WFSG and Reorganized WFSG may settle or compromise any
Disputed Claim or Disputed Interest without approval of the Bankruptcy Court.
Except as (i) specified otherwise in the Plan, or (ii) ordered by the Bankruptcy
Court, all Disputed Claims or Disputed Interests will be resolved by the
Bankruptcy Court.
Except as otherwise ordered by the Bankruptcy Court, objections to the
Claims of professionals will be governed by the applicable provisions of the
Plan. Objections to Administrative Claims based on ordinary course liabilities,
Trade Claims and Employee Claims will be governed by applicable law.
Setoffs
Except with respect to Claims Allowed pursuant to the Plan or claims of
WFSG or Reorganized WFSG released pursuant to the Plan or any contract,
Instrument, release, indenture or other agreement or document created in
connection with the Plan, WFSG or Reorganized WFSG may, pursuant to Section 553
of the Bankruptcy Code or applicable nonbankruptcy law, set off against any
Allowed Claim and the distributions to be made pursuant to this Plan on account
of such Claim (before any distribution is made on account of such Claim), the
claims, rights and causes of action of any nature that WFSG or Reorganized WFSG
may hold against the Holder of such Allowed Claim; provided, however, that
neither the failure to effect such a setoff nor the allowance of any Claim
hereunder shall constitute a waiver or release by WFSG or Reorganized WFSG of
any such claims, rights and causes of action that WFSG or Reorganized WFSG may
possess against such Holder.
Termination of Subordination
The classification and manner of satisfying all Claims and Interests under
the Plan and the distributions thereunder take into consideration all
contractual, legal and equitable subordination rights, if any, whether arising
under any agreement, general principles of equitable subordination, Section
510(c) of the Bankruptcy Code or otherwise, that a Holder of a Claim or Interest
may have against other Claim or Interest Holders with respect to any
distribution made pursuant to the Plan. On the Effective Date, all contractual,
legal or equitable subordination rights that such Holder may have with respect
to any distribution to be made pursuant to the Plan will be deemed to be waived,
discharged and terminated, and all actions related to the enforcement of such
subordination rights will be permanently enjoined. Accordingly, distributions
pursuant to the Plan or the Market Liquidity Reallocation to Holders of Allowed
Claims and Allowed Interests will not be subject to payment to a beneficiary of
such terminated subordination rights, or to levy, garnishment, attachment or
other legal process by any beneficiary of such terminated subordination rights.
General Information Concerning the Plan
The following is a summary of certain additional information concerning the
Plan. This summary is qualified in its entirety by reference to the provisions
of the Plan. For a discussion of the classification and treatment of Claims and
Interests under the Plan, see "Overview of the Plan -- Summary of Classes and
Treatment of Claims and Interests."
Treatment of Executory Contracts and Unexpired Leases
Under Section 365 of the Bankruptcy Code, WFSG has the right, subject to
Bankruptcy Court approval, to assume or reject any executory contracts or
unexpired leases. If an executory contract or unexpired lease entered into
before the Filing Date is rejected by WFSG, it will be treated as if WFSG
breached such contract or lease on the date
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immediately preceding the Filing Date, and the other party to the agreement may
assert an Unsecured Claim for damages incurred as a result of the rejection. In
the case of the rejection of employment agreements and real property leases,
damage claims are subject to certain limitations imposed by Sections 365 and 502
of the Bankruptcy Code.
Assumption of Executory Contracts and Unexpired Leases
Except as otherwise provided in the Plan, or in any contract, instrument,
release, indenture or other agreement or document entered into in connection
with the Plan, on the Effective Date, pursuant to Section 365 of the Bankruptcy
Code, Reorganized WFSG will assume each executory contract and unexpired lease
entered into by WFSG prior to the Filing Date that has not previously (a)
expired or terminated pursuant to its own terms or (b) been assumed or rejected
pursuant to Section 365 of the Bankruptcy Code. The Confirmation Order will
constitute an Order of the Bankruptcy Court approving such assumptions pursuant
to Section 365 of the Bankruptcy Code, as of the Effective Date.
Cure of Defaults in Connection with Assumption
Any monetary amounts by which each executory contract and unexpired lease
to be assumed pursuant to the Plan is in default will be satisfied pursuant to
Section 365(b) (1) of the Bankruptcy Code, at the option of Reorganized WFSG (a)
by payment of the default amount in cash on the Effective Date or (b) on such
other terms as are agreed to by the parties to such executory contract or
unexpired lease. If there is a dispute regarding (i) the amount of any cure
payments; (ii) the ability of Reorganized WFSG to provide "adequate assurance of
future performance" (within the meaning of Section 365 of the Bankruptcy Code)
under the contract or lease to be assumed; or (iii) any other matter pertaining
to assumption, the cure payments required by Section 365(b)(1) of the Bankruptcy
Code will be made following the entry of a Final Order of the Bankruptcy Court
resolving the dispute and approving the assumption.
Continuation of Certain Retirement and Other Benefits
All employment, retirement and other related agreements and incentive
compensation programs to which WFSG is a party are treated as executory
contracts under the Plan, and, on the Effective Date, will be assumed pursuant
to Sections 365 and 1123 of the Bankruptcy Code other than the Company's
existing stock option plan.
Executory Contracts and Unexpired Leases Entered Into and Other Obligations
Incurred After the Filing Date
Executory contracts and unexpired leases entered into and other obligations
incurred after the Filing Date by WFSG will be performed by WFSG or Reorganized
WFSG, as the case may be, in the ordinary course of its businesses. Accordingly,
such executory contracts, unexpired leases and other obligations will survive
and remain unaffected by entry of the Confirmation Order.
Legal Effects of the Plan
Continued Corporate Existence; Vesting of Assets in Reorganized WFSG
Reorganized WFSG will exist after the Effective Date as a separate
corporate entity with all the powers of a corporation under the general
corporate law of Delaware. Except as otherwise provided in the Plan or the
Confirmation Order, on the Effective Date, all property of WFSG's Estate will
vest in Reorganized WFSG all free and clear of all Claims, liens, encumbrances
and Interests of Holders of Claims and Holders of Interests. From and after the
Effective Date, Reorganized WFSG may operate its business and use, acquire, and
dispose of property and settle and compromise claims or interests arising on or
after the Effective Date without supervision by the Bankruptcy Court and free of
any restrictions of the Bankruptcy Code, the Bankruptcy Rules or the Local
Bankruptcy Rules, other than those restrictions expressly imposed by the Plan or
the Confirmation Order.
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Cancellation of Old Notes and Related Agreements
On the Effective Date, all securities, instruments and agreements governing
any Claims or Interests Impaired by the Plan, including, without limitation, (i)
the Old Notes and (ii) the indentures governing the Old Notes, in each case will
be deemed terminated, canceled and extinguished, and except as otherwise
provided in the Plan, WFSG, on the one hand, and the Indenture Trustee, on the
other hand, will be released from any and all obligations under the Old Notes
and the Old Indentures except with respect to the payments required to be made
to the Indenture Trustee as provided in the Plan. Termination of the indentures
will not impair the rights of the Holders of Old Notes to receive distributions
on account of such Old Notes pursuant to the Plan. WFSG shall also be released
from any and all obligations relating to or arising under the Old Common Stock.
Preservation of Rights of Action Held by WFSG or Reorganized WFSG
Except as provided in the Plan, or in any contract, instrument, release or
other agreement entered into in connection with the Plan, in accordance with
Section 1123(b) of the Bankruptcy Code, Reorganized WFSG will retain (and may
enforce) any claims, rights (including rights of set-off) and causes of action
that WFSG or its Estate may hold against any Person including, among other
things, any claims, rights or causes of action under Sections 544 through 550 of
the Bankruptcy Code or any similar provisions of State law, or any other statute
or legal theory; provided, however, that in the event that Class 4 votes to
accept the Plan, any such claims, rights or causes of action against Holders of
Allowed Claims in such Class (solely in their capacities as such) will be
released, discharged and extinguished on the Effective Date, whether or not then
pending.
Discharge of Claims and Termination of Interests; Related Injunction
Discharge. Except as provided in the Plan or the Confirmation Order,
Confirmation will (a) discharge WFSG from all Claims (including the Compromised
WREIT/WREP Claims, the Compromised MLMC Claims and CCI Guaranty Claims) or other
debts that arose before the Effective Date and all debts of the kind specified
in Sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not (i)
a proof of Claim based on such debt is filed or deemed filed pursuant to Section
501 of the Bankruptcy Code, (ii) a Claim based on such debt is Allowed pursuant
to Section 502 of the Bankruptcy Code, or (iii) the Holder of a Claim based on
such debt has accepted the Plan; and (b) all Persons will be precluded from
asserting against Reorganized WFSG, its successors, or their respective assets
or properties any other or further Claims or Interests based upon any act or
omission, transaction, or other activity of any kind or nature that occurred
prior to the Effective Date. Except as otherwise provided in the Plan or the
Confirmation Order, the Confirmation Order will act as a discharge of any and
all Claims against and all debts and liabilities of WFSG, as provided in
Sections 524 and 1141 of the Bankruptcy Code, and such discharge will void any
judgment against WFSG at any time obtained to the extent that it relates to a
Claim discharged.
Except as otherwise provided in the Plan or the Confirmation Order, on and
after the Effective Date, all Persons who have held, currently hold or may hold
a debt, Claim or Interest discharged pursuant to the terms of the Plan are
permanently enjoined from taking any of the following actions on account of any
such discharged debt, Claim or Interest (i) commencing or continuing in any
manner any action or other proceeding against WFSG, Reorganized WFSG, or their
respective successors or their respective properties; (ii) enforcing, attaching,
collecting or recovering in any manner any judgment, award, decree or order
against WFSG, Reorganized WFSG, or their respective successors or their
respective properties; (iii) creating, perfecting or enforcing any lien or
encumbrance against WFSG, Reorganized WFSG, or their respective successors or
their respective properties; and (iv) commencing or continuing any action, in
any manner, in any place that does not comply with or is inconsistent with the
provisions of the Plan or the Confirmation Order. Any Person injured by any
willful violation of such injunction will be entitled to recover actual damages,
including costs and attorneys' fees, and, in appropriate circumstances, may
recover punitive damages, from the willful violator.
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Releases
Under the Plan, on the Effective Date, WFSG shall unconditionally release
(a) WFSG's then current and former officers, directors, shareholders and
employees (solely in their capacity as such) (collectively, the "Debtor
Releasees"), (b) the Unofficial Noteholders' Committee and, solely in their
capacity as members of the Unofficial Noteholders' Committee or representatives
thereof or of such members, each member, consultant, attorney, accountant or
other representative of the Unofficial Noteholders' Committee or any member
thereof and (c) the Indenture Trustee, in its respective capacity as Indenture
Trustee (collectively the parties in (b) and (c) above being referred to as the
"Additional Releasees") from any and all claims, obligations, suits, judgments,
damages, rights, causes of action and liabilities whatsoever, whether known or
unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity
or otherwise, based in whole or in part upon any act or omission, transaction,
event or other occurrence taking place on or prior to the Effective Date in any
way relating to the Reorganization Case, the Plan, the Notes or this
Solicitation Statement.
Also, under the Plan, on the Effective Date (i) each Holder of a Claim or
Interest shall be deemed to have unconditionally released WFSG, the Debtor
Releasees, the Debtor's advisors and professionals and the Additional Releasees
from any and all claims, obligations, suits, judgments, damages, rights, causes
of action and liabilities whatsoever which any such Holder may be entitled to
assert, whether known or unknown, foreseen or unforeseen, existing or hereafter
arising, in law, equity or otherwise, based in whole or in part upon any act or
omission, transaction, event or other occurrence taking place on or prior to the
Effective Date in any way relating to WFSG, the Reorganization Case, the Plan or
this Solicitation Statement, and (ii) WFSG and the Debtor Releasees, on the one
hand, and the Additional Releasees, on the other hand, shall, or shall be deemed
to, unconditionally mutually release each other, from any and all claims,
obligations, suits, judgments, damages, rights, causes of action and liabilities
whatsoever which any such Holder may be entitled to assert, whether known or
unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity
or otherwise, based in whole or in part upon any act or omission, transaction,
event or other occurrence taking place on or prior to the Effective Date in any
way relating to the Reorganization Case, the Plan or this Solicitation
Statement.
Brokerage Firms, Banks and Other Nominees
A brokerage firm, commercial bank, trust company or other nominee
(collectively, "Nominees") which is the registered holder, on the Record Date,
of Old Notes for a beneficial owner, or is a participant in a Clearing System
and is authorized to vote in the name of such securities Clearing System
pursuant to a master ballot omnibus proxy, assignment letter form, or similar
document (as described below) and is acting for a beneficial owner, can obtain
the vote of the beneficial owner of such Old Notes, consistent with customary
practices for obtaining the votes of securities held in "street name," in one of
the following two ways:
(i) The Nominee may "prevalidate" a ballot by (i) signing the ballot;
(ii) indicating on the ballot the name of the Nominee or registered holder, the
amount of Old Notes held by the Nominee for the beneficial owner, and the
account number for the accounts in which such Old Notes are held by the Nominee;
and (iii) forwarding such ballot, together with the Solicitation Statement,
return envelope and other materials requested to be forwarded, to the beneficial
owner for voting. The beneficial owner must then complete the information
requested in the ballot, review the certifications contained in the ballot, and
return the original ballot directly to the Information Agent in the
pre-addressed, postage-paid envelope so that it is actually received by the
Information Agent before the Voting Deadline. A list of the beneficial owners to
whom "prevalidated" ballots were delivered should be maintained by each Nominee
for inspection for at least one year from the Voting Deadline.
(ii) The Nominee may obtain the votes of beneficial owners by
forwarding to the beneficial owners the unsigned ballots, together with the
Solicitation Statement, a return envelope provided by, and addressed to the
Nominee, and other materials requested to be forwarded. Each such beneficial
owner must then indicate his, her or its vote on the original ballot, complete
the information requested in the ballot, review the certifications contained in
the ballot, execute the ballot and return the original ballot to the Nominee.
After collecting the ballots, the Nominee should,
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in turn, complete a master ballot compiling the votes and other information from
the ballots, execute the master ballot and deliver the original master ballot to
the Information Agent so that it is actually received by the Information Agent
before the Voting Deadline. All ballots returned by beneficial owners should
either be forwarded to the Information Agent (along with the master ballot) or
retained by the Nominee for inspection for at least one year from the Voting
Deadline. Please note: the Nominee should advise the beneficial owner to return
his, her or its ballot to the Nominee by a date calculated by the Nominee to
allow it to prepare and return the master ballot to the Information Agent so
that it is actually received by the Information Agent before the Voting
Deadline.
A proxy intermediary acting on behalf of a brokerage firm or bank may
follow the procedures outlined in the preceding paragraph to vote on behalf of
such beneficial owner. A Nominee which is the registered holder of an Old
Security for only one beneficial owner also may arrange for such beneficial
owner to vote by executing the appropriate ballot and by distributing a copy of
the Solicitation Statement and such executed ballot to such beneficial owner for
voting and returning such original ballot to the Information Agent so that it is
actually received by the Information Agent before the Voting Deadline.
Securities Clearing Systems
The Company expects that DTC, as nominee of holders of Old Notes, will
arrange for its participants to vote by executing an omnibus proxy, assignment
letter form, or similar document in favor of its respective participants. As a
result, each such participant will be authorized to vote the Old Notes owned by
it and held in the name of DTC. The Company also expects that Morgan Guaranty
Trust Company of New York, as operator of Euroclear System ("Euroclear"), and
Cedel Bank societe anonyme ("Cedel"), upon the direction of their respective
participants, will provide a summary of votes received from their respective
participants to the Information Agent, thus confirming the validity of signed
ballots.
Voting Deadline and Extensions
In order to be counted for purposes of voting on the Plan, all of the
information requested by the applicable ballot must be provided. Ballots
indicating acceptance or rejection of the Plan must be actually received by the
Information Agent at its address set forth on the back cover of this
Solicitation Statement no later than 5:00 p.m., New York City Time, on 5:00
p.m., March 1, 1999, the Voting Deadline. WFSG reserves the right, upon the
consent of Holders of Old Notes representing more than 50% of the principal
amount such Old Notes, to extend the Voting Deadline, in which case the term
"Voting Deadline" will mean the latest date on which a ballot will be accepted.
In order to extend the Voting Deadline, WFSG will notify the Information
Agent of any extension by oral or written notice and will make a public
announcement thereof, prior to 9:00 a.m., New York City Time, on the next
business day immediately after the previously scheduled Voting Deadline. Such
announcement may state that WFSG is extending the Plan voting deadline for a
specified period of time or on a daily basis until 5:00 p.m., New York City
Time, on the date on which sufficient acceptances required to seek confirmation
of the Plan have been received.
Delivery of all documents must be made to the Information Agent at its
address set forth on the back cover of this Solicitation Statement. The method
of such delivery is at the election and risk of the Holder. If such delivery is
by mail, it is recommended that Holders use an air courier with a guaranteed
next day delivery or registered mail, properly insured, with return receipt
requested. In all cases, sufficient time should be allowed to assure timely
delivery.
Withdrawal of Votes on the Plan
The solicitation of acceptances of the Plan will expire on the Voting
Deadline. A properly submitted ballot may be withdrawn by delivering written
notice of withdrawal to the Information Agent at its address set forth on the
back cover page of this Solicitation Statement at any time prior to the earlier
of (i) the Voting Deadline and (ii) the Petition Date. Thereafter, withdrawal
may be effected only with the approval of the Bankruptcy Court.
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In order to be valid, a notice of withdrawal must (i) specify the name of
the Holder who submitted the votes on the Plan to be withdrawn; (ii) contain the
description of the Claim to which it relates and the aggregate principal amount
represented by such Claim; and (iii) be signed by the Holder in the same manner
as on the ballot. WFSG expressly reserves the absolute right to contest the
validity of any such withdrawals of votes on the Plan.
Any Holder who has previously submitted to the Information Agent prior to
the Voting Deadline a properly completed ballot may revoke and change such vote
by submitting to the Information Agent prior to the Voting Deadline a subsequent
properly completed ballot for acceptance or rejection of the Plan. In the case
where more than one timely, properly completed ballot is received, only the one
which bears the latest date will be counted for purposes of determining whether
sufficient acceptances required to seek confirmation of the Plan have been
received. If more than one master ballot is submitted and the later dated master
ballot(s) supplement rather than supersede the earlier master ballot(s), please
mark the subsequent master ballot(s) with the words "Additional Votes" or such
other language as is customarily used to indicate additional votes that are not
meant to revoke earlier votes.
Information Agent
Bankruptcy Services, LLC has been appointed as the Information Agent for
the Solicitation. Questions on the voting procedures and requests for assistance
with respect to such procedures may be directed to the Information Agent whose
address, telephone number and facsimile number are set forth on the back of this
Solicitation Statement. Requests for additional copies of this Solicitation
Statement, the ballots or the master ballots should be directed to the
Information Agent.
Acceptance or Cramdown
A plan is accepted by an impaired class of claims if holders of at least
two-thirds in dollar amount and more than one-half in number of claims of that
class vote to accept the plan. A plan is accepted by an impaired class of
interests if holders of at least two-thirds of the number of shares in such
class vote to accept the plan. Only those holders of claims or interests who
actually vote count in these tabulations.
In addition to this voting requirement, Section 1129 of the Bankruptcy Code
requires that a plan be accepted by each holder of a claim or interest in an
impaired class or that the plan otherwise be found by the bankruptcy court to be
in the best interests of each holder of a claim or interest in such class. In
addition, each impaired class must accept the plan for the plan to be confirmed
without application of the "fair and equitable" and "unfair discrimination"
tests in Section 1129(b) of the Bankruptcy Code discussed below.
The Bankruptcy Code contains provisions authorizing the confirmation of a
plan even if it is not accepted by all impaired classes, as long as at least one
impaired class of claims (without including any acceptance of the plan by an
insider) has accepted it. These so-called "cramdown" provisions are set forth in
Section 1129(b) of the Bankruptcy Code. As indicated above, a plan may be
confirmed under the cramdown provisions if, in addition to satisfying the other
requirements of Section 1129 of the Bankruptcy Code, it (i) is "fair and
equitable" and (ii) "does not discriminate unfairly" with respect to each class
of claims or interests that is impaired under, and has not accepted, the plan.
The "fair and equitable"standard, also known as the"absolute priority rule,"
requires, among other things, that unless a dissenting class of claims or a
class of interests receives full compensation for its allowed claims or allowed
interests, no holder of claims or interests in any junior class may receive or
retain any property on account of such claims. The Bankruptcy Code establishes
different "fair and equitable" tests for secured creditors, unsecured creditors
and equity holders, as follows:
(a) Secured Creditors: either (i) each impaired secured creditor
retains its liens securing its secured claim and receives on account of its
secured claim deferred cash payments having a percent value equal to the amount
of its allowed secured claim, (ii) each impaired secured creditor realizes the
"indubitable equivalent" of its allowed secured claim, or (iii) the property
securing the claim is sold free and clear of liens with such liens to attach to
the proceeds, and the liens against such proceeds are treated in accordance with
clause (i) or (ii) of this subparagraph (a).
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(b) Unsecured Creditors: either (i) each impaired unsecured creditor
receives or retains under the plan of reorganization property of a value equal
to the amount of its allowed claim, or (ii) the holders of claims and equity
interests that are junior to the claims of the nonaccepting class do not receive
any property under the plan of reorganization on account of such claims and
equity interests.
(c) Equity Holders: either (i) each equity holder will receive or
retain under the plan of reorganization property of a value equal to the greater
of (A) the fixed liquidation preference or redemption price, if any, of such
stock or (B) the value of the stock, or (ii) the holders of interests that are
junior to the nonaccepting class will not receive any property under the plan of
reorganization.
The "fair and equitable" standard has also been interpreted to prohibit any
class senior to a dissenting class from receiving under a plan more than 100% of
its allowed claims. The requirement that a plan not "discriminate unfairly"
means, among other things, that a dissenting class must be treated substantially
equally with respect to other classes of equal rank.
WFSG believes that the Plan may be crammed down over the dissent of the
Class of Interests in view of the treatment proposed for such Class. See
"Treatment of Claims and Interests Under the Plan" for information concerning
the treatment of various Classes depending on which Classes vote to accept or
reject the Plan. WFSG intends to request a cramdown of the Class of Interests.
There can be no assurance, however, that the requirements of Section 1129(b) of
the Bankruptcy Code would be satisfied even if the Plan treatment provisions
were amended or withdrawn as to one or more Classes. WFSG believes that the
treatment under the Plan of the Holders of Allowed Interests, if any, in Class 6
will satisfy the "fair and equitable" test because, although no distribution or
only a limited distribution will be made in respect of Interests in such Class
under certain circumstances and, as a result, such Class will be deemed,
pursuant to Section 1126 of the Bankruptcy Code, to have rejected the Plan, no
Class junior to any such non-accepting Class will receive or retain any property
under the Plan.
In addition, WFSG does not believe that the Plan unfairly discriminates
against any Class that may not accept or otherwise consent to the Plan. A plan
of reorganization "does not discriminate unfairly" if (i) the legal rights of a
nonaccepting class are treated in a manner that is consistent with the treatment
of other classes whose legal rights are similarly situated to those of the
nonaccepting class, and (ii) no class receives payments in excess of that which
it is legally entitled to receive for its claims or equity interests. WFSG
believes the Plan does not discriminate unfairly.
WFSG RESERVES THE ABSOLUTE RIGHT TO SEEK CONFIRMATION OF THE PLAN UNDER
SECTION 1129(b) OF THE BANKRUPTCY CODE IN THE EVENT THE PLAN IS NOT ACCEPTED BY
ALL IMPAIRED CLASSES. AT A MINIMUM, WFSG WILL SEEK CONFIRMATION OF THE PLAN
PURSUANT TO SECTION 1129(b) OF THE BANKRUPTCY CODE AS TO CLASS 6 AS NO CLASS
JUNIOR TO SUCH CLASS WILL RECEIVE OR RETAIN ANY PROPERTY UNDER THE PLAN.
Subject to the conditions set forth in the Plan, a determination by the
Bankruptcy Court that the Plan is not confirmable, pursuant to Section 1129 of
the Bankruptcy Code, will not limit or affect WFSG's ability to modify the Plan
to satisfy the Confirmation requirements of Section 1129 of the Bankruptcy Code.
Chapter 7 Liquidation Analysis
The "Best Interest Test" under Section 1129 of the Bankruptcy Code requires
that each holder of impaired claims or impaired interests receive property with
a value not less than the amount such holder would receive in a Chapter 7
liquidation. WFSG believes that under the Plan, Holders of Impaired Claims or
Impaired Interests will receive property with a value equal to or in excess of
the value such Holders would receive in a liquidation of WFSG under Chapter 7 of
the Bankruptcy Code. The Chapter 7 Liquidation Analysis set forth herein
demonstrates that the Plan satisfies the requirements of the "Best Interest
Test."
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To estimate potential returns to Holders of Claims and Interests in a
Chapter 7 liquidation, WFSG determined, as might a Bankruptcy Court conducting
such an analysis, the amount of liquidation proceeds that might be available for
distribution and the allocation of such proceeds among the Classes of Claims and
Interests based on their relative priority. WFSG considered many factors and
recent data including experiences with collateral calls made by lenders under
certain repurchase agreements and loan agreements to which WFSG or its
subsidiaries are parties and actual sales and market data from WFSG's recent
divestitures of pools of mortgage loans and mortgage-backed securities, which
are two significant types of WFSG's assets. Given the nature of a Chapter 7
liquidation, WFSG has not assumed that bids received for WFSG's significant
assets would be commensurate with the bids WFSG has received from sales and
inquiries in recent months, but instead has applied its judgment to determine
likely levels of bids. The liquidation proceeds available to WFSG for
distribution to Holders of Claims and Interests would consist of the net
proceeds from the disposition of the assets of WFSG, augmented by any other cash
held and generated during the assumed holding period stated herein by WFSG and
after deducting the incremental expenses of operating the business pending
disposition.
WFSG owns substantially all of its assets through its subsidiaries. The
liquidation analysis assumes that the liquidation would occur on a
non-consolidated basis, therefore, the proceeds available to WFSG would consist
of any residual proceeds, if any, remaining after liquidation of the assets of
each material operating subsidiary and payment of all secured and unsecured
claims of such subsidiary. In general, as to WFSG and as to each material
operating subsidiary, liquidation proceeds would be allocated in the following
priority: (i) first, to the claims of secured creditors to the extent of the
value of their collateral; (ii) second, to the costs, fees and expenses of the
liquidation, as well as other administrative expenses of WFSG's Chapter 7 case,
including tax liabilities; (iii) third, as to WFSG, to the unpaid Administrative
Claims of the Chapter 7 Case (if commenced); (iv) fourth, as to WFSG, to
Priority Tax Claims and other Claims entitled to priority in payment under the
Bankruptcy Code; (v) fifth, to unsecured claims; and (vi) sixth, to Holders of
such entity's common stock. In addition to the foregoing, WFSG's liquidation
costs in a Chapter 7 case would include the compensation of a bankruptcy
trustee, as well as compensation of counsel and other professionals retained by
such trustee, asset disposition expenses, applicable taxes, litigation costs,
Claims arising from the operation of WFSG and any of its guaranties of its
subsidiaries during the pendency of the Chapter 7 case, and all unpaid
Administrative Claims incurred by WFSG during the Reorganization Case (if
commenced) that are allowed in the Chapter 7 case. The liquidation itself might
trigger certain Priority Claims, such as Claims for severance pay, and would
likely accelerate or, in the case of taxes, make it likely that the Internal
Revenue Service would assert all of its claims as Priority Tax Claims rather
than asserting them in due course as is expected to occur under the
Reorganization Case. These Priority Claims would be paid in full out of the net
liquidation proceeds, after payment of Secured Claims, Chapter 7 costs of
administration and other Administrative Claims, and before the balance would be
made available to pay Unsecured Claims or to make any distribution in respect of
Interests.
The following Chapter 7 liquidation analysis is provided solely to discuss
the effects of a hypothetical Chapter 7 liquidation of WFSG and is subject to
the assumptions set forth herein. There can be no assurance that such
assumptions would be accepted by a Bankruptcy Court. The Chapter 7 liquidation
analysis has not been independently audited or verified.
Liquidation Value of WFSG
The table below details the computation of WFSG's liquidation value and the
estimated distributions to Holders of Claims and Interests in a Chapter 7
liquidation of WFSG. This analysis is based upon a number of estimates and
assumptions that are inherently subject to significant uncertainties and
contingencies, many of which would be beyond the control of WFSG. Accordingly,
while the analyses that follow are necessarily presented with numerical
specificity, there can be no assurance that the values assumed would be realized
if WFSG was in fact liquidated, nor can there be any assurance that a Bankruptcy
Court would accept this analysis or concur with such assumptions in making its
determinations under Section 1129(a)of the Bankruptcy Code. Actual liquidation
proceeds could be materially lower or higher than the amounts set forth below;
no representation or warranty can or is being made with respect to the actual
proceeds that could be received in a Chapter 7 liquidation of WFSG. The
liquidation valuations have been prepared solely for purposes of estimating
proceeds available in a Chapter 7 liquidation of the Estate and do not
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represent values that may be appropriate for any other purpose. Nothing
contained in these valuations is intended or may constitute a concession or
admission of WFSG for any other purpose.
Estimated Liquidation Proceeds
WFSG assumes that even in an orderly Chapter 7 liquidation scenario, in
light of the highly leveraged nature of WFSG's portfolios of mortgage loans and
mortgage-backed securities, only a small percentage of the carrying value of
such assets on WFSG's books would be realized. As such, WFSG assumes that the
net proceeds available from a liquidation would principally result from (i) the
sale of WFSG's wholly-owned interest in the holding company of First Bank of
Beverly Hills, F.S.B., which is assumed to be sold as an operating business
rather than dissolved through a liquidation, (ii) one or more state or federal
income tax receivables, (iii) sale of the shares of WREIT owned by WFSG, and
(iv) residual equity in its domestic subsidiaries. In determining the estimated
proceeds from the sale of these, as well as certain other assets, WFSG:
(i) Estimated the value of all assets and amount of related liabilities as
of December 31, 1998;
(ii) Estimated the recovery on each individual class of assets based on
current market data and taking into account the impact of Chapter 7 on the
potential buyers' pricing strategies;
(iii) Assumed that the inventory of loans at the time of the liquidation
would be sold in multiple pools of "whole loan" sales, rather than through
securitizations; and
(iv) Projected the remaining balances of loans to be sold six months
forward and used cash flow from these loans to reduce related indebtedness
outstanding at December 31, 1998.
Nature and Timing of the Liquidation Process
Under Section 704 of the Bankruptcy Code, a Chapter 7 trustee must, among
other duties, collect and convert the property of the debtor's estate to cash
and close the estate as expeditiously as is compatible with the best interests
of the parties in interest. Solely for the purposes of this liquidation
analysis, WFSG assumed that it would commence the Chapter 7 liquidation on
February 1, 1999. WFSG assumed a piecemeal liquidation of its assets in multiple
transactions, rather than as an entirety, during a 6 month period ending July
31, 1999. Based on the complexity of the Company's business and the likelihood
of litigation between and among the Company's various creditors, it is likely
that ultimate distribution of proceeds from a liquidation would occur at a time
significantly later than July 31, 1999. This analysis does not reflect the
additional discount to projected recoveries from such a delayed distribution.
Additional Liabilities and Reserves
WFSG believes that there would be certain actual and contingent liabilities
and expenses for which provision would be required in a Chapter 7 liquidation
before distributions could be made to creditors in addition to the expenses that
would be incurred in a chapter 11 reorganization, including: (a) certain
liabilities that are not dischargeable pursuant to the Bankruptcy Code; (b)
Administrative Claims including the fees of a trustee and of counsel and other
professionals (including financial advisors and accountants)and other
liabilities; and (c) certain administrative costs including the incremental
expenses of marketing the assets and performing the procedures necessary to
divest of the remaining loan portfolio and mortgage-backed securities.
Management believes that there is significant uncertainty as to the reliability
of WFSG's estimates of the amounts related to the foregoing that have been
assumed in the liquidation analysis.
Conclusion
In summary, WFSG believes that a Chapter 7 liquidation of its assets would
result in a diminution in the value to be realized by the Holders of Claims and
Interests. As set forth in the table below and based on the assumptions made as
part of this analysis, WFSG's management estimates that the total liquidation
proceeds available for distribution, net
56
<PAGE>
of Chapter 7 expenses, would aggregate approximately $48.7 million. WFSG
believes that after payment in full of secured lenders under repurchase
agreements and warehouse facilities, satisfaction of claims at non-debtor
subsidiaries, and professional fees and related liquidation expenses, Holders of
Unsecured Claims, including Holders of Old Notes, would receive significantly
less value in a liquidation of WFSG under Chapter 7 of the Bankruptcy Code
compared to their treatment under the Plan. Similarly, general unsecured
creditors are being paid in full under the Plan whereas in a liquidation they
would receive distributions of approximately 18.46% of their Claims. Under the
Plan, Holders of Old Notes are receiving New Common Stock with an estimated
value of $3.73 to $4.13 per share of New Common Stock on a fully diluted basis
except for any management stock options, yielding an estimated recovery of 40 to
45% of principal amount (or 37% to 42% of their Claims), whereas in a
liquidation they would receive distributions of approximately 18.46% of their
Claims. WFSG further believes that because Holders of Claims would not be paid
in full, Holders of Interest would not receive or retain any property in a
Chapter 7 liquidation. Thus, the recovery for WFSG's creditors would in the
aggregate, be less in a liquidation than the proposed distribution under the
Plan, and would be the same for a holder of WFSG's Old Common Stock.
Consequently, WFSG believes that the Plan will prove a substantially greater
ultimate return to the Holders of Claims and no less recovery to Holders of
Interests than would a Chapter 7 liquidation.
57
<PAGE>
The following table reflects the estimate of WFSG of the proceeds available
for distribution in a Chapter 7 liquidation.
Liquidation Analysis
(Dollars in Thousands)
Estimated
Proceeds
Available (4)
------------
Residual Proceeds from Liquidation of Material
Operating Subsidiaries:
Wilshire Funding Corporation $1,600
Wilshire Servicing Corp. 1,300
WFSG Europe, Inc. 0
WFSG Assets:
Cash Balances as of February 1, 1999 500
MBS Portfolio 500
WREIT Stock 2,000
First Bank Stock (1) 45,000
Tax Refund 8,000
-------
$58,900
Gross Recoverable Proceeds
Less: Chapter 7 Trustee (1%) ( 600)
Less: Carry Costs (U.S.) (9,600)
------------
Net Distributable Proceeds to Unsecured Claims of WFSG $48,700
============
Application of Proceeds to Claims and Interests:
Unsecured Claims
Old Notes 36,350
Merrill Lynch Deficiency Claim 400
WCC (2) 2,100
WREIT (2) 3,400
CCI (3) 6,450
------------
$48,700
============
Recovery as a Percent of Claim or Interests
Holders of Old Notes 18.46%
Holders of Old Common Stock 0%
- ---------------------
(1) For purposes of the liquidation analysis, the assets of First Bank of
Beverly Hills F.S.B., a wholly-owned subsidiary, are grouped into one
caption as this entity is assumed to be disposed of as a stand alone
business as opposed to liquidation of its individual assets.
(2) Treated pari passu with the Senior Notes but may be subject to equitable
subordination.
(3) Assumes pari passu treatment. May be subject to litigation on fraudulent
conveyance claims.
(4) The amounts in this table have been rounded for convenience.
58
<PAGE>
General Assumptions Concerning Sale of Loan Portfolios and MBS Portfolios
The Company has assumed that all loans sales currently scheduled for
January and February of 1999 will be sold as scheduled with a certain percentage
held back (a "Holdback") because the Company would not be able to provide
customary representations and warranties. The Company estimates that because of
its inability in a liquidation scenario to perform or control representations
and warranties, the Holdback amount will not be available for use to pay off any
Claims. The remaining portfolios of loans shall continue to pay down and
liquidate as projected by the Company until July 1999. At such time, the
remaining assets outstanding are sold at a discount of the projected remaining
cash flow for such asset, based upon the perceived rate of return an investor
would require given the context of a distressed/bankruptcy sale. For those
assets which cannot be sold as of July 1999, such amount is based on projected
cash flows from December 1998 through June 1999, with all net proceeds (after
debt, servicing fees, and third party costs) used to pay down the debt balance
as of December 1998.
It is assumed, based on market precedents, that the mortgage-backed
securities portfolio would be sold quickly and well before July 1999. The
liquidation value of the mortgage-backed securities portfolio was determined by
applying discounts to the most recently available broker/dealer valuation (or
internal impairment valuation, if lower). The discounts range from 5% to 50%,
based on the rating of the security, the accelerated timing of the disposition
of the mortgage-backed securities portfolios and the issuer and servicer of such
portfolios.
General Assumptions Concerning Residual Proceeds Derived from the Liquidation of
WFSG's Material Operating Subsidiaries
Wilshire Funding Corporation ("WFC")
The liquidation analysis of WFC includes the liquidation of portfolios of
performing loans serviced and managed by it and its subsidiaries WMFC 1997-1
Inc. and WFMC 1997-2 Inc. and the liquidation of the assets of its subsidiary
Wilshire Ventures Corporation. The analysis assumes the liquidation of all
portfolios of performing loans, including manufactured housing loans and
commercial real estate loans, as well as mortgage backed securities held by such
entities.
Wilshire Ventures Corporation is assumed to liquidate miscellaneous securities
for $2.7 million. The gross proceeds from the liquidation of such assets are
first applied to pay 100% of all claims against WFC (including certain secured
creditor deficiency claims) and provide residual proceeds available for
distribution to WFSG creditors of $1.6 million.
Wilshire Servicing Corporation ("WSC")
WSC, a subsidiary of WFSG, has servicer advance receivables of $7.9
million. These receivables secure a $6.6 million loan from First Bank. The
proceeds after collection of the receivable and payment of the First Bank loan,
are estimated to be $1.3 million. WSC has no other debt or claims against it.
Wilshire Financial Services Group Europe, Inc. ("WFSGE")
The liquidation analysis of WFSGE includes the liquidation of performing
and non-performing loans and real estate owned assets serviced and managed by
the European offices. The analysis assumes that the portfolios of loans held by
Wilshire Funding Group UK Limited and Unifina E.F. SA shall continue to pay down
and liquidate in a similar manner as domestic loan portfolios and, for purposes
of this analysis, prevailing exchange rates of 1.66 U.S. Dollars to the British
Pound and 5.6233 French Francs to the U.S. Dollar as of January 1, 1999 were
used. It is assumed that general trade vendor claims in Europe have no Chapter 7
recourse to the WFSG proceeding. WFSGE is assumed to generate $700,000 from
liquidating furniture, fixtures and equipment. In addition to the debt secured
by loans described above, MLMC also has a $2.6 million claim resulting from a
proposed investment in loans owned by Abbey National Bank (Abbey) and with a
right of set off of approximately $500,000. It is assumed that the setoff amount
is retained in full with the deficiency asserted as an Unsecured Claim in the
WFSG Chapter 7 case (based upon WFSG's indemnification
59
<PAGE>
of MLMC). Estimated operating costs during the liquidation are $4.2 million
based on the current monthly level of operating expenses and limitations in
Europe on severance of employees. Based on the estimated liquidation proceeds
available, it is assumed that WFSGE will pay all of its secured creditors in
full, but that the estimated amount of general creditors will not receive
payment in full. As such, no residual proceeds are expected from WFSGE.
Wilshire Financial Services Group Assets
In addition to the assets held by its subsidiaries, WFSG owns certain
assets which are assumed to be liquidated as follows:
(i) WFSG, through WAC, owns 100% of the stock of First Bank, which is
assumed to be sold on a going-concern basis for $45 million, which is equal to
80% of its estimated book value at July 31, 1999. The discount to book value
reflects transaction fees and expenses, the expedited timing of a sale, the
context of a chapter 7 proceeding and a qualitative assessment of First Bank's
business.
(ii) WFSG owns 990,000 shares of Wilshire Real Estate Investment Trust Inc.
which is assumed to be sold at $2 per share, a discount to the present market
price of $3 per share. It is likely that the liquidation of WFSG and the WREIT
manager, would result in depressing the market price of WREIT shares, as well as
the sale of approximately 8.6% of WREIT common stock.
(iii) WFSG expects to receive one or more tax refunds totalling
approximately $8 million in the next 60 to 90 days.
Liquidation Analysis of Operations
Cash requirements for continuing operations during the
bankruptcy/liquidation period are estimated by utilizing the 1999 operating
budget of WFSG (excluding First Bank), with certain adjustments to reflect
ceasing operations (such as certain reductions in travel expense). In addition,
due to the nature of liquidation and the difficulty in retaining qualified,
experienced employees, the Company feels that it may be required to pay
retention bonuses in order to assure the continued services of key employees in
the liquidation. This has been estimated to be $750,000 in the aggregate. The
Company has also allocated $650,000 per month to cover legal, accounting and
advisory fees during the 6-month liquidation period.
Unsecured Claims
It is assumed that aggregate Unsecured Claims of $263.8 million, based on
the following Unsecured Claims assumed to be asserted in a Chapter 7 proceeding
as follows:
(i) Senior Notes are expected to assert a claim of approximately $196.9
million, based on the principal amount and accrued interest as of February 1,
1999.
(ii) Compromised MLMC Claim of approximately $2.1 million, based on the
guarantee of WFSG on a deposit in Europe and after giving effect to the set off
right of MLMC of $500,000.
(iii) Compromised WREIT/WREP Claim of $18.4 million. No advances are
presumed to have been made under the Interim Facility.
(iv) A claim by WCC of $11.4 million.
(v) CCI Guaranty Claim of $35 million arising from a guarantee of WFSG on
indebtedness of WCC to CCI.
60
<PAGE>
Compliance With Applicable Provisions of the Bankruptcy Code
Section 1129(a)(l) of the Bankruptcy Code requires that the Plan comply
with the application provisions of the Bankruptcy Code. WFSG believes that the
Plan satisfies this requirement.
Alternatives if the Plan is Not Confirmed and Consummated
Alternative Restructuring
If WFSG does not receive sufficient acceptances to seek Confirmation of the
Plan, WFSG will consider all alternatives available to them at such time, which
may include the implementation of an alternative restructuring plan outside of
bankruptcy, or the commencement or continuation of chapter 11 cases without a
preapproved plan or reorganization, or the commencement of, or conversion to, a
liquidation under Chapter 7 of the Bankruptcy Code. As compared to the Plan, a
non-prepackaged chapter 11 case would likely be lengthier, involve more
contested issues with creditors and other parties in interest, result in
significantly increase chapter 11 administrative expenses, risk the loss of
additional employees making it difficult to continue operating the business,
risk a decrease in the confidence of the Company's mortgage brokers and bankers,
borrowers, investors and vendors, risk the loss of required financing for the
continued operation of the business, and risk the loss of valuable servicing
contract, thereby having a negative impact on cash flow and a corresponding
reduction in the consideration received by Holders of unsecured or undersecured
claims.
Recommendation and Conclusion
For all of the reasons set forth in this Solicitation Statement, WFSG
believes that the Confirmation and consummation of the Plan is preferable to all
other alternatives. Consequently, WFSG urges all Holders of Impaired Claims who
are to receive distributions under the Plan to vote to ACCEPT the Plan, and to
duly complete and return their original ballots such that they will be ACTUALLY
RECEIVED by the Information Agent on or before 5:00 p.m. New York City Time on
Monday, March 1, 1999.
61
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables present selected 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, 1997, 1996 and
1995 and balance sheet data as of December 31, 1997, 1996 and 1995 have been
derived from the Company's audited financial statements. The historical income
statement data presented for the nine month periods ended September 30, 1998 and
1997 and balance sheet data presented as of September 30, 1998 have been derived
from the interim unaudited financial statements as filed in the Company's Form
10-Q. Operating results for the nine month period ended September 30, 1998 and
1997 are not necessarily indicative of the results that may be expected for any
other interim period of the entire year ending December 31, 1998. 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.
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."
62
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
------------ ------------- --------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total interest income ....................... $ 117,158 $ 75,456 $ 110,057 $ 48,422 $ 24,381
Total interest expense ...................... 99,307 59,036 86,836 29,277 14,481
------------ ------------- --------------- ------------- -------------
Net interest income ...................... 17,851 16,420 23,221 19,145 9,900
Provision for loan losses(1) ................ 12,191 926 1,991 16,549 4,266
------------ ------------- --------------- ------------- -------------
Net interest (loss) income
after provision for loan losses ....... 5,660 15,494 21,230 2,596 5,634
------------ ------------- --------------- ------------- -------------
Other (loss) income:
Market valuation adjustments ............. (76,580) -- -- -- --
Write-down of mortgage servicing rights .. (13,704) -- -- -- --
Bankcard income, net ..................... 3,486 1,579 1,995 1,666 1,232
Gain on sale of loans .................... 27,904 31,252 39,049 11,538 642
Trading account--unrealized gain ......... 1,630 1,171 2,330 1,833 --
Real estate owned, net ................... 3,616 4,574 6,309 556 (170)
Servicing revenue ........................ 4,810 3,339 5,580 -- --
Gain on sale of securities ............... 7,768 3,053 3,742 -- --
Other, net ............................... 1,075 1,749 2,298 2,349 1,233
------------ ------------- --------------- ------------- -------------
Total other (loss) income ............. (39,995) 46,717 61,303 17,942 2,937
------------ ------------- --------------- ------------- -------------
Other Expenses:
Compensation and employee benefits ....... 26,023 11,274 14,404 4,464 2,516
FDIC insurance premiums .................. 656 791 1,049 2,381 721
Occupancy ................................ 1,769 727 1,125 339 385
Professional services .................... 5,702 2,104 3,171 700 1,028
Loan service fees and expenses ........... 32,995 19,423 28,126 5,176 1,958
Other general and administrative expenses 18,517 6,669 8,857 2,386 1,324
------------ ------------- --------------- ------------- -------------
Total other expenses .................. 85,662 40,988 56,732 15,446 7,932
------------ ------------- --------------- ------------- -------------
(Loss) income before income taxes............ (119,997) 21,223 25,801 5,092 639
Income tax (benefit) provision .............. (8,192) 8,981 10,637 125 47
------------ ------------- --------------- ------------- -------------
Net (loss) income ........................... $ (111,805) 12,242 15,164 4,967 592
============ ============= =============== ============= =============
Selected Cash Flow Data:
Cash provided by (used in) operations
excluding loans held for sale)............ $ (36,155) $ (95,305) $ (121,325) $ (19,453) $ 1,589
Proceeds and repayments from loans
and other assets ......................... 1,486,272 556,992 749,192 393,392 76,695
Purchase and origination of loans and other
assets ................................... (1,778,123) (1,111,814) (1,553,031) (621,934) (190,863)
Cash from financing activities .............. 316,563 575,822 838,981 395,811 108,231
------------ ------------- --------------- ------------- -------------
Net (decrease) increase in cash(2) ....... $ (11,443) $ (74,305) $ (86,183) $ 147,816 $ (4,348)
============ ============= =============== ============= =============
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
------------ ------------- --------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalent..................... $ 54,672 $ 77,993 $ 66,115 $ 152,298 $ 4,482
Portfolio assets:
Discounted Loans, net..................... 247,199 350,460 463,355 219,630 31,354
Non-Discounted Loans, net................. 1,031,012 440,559 464,602 191,962 259,417
Mortgage Backed and other securities...... 267,490 256,297 362,347 84,964 28,672
Foreclosed real estate, net .............. 140,078 146,464 169,612 78,200 4,964
------------ ------------- --------------- ------------- -------------
Total portfolio assets ................ $ 1,685,779 $ 1,193,780 $ 1,459,916 $ 574,756 $ 324,407
Total assets ................................ 1,842,227 1,369,761 1,629,027 753,849 340,695
Deposits .................................... 534,091 407,768 362,598 501,614 303,524
Short-term debt ............................. 1,076,078 658,042 966,500 97,624 13,000
Long-term debt .............................. 184,245 184,245 184,245 75,000 11,000
Stockholders' equity(3) ..................... 16,306 99,769 99,122 61,022 7,039
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
------------ ------------- --------------- ------------- -------------
(Annualized)
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Financial Ratios and Other Data:
Return on average assets..................... (7.87)% 1.42% 1.22% 0.95% 0.24%
Return on average equity..................... (128.66)% 23.08% 19.48% 13.68% 8.65%
Average interest yield on total loans ....... 8.11% 9.42% 9.68% 9.41% 10.02%
Net interest spread(4)(5)................... 0.62% 1.99% 2.03% 3.07% 3.44%
Net interest margin(5)(6)................... 1.26% 2.06% 2.03% 3.63% 3.87%
Ratio of earnings to fixed charges(7)(8):
Including interest on deposits ........... -- 1.36 1.30 1.17 1.04
Excluding interest on deposits ........... -- 1.54 1.42 2.19 2.19
Long-term debt to total capitalization(9) ... 0.92 0.65 0.65 0.55 0.61
Total financial liabilities to equity ....... 111.98 12.73 15.43 11.35 47.40
Average equity to average assets ............ 6.12% 6.15% 6.25% 6.90% 2.72%
Non-Performing loans to Non-Discounted Loans
at end of period(10)(11).................. 5.46% 16.82% 12.83% 23.69% 4.46%
Allowance for loan losses to total Non-
Discounted Loans at end of period......... 4.75% 10.96% 5.98% 13.88% 3.60%
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------------- -----------------------------------------------
1998 1997 1997 1996 1995
------------ ------------- --------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Investments and originations:
Discounted Loans and foreclosed
real estate $ 179,013 $ 316,931 $ 584,014 $ 324,159 $ 29,224
Non-Discounted Loans (11)(12) 873,712 556,231 673,234 254,517 157,671
Mortgage originations 573,562 50,962 77,918 2,280 8,748
Mortgage-backed and other securities 132,945 184,393 310,220 67,604 2,965
------------ ------------- --------------- ------------- -------------
Total 1,759,232 1,108,517 1,645,386 648,560 198,608
Recoveries and repayments (408,585) (136,316) (196,646) (66,160) (61,135)
Loan sales and securitizations (879,576) (344,710) (486,109) (301,411) (16,031)
Net change in portfolio assets 225,863 619,024 885,160 250,349 111,841
</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 First Bank. 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 the Notes and the decrease in cash for the nine
months ended September 30, 1997 and the year ended December 31, 1997
reflects the subsequent investment of that cash in interest earning assets
which was partially offset by the proceeds of the Company's Series A Notes
and a securitization.
(3) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for subordinated debt. Prior to the Company's initial public
offering, an additional $17.8 million of common stock was issued for cash.
In December 1996, the Company completed its initial public offering, which
resulted in $20.9 million of new capital. Effective July 31, 1997, the
Company issued to WCC 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 WCC 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. The
$27.5 million of PIK Preferred was redeemed in February 1998 with a portion
of the $61.8 million of proceeds from the Company's secondary offering of
common stock, which net of the redemption, increased stockholders equity
$40.6 million.
(4) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(5) The reduction in net interest margin and net interest spread in the 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 Notes and part of the most
recent quarter of interest expense on approximately $100.0 million of Series
B 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.
(6) Net interest margin represents net interest income divided by total average
earning assets.
(7) The ratios of earnings to fixed charges were computed by dividing (x) income
from continuing operations before income taxes, extraordinary gains and
cumulative effect of a change in accounting principle plus fixed charges by
(y) fixed charges. Fixed charges represent total interest expense, including
and excluding interest on deposits, as applicable, as well as the interest
component of rental expense.
(8) Earnings for the nine months ended September 30, 1998 were inadequate to
cover fixed charges by $20.7 million.
(9) Total capitalization equals long-term debt plus equity.
(10)It is the Company's policy to establish an allowance for uncollectible
interest on Non-Discounted Loans that are past due more than 90 days or at
such earlier time when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
accrual at which time those loans are placed on non-accrual status and
deemed non-performing.
(11)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."
(12)Excludes purchases of newly originated mortgage and manufactured housing
loans, which are shown as mortgage originations.
65
<PAGE>
REGULATORY CAPITAL RATIOS OF FIRST BANK
The following table sets forth the regulatory capital ratios of First Bank
at September 30, 1998:
September 30, 1998
------------------
Regulatory capital ratios of First Bank:
Tangible capital to tangible assets.................. 8.4%
Core capital to tangible assets...................... 8.4%
Total capital to risk-weighted assets
(Risk-Based Capital)............................ 15.1%
66
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Solicitation Statement.
General Market Conditions
Beginning in August 1998, and more significantly since October 12, 1998,
and continuing to the present, the Company has been significantly and negatively
impacted by various market factors. These factors, which are discussed further
below, resulted in a dramatic reduction in market valuations for certain of the
Company's mortgage-backed securities and other assets, as well as a reduction in
the availability of borrowings for those assets and certain of the Company's
loan assets, thereby reducing the Company's liquidity.
Turmoil in the Russian financial markets, following a prolonged period of
uncertainty in Asian financial markets, caused investors to reassess their risk
tolerance. This resulted in a dramatic movement of liquidity toward less risky
assets (e.g., U.S. Treasury instruments) and away from higher risk assets,
including most non-investment grade assets and commercial and other mortgage and
asset-backed securities. On October 7, 1998, the Company issued a press release
announcing changes in the expected results for the quarter ended September 30,
1998 as a result of market conditions through the date of that release. At the
time of that release, the Company had no indication of the events that would
transpire beginning the week of October 12, 1998, as further described below.
This movement toward higher quality investments dramatically reduced
available liquidity to non-investment grade assets. Without available funding
sources, many investors in these assets, including several well-known hedge
funds, were forced to liquidate holdings at reduced prices. With greater sales
pressure and supply outpacing demand, prices continued to fall as more lenders
made collateral calls, demanding additional collateral for their loan positions.
Many companies were rapidly depleting available cash reserves.
On October 12, 1998, another large, well-known hedge fund was liquidated.
This event triggered further collateral calls, forcing additional companies to
sell assets to cover collateral calls, and continuing the downward spiral in
prices. On October 15, 1998, the Federal Reserve lowered interest rates, largely
in response to this liquidity crisis.
During October and continuing into the month of November 1998, the Company
sold a significant amount of assets in response to the above conditions to meet
collateral calls by lenders, primarily certain affiliates of Salomon Smith
Barney, Inc., and to increase liquidity. The downward pressure on prices and the
Company's need to sell assets to meet these collateral calls resulted in the
Company disposing of certain assets for proceeds which resulted in significant
losses for the quarter and nine months ended September 30, 1998. Beginning
during the week of October 12, 1998, the Company sold, primarily as a result of
collateral calls, Discounted Loans with a carrying value of $211.8 million,
Non-Discounted Loans with a carrying value of $232.5 million and mortgage-backed
securities with a carrying value of $63.3 million. Had the Company not been
forced to sell these assets, but rather held these assets until market
conditions stabilized, management believes the Company's losses would have been
far less severe.
Primarily as a result of these asset sales, the Company had a net loss of
approximately $111.8 million for the nine months ended September 30, 1998
compared to net income of approximately $12.2 million for the nine months ended
September 30, 1997.
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
67
<PAGE>
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 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 monthly balances during the indicated
periods.
68
<PAGE>
<TABLE>
<CAPTION>
Interest-Earning Assets and Interest-Bearing Liabilities
Nine Months Ended September 30,
---------------------------------------- ----------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortagage-backed securities $ 302,610 $ 21,707 9.59% $ 196,218 $ 20,785 10.59%
Loan portfolio net of
Unaccreted discounts(1) .. 1,527,346 92,603 8.11 878,846 85,090 9.68
Investment securities and
other .................... 58,706 2,848 6.49 67,804 4,182 6.17
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning
assets ................. 1,888,662 117,158 8.29 1,142,868 110,057 9.63
Non-interest earning cash .. 1,081 -- -- 2,416 -- --
Allowance for loan losses .. (289,970) -- -- (75,939) -- --
Other assets ............... 293,767 -- -- 176,533 -- --
------------ ------------ ------------ ------------
Total assets ............. $ 1,893,540 $ 117,158 $ 1,245,878 $ 110,057
============ ============ ============ ============
Average Liabilities and
Stockholders' Equity:
Interest-bearing deposits .. $ 407,025 $ 18,086 5.94% $ 429,289 $ 25,687 5.98%
FHLB advances -- -- -- 479 27 5.67
Subordinated borrowings and
other interest-bearing
obligations .............. 1,139,013 62,096 7.29 586,370 43,682 7.45
Long-term debt ............. 184,245 19,125 13.88 125,912 17,440 13.85
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities .............. 1,730,283 99,307 7.67 1,142,050 86,835 7.60
Non-interest bearing deposits 7,373 -- -- 5,674 -- --
Escrow deposits ............ 1,150 -- -- 330 -- --
Other liabilities .......... 38,870 -- -- 19,993 -- --
------------ ------------ ------------ ------------
Total liabilities ........ 1,777,676 99,307 1,168,047 86,836 --
Stockholders' equity ....... 115,864 -- 77,831 -- --
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity ... $ 1,893,540 $ 99,307 $ 1,245,878 $ 86,836
============ ============ ============ ============
Net interest income ........ $ 17,851 $ 23,221
Net interest spread(2)(3) .. 0.62% 2.03%
Net interest margin(3) ..... 1.26% 2.03%
Ratio of average interest-
earning assets to
average interest-bearing
liabilities .............. 109.2% 100.1%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------- ----------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortagage-backed securities $ 29,241 $ 1,797 6.15% $ 24,054 $ 1,359 5.65%
Loan portfolio net of
Unaccreted discounts(1) .. 470,654 44,294 9.41 217,716 21,821 10.02
Investment securities and
other .................... 27,446 2,331 8.49 14,216 1,201 8.45
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning
assets ................. 527,341 48,442 9.18 255,986 24,381 9.52
Non-interest earning cash .. 6,019 -- -- 1,868 -- --
Allowance for loan losses .. (39,675) -- -- (21,591) -- --
Other assets ............... 32,061 -- -- 15,277 -- --
------------ ------------ ------------ ------------ ------------
Total assets ............. $ 525,746 $ 48,422 $ 251,540 $ 24,381
============ ============ ============ ============
Average Liabilities and
Stockholders' Equity:
Interest-bearing deposits .. $ 423,011 $ 25,270 5.97% $ 232,510 $ 14,111 6.07%
FHLB advances 2,420 159 6.57 1,381 104 7.53
Subordinated borrowings and
other interest-bearing
obligations .............. 51,316 3,531 6.88 4,122 232 5.62
Long-term debt ............. 2,292 317 13.85 306 34 11
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities .............. 479,039 29,277 6.11 238,319 14,481 6.08
Non-interest bearing deposits 2,822 -- -- 2,196 -- --
Escrow deposits ............ 257 -- -- 106 -- --
Other liabilities .......... 7,330 -- -- 4,077 -- --
------------ ------------ ------------ ------------
Total liabilities ........ 489,448 29,227 -- 244,698 14,481
Stockholders' equity ....... 36,298 -- -- 6,842 -- --
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity ... $ 525,746 $ 29,277 $ 251,540 $ 14,481
============ ============ ============ ============
Net interest income ........ $ 19,145 $ 9,900
Net interest spread(2)(3) .. 3.07% 3.44%
Net interest margin(3) ..... 3.63% 3.87%
Ratio of average interest-
earning assets to
average interest-bearing
liabilities .............. 110.1% 107.4%
</TABLE>
- ----------
(1) The average balances of the loan portfolio include Discounted Loans and
non-performing loans, interest on which is recognized on a cash basis.
(2) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(3) The reduction in net interest margin and net interest spread in the year
ended December 31, 1997 primarily reflects the significant increase in the
Company's holdings of Discounted Loans during the year 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. The reduction also
reflected a full year of interest expense on the $84.2 million of Notes and
part of the third quarter and all of the fourth quarter of interest expense
on approximately $100.0 million of Series B Notes, the proceeds of which
were held for part of such period in a lower-yielding liquid investment
prior to their use by the Company to fund acquisitions.
69
<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,
---------------------------------------- ----------------------------------------
1998 v. 1997 1997 v. 1996
---------------------------------------- ----------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------- ----------------------------------------
Rate Volume Total Rate Volume Total
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage-backed securities.. $ (1,431) $ 10,654 $ 9,223 $ 2,136 $ 16,852 $ 18,988
Loan portfolio.............. (7,048) 39,701 32,653 1,310 39,486 40,796
Investment securities and
other .................... 88 (262) (174) (423) 2,274 1,851
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning
assets................ (8,391) 50,093 41,702 3,023 58,612 61,635
Interest-Bearing Liabilities:
Interest-bearing deposits... (113) (1,809) (1,922) 41 376 417
FHLB advances............... (14) (14) (28) (19) (113) (132)
Short-term borrowings and
other interest-bearing
obligations .............. (1,054) 34,629 33,575 316 39,835 40,151
Long-term debt.............. (5) 10,480 10,475 -- 17,123 17,123
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities ............ (1,186) 43,286 42,100 338 57,221 57,559
------------ ------------ ------------ ------------ ------------ ------------
Increase (decrease) in net
interest income............. $ (7,205) $ 6,807 $ (398) $ 2,685 $ 1,391 $ 4,076
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------- ----------------------------------------
1996 v. 1995 1995 v. 1994
---------------------------------------- ----------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------- ----------------------------------------
Rate Volume Total Rate Volume Total
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage-backed securities.. $ 127 $ 311 $ 438 $ (52) $ 50 $ (2)
Loan portfolio.............. (1,246) 23,719 22,473 2,485 11,413 13,898
Investment securities and
other .................... 6 1,124 1,130 582 334 916
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning
assets................ (1,113) 25,154 24,041 3,015 11,797 14,812
Interest-Bearing Liabilities:
Interest-bearing deposits... (218) 11,377 11,159 2,806 6,288 9,094
FHLB advances............... (11) 66 55 (631) 507 (124)
Short-term borrowings and
other interest-bearing
obligations .............. 63 3,236 3,299 40 (20) 20
Long-term debt.............. 10 273 283 -- 34 34
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities ............ (156) 14,952 14,796 2,215 6,809 9,024
------------ ------------ ------------ ------------ ------------ ------------
Increase (decrease) in net
interest income............. $ (957) $ 10,202 $ 9,245 $ 800 $ 4,988 $ 5,788
============ ============ ============ ============ ============ ============
</TABLE>
70
<PAGE>
Results of Operations--Nine Months Ended September 30, 1998 Compared to Nine
Months Ended September 30, 1997
Net Loss
The Company had a net loss of approximately $111.8 million for the nine
months ended September 30, 1998 compared to net income of approximately $12.2
million for the nine months ended September 30, 1997. The net loss for the nine
months ended September 30, 1998 is primarily attributable to $76.6 million of
market valuation adjustments recognized by the Company, write-down of mortgage
servicing rights of $13.7 million and provision for losses on loans of $12.2
million, as further explained below.
Net Interest
The Company's net interest income was approximately $17.9 million for the
nine months ended September 30, 1998 compared to approximately $16.4 million for
the nine months ended September 30, 1997, an increase of 8.7%. Interest-earning
assets increased from $1.1 billion as of September 30, 1997 to $1.6 billion as
of September 30, 1998. The increase in interest-earning assets is primarily
attributable to acquisitions of loans and mortgage-backed securities which in
part were funded from the Company's issuance of $100.0 million of Series B Notes
in August 1997 and its offering of 3,500,000 shares of common stock in February
1998.
Interest Income. The Company's interest income was approximately $117.2
million for the nine months ended September 30, 1998 compared to approximately
$75.5 million for the nine months ended September 30, 1997, an increase of
55.3%. The increase in the Company's interest income was due primarily to an
increase in the Company's interest earning assets from approximately $1.1
billion at September 30, 1997 to approximately $1.6 billion at September 30,
1998. During the nine months ended September 30, 1998, the Company purchased
approximately $1.0 billion of interest-earning assets, compared to approximately
$875.0 million during the nine months ended September 30, 1997. In addition, the
Company originated $573.6 million of loans during the nine months ended
September 30, 1998, compared to approximately $51.0 million during the nine
months ended September 30, 1997.
Interest Expense. The Company's interest expense was approximately $99.3
million for the nine months ended September 30, 1998 compared with approximately
$59.0 million for the nine months ended September 30, 1997, an increase of
68.2%. The increase in interest expense resulted from an increase in the
Company's interest-bearing liabilities to approximately $1.8 billion at
September 30, 1998 from approximately $1.3 billion at September 30, 1997 and
includes the issuance of $100.0 million of the Company's Series B Notes in the
third quarter of 1997.
Provisions for Estimated Losses on Loans
Provision for estimated losses on loans for the nine months ended September
30, 1998 was approximately $12.2 million resulting from provision of
approximately $15.2 million during the quarter ended September 30, 1998. The
provision of approximately $15.2 million results primarily from additional
provisions taken on Discounted Loans at the Company's non-banking subsidiaries.
The provision results from increasing market yields on loans, which have driven
down market values on many pools of loans (primarily Discounted Loans) in the
Company's portfolio. The Company has provided for additional reserves to the
extent market values for pools of loans have been reduced below book value. This
compares with a net provision for estimated losses on loans for the nine months
ended September 30, 1997 of approximately $0.9 million resulting from additional
provision of approximately $3.4 million, which was partially offset by the
reversal of $2.5 million of excess reserves on loans previously sold.
Other Income
The Company's other loss was approximately $40.0 million for the nine
months ended September 30, 1998 compared to income of approximately $46.7
million for the nine months ended September 30, 1997. The components of the
Company's non-interest income are reflected in the following table:
71
<PAGE>
Nine Months Ended September 30
-------------------------------
1998 1997
------------ -------------
Other income: (Dollars in thousands)
Market Valuation Adjustments............... $ (76,580) $ --
Write-down of mortgage servicing rights.... (13,704) --
Servicing revenue.......................... 4,810 3,339
Real estate owned, net..................... 3,616 4,574
Bankcard income, net....................... 3,486 1,579
Gain on sale of loans...................... 27,904 31,252
Gain on sale of securities................. 7,768 3,053
Trading income............................. 1,630 1,171
Other, net................................. 1,075 1,749
----------- ------------
Total other income....................... $ (39,995) $ 46,717
The decrease in other income between the comparable periods was due
primarily to market valuation adjustments of $76.6 million, write-down of
mortgage servicing rights of $13.7 million, a $3.3 million reduction in gain on
sale of loans, offset by a $4.7 million increase in gain on sale of securities
and a $1.9 million increase in bankcard income, net.
Market Valuation Adjustments. Subsequent to September 30, 1998, the Company
sold a significant amount of its loans and mortgage-backed securities to meet
collateral calls, primarily by certain affiliates of Salomon Smith Barney, Inc.,
and increase liquidity (see "General Market Conditions"). The declines in values
on the assets included in these sales have been recognized as market valuation
adjustments to the applicable assets as of September 30, 1998 and recognized in
determining net loss for the nine months and quarter then ended. In addition,
the Company has evaluated the impact of the current market conditions on the
remainder of its mortgage-backed securities portfolio and reflected in market
valuation adjustments that amount which has been deemed to be other than
temporary impairment.
Subsequent to September 30, 1998, the Company sold, primarily as a result
of collateral calls, Discounted Loans with a carrying value of $211.8 million,
loans held for sale with a carrying value of $232.5 million and mortgage-backed
securities with carrying value of $63.3 million. As a result of these sales,
short term borrowings were reduced $500.2 million. These assets, and the related
short term financing, are reflected in the Company's consolidated statements of
financial condition as of September 30, 1998 net of the applicable market
valuation adjustments. The effect of these sales on the consolidated statements
of financial condition as of September 30, 1998 would be to reduce total assets
from approximately $1.8 billion to $1.3 billion. Discounted Loans would be
reduced from $247.2 million to $35.4 million, loans held for sale would be
reduced from $592.2 million to $359.7 million and mortgage-backed securities
available for the sale would be reduced from $245.9 million to $182.6 million.
Short term borrowings would be reduced from $1.1 billion to $575.9 million.
Total market valuation adjustments for the quarter ended September 30, 1998
was $76.6 million. Of this amount, $22.2 million relates to sales of
mortgage-backed securities, $5.2 million relates to other than temporary
impairment of unsold mortgage-backed securities, $34.9 million relates to sales
of loans held for sale and discounted loans and $14.3 million relates to hedge
losses previously deferred and classified in other assets in the statement of
financial condition.
Based on the use of current available data in the valuation of its assets,
the Company's management believes it is proper to reflect the decline of these
assets as an adjustment in the nine months ended September 30, 1998.
72
<PAGE>
Write-Down of Mortgage Servicing Rights. During the nine months ended
September 30, 1998, the Company wrote-down capitalized servicing rights by
approximately $13.7 million. The write-down is the result of faster than
expected prepayments on loans being serviced and revised estimates of future
prepayments.
Gain on Sale of Loans. Gain on sale of loans decreased $3.3 million during
the nine months ended September 30, 1998 as a result of lower than expected
securitization activity by the Company during the current year. As described
under "General Market Conditions," beginning in August 1998, turmoil in the
financial markets resulted in reduced demand for asset-backed securities and,
therefore, the Company was unable to complete all planned securitization
transactions, resulting in lower than anticipated gain on sale of loans. During
the nine months ended September 30, 1998, the Company completed three
securitizations of approximately $507.7 million aggregate unpaid principal
balance and one whole loan sale of approximately $72.3 million unpaid principal
balance. These sale transactions resulted in gains on sale of approximately
$29.2 million. These gains were offset by net losses of $1.3 million, primarily
resulting from the sale of loans originated through the Company's retail and
wholesale residential mortgage channels. The loss on sale is the net effect of
$1.5 million of gains, offset by hedge losses of $2.8 million.
Gain on the Sale of Securities. During the nine months ended September 30,
1998, the Company sold mortgage-backed securities with carrying values of
approximately $95.0 million to WREIT in conjunction with the initial public
offering of common stock in April 1998, resulting in gains of approximately $0.7
million. Additionally, the Company sold, to unrelated parties, securities with
carrying values of approximately $53.3 million, resulting in net gains of
approximately $7.8 million. Subsequent to September 30, 1998, the Company sold a
substantial amount of mortgage-backed securities to meet collateral calls and
increase liquidity, which resulted in the recognition of losses on such
securities. These losses are classified as market valuation adjustments in the
Company's consolidated statement of operations.
Real Estate Owned, Net. The decrease in 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, including
European assets.
Servicing Revenue. Servicing revenue increased $1.5 million or 44.1% during
the nine months ended September 30, 1998, primarily as a result of contracting
for the servicing rights on loan portfolios owned by unaffiliated third parties
(including securitizations) and arranging for such loans to be sub-serviced by
WCC, an affiliated entity, at a rate which is lower than the rate received by
the Company.
Other, Net. Other, net decreased $0.7 million or 38.5% during the nine
months ended September 30, 1998. The net decrease is attributable to a loss of
$4.2 million resulting from the Company's ownership of WREIT, offset by $2.5
million of loan fees and charges from origination activity and $1.9 million of
management fee income associated with the Company's management of WREIT.
Other Expense
The Company's other expense totaled approximately $85.7 million for the
nine months ended September 30, 1998 compared to approximately $41.0 million for
the nine months ended September 30, 1997, primarily attributable to an increase
in loan service fees and expenses paid to affiliates which results from
increases in the Company's total loan portfolio and third party servicing (which
is sub-serviced by WCC) and increased compensation and employee benefits and
other general and administrative expenses resulting from the expansion of
business operations and infrastructure necessary to accommodate growth.
Loan Service Fees and Expenses Paid to Affiliate. The largest other
component of other expense in the nine months ended September 30, 1998 was loan
service fees and expenses, which includes servicing fees paid to WCC and
collection-related expenses incurred directly by WCC and reimbursed by the
Company. Loan service fees and expenses paid to affiliate were approximately
$33.0 million (of which approximately $21.3 million represents collection
related loan expenses) for the nine months ended September 30, 1998 compared to
approximately $19.4 million for the nine months ended September 30, 1997, an
increase of approximately $13.6 million, or 69.9%. The $13.6 million increase is
primarily attributable to growth in the average balance of total loans during
the nine months ended September 30,
73
<PAGE>
1998 (considers the securitization of $507.7 unpaid principal balance of loans
during June and September 1998 and the whole loan sale of $72.3 million unpaid
principal balance of loans during June 1998) and collection related expenses
incurred in the resolution of Discounted Loans.
Subsequent to September 30, 1998, in response to collateral calls by
certain affiliates of Salomon Smith Barney, Inc, the Company sold Discounted
Loans with unpaid principal balance of approximately $266.5 million.
Discounted Loans tend to reduce net interest margin and net interest
spread, because the interest cost of debt (which is higher than for
Non-Discounted Loans) is not offset by a corresponding increase in interest
income. Relatively little cash flow from a pool of Discounted Loans is generally
received in the first six to nine months following acquisition and the Company
only recognizes interest and discount on Discounted Loans in income when those
loans result in the receipt of cash. The Company also experiences a much higher
level of collection related expenses associated with Discounted Loans, requiring
a higher level of cash investment prior to resolution. Due to the
capital-intensive nature of these investments and the related unpredictable
earnings stream, the Company believes its reduced investment in Discounted Loans
will improve cash flow and provide more predictable earnings.
Compensation and Employee Benefits. Compensation and employee benefits were
approximately $26.0 million for the nine months ended September 30, 1998,
compared to approximately $11.3 million for the nine months ended September 30,
1997, an increase of 130.8%. The increase was primarily due to an increase in
the average number of full-time equivalent employees from 205 for the nine
months ended September 30, 1997 to 360 for the nine months ended September 30,
1998, reflecting the expansion of business activities, particularly loan
acquisition and origination activities, European operations, and the growth of
activities at the non-bank subsidiaries. Subsequent to September 30, 1998, the
Company reduced its workforce by approximately 19%, primarily resulting from the
Company's elimination of its retail residential and manufactured housing
origination activities.
Other General and Administrative Expenses. Other general and administrative
expenses increased from approximately $6.7 million for the nine months ended
September 30, 1997 to approximately $18.5 million for the nine months ended
September 30, 1998, an increase of 177.7%, due primarily to travel and
entertainment expense of $5.5 million, depreciation and amortization of $3.1
million (includes the write-off of goodwill associated with retail residential
mortgage origination branches) and other general corporate costs resulting from
the expansion of business activities at the non-bank subsidiaries, particularly
loan acquisition activities such as due diligence costs, European operations and
origination activities.
Results of Operations--Year Ended December 31, 1997 Compared to 1996
Net Interest Income
The Company's net interest income was approximately $23.2 million for 1997
compared to approximately $19.1 million for 1996, an increase of approximately
21.3%. The Company's asset base was significantly larger in 1997 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 $110.1
million for 1997 compared to approximately $48.4 million for 1996, an increase
of 127.3%. The increase in the Company's interest income was due primarily to an
increase in the Company's average interest earning assets from approximately
$527.3 million in 1996 to approximately $1.1 billion in 1997.
Interest Expense. The Company's interest expense was approximately $86.8
million for 1997 compared with approximately $29.3 million for 1996, an increase
of 196.6%. The increase in interest expense resulted from an increase in the
Company's average interest-bearing liabilities to approximately $1.1 billion in
1997 from approximately $479.0 million in 1996 and includes the issuance in the
fourth quarter of 1996 and early 1997 of $84.2 million of the Company's Notes
and the issuance in the third quarter of 1997 of $100.0 million of the Company's
Series B Notes. Primarily as a result of the Company's $184.2 million of 13%
notes, the average rate paid on interest-bearing liabilities increased from
6.11% in 1996 to 7.6% in 1997.
74
<PAGE>
Provisions for Estimated Losses on Loans
Provision for estimated losses on loans for 1997 was approximately $2.0
million resulting from additional provisions of approximately $4.5 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 $16.5 million for 1996 from reserves
established primarily for certain sub-prime auto loans and loans held by First
Bank at the time they were acquired.
Other Income
The Company's other income was approximately $61.3 million for 1997
compared to approximately $17.9 million for 1996, an increase of 241.7%. The
components of the Company's non-interest income are reflected in the following
table:
Year Ended
December 31,
----------------------------
1997 1996
------------ -------------
Other income: (Dollars in Thousands)
Gain on sale of loans.................. $ 39,049 $ 11,538
Servicing revenue...................... 5,580 --
Real estate owned, net................. 6,309 556
Bankcard income, net................... 1,995 1,666
Gain on sale of securities............. 3,742 --
Trading account-unrealized gain........ 2,330 1,833
Other, net............................. 2,298 2,349
------------ -------------
Total other income............... $ 61,303 $ 17,942
============ =============
The increase in other income for 1997 is primarily attributable to (i)
sales of loans, which resulted in gains of approximately $39.0 million, (ii) the
sale of securities, which resulted in a gain of approximately $3.7 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.
Gains on Sale of Loans. The gain on the sale of loans for 1997 is the
result of the sale of loans with a book value of approximately $469.0 million,
of which approximately $204.2 million were sold through whole loan sales and
approximately $264.8 million were sold through securitizations. For 1997, gain
on the sale of whole loans totaled approximately $15.5 million and gains from
securitizations totaled approximately $23.5 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 (excluding
any cost basis attributable to servicing rights retained).
Gain on the Sale of Securities. The gain on the sale of securities for 1997
is a result of the sale of approximately $20.8 million of mortgage-backed
securities which resulted in a gain of approximately $3.7 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.
75
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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.
Servicing Revenue. The increase in servicing revenue of approximately $5.6
million in 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 expense totaled approximately $56.7 million for 1997
compared to approximately $15.4 million for 1996, an increase of 267.3%, 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 expense in 1997 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 $28.1 million for
1997 compared to approximately $5.2 million for 1996, an increase of
approximately 443.4%. 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 $1.4 billion at December 31, 1997 from approximately $513.5
million at December 31, 1996 and an increase in sub-servicing fees of
approximately $4.6 million. Also, collection-related expense increased from 1996
to 1997 due to the substantial increase in Discounted Loans. Discounted Loans
generally require more significant expenditures than performing and
sub-performing loans.
Compensation and Employee Benefits. Compensation and employee benefits were
approximately $14.4 million for 1997, compared to approximately $4.5 million for
1996, an increase of 222.7%. The increase was primarily due to an increase in
the average number of full-time equivalent employees from 56 for 1996 to 184 for
1997, reflecting the expansion of business activities, particularly loan
acquisition activities and the growth of activities at the non-bank
subsidiaries.
Other general administrative expenses increased from approximately $2.4
million for 1996 to approximately $8.9 for 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
Income tax provision was approximately $10.6 million for 1997 compared with
approximately $0.1 million for 1996. The change was primarily due to the
utilization of net operating loss deductions in 1996 and a normalized tax
provision in 1997.
Results of Operations--Year Ended December 31, 1996 Compared to 1995
Net Interest Income
The Company's net interest income increased by approximately $9.2 million
or 93.4% during year 1996, as compared to the same period in the prior year.
This increase resulted from an approximately $24.0 million or 98.6% increase to
interest income due to an approximately $278.3 million or 104.5% increase in
average interest-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.
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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.
First Bank 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 First Bank's
provision for loan losses for the year ended December 31, 1996:
Provision % of total
------------ -------------
(Dollars in thousands)
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%
============ =============
Approximately $6.1 million of the increase in the provisions from 1995 to
1996 was made after discussions between the OTS and First Bank concerning the
appropriate provision for the Sub-Prime Auto Loans acquired by First Bank in the
fourth quarter of 1995 and the first quarter of 1996. The Company also increased
the provision by approximately $4.8 million in 1996 related to the Inherited
Loans owned by First Bank or Girard at the time First Bank 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
First Bank's allowances for losses on Non-Discounted Loans and Discounted Loans
and may require adjustments to First Bank's 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.
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:
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Year Ended
December 31,
----------------------------
1996 1995
------------ -------------
(Dollars in Thousands)
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
============ =============
Bankcard Income and Processing Expense. The increase in other income for
1996 was due in part to an increase of approximately $2.1 million in bankcard
income, from approximately $4.7 million for 1995 to approximately $6.8 million
for 1996. The large increase in income from the Company's merchant bankcard
operations was primarily due to the development of new accounts. Bankcard
processing expense increased by approximately $1.6 million from approximately
$3.5 million for 1995 to approximately $5.1 million for 1996. This increase
resulted primarily from an increase in bankcard processing due to growth in
merchant transactions evidenced by the growth in bankcard income.
Gains on Sale of Loans. The increase in other income in 1996 was due
primarily to an increase of approximately $10.9 million in gains on sales of
loans, from approximately $0.6 million for 1995 to approximately $11.5 million
for 1996. This increase was due to gains from the sale of approximately $287.8
million of loans. For the year ended December 31, 1996, gain on sale of whole
loans totaled $5.4 million and gains from securitizations totaled approximately
$6.1 million.
Other income also includes loan fees and charges (e.g., late fees,
commitment fees). Loan fees and charges increased approximately $1.1 million,
from approximately $0.6 million for 1995 to approximately $1.7 million for 1996.
The increase was primarily due to an increase in loan volume.
Other Expense
The Company's other expense totaled approximately $15.4 million for 1996
compared to approximately $7.9 million for 1995, an increase of 94.7%.
Loan Service Fees and Expenses. The largest component of other expense in
1996 was loan service fees and expense which increased by approximately $3.2
million from approximately $2.0 million for 1995 to approximately $5.2 million
for 1996. Loan servicing fees and expenses are paid to WCC and include (a)
servicing fees and (b) collection-related expenses incurred directly by WCC and
reimbursed by the Company. Servicing fees for Discounted Loans have been based
on a percentage of cash flows collected. Therefore, when Discounted Loans are
sold, servicing fees increase substantially. The volume of loans, particularly
Discounted Loans, being serviced for the Company by WCC increased substantially
during 1996 compared to 1995 due to the substantial growth in the Company's loan
pool acquisition activity. In addition, due to a securitization of
non-performing loans (primarily Discounted Loans) in March 1996, higher fees
associated with the accelerated cash flows to First Bank were paid to WCC in the
first quarter of that year.
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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, First Bank's
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.
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 First
Bank (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
First Bank's 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 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
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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 $129.0 million
notional principal amount of interest rate swap agreements outstanding at
September 30, 1998, which had the effect of decreasing the Company's net
interest income by approximately $64,000 during the nine months ended September
30, 1998.
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 First
Bank. At September 30, 1998, 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 33% decrease or 22% 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, 1998:
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Interest Rate Sensitivity of First Bank's Net Portfolio Value
Net Portfolio Value
---------------------------------
Amount $ Change % Change
------- ----------- ----------
(Dollars in thousands)
+400bp.................................. $ 10,573 $ (47,152) (82)%
+300bp.................................. 25,080 (32,645) (57)%
+200bp.................................. 38,741 (18,984) (33)%
+100bp.................................. 50,182 (7,543) (13)%
0bp.................................. 57,725 -- --
- -100bp.................................. 63,454 5,730 10 %
- -200bp.................................. 70,243 12,518 22 %
- -300bp.................................. 78,019 20,294 35 %
- -400bp.................................. $ 86,383 $ 28,658 50 %
Management of First Bank believes that the assumptions (including
prepayment assumptions) used by it to evaluate the vulnerability of First Bank's
operations to changes in interest rates approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of First
Bank's assets and liabilities and the estimated effects of changes in interest
rates on First Bank's net interest income and MVPE could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which they are based. Additionally, the OTS's model does not
incorporate all of the terms and features of the hedging instruments.
Changes in Financial Condition
Mortgage-Backed and Other 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. The Company's holdings of
mortgage-backed securities available for sale decreased approximately $53.1
million during the nine months ended September 30, 1998 primarily as a result of
the sale of approximately $142.8 million carrying amount ($95.0 million of which
was sold to WREIT in conjunction with its initial public offering of common
stock) purchases of approximately $132.9 million, realized market valuation
adjustment of approximately $27.4 million, transfer from trading account
securities of approximately $16.9 million, an increase in unrealized loss on
available for sale securities of approximately $2.7 and net other decrease of
$30.0 million which primarily represents principal repayment. The Company's
holdings of trading account securities decreased $39.0 million during the nine
months ended September 30, 1998 primarily as a result of the sale of certain
subordinate securities and the aforementioned transfer to available for sale.
The Company granted WREIT a right of first refusal with respect to future
investments in mortgage-backed securities primarily comprised of interests in
residential mortgage loans. As a consequence, the opportunity for the Company to
invest in such assets would be limited to the extent WREIT takes advantage of
such investment opportunities.
Loans, Net. The Company's portfolio of performing and sub-performing loans
("Non-Discounted Loans"), net of discounts and allowances, increased by
approximately $284.9 million during the nine months ended September 30, 1998.
This increase is primarily attributable to the acquisition of Non-Discounted
Loans at First Bank, reflecting the Company's emphasis on increasing the level
of investment in Non-Discounted Loans as a percentage of the total loan
portfolio. See "Discounted Loans" below.
Discounted Loans, Net. The Company's portfolio of Discounted Loans
decreased by approximately $216.2 million during the nine months ended September
30, 1998. During the nine months ended September 30, 1998, the Company has
reduced its investment level in Discounted Loans, resulting in a decrease in
balance due to attrition resulting from resolution of the loans either through
workout with the borrower or acquisition of properties securing
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the loans through foreclosure or deed-in-lieu thereof. Discounted loans require
significant capital resources prior to resolution, which is typically six to
nine months following acquisition. The Company believes it can create a more
predictable and less capital intensive earnings stream by reducing the level of
investment in these assets. Subsequent to September 30, 1998, the Company sold,
in response to collateral calls by an affiliate of Salomon Smith Barney, Inc.,
approximately $266.5 million unpaid principal balance of Discounted Loans, which
resulted in $29.5 million of the Company's $76.6 million of market valuation
adjustments recognized in the Quarter ended September 30, 1998.
Loans Held for Sale, Net, at Lower of Cost or Market. Loans held for sale,
net, at lower of cost or market increased by approximately $281.5 million during
the nine months ended September 30, 1998 primarily as the net result of
acquisition of Non-Discounted Loans, securitization and whole loan sale
activity, and the Company's expansion of its loan originations. The Company has
adopted the strategy of increasing Non-Discounted Loans and decreasing
Discounted Loans as a percentage of the total loan portfolio. Non-Discounted
Loans have the advantage of being financed at lower rates than Discounted Loans
and provide more predictable cash flows and earnings stream to the Company. In
addition, Non-Discounted Loans are less capital intensive than Discounted Loans,
which often require the Company to expend cash to ready the loan for resolution,
which typically is six to nine months following acquisition. Subsequent to
September 30, 1998, the Company sold loans held for sale with carrying value of
$232.5 million which are reflected in the consolidated statement of financial
condition as of September 30, 1998. The effect of this sale would be to reduce
loans held for sale from $592.2 million to $359.7 million.
Due from Affiliate, Net. Due from affiliate, net primarily represents
payments received in the normal course of servicing operations by WCC, which had
not yet been due for remittance to the Company. As of September 30, 1998, due
from affiliate, net of approximately $15.3 million was net of $17.7 million due
from the Company to WREIT, resulting from a loan during the third quarter of
1998. In addition, due to affiliates, net at December 31, 1997 included
approximately $1.6 million of PIK preferred stock dividend due to WCC from the
Company that was subsequently redeemed February 1998.
Mortgage Servicing Rights. Mortgage servicing rights decreased by $5.2
million during the nine months ended September 30, 1998 primarily attributable
to the net effect of the allocation of basis of approximately $6.0 million of
servicing rights relating to two securitizations and the purchase of
approximately $5.0 million of servicing rights, offset by the write-down of
approximately $13.7 million of servicing rights resulting from faster than
expected prepayments on loans being serviced and revised future prepayment
estimates, and $2.5 million of amortization.
Investment in Wilshire Real Estate Investment Trust Inc. Investment in
WREIT increased $14.7 million as a result of the Company's purchase of 9.9% of
the original 10,000,000 shares of common stock offered by WREIT as part of its
initial public offering in April 1998, offset by the Company's ownership share
of losses and dividends received.
Deposits. First Bank increased its deposits by approximately $171.5 million
or 47.3% during the nine months ended September 30, 1998 to fund the acquisition
of Non-Discounted Loans. Pursuant to a Cease and Desist Order, as amended (the
"Order"), imposed on First Bank by the OTS, First Bank was prohibited from
increasing its total assets, as measured at the end of each calendar quarter
above $750 million (increased from previous limitation of $553 million in April
1998), unless such increase was an amount that represents the total net interest
credited on deposit liabilities earned during that quarter plus any increase
permitted by the Order in prior quarters. First Bank has complied with these
requirements. In October 1998, as the result of a recent examination, the OTS
agreed to lift the Order.
Subsequent to September 30, 1998, the OTS informed the Company and Wilshire
Acquisition Corporation, a subsidiary of the Company, both savings and loan
holding companies, that formal enforcement actions may be imposed and in January
1999 imposed a new cease and desist order against such holding companies
covering affiliated transactions. These actions respond to alleged violations of
certain affiliated transactions regulations with First Bank. Management
requested the OTS consider less formal responses, as the alleged violations were
induced by external conditions. Management believes these restrictions, as well
as other related restrictions that may be imposed, will have no material impact
on operations.
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Short-Term Borrowings. Short-term borrowings increased by approximately
$109.6 million during the nine months ended September 30, 1998, resulting from
use of repurchase agreements and warehouse financing to fund the purchase of
loans and securities.
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 fund newly originated loans, and for
general business purposes. The Company's sources of cash flow include
certificates of deposit, securitizations, whole loan sales, net interest income
and borrowings under its warehouse and repurchase facilities and from
institutional investors and other lenders and public and private debt or equity
offerings. The Company has also borrowed money on an unsecured basis from WREIT
and WCC. In addition, First Bank obtains 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.
There can be no assurance that existing lines of credit can be extended or
refinanced or that funds generated from operations will be sufficient to satisfy
obligations. The Company believes that its future success is dependent upon its
ability to (i) access loan warehouse or repurchase facilities, (ii) successfully
sell loans in the whole loan sales market, (iii) obtain additional capital, (iv)
streamline its operations and (v) retain an adequate number and mix of its
employees. No assurance can be given that the Company will be able to achieve
these results. The implementation of any of these or other liquidity initiatives
is likely to have a negative impact on the Company's profitability. The Company
has investigated a variety of alternatives for reorganization and has concluded
that the best way to recapitalize the Company over the long-term and maximize
the recovery of creditors and equity interest holders of the Company is through
a prepackaged plan of reorganization for WFSG. See "The Plan of Reorganization."
The recent dramatic events in the financial markets, which included a
significant reduction in valuations of, and liquidity for, mortgage-backed
securities, has had a significant adverse impact on the Company's liquidity and
financial condition. The decline in valuations resulted in collateral calls from
the Company's lenders, which reduced the Company's cash position and eventually
prompted asset sales at depressed prices to meet these calls and provide
liquidity. While these asset sales have improved the liquidity position of the
Company, the market for mortgage-backed securities -- particularly subordinate
mortgage-backed securities -- has not recovered and the financial markets
generally continue to be volatile. Further, certain of the Company's lenders
have expressed concern about continued lending given market conditions and
recent losses incurred by the Company.
In order to address these liquidity concerns and improve the Company's
financial condition, management entered into discussions with the Unofficial
Noteholders' Committee holding a majority of the Company's $184.2 million in
outstanding publicly issued notes and its financial advisors, Houlihan Lokey
Howard & Zukin, Inc., and legal counselors, Latham & Watkins, concerning a
restructuring of the Company's obligations under the Old Notes. Following
extensive discussions, the Company and the Unofficial Noteholders' Committee
agreed to a restructuring of the Company substantially in the form of the Plan.
Management believes that this Restructuring will significantly improve the
Company's financial position by reducing indebtedness by $198.8 million
(including accrued interest), the ongoing interest cost associated with that
indebtedness, and significantly increase the Company's equity account and
provide additional liquidity through the DIP Facility. This restructuring is
subject to a number of conditions, including no material adverse change and
negotiation of definitive documents. The Company currently expects that this
restructuring will be completed at the end of the first quarter of 1999. Other
creditors, including trade creditors and secured creditors, are not expected to
be adversely affected by this restructuring.
Following the losses incurred by the Company in October and November of
1998, the Company began discussions with a number of potential new equity
investors in order to strengthen its diminished equity base and obtain
additional capital to operate and develop the business. The Company is currently
in discussions with a number of potential investors concerning possible equity
investments in the Company or a sale of the Company. Such discussions
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are expected to continue during the pendency of the Reorganization Case. It is
currently anticipated that any such investments will be made after the Effective
Date and is expected to be no less favorable to Noteholders than the Plan.
There can be no assurance, however, that any such investments will be made.
As a part of the Restructuring, the Company and the Unofficial Noteholders
Committee anticipate incorporation of servicing functions currently performed by
WCC into a new subsidiary of WFSG.
The Company's unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and the liquidation of liabilities in the normal course of
business. The appropriateness of using the going concern basis is dependent
upon, among other things, the adequate resolution of the Company's near and long
term liquidity shortfall, as well as the successful consummation of the
reorganization described above.
Sources of liquidity for First Bank include wholesale and brokered
certificates of deposit, repurchase financing Facility and FHLB advances. At
September 30, 1998, First Bank had approximately $522.4 million of certificates
of deposit. At September 30, 1998, scheduled maturities of certificates of
deposit during the 12 months ending September 30, 1999 and thereafter amounted
to approximately $451.9 million and approximately $70.5 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 First Bank believes it can adjust the rates paid on certificates
of deposit to retain deposits in changing interest rate environments and that
brokered and other wholesale deposits can be both a relatively cost-effective
and stable source of funds.
The Company's uses of cash include the funding of purchases of United
States residential Discounted Loans and 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 securitization, 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 Discounted Loans and
Non-Discounted Loans, the Company generally seeks to fund 90% and 95%,
respectively, of the purchase price of such pools of loans with borrowed money.
The Company draws on a number of sources to obtain such funds including
certificates of deposit and repurchase arrangements with major investment banks.
Capital expenditures by the Company have not been material.
The Company is party to various off-balance sheet financial instruments in
the normal course of business to manage its interest rate risk. The Company
conducts business with a variety of financial institutions and other companies
in the normal course of business, including counter parties to its off-balance
sheet financial instruments. The Company is subject to potential financial loss
if the counter party is unable to complete an agreed upon transaction. The
Company seeks to limit counter party 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
fund newly originated loans. During the third quarter, as described in General
Market Conditions, financial markets were severely and negatively impacted by
various factors which have resulted in reduced availability of liquidity and
capital to specialty finance companies and other holders of non-investment grade
assets and certain types of loans. This includes the ability to raise new equity
capital and long-term debt, as well as the ability to securitize or finance
certain types of loans. Prior to the Solicitation, the Company entered into a
letter agreement with WREP whereby it agreed to provide the Interim Facility and
the DIP Facility. In addition, the Company expects to receive a large tax refund
during the first quarter of 1999 as a result of the substantial losses incurred
by the Company in September and October of 1998.
The Company's growth strategy is dependent on its ability to raise
additional debt and/or equity financing. To the extent this market environment
persists, such growth is likely to be significantly curtailed or delayed.
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To the extent permitted by regulations and deemed appropriate by
management, the Company is exploring available liquidity and capital resources
at First Bank to conduct certain activities through First Bank during this
period of market tightness.
First Bank is 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. First Bank has
complied with these requirements. In addition, the Company has been required to
maintain funds sufficient to meet two semiannual interest payments on the Old
Notes in liquid assets. On August 12, 1998, the Company completed a Consent
Solicitation, pursuant to which the Company obtained the consents of Holders of
the Old Notes to certain amendments to the indentures relating to the Old Notes,
including the elimination of the liquidity requirements.
Regulatory Capital Requirements
Federally-insured savings associations such as First Bank 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.
The following table sets forth the regulatory capital ratios of First Bank
at September 30, 1998:
Regulatory Capital Ratios of First Bank
<TABLE>
<CAPTION>
To Be Categorized as
"Well Capitalized"
under Prompt
For Capital Adequacy Corrective Action
Actual Purposes(1) Provisions
-------------------------- -------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-Weighted
Assets (Risk-Based Capital):
First Bank ..................... $ 56,365 15.1% $ 29,886 > 8.0% $ 37,358 > 10.0%
- -
Tier 1 Capital to Risk-Weighted
Assets:
First Bank ..................... 52,457 14.0% 14,943 > 4.0% 22,415 > 6.0%
- -
Core Capital to Tangible Assets:
First Bank ..................... 52,457 8.4% 25,116 > 4.0% $ 31,395 > 5.0%
- -
Tangible Capital to Tangible Assets:
First Bank ........................ $ 52,457 8.4% $ 9,419 > 1.5% Not applicable
</TABLE>
Transactions with Affiliates
Due to the interrelated business and operations of the Wilshire group of
companies, WFSG has from time to time in the past engaged in transaction with
certain affiliated companies, including WCC, WREP, WLL, WSC and WREIT. Following
the completion of the WCC Restructuring and confirmation of the Plan, many of
these transactions with affiliates will cease. Currently, WCC services WFSG's
loan portfolio and other estate related assets and provides administrative
services to WFSG and WREIT. As a result of these services, WCC regularly makes
servicing advances
85
<PAGE>
on behalf of WFSG and WREIT for which it is reimbursed and receives servicing
fees. WLL employs the individuals who work at WFSG and regularly receives
payments from WFSG to cover salaries. In the past, from time to time, WCC has
lent money to WFSG on an unsecured basis and an arm's length basis. During the
recent market disruptions, WCC again lent money to WFSG. Following the WCC
Restructuring, the New Servicer and WLL will be subsidiaries of WFSG. It is
anticipated that WFSG will continue to provide services to WREIT, including
management advisory services through a subsidiary and servicing through the New
Servicer, pursuant to arm's length negotiated agreements. In addition, WREIT
will provide DIP financing to WFSG. In addition, WFSG and WREIT may sell assets
to each other, subject to approval by independent boards.
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 First Bank, 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.
Non-Discounted Loans are presented in the Consolidated Financial Statements
in substantially the same manner as Discounted Loans, except that interest
income is recognized on an accrual basis.
Gains or losses on loans sold through securitization transactions are based
on the difference between the cash proceeds received from the sale of the senior
classes of mortgage-backed securities to outside investors and the Company's
cost basis allocated to the senior classes of mortgage-backed securities. The
Company's cost basis in loans sold is allocated between the senior classes of
mortgage-backed securities and the subordinate classes of mortgage-backed
securities retained by the Company based on the relative fair values of the two
types of securities. The cost basis of the loans securitized is determined by
their acquisition cost (for purchased loans) or net carrying value (for
originated loans). The Company carries subordinate classes of mortgage-backed
securities at fair value. As such, the carrying value of these securities is
impacted by changes in market interest rates and prepayment and loss experiences
of these and similar securities. In cases where the Company has financed the
holding of subordinate classes with a lender under a repurchase agreement, the
Company uses such lender's determination of market value for purposes of
potential collateral 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.
86
<PAGE>
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.
Year 2000 Compliance
The Company is reliant on information technology for both general business
operations and its loan servicing system. The Company has formed a committee to
address year 2000 issues (the "Committee") that reports directly to the
Company's executive committee. The Committee is headed by the Chief Information
Officer and includes representatives from across the Company.
The Committee has conducted an inventory of all systems within the Company,
classifying each as either "critical" or "non-critical." For non-critical
systems, the Company has obtained a certification from the vendor that the
applicable package is "year 2000 compliant." For systems deemed "critical," the
Company has developed detailed test plans and created separate year 2000 test
environments.
The Company has begun the testing of critical systems and is scheduled to
complete all necessary testing by March 31, 1999. Testing of the Company's
internally developed systems is near completion, and changes which have resulted
from testing to date are being coded and moved into production. Following the
testing phase, each department's executive management will be responsible for
certifying that their staff has tested critical code and deemed it adequate.
Aside from limited hardware costs, the Company's primary expense related to
year 2000 compliance is allocation of existing staff. The Company estimates that
the total cost related to year 2000 compliance to be approximately $500,000.
The significant risk to the Company of year 2000 non-compliance is the
inability to perform necessary loan servicing activities. Currently, the
Company's loan portfolio is serviced by WCC, an affiliated entity. The Company
services loans for third parties (including securitizations), and contracts with
WCC for sub-servicing. To the extent the loan servicing system is not year 2000
compliant, the ability to service the Company's loans and those of third parties
would be in jeopardy.
Based on the results of testing performed to date, the Company is confident
that it is appropriately addressing the Year 2000 issues. Critical systems
supplied by outside vendors have undergone testing not only by the Company, but
other customers of the vendors as well. The Company's loan servicing system is
an internally developed system and therefore, information technology personnel
are very familiar with the system and believe their efforts will have favorable
results. As a contingency plan, the Company is in the process of identifying an
alternative servicer for the Company's loan portfolio and third party loans
currently serviced by the Company and its affiliate. To date, the Company has no
formal agreement in place regarding back-up servicers.
87
<PAGE>
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. All of the statements
contained in this Quarterly Report on Form 10-Q which are not identified as
historical should be considered forward-looking. In connection with certain
forward-looking statements contained in this Quarterly Report on Form 10-Q and
those that may be made in the future by or on behalf of the Company which are
identified as forward-looking, the Company notes that there are various factors
that could cause actual results to differ materially from those set forth in any
such forward-looking statements. Such factors include, but are not limited to,
the real estate market, the availability of loan portfolios at acceptable
prices, the availability of financing for loan portfolio acquisitions, interest
rates and expansion outside the U.S. Accordingly, there can be no assurance that
the forward-looking statements contained in this Quarterly Report on Form 10-Q
will be realized or that actual results will not be significantly higher or
lower. The forward-looking statements have not been audited by, examined by or
subjected to agreed-upon procedures by independent accountants, and no
third-party has independently verified or reviewed such statements. Readers of
this Quarterly Report on Form 10-Q should consider these facts in evaluating the
information contained herein. The inclusion of the forward-looking statements
contained in this Quarterly Report on Form 10-Q should not be regarded as a
representation by the Company or any other person that the forward-looking
statements contained in this Quarterly Report on Form 10-Q will be achieved. In
light of the foregoing, readers of this Quarterly Report on Form 10-Q are
cautioned not to place undue reliance on the forward-looking statements
contained herein.
88
<PAGE>
PROJECTED FINANCIAL INFORMATION
The following Projections were prepared by WFSG, based upon, among other
things, the anticipated future financial condition and results of operations of
the Reorganized Company.
WFSG does not generally publish its business plans and strategies or make
external projections of its anticipated financial position or results of
operations. Accordingly, after the Effective Date, the Reorganized Company does
not intend to update or otherwise revise the Projections to reflect
circumstances existing since its preparation in January 1999 or to reflect the
occurrence of unanticipated events, even in the event that any or all of the
underlying assumptions are shown to be in error. Furthermore, the Reorganized
Company does not intend to update or revise the projections to reflect changes
in general economic or industry conditions. However, the Reorganized Company's
regular quarterly and annual financial statements, and the accompanying
discussion and analysis, will contain disclosure concerning the Reorganized
Company's actual financial condition and results of operations during the period
covered by the Projections.
The Projections were not prepared with a view toward general use, but
rather for the limited purpose of providing information in conjunction with the
Plan. Accordingly, the projections were not intended to be presented in
accordance with the published guideline of the American Institute of Certified
Public Accountants regarding financial projections, nor have they been presented
in lieu of pro forma historical financial information, and accordingly, are not
intended to comply with Rule 11-03 of Regulation S-X of the Commission.
The Projections assume a hypothetical Effective Date of March 31, 1999
i.e., the month-end closest to the assumed Effective Date of April 12, 1999, and
are in part based on a projected unaudited consolidated balance sheet as of
March 31, 1999, which reflects certain assumption concerning the Company's
operations during the solicitation period and during the pendency of the
prepackaged bankruptcy proceeding.
Additional information relating to the principal assumptions used in
preparing the Projections is set forth below. See "Certain Risk Factors" for a
discussion of various other factors that could materially affect the Reorganized
Company's financial condition, results of operations, businesses, prospects and
securities.
For the purpose of providing projected financial information, the Company
has defined its core business as originating, purchasing, holding, servicing and
selling Non-Discounted Loans and to a lesser degree Discounted Loans. With this
context, the following points represent the major assumptions (the
"Assumptions") underlying the attached projected financial data. There can be no
assurance that any of the Assumptions will be proven correct over time.
1. Effective Date and Plan Terms. The Projections assume that the Plan will
be confirmed in accordance with its terms, and that all transactions
contemplated by the Plan and the WCC Restructuring will be consummated by the
assumed Effective Date. Any significant delay in the assumed Effective Date of
the Plan may have a significant negative impact on the operations and financial
performance of the Reorganized Company including, but not limited to, higher
reorganization expenses.
2. General Operating Assumptions. The Projections assume that the
Reorganized Company does not raise any additional new equity capital from third
parties, but that the Reorganized Company reinvests any earnings and that First
Bank increases its assets to reflect a minimum 6% ratio of core and tangible
capital and maintains a risk based capital ratio in excess of 10%. The
Projections also assume that the Reorganized Company will reinvest the proceeds
of any maturing assets in new assets, principally performing residential
mortgage loans. The Projections assume that servicing revenues increase as
assets increase and that the New Servicer obtains additional third party
servicing. The Projections were prepared assuming that expenses will generally
increase in line with inflation with some additional incremental costs
associated with increased third party servicing and that the current general
economic conditions prevailing today will not change materially during the
projection period.
3. Fresh Start Accounting. The Projections have been prepared using the
basic principles of "fresh start" accounting. These principles are contained in
SOP90-7. The fair values of the assets and liabilities of the Reorganized
Company (and thus the amount allocable to reorganization value in excess of
amounts allocable to
89
<PAGE>
identifiable tangible and intangible assets) are subject to revision following
the results of appraisals and other studies which will be performed after
consummation of the Restructuring and the related transactions. The amount of
stockholders' equity in the "fresh start" balance sheet is not an estimate of
the trading value of the New Common Stock after the confirmation of the Plan.
The Company does not make any representation as to the trading value of the
shares to be issued under the Plan. The Projections also assume that the New
Servicer will be consolidated with the Reorganized Company, net of minority
interest, for accounting purposes and that the acquisition of certain assets and
liabilities of WCC by the New Servicer will be treated as a "purchase" under
U.S. generally accepted accounting principles, except that no servicing rights
have been capitalized on the balance sheet of the New Servicer for purposes of
these projections.
4. Income Taxes. Projected income taxes are based on an assumed combined
state and federal tax of 40% and are assumed to accrue and be paid on a
quarterly basis. The Projections assume that all net operating losses will be
offset by gain on forgiveness of debt and that therefore the Reorganized Company
will not have the benefit of any net operating loss carryforwards for income tax
purposes. Management believes that there may be some net operating loss
carryforwards available to the Reorganized Company, but has not reflected that
in the Projections due to the inherent difficulties and uncertainties in
determining such amounts.
5. Secured Lending and Warehouse Credit Facilities. The Projections assume
that the Reorganized Company will have secured lending and warehouse credit
facilities on the same terms and rates as currently exist, even though the
Projections assume lower use of such facilities due to more growth at First
Bank.
6. Indebtedness. The Projections assume that the Reorganized Company issues
the New 6% Notes in connection with the Compromised WREIT/WREP Claim and borrows
$10.0 million under the DIP Facility.
7. WREIT. The Projections assume that WREIT does not raise any additional
equity capital, but does invest its earnings in new assets, resulting in an
increase in the management fee payable by WREIT to a subsidiary of the
Reorganized Company. The management fee is based on assets invested and as
WREIT's assets increase so does the management fee. (Such management fees are
reflected in Other(Loss) Income under the caption "Other, net.") The Projections
assume also that there is no increase in the value of WREIT common stock owned
by the Reorganized Company from the book value of such stock at December 31,
1998.
8. Mortgage-Backed Securities. The Projections assume that there will be no
recovery of unrealized losses on the Reorganized Company's mortgage-backed
securities, Management believes that a majority of its mortgage-backed
securities are not permanently impaired and therefore should experience
recoveries of market value adjustments as principal and interest on the
underlying mortgage loans are repaid.
9. Europe. The Projections assume that the Reorganized Company refinances
its French portfolio, uses the proceeds thereof to invest with partners in
additional European loan portfolios and that the Reorganized Company has a 10%
interest in such new loan portfolios and its partners a 90% interest.
90
<PAGE>
<TABLE>
<CAPTION>
WILSHIRE FINANCIAL SERVICES GROUP INC.
PROJECTED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Amounts in Thousands)
Projected WFSG Incorporation Projected
Pre-Confirmation Reorganization of Post-Confirmation
March 31, 1999 Adjustments WCC March 31, 1999
----------------- --------------- -------------- -----------------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 43,251 $ -- $ 46,755 $ 90,006
Securities 129,896 -- 1,000 130,896
Loans 634,049 -- -- 634,049
Real estate owned, net 63,701 -- -- 63,701
Investment in Wilshire Real Estate Investment
Trust Inc. 3,341 -- -- 3,341
Other Assets 69,033 (29,600)(a) 1,001 40,434
----------------- --------------- -------------- -----------------
TOTAL $ 943,271 $ (29,600) $ 48,756 $ 962,427
================= =============== ============== =================
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 547,992 $ -- $ -- $ 547,992
Short-term borrowings 228,517 -- -- 228,517
Long-term borrowings 25,614 25,614
Notes payable 184,245 (184,245)(b) -- --
Accounts payable and liabilities 53,831 (33,120)(c) 44,360 65,071
----------------- --------------- -------------- -----------------
Total Liabilities 1,040,199 (217,365) 44,360 867,194
----------------- --------------- -------------- -----------------
Commitments and Contingencies
Minority Interest -- 1,533 (d) 2,198 3,731
Stockholders' Equity:
Common stock 117,708 (29,937)(e) 2,198 91,502
Treasury stock, at cost (2,852) 2,852 (f) -- --
Retained earnings (deficit) (183,992) 183,992 (g) -- --
Accumulated other comprehensive loss, net (29,325) 29,325 (h) -- --
----------------- --------------- -------------- -----------------
Total stockholders' equity (96,928) 186,232 2,198 91,502
----------------- --------------- -------------- -----------------
TOTAL $ 943,271 $ (29,600) $ 48,756 $ 962,427
================= =============== ============== =================
</TABLE>
91
<PAGE>
- ----------
Notes:
(a) To record the elimination of deferred issuance costs related to the
Notes Payable and the write-off of other assets.
(b) To record the discharge of the Notes Payable.
(c) To record the elimination of accrued interest payable related to the
Notes Payable and the discharge and discount of certain other amounts
payable to affiliates.
(d) To record the minority interest related to Wilshire Servicing
Corporation.
(e) To record the net effect of the "fresh start" accounting adjustments
and conversion of the Notes Payable to equity.
(f) To record the elimination of the old treasury stock.
(g) To record the extinguishment of accumulated deficit.
(h) To record the discharge of accumulated unrealized loss on available
for sale securities and unrealized gain on foreign currency
transactions.
92
<PAGE>
<TABLE>
<CAPTION>
WILSHIRE FINANCIAL SERVICES GROUP INC.
PROJECTED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Amounts in Thousands)
The Reorganized Company
---------------------------------------------------
Projected Fiscal Year Ending December 31,
---------------------------------------------------
1999 2000 2001
---------- ---------- ----------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 238,115 $ 311,931 $ 387,983
Securities 116,635 101,426 83,533
Loans 954,997 1,460,430 1,635,029
Real estate owned, net 42,805 38,563 34,152
Investment in Wilshire Real Estate Investment
Trust Inc. 3,341 3,341 3,341
Other Assets 42,033 45,012 48,364
---------- ---------- ----------
TOTAL $1,397,926 $1,960,703 $2,192,402
========== ========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 688,007 $ 840,787 $ 944,939
Short-term borrowings 384,840 717,997 774,406
Long-term borrowings 24,954 24,554 24,154
Accounts payable and liabilities 197,726 244,284 274,913
---------- ---------- ----------
Total Liabilities 1,295,527 1,827,622 2,018,412
========== ========== ==========
Commitments and Contingencies
Minority Interest 4,220 9,246 16,021
Stockholders' Equity:
Common stock 91,502 91,502 91,502
Retained earnings 6,677 32,333 66,467
Total stockholders' equity 98,179 123,835 157,969
---------- ---------- ----------
TOTAL $1,397,926 $1,960,703 $2,192,402
========== ========== ==========
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
WILSHIRE FINANCIAL SERVICES GROUP INC.
PROJECTED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands)
The Reorganized Company
----------------------------------------------------------------------------------
Projected Fiscal Year Ending
Projected 1999 December 31,
----------------------------------------------------- ----------------------------
Nine Months
Second Third Fourth Ending
Quarter Quarter Quarter December 31 2000 2001
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 16,101 $ 18,930 $ 20,562 $ 55,593 $ 105,391 $ 133,220
Mortgage-backed securities 3,178 3,094 3,015 9,287 11,338 10,344
Securities and federal funds sold 916 1,211 1,810 3,937 9,643 11,675
------------ ------------ ------------ ------------ ------------ ------------
Total interest income 20,195 23,235 25,387 68,817 126,372 155,239
INTEREST EXPENSE
Deposits 7,595 8,248 9,091 24,934 42,302 48,371
Borrowings 5,629 6,697 6,862 19,188 36,211 48,376
------------ ------------ ------------ ------------ ------------ ------------
Total interest expense 13,224 14,945 15,953 44,122 78,513 96,747
------------ ------------ ------------ ------------ ------------ ------------
NET INTEREST INCOME 6,971 8,290 9,434 24,695 47,859 58,492
PROVISION FOR ESTIMATED LOSSES ON
LOANS 728 1,079
------------ ------------ ------------ ------------ ------------ ------------
NET INTEREST (LOSS) INCOME AFTER
PROVISION FOR ESTIMATED LOSSES
ON LOANS 6,971 8,290 9,434 24,695 47,131 57,413
------------ ------------ ------------ ------------ ------------ ------------
OTHER (LOSS) INCOME
Servicing revenue, net 4,332 5,074 6,866 16,272 34,200 38,311
Real estate owned, net 3,988 1,752 1,907 7,647 7,366 5,395
Bankcard income, net 1,344 1,579 1,864 4,787 8,071 8,431
Gain on sale of loans and
securities 24 1,002 2,261 3,287 8,343 7,443
WREIT earnings 300 219 338 857 2,165 3,390
Other, net 1,211 1,623 2,799 5,633 18,664 27,909
------------ ------------ ------------ ------------ ------------ ------------
Total other income 11,199 11,249 16,035 38,483 78,809 90,879
------------ ------------ ------------ ------------ ------------ ------------
OTHER EXPENSES:
Compensation and employee benefits 10,264 10,293 10,668 31,225 45,482 47,969
Loan expenses 541 553 561 1,655 2,498 2,763
Professional services 736 737 738 2,211 3,071 3,186
Occupancy 801 761 761 2,323 3,137 3,246
FDIC insurance premiums 315 327 357 999 1,719 1,998
Other general and administrative
expenses 4,022 4,032 4,039 12,093 17,185 18,961
------------ ------------ ------------ ------------ ------------ ------------
Total other expenses 16,679 16,703 17,124 50,506 73,092 78,123
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
The Reorganized Company
----------------------------------------------------------------------------------
Projected Fiscal Year Ending
Projected 1999 December 31,
----------------------------------------------------- ----------------------------
Nine Months
Second Third Fourth Ending
Quarter Quarter Quarter December 31 2000 2001
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME BEFORE INCOME TAX
PROVISION 1,491 2,836 8,345 12,672 52,848 70,169
INCOME TAX PROVISION 674 1,252 3,580 5,506 22,166 29,261
MINORITY INTEREST 232 (55) (666) (490) (5,025) (6,774)
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME $ 1,049 $ 1,529 $ 4,099 $ 6,676 $ 25,657 $ 34,134
============ ============ ============ ============ ============ ============
EARNINGS PER SHARE:
Basic $ 0.05 $ 0.08 $ 0.20 $ 0.33 $ 1.28 $ 1.71
Diluted $ 0.05 $ 0.08 $ 0.20 $ 0.33 $ 1.28 $ 1.71
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000
Diluted 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000
</TABLE>
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<PAGE>
PRICE RANGE OF COMMON STOCK
The Old Common Stock of the Company is included for quotation in the Nasdaq
National Market under the symbol "WFSG." The following table sets forth, for the
periods indicated, the high and low sales price per share of the Old Common
Stock on the Nasdaq National Market.
High Low
---------- ---------
1996:
Fourth Quarter (commencing December 24, 1996)..... $16 1/4 $12 3/4
1997:
First Quarter..................................... $18 $14 1/4
Second Quarter.................................... $16 1/4 $13 1/2
Third Quarter..................................... $26 1/4 $15 1/2
Fourth Quarter.................................... $33 1/2 $21 1/8
1998:
First Quarter..................................... $ 27 $20
Second Quarter.................................... $ 25 1/4 $19 13/16
Third Quarter..................................... $ 24 $ 6 1/4
Fourth Quarter.................................... $ 6 $17 17/32
On January 29, 1999, the last reported sales price for the Old Common Stock
on the Nasdaq National Market was $0.3125 per share. The Company believes that
there are in excess of 1,000 shareholders of the Old Common Stock.
The Company currently intends to retain its earnings to support its future
growth strategy and does not anticipate declaring and paying any dividends on
the Old Common Stock in the foreseeable future. As a holding company, the
ability of the Company to pay dividends is dependent upon the receipt of
dividends or other payments from its subsidiaries. There are various regulatory
restrictions on the ability of First Bank to pay dividends or make other
distributions to the Company. Any determination to declare and pay dividends in
the future will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's results of operations, financial condition,
contractual restrictions, and other factors deemed relevant at that time by the
Company's Board of Directors.
96
<PAGE>
BUSINESS
The Company
Wilshire Financial Services Group Inc. ("WFSG" or the "Company") is a
diversified financial services company. The Company conducts business in the
United States and Europe, specializing in acquisitions of loan portfolios and
mortgage-backed securities, securitization, correspondent lending and servicing.
The Company offers wholesale banking through its subsidiary, First Bank of
Beverly Hills, F.S.B. ("First Bank"). First Bank is a federally chartered
savings institution regulated by the Office of Thrift Supervision ("OTS") with
one branch and a merchant bankcard processing center in Southern California.
WFSG's common stock is listed on the NASDAQ National Market. Administrative
headquarters of the Company, Wilshire Funding Corporation ("WFC") and First Bank
are located at 1776 S.W. Madison, Portland, Oregon 97205. The Company's
telephone number is (503) 223-6600.
Recent Events
Beginning in August 1998, and more significantly since October 12, 1998,
and continuing to the present, the Company has been significantly and negatively
impacted by various market factors. These factors, which are discussed further
below, resulted in a dramatic reduction in market valuations for certain of the
Company's mortgage-backed securities and other assets, as well as a reduction in
the availability of borrowings for those assets and certain of the Company's
loan assets, thereby reducing the Company's liquidity.
Turmoil in the Russian financial markets, following a prolonged period of
uncertainty in Asian financial markets, caused investors to reassess their risk
tolerance. This resulted in a dramatic movement of liquidity toward less risky
assets (e.g., U.S. Treasury instruments) and away from higher risk assets,
including most non-investment grade assets and commercial and other mortgage-
backed and asset-backed securities. This movement toward higher quality
investments dramatically reduced available liquidity to non-investment grade
assets. Without available funding sources, many investors in these assets,
including several well-known hedge funds, were forced to liquidate holdings at
reduced prices. With greater sales pressure and supply outpacing demand, prices
continued to fall as more lenders made collateral calls, demanding additional
collateral for their loan positions. Many companies were rapidly depleting
available cash reserves.
On October 12, 1998, another large, well-known hedge fund was liquidated.
This event triggered further collateral calls, forcing additional companies to
sell assets to cover borrower collateral calls, and continuing the downward
spiral in prices. On October 15, 1998, the Federal Reserve lowered interest
rates, largely in response to this liquidity crisis.
During October and continuing into the month of November 1998, the Company
sold a significant amount of assets in response to the above conditions to meet
collateral calls by lenders, primarily certain affiliates of Salomon Smith
Barney, Inc., and to increase liquidity. The downward pressure on prices and the
Company's need to sell assets to meet these collateral calls resulted in the
Company disposing of certain assets for proceeds which resulted in significant
losses for the quarter and nine months ended September 30, 1998. Beginning
during the week of October 12, 1998, the Company sold, primarily as a result of
collateral calls, Discounted Loans with a carrying value of $211.8 million,
Non-Discounted Loans with a carrying value of $232.5 million and mortgage-backed
securities with a carrying value of $63.3 million. Had the Company not been
forced to sell these assets, but rather held these assets until market
conditions stabilized, management believes the Company's losses would have been
far less severe.
While these asset sales have improved the liquidity position and financial
condition of WFSG, management concluded that WFSG's diminished equity base was
insufficient to obtain prior levels of profitability. Further, certain of the
Company's lenders have expressed concern about continued lending given market
conditions and recent losses incurred by the Company. In order to address these
liquidity concerns and improve the Company's financial condition, management
entered into discussions with the Unofficial Noteholders' Committee holding a
majority of the Company's $184.2 million in outstanding publicly issued notes
and its financial advisors, Houlihan Lokey Howard & Zukin, Inc., and legal
counselors, Latham & Watkins, concerning a restructuring of the Company's
obligations under the Old Notes. Following extensive discussions, the Company
and the Unofficial Noteholders' Committee agreed to a restructuring
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<PAGE>
of the Company through a prepackaged Chapter 11 bankruptcy filing with a view to
enabling the Reorganized Company to continue as a going concern with adequate
capitalization.
Recent Developments
Management of the Company had been negotiating with a European insurance
company to acquire its wholly owned subsidiary, which holds a portfolio of loans
and other financial instruments. The seller recently indicated that it would not
sell the portfolio of loans and retained the Company's security deposit. The
Company is currently pursuing its legal remedies against the seller. The Company
may be required to write-off against the Company's earnings approximately $8.2
million of previously capitalized costs, consisting of a non-refundable deposit
of $7.2 million and capitalized deal costs of approximately $1.0 million. The
Projections assume that this amount will be written off.
In October 1998, as the result of a recent examination, the Office of
Thrift Supervision agreed to lift the cease and desist order previously imposed
on First Bank.
Subsequent to September 30, 1998, the Office of Thrift Supervision informed
the Company and Wilshire Acquisitions Corporation, a subsidiary of the Company,
both savings and loan holding companies, that formal enforcement actions may be
imposed and in January 1999 imposed a new cease and desist order against such
holding companies covering affiliated transactions. These actions respond to
alleged violations of certain affiliated transactions regulations with First
Bank. Management requested the OTS consider less formal responses, as the
alleged violations were induced by external conditions. Management believes
these restrictions will have no material impact on its operations.
In October 1998, the Company purchased George Elkins Mortgage Company, a
four branch commercial mortgage loan originator headquartered in Southern
California for approximately $3.7 million in cash and an additional $1.5
million, which is contingent on certain operating performances through the year
2000. The purchase was consummated through First Bank.
As a result of the Company's recent financial difficulties and proposed
prepackaged bankruptcy filing, many of the Company's lenders, regulators,
insurers and customers have expressed concern over the Company's continued
operations. For example, an insurer for certain mortgage securities serviced by
a subsidiary of the Company has questioned the Company's continuing ability to
service the underlying mortgage loans. In addition, many states require that
companies post bonds to conduct servicing or mortgage operations in their states
and the Company's bonding companies have raised concerns about continuing to
provide bonds to the Company. Certain of the Company's secured lenders have made
collateral calls, of which approximately $11.9 million are outstanding as of
January 27, 1999. Such lenders have not sought to enforce such collateral calls,
but are under no legal obligation to refrain from doing so.
Acquisitions of Pools of Loans
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 loans through correspondents.
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, 1998, the Company held approximately
$97.5 million of Discounted Loans and approximately $784.9 million of
Non-Discounted Loans.
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<PAGE>
The following table sets forth the composition of the Company's portfolio
of Non-Discounted Loans and Discounted Loans by type of loan at the dates
indicated.
Composition of the Non-Discounted Loans and Discounted Loans
<TABLE>
<CAPTION>
October 31, September 30, December 31,
---------- ------------ ---------------
1998 1998 1997 1996
---------- ------------ ---------------
(Dollars in Thousands)
Non-Discounted Loans:
<S> <C> <C> <C> <C>
Single-family residential...... $ 492,230 $ 758,148 $ 306,601 $ 74,895
Multi-family residential....... 66,574 59,225 68,301 69,044
Commercial real estate......... 166,487 164,102 95,133 63,374
Consumer and other............. 85,625 80,119 49,443 22,817
--------- ----------- --------- ---------
Non-Discounted Loan portfolio..... 810,916 1,061,594 519,478 230,130
Unaccreted discount and deferred fees (159) 20,121 (23,830) (6,232)
Valuation allowance............... (25,900) (50,703) (31,046) (31,936)
--------- ----------- --------- ---------
Total Non-Discounted Loans, net $ 784,857 $ 1,031,012 $ 464,602 $ 191,962
========= =========== ========= =========
Discounted Loans:
Single-family residential...... $ 97,005 $ 307,328 $ 507,206 $ 276,759
Multi-family residential....... 6,339 6,684 16,300 317
Commercial real estate (2)..... 41,254 38,049 79,370 4,919
Consumer and other............. 233,709 244,350 238,152 1,342
--------- ----------- --------- ---------
Discounted Loan portfolio......... 378,307 596,411 841,028 283,337
Unaccreted discount and deferred fees(2) (15,105) (33,098) (290,444) (58,088)
Valuation allowance (1)........... (265,716) (316,114) (87,229) (5,619)
--------- ----------- --------- ---------
Total Discounted Loans, net.... $ 97,486 $ 247,199 $ 463,355 $ 219,630
========= =========== ========= =========
</TABLE>
- ----------
(1) For discussion of the valuation allowance allocation for purchase discount,
see "Asset Quality--Allowances for Losses."
(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.
The real properties which secure the Company's Non-Discounted Loans are
located throughout the United States. At October 31, 1998, the five states with
the greatest concentration of properties securing the Company's Non-Discounted
Loans were California, Washington, Oregon, Texas and Arizona, which had $406.2
million, $82.7 million, $35.2 million, $23.1 million and $19.1 million principal
amount of loans, respectively. The real properties which secure the Company's
Discounted Loans are located throughout the United States and Europe. At October
31, 1998, the five states with the greatest concentration of properties securing
the Company's Discounted Loans were New York, Connecticut, New Jersey,
California and Massachusetts, which had $30.3 million, $18.1 million, $15.8
million, $8.2 million and $6.1 million principal amount of loans, respectively.
The following table sets forth certain information at October 31, 1998
regarding the dollar amount for Non-Discounted Loans based on their contractual
terms to maturity and includes scheduled payments but not potential
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<PAGE>
prepayments, as well as the dollar amount of those loans which have fixed or
adjustable interest rates. No information is shown with respect to Discounted
Loans because those loans, by definition, are in default and unlikely to mature
in accordance with their stated amortization schedules. Demand loans, loans
having no stated schedule of repayments and no stated maturity and overdrafts
are reported as due in one year or less. Loan balances have not been reduced for
undisbursed loan proceeds, unearned discounts and the allowance for loan losses.
Maturity of Non-Discounted Loans
<TABLE>
<CAPTION>
Maturing In
------------------------------------------------
After One Year After Five
One Year Through Five Years Through After Ten
or Less Years Ten Years Years
-------- ------------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single-family residential........... $ 3,741 $ 3,590 $ 6,752 $ 478,147
Multi-family residential............ 6,083 18,620 24,909 16,962
Commercial and other mortgage loans. 20,088 80,328 39,531 26,540
Consumer and other.................. 8,638 7,433 8,148 61,406
Interest rate terms on amounts due
after one year:
Fixed............................ -- 65,824 55,250 535,521
Adjustable....................... -- 44,147 24,090 47,533
</TABLE>
Scheduled contractual principal repayments do not reflect 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 current mortgage
loan rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than prevailing mortgage loan rates.
The Company has granted a right of first refusal to WREIT with respect to
discounted U.S. commercial mortgage loans and U.S. commercial properties ("U.S.
Commercial Investments"). As a consequence, the opportunity for the Company to
invest in such assets would be limited to the extent WREIT takes advantage of
such investment opportunities.
International Assets and Operations. The Company in the fourth quarter of
1996 expanded its loan acquisition activities to the United Kingdom and France.
At September 30, 1998, the Company had established offices in London and Paris.
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 servicing with its
automated systems and detailed investor reporting and aggressive servicing and
work out approaches. Most of the purchasers of distressed assets in the United
Kingdom and France are U.S.-based companies 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
WCC's servicing system, which has been adapted for servicing loans in Western
Europe.
The Company has granted a right of first refusal to WREIT with respect to
international Discounted and Non- Discounted Loans and properties
("International Investments"). As a consequence, the opportunity for the Company
to invest in such assets would be limited to the extent WREIT takes advantage of
such investment opportunities.
Acquisition of Securities. 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 as well as certain governmental agency and other
securities. 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 a portfolio of the Company or an
affiliate and for which the Company is continuing
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<PAGE>
to act as servicer. The following table sets forth the Company's holdings of
mortgage-backed and other securities at the dates indicated:
Mortgage-Backed Securities and Other Securities
<TABLE>
<CAPTION>
October 31, September 30, December 31,
---------- ------------ -------------------
1998 1998 1997 1996
---------- ------------ -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available for sale
Mortgage-backed securities....... $ 150,924 $ 245,901 $ 298,964 $ 31,270
Trading account securities:
Mortgage-backed securities....... -- -- 38,969 24,541
Held to maturity:
U.S. Government and other securities 6,729 6,728 5,946 7,429
Mortgage-backed securities....... 14,315 14,861 18,468 21,724
--------- --------- --------- --------
Total......................... 21,044 21,589 24,414 29,153
--------- --------- --------- --------
Total investment securities... $ 171,968 $ 267,490 $ 362,347 $ 84,964
========= ========= ========= ========
</TABLE>
The Company has granted a right of first refusal to WREIT with respect to
certain residential mortgage-backed securities ("MBS Investments"). As a
consequence, the opportunity for the Company to invest in MBS Investments would
be limited to the extent WREIT takes advantage of such investment opportunity.
Mortgage Loan Originations
The Company currently operates a mortgage loan origination program through
its mortgage loan origination subsidiary for the origination, through
correspondents, of first and second lien mortgage loans. The Company is in the
process of transferring this business to First Bank. The Company does not seek
to compete broadly with other mortgage and secured loan originators but,
instead, targets market niches where management believes its experience in
evaluating credit risk and servicing non-conforming loans gives it a competitive
advantage. The Company believes that the higher risk generally associated with
non-conforming loans is offset by the Company's strong credit underwriting
guidelines and the higher pricing associated with these loans.
Since commencing its mortgage loan origination program through October 31,
1998, the Company has funded or purchased loans totaling approximately $684.0
million in principal amount.
Merchant Bankcard Processing Operations
The Company, through First Bank, is continuing to develop its merchant
bankcard processing operations, which generate revenues through merchant
discounts and processing fees for Visa(R) and MasterCard(R) transactions. The
Company's bankcard processing operations focus on certain higher risk market
niches, principally audio-text transactions, where the Company believes it
obtains higher returns. Bankcard revenues, net of processing expense, have
increased from approximately $1.2 million in 1995 to approximately $1.7 million
in 1996 and totaled approximately $2.0 million in 1997.
Servicing
As described above under "The Plan of Reorganization -- Description of WCC
Restructuring," WCC's servicing operations will be transferred to a subsidiary
of WFSG. The following describes the current servicing arrangement without
giving effect to the WCC Restructuring.
WCC has developed specialized procedures and proprietary software designed
to effectively service performing, non-performing and sub-performing loans and
foreclosed real estate. WCC designs a servicing plan for
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<PAGE>
each underlying loan and property in a pool that it has been requested to
service and as part of the acquisition analysis on a pool that is intended to
maximize 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.
The Company is a party to a loan servicing agreement with WCC pursuant to
which WCC acts as sub-servicer for the Company and provides loan portfolio
management services, including billing, portfolio administration and collection
services for the Company's pools of loans. The Company pays WCC a servicing fee
equal to or below prevailing market rates for each pool of loans that WCC is
servicing for the Company. The Company and the Unofficial Noteholders' Committee
have agreed that the servicing function conducted by WCC should be incorporated
in the Company as part of the plan. Following the WCC Restructuring, WFSG as the
owner of 50.01% economic interest will benefit from the market rate servicing
fees paid to WCC.
First Bank is party to a loan servicing agreement with WCC pursuant to
which WCC provides loan portfolio management services, including billing,
portfolio administration and collection services, for all loans owned, acquired
or made by First Bank. The OTS has reserved the right to terminate this
arrangement in the event that WCC is not adequately servicing First Bank's
loans.
European Servicing. 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 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 companies
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 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 WCC's servicing
system, which has been adapted for servicing loans in Western Europe.
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 First Bank and
the securitization of loans. In addition, the Company has publicly sold its
Common Stock, sold the Notes and sold its 13% Series A Notes due 2004 (the
"Series A Notes"). In the first quarter of 1998, the Company completed an
exchange offer, pursuant to which the holders of the Series A Notes exchanged
their Series A Notes for the Series B Notes, which contain substantially
identical terms as the Series A Notes, except with respect to restrictions on
transfer. In certain limited circumstances, the Company has also borrowed money
from WCC in order to fund the acquisition of loans. The Company repaid the then
outstanding borrowings with the issuance of its Cumulative Redeemable PIK
Preferred Stock (the "PIK Preferred Stock") on July 31, 1997. The Company
redeemed the PIK Preferred Stock in February 1998. Management of the Company
closely monitors rates and terms of competing sources of funds on a regular
basis and generally utilizes the source which is the most cost effective.
The following table sets forth information relating to the Company's
borrowings and other interest-bearing obligations at the dates indicated.
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<PAGE>
Borrowings and Interest-Bearing Obligations
<TABLE>
<CAPTION>
October 31, September 30, December 31,
------------ ------------ --------------------------
1998 1998 1997 1996
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Deposits............................ $ 523,024 $ 534,091 $ 362,598 $ 501,614
Warehouse and Repurchase Agreements. 508,848 1,076,078 966,500 97,624
Notes Payable and Subordinated Debt. 184,245 184,245 184,245 75,000
------------ ------------ ------------ ------------
Total......................... $ 1,216,117 $ 1,794,414 $ 1,513,343 $ 674,238
============ ============ ============ ============
</TABLE>
The following table sets forth certain information related to the Company's
short-term borrowings having average balances during the period of greater than
30% of stockholders' equity at the end of the period. During each reported
period, FHLB advances and repurchase agreements are the only categories for
borrowings meeting this criteria. Averages are determined by utilizing month-end
balances.
Short-Term Borrowings
<TABLE>
<CAPTION>
October 31, September 30, December 31,
------------ ------------ --------------------------
1998 1998 1997 1996
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
FHLB advances:
Average amount outstanding
during the period ............... $ -- $ -- $ 479 $ 2,420
Maximum month-end balance
outstanding during the period.... -- -- 8,000 11,000
Weighted average rate:
During the period............. -- -- 5.67% 6.57%
At end of period.............. -- -- -- --
Warehouse and repurchase agreements:
Average amount outstanding
during the period................ 1,113,453 1,139,013 586,370 51,316
Maximum month-end balance
outstanding during the period ....$ 1,455,543 $ 1,455,543 $ 966,500 $ 190,000
Weighted average rate:
During the period............. 7.26% 7.29% 7.45% 6.88%
At end of period.............. 7.70% 7.63% 7.32% 7.88%
</TABLE>
Repurchase Facility. As described previously, given the Company's current
financial difficulties, the repurchase facilities described below are not
available for new borrowings and some of them have outstanding collateral calls.
The Company through a subsidiary has entered into a master repurchase agreement
with Credit Suisse First Boston Mortgage Capital LLC ("CSFBMC"). CSFBMC has
agreed to lend up to $350 million to the Company for the purchase of portfolios
of performing and non-performing mortgage loans. Subsequent to December 31,
1997, the facility was increased to $425 million. The Company and its
subsidiaries have entered into several master repurchase agreements with Salomon
Brothers Realty Corp.
The Company through a subsidiary has entered into a master repurchase
agreement with Bear, Stearns International Limited. Though such master
repurchase agreement does not specify a maximum amount available under such
agreement, the parties have agreed that such agreement may be used for up to
$100 million of acquisitions.
The Company through a subsidiary has entered into a master repurchase
agreement with CS First Boston (Hong Kong) Limited for the purchase of
portfolios of subordinate securities. Though such master repurchase agreement
does not specify a maximum amount available under such agreement, the parties
have agreed that such agreement may be used for up to $200 million of
acquisitions.
The Company through a subsidiary has entered into a master repurchase
agreement with Salomon Brothers Realty Corp. Though such agreement does not
specify a maximum amount available under such agreement, the parties have agreed
that such agreement may be used for up to $100 million of acquisitions.
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<PAGE>
Warehouse Facility. The Company through a subsidiary has a secured
warehouse financing facility with Prudential Securities Credit Corporation of up
to $150 million for the origination or purchase of residential first and second
lien mortgage loans.
Securitizations. At October 31, 1998, the Company and its affiliates had
securitized in excess of $1.5 billion of securities through 10 publicly offered
and three privately placed securitizations, including non-performing and sub-
performing mortgage loans, manufactured housing loans, consumer loans,
non-conforming mortgage loans and foreclosed real estate. Securitizations are
expected to allow the Company to increase its loan acquisition and origination
volume, reduce the risks associated with interest rate fluctuations and provide
access to longer term funding sources. The Company currently intends to complete
securitizations either through private placements or in public offerings when
advantageous. The market for securitizations has recently been subject to
adverse conditions and substantial volatility. There can be no assurance that
this market will be available to the Company as a funding source at any time in
the future or at all.
Funding Sources for First Bank. The primary source of deposits for First
Bank currently is "wholesale" certificates of deposit. To a lesser extent First
Bank obtains brokered certificates of deposit from national investment banking
firms which pursuant to agreements with First Bank, solicit funds from their
customers for deposit with First Bank. At October 31, 1998, $204.7 million or
39.1% of First Bank's total deposits were brokered and $318.3 million or 60.9%
were wholesale deposits. Wholesale deposits generally are obtained on more
economically attractive terms to First Bank than brokered deposits.
First Bank's funding strategy has been to offer deposit rates above those
customarily offered by banks and savings and loans in its markets. First Bank
has been able to pursue this strategy because the general and administrative
costs associated with operating First Bank is significantly lower than
traditional banks and savings institutions with branch office networks. First
Bank has generally accumulated deposits by participating in deposit rate surveys
which list First Bank among the higher rate paying insured institutions, and
periodically advertising in various local market newspapers and other media.
However, because First Bank competes for deposits primarily on the basis of
rates, First Bank could experience difficulties in attracting deposits if it
could not continue to offer deposit rates at levels above those of other banks
and savings institutions or as a result of concern over the Restructuring.
The following table sets forth information relating to First Bank's
deposits at the dates indicated.
Deposits
<TABLE>
<CAPTION>
December 31,
--------------------------------------
October 31, 1998 September 30, 1998 1997 1996
----------------- ------------------ ----------------- ------------------
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 $ 9,492 0.00% $ 9,726 0.00% $ 5,959 0.00% $ 5,625 0.00%
NOW and money market
checking accounts 2,556 2.87 1,677 1.82 1,563 1.47 2,023 1.82
Savings accounts 280 2.00 298 3.19 329 2.02 480 2.15
Certificates of
deposit 510,696 5.82 522,390 5.84 354,747 6.02 493,486 5.92
-------- ----- -------- ----- -------- ----- -------- -----
Total deposits $523,024 5.72% $534,091 5.72% $362,598 5.83% $501,614 5.84%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
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<PAGE>
The following table sets forth, by various interest rate categories, First
Bank's certificates of deposit at October 31, 1998.
Interest Rates for Certificates of Deposit
October 31, 1998
----------------
(Dollars in
Thousands)
3.50% or less.................................. $ --
3.51-4.50...................................... 643
4.51-5.50...................................... 52,524
5.51-6.50...................................... 457,429
6.51-7.50...................................... 100
7.51-8.50...................................... --
----------
Total.................................... $ 510,696
==========
The following table sets forth the amount and maturities of First Bank's
certificates of deposit at October 31, 1998.
Maturities of Certificates of Deposit
<TABLE>
<CAPTION>
Original Maturity in Months
--------------------------------------
12 or Less Over 12 to 36 Over 36
---------- ------------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balances Maturing in 3 Months or Less.... $ 86,427 $ 73,769 $ 1,621
Weighted Average....................... 5.70% 6.05% 5.98%
Balances Maturing in over 3 Months
to 12 Months........................... $ 45,811 $ 234,013 $ 498
Weighted Average....................... 5.68% 5.88% 5.81%
Balances Maturing in over 12 Months
to 36 Months........................... -- $ 61,532 $ 5,185
Weighted Average......................... -- 5.86% 5.89%
Balances Maturing in over 36 Months...... -- -- $ 1,840
Weighted Average......................... -- -- 5.90%
</TABLE>
At October 31, 1998, First Bank had outstanding an aggregate of
approximately $152.8 million of certificates of deposit in face amounts equal to
or greater than $100,000 maturing as follows: approximately $49.2 million within
three months; approximately $32.9 million over three months through six months;
approximately $46.7 million over six months through 12 months; and approximately
$24.0 million thereafter.
First Bank is party to a master repurchase agreement with Bear Stearns
Mortgage Capital Corporation ("BSMCC"). Though the master repurchase agreement
does not specify a maximum amount available under such agreements, the parties
had agreed that such agreement may be used for up to $210 million of
acquisitions in the aggregate. This agreement enables First Bank to purchase
pools of loans with immediate financing from BSMCC which can then be repaid as
deposits are increased.
First Bank obtains advances from the FHLB of San Francisco upon the
security of certain of its assets, including FHLB stock, provided certain
standards related to the creditworthiness of First Bank have been met. FHLB
advances are available to member financial institutions such as First Bank for
investment and lending activities and other
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<PAGE>
general business purposes. FHLB advances are made pursuant to several different
credit programs (each of which has its own interest rate, which may be fixed or
adjustable).
Asset Quality
The Company is exposed to certain credit risks related to the value of the
collateral that secures its loans and the ability of borrowers to repay their
loans. Management of the Company closely monitors the Company's pools of loans
and foreclosed real estate for potential problems on a periodic basis and
reports to the Board of Directors at regularly scheduled meetings.
Non-Performing Loans. It is the Company's policy to establish an allowance
for uncollectible interest on loans that are over 90 days past due 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 loan is placed on non-accrual status, previously accrued
but unpaid interest is reversed by a charge to interest income.
Foreclosed Real Estate. The Company carries its holdings of foreclosed real
estate at the lower of cost or fair value. Foreclosed real estate held by the
Company is periodically re-evaluated to determine that they are being carried at
the lower of cost or fair value less estimated costs to sell. Holding and
maintenance costs related to properties are recorded as expenses in the period
incurred. Deficiencies resulting from valuation adjustments to foreclosed real
estate subsequent to acquisition are recognized as a valuation allowance.
Subsequent increases related to the valuation of real estate owned are reflected
as a reduction in the valuation allowance, but not below zero. Increases and
decreases in the valuation allowance are charged or credited to income,
respectively. The following table sets forth the aggregate carrying value of the
Company's holdings of foreclosed real estate (by source of acquisition) at the
dates indicated.
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<PAGE>
Foreclosed Real Estate by Loan Type
<TABLE>
<CAPTION>
October 31, September 30, December 31,
---------- ------------ ----------------------
1998 1998 1997 1996
---------- ------------ ----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Discounted Loans (1):
Single-family residential.......... $ 14,159 $ 16,682 $ 111,316 $ 15,274
Multi-family residential........... -- -- 2,270 --
Commercial and other mortgage loans 1,153 1,208 10,248 200
-------- --------- ---------- --------
Total............................ 15,312 17,890 123,834 15,474
Non-Discounted Loans:
Single-family residential.......... 23,045 73,120 6,110 2,773
Multi-family residential............ 5,227 7,630 3,082 100
Commercial and other mortgage loans. 8,329 9,623 950 124
-------- --------- ---------- --------
Total............................ 36,601 90,373 10,142 2,997
Foreclosed real estate purchased
directly:
Single-family residential........... 27,383 28,942 40,706 59,729
Investment real estate............... 5,173 5,178 -- --
Valuation allowance from losses........ (2,073) (2,305) (5,070) --
-------- --------- ---------- --------
Foreclosed real estate owned, net $ 82,396 $ 140,078 $ 169,612 $ 78,200
======== ========= ========== ========
</TABLE>
- ----------
(1) The increase in foreclosed real estate in 1997 was due to the substantial
growth of the Company's portfolio of Discounted Loans and purchases of
foreclosed real estate.
Allowances for Loan 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 (60 days for First Bank's automobile loans).
First Bank uses its 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. First Bank's policies are 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
of First Bank's 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 First Bank are based on management's periodic analysis 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 the
analyses of specific and general valuation allowances discussed above. Amounts
allocated to the allowance for loan losses from
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<PAGE>
purchase discounts do not increase the provision for loan losses recorded in the
statement of operations; rather they decrease the amounts of the purchase
discounts that are accreted into the interest income over the lives of the
loans. If, after the initial allocation of the purchase discount to the
allowance for loan losses, management subsequently identifies the need for
additional allowances against Discounted Loans, the additional allowances are
established through charges to the provision for loan losses.
In addition, the OTS, as part of its examination process, periodically
reviews First Bank's 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.
The following table sets forth information with respect to the Company's
allowances for loan losses by category of loan.
Allowances for Loan Losses by Loan Category
<TABLE>
<CAPTION>
October 31, December 31,
----------------------- ------------------------------------------
1998 % of Total 1997 % of Total 1996 % of Total
--------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loan category:
Real estate........... $ 17,492 6.0% $ 27,534 23.3% $ 24,051 64.0%
Non-real estate....... 8,408 2.9 3,512 3 7,885 21.0
Discounted Loans...... 265,716 91.1 87,229 73.7 5,619 15.0
--------- ----- -------- ----- -------- ------
Total allowances for
loan losses $291,616 100.0% $118,275 100.0% $ 37,555 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth the activity in the allowance for loan
losses during the periods indicated.
Activity in the Allowances for Loan Losses
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
Ten Months Ended
October 31, 1998 1997 1996 1995
----------------- -------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period...... $ 118,275 $ 37,555 $ 25,651 $ 7,701
Allocation of purchased loan discount:
at acquisition................. 376,687 174,920 10,751 19,007
at disposition................. (255,161) (97,397) (17,218) (5,404)
Recoveries........................ (5,930) 1,206 1,822 81
Market valuation adjustments...... 34,900 -- -- --
Provision for loan losses......... 20,919 1,991 16,549 4,266
Foreign currency translation adjustments 1,926 -- -- --
--------- --------- -------- ---------
Balance, end of period............ $ 291,616 $ 118,275 $ 37,555 $ 25,651
========= ========= ======== =========
</TABLE>
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<PAGE>
The table below sets forth the delinquency status of the Company's
Non-Discounted Loans at the dates indicated.
Delinquency Experience for Non-Discounted Loans
<TABLE>
<CAPTION>
December 31,
------------------------------------------
October 31, September 30, 1997 1996
------------------- ------------------- -------------------- -------------------
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........ $ 7,104 0.9% $ 10,553 1.0% $ 56,751 10.9% $ 7,613 3.3%
61-90 days........ 3,376 0.4% 1,293 0.1% 36,294 7.0% 7,204 3.1%
91 days or more (1)(2) 36,334 4.5% 58,371 5.5% 66,643 12.8% 54,524 23.7%
-------- ---- -------- ---- -------- ----- -------- -----
Total loans delinquent $ 46,814 5.8% $ 70,217 6.6% $ 159,688 30.7% $ 69,341 30.1%(3)
======== ==== ======== === ========= ==== ======== ====
</TABLE>
- ----------
(1) All loans delinquent over 90 days 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.
(3) Increase in Percent of Portfolio reflects the securitization and sale of
$259.9 million of the Company's performing loans in the fourth quarter of
1996.
Fee-Based Income
Management of WREIT. In October 1997, the Company established WREIT, which
may elect to be taxed as a real estate investment trust. The Company currently
owns a minority interest (approximately 9.9%, with options to acquire an
additional 10%) in WREIT following WREIT's proposed initial public offering.
The Company formed WREIT 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. WREIT
conducts certain business activities that management believes are more
efficiently operated in a REIT tax advantaged format. WREIT intends to
concentrate on the acquisition of U.S. Commercial Investments, MBS Investments
and International Investments. The Company granted a right of first refusal to
WREIT with respect to U.S. Commercial Investments, MBS Investments and
International Investments.
Wilshire Realty Services Corporation ("WRSC"), a wholly-owned subsidiary of
the Company, entered into a management agreement with WREIT, pursuant to which
WRSC will manage WREIT for a management fee and an incentive fee.
Servicing. 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 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, management believes that the prevailing loan
servicing 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 WCC's servicing
system, which has been adapted for servicing loans in Western Europe. WREIT
entered into servicing agreements with the Company, pursuant to which the
Company will provide loan and real property management services in France and
the United Kingdom. Under the servicing agreements, WREIT will pay the Company a
servicing fee at market rates for each pool of loans
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<PAGE>
or real estate assets that they service for WREIT and reimburse them for certain
out-of-pocket costs associated with servicing such assets.
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. A portion of the computer
systems and applications used by the Company is owned by WCC and licensed to the
Company.
Employee Attrition
As a result of the difficult environment the Company has recently been
operating in, the Company is experiencing an increase in the rate of attrition
of its employees and an inability to attract, hire and retain qualified
replacement employees. On August 31, 1998 the Company had 514 employees. As part
of its initiatives designed to improve the efficiency and productivity of the
Company's operations and corporate restructuring due to recent losses, the
Company reduced its workforce to 296 employees as of January 15, 1999. Further
attrition may hinder the ability of the Company to operate efficiently which
could have a material adverse effect on the Company's results of operations and
financial condition. No assurances can be given that such attrition will not
occur.
In order to retain key employees through the restructuring period, WFSG may
enter into retention agreements that could extend through December 31, 1999.
Such agreements may provide for reasonable retention bonuses or other incentives
to ensure the cooperation of key employees.
Strategic Restructuring
In addition to the Plan outlined herein, the Company has taken a number of
strategic initiatives to improve its competitive position and its ability to
execute its business strategy in a more difficult external environment.
During October 1998, the Company made a strategic decision to eliminate its
retail residential mortgage and manufactured housing mortgage origination
operations and to focus on wholesale residential mortgage operations, commercial
mortgage origination and its thrift subsidiary. As a result of this action, the
Company has written off approximately $1.2 million of goodwill originally
established upon acquisition of the residential mortgage origination branches.
As part of its effort to focus on the commercial mortgage origination
segment, the Company, through its subsidiary, First Bank, in October 1998
purchased George Elkins Mortgage Company, a four-branch commercial mortgage loan
originator headquartered in Southern California for approximately $1.5 million
contingent on certain operating performance through the year 2000.
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<PAGE>
DESCRIPTION OF WCC
General
WCC, a Nevada corporation owned by the Principal Shareholders, is a
specialty servicing company that currently services the Company's loan portfolio
and for third parties and provides administrative services to the Company and
its affiliates. As part of the restructuring negotiations with the Unofficial
Noteholders' Committee, the parties agreed that the servicing operations of WCC
would be transferred to a new subsidiary of the Company. See "The Plan of
Reorganization -- Description of WCC Restructuring." The Plan also requires that
two other companies owned by the Principal Shareholders, Wilshire Leasing
Limited ("WLL") and Wilshire Securities Corporation ("Wilshire Securities"),
become subsidiaries of WFSG on or prior to the Effective Date and that Portland
Servicing Corporation, which is also owned by the Principal Shareholders, be
merged into WCC prior to the transfer of servicing operations to WFSG. WLL
employs all of the employees (other than employees of First Bank) used in the
Company's and WCC's business. Wilshire Securities was formed to engage in
limited broker/dealer activities and is currently inactive. Portland Servicing
Corporation has an ownership interest in certain smaller loan portfolios and has
a minority interest in 11 special-purpose entities which were formed for
financings and to effect securitizations.
As described above under "The Plan of Reorganization -- Description of WCC
Restructuring," on or prior to the Effective Date, Capital Wilshire Holdings,
Inc., a successor to WCC, will contribute all of its assets (including the right
to the name Wilshire Credit Corporation) to a newly formed subsidiary of the
Company ("New Servicer") in exchange for the Class B Common Stock of the New
Servicer and for the assumption by New Servicer of all of CWH's liabilities,
other than its obligations under a certain loan agreement with CCI
(approximately $160.0 million) and certain other obligations. In addition,
certain indebtedness of Andrew A. Wiederhorn and Lawrence A. Mendelsohn to WCC
and WLL reflected on the September 30, 1998 balance sheet of WCC and WLL and
certain combined companies under "Shareholder Loans" (approximately $74.5
million) shall be distributed to the Principal Shareholders. After giving effect
to the restructuring of WCC and excluding non-capitalized servicing assets, the
Company projects on a pro forma basis that the New Servicer will have total
assets of approximately $57.8 million, total liabilities of approximately $51.2
million and stockholders' equity of approximately $6.6 million. At September 30,
1998, WCC and certain combined companies had total assets of $124.5 million,
total liabilities of $234.3 million and a stockholders' deficit of $109.8
million.
Rationale for the Servicing Transfer
The Board of Directors of the Company unanimously approved the transfer of
WCC's servicing operations and believes that the transfer of servicing improves
WFSG's financial position and long term outlook. In reaching this determination
the Board of Directors considered, without assigning any relative or specific
weights, the following material factors: (i) integration of servicing operations
without assuming the significant indebtedness owed by WCC to CCI; (ii) potential
additional future revenues from the servicing operation; (iii) the Board of
Directors' familiarity with the history, financial condition and results of
operations of WCC; (iv) the requirements of the Holders of the Old Notes to
effect a restructuring of the Company's indebtedness; (v) elimination of
servicing fees being paid to WCC as a third party; (vi) increased fee based
revenues through servicing for unaffiliated third parties; (vii) reduction of
potential regulatory concerns regarding the relationship between First Bank and
WCC; (viii) reduction of potential regulatory concerns regarding the
relationship between the Company and WCC; and (ix) elimination of potential
conflicts of interest between the Company and WCC and WLL.
The terms of the transfer of servicing operations to the Company were
negotiated between officers of the Company, the Unofficial Noteholders'
Committee, CCI and the Principal Shareholders. In view of the Principal
Shareholders' ownership interest in WCC and despite the extensive third party
involvement of the Company's and WCC's creditors, the independent members of the
Board of Directors of the Company (the "Independent Directors") reviewed the
terms and the Independent Directors determined that such terms were no less
favorable to the Company than would be available in a comparable transaction in
an arm's length dealing with a person that is not an affiliate of the Company.
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<PAGE>
Terms of the Acquisition
Regulatory Approvals. The Company, WCC and Andrew A. Wiederhorn and
Lawrence A. Mendelsohn (the "Sellers") have agreed to apply for all applicable
federal and state regulatory approvals, if any, required to effectuate the
servicing transfer.
Termination of Shareholder Agreement. The Sellers and WCC have agreed to
terminate the Wiederhorn- Mendelsohn Buy-Sell Agreement dated December 14, 1994
(the "Buy-Sell Agreement") so that that it is of no further force or effect as
of the Effective Date.
Employees' Credits. The Company will credit employees of WCC or WLL, who
are employed by WLL or the Company immediately after the Effective Date, with
all years of service with WCC or its affiliates under any employee benefit plans
and other compensation and employment related benefit plans of the Company or
its subsidiaries.
Conditions Precedent. Consummation of the servicing transfer is subject to
certain conditions, unless waived by the party benefitting therefrom, including
but not limited to the conditions specified in the Amended and Restated
Restructuring Agreement and the Amended and Restated WCC Restructuring
Agreement.
Certain Federal Income Tax Consequences. The Company believes that neither
the Company nor its shareholders will experience a taxable event as a result of
the servicing transfer.
Accounting Treatment. In accordance with generally accepted accounting
principles, the servicing transfer is expected to be treated by the Company as a
purchase for accounting purposes. Accordingly, from and after the Effective
Date, WCC's results of operations should be included in the Company's
consolidated results of operations.
Description of Business
WCC is primarily engaged in the specialty loan servicing and resolution
business. At October 31, 1998, WCC was servicing (i) approximately $1.2 billion
aggregate principal amount of loans for the Company; (ii) $6.0 million aggregate
principal amount of loans owned by WCC and (iii) approximately $2.3 billion
aggregate principal amount of loans for third parties. The Company's management
believes that WCC'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 WCC will need
to hire additional personnel and expand the existing computer systems.
WCC has developed specialized procedures and software designed to
effectively service performing, non-performing and sub-performing loans. WCC
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 of loans that is intended to maximize the cash flow from that
loan or property. For servicing contracts with third parties this servicing plan
serves as a benchmark for WCC's performance. Certain of WCC's servicing
contracts with third parties provide for incentive compensation to the extent
that the cash flows generated from servicing exceed the amounts provided for in
the servicing plan. Non-performing loans are resolved as quickly as possible
(generally within one to two years) through foreclosure, compromise, a
discounted payoff or reinstatement. Performing and sub-performing loans are
actively serviced to ensure timely and accurate payments over their remaining
lives.
The Company is a party to a loan servicing agreement with WCC pursuant to
which WCC acts as sub-servicer for the Company and provides loan portfolio
management services, including billing, portfolio administration and collection
services for the Company's pools of loans. The Company pays WCC a servicing fee
equal to prevailing market rates for each pool of loans that WCC is servicing
for the Company. First Bank also is a party to a loan servicing agreement with
WCC pursuant to which WCC provides loan portfolio management services, including
billing, portfolio administration and collection services, for all loans owned,
acquired or made by First Bank.
WREIT is party to a loan servicing agreement with WCC pursuant to which WCC
acts as sub-servicer for certain of WREIT's assets and provides loan and real
property management services, including billing, portfolio
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<PAGE>
administration and collection services for certain of WREIT's assets. WREIT pays
WCC a servicing fee at market rates for each pool of loans or real estate assets
that it services for WREIT and WREIT reimburses WCC for out-of-pocket costs
associated with servicing such assets.
Legal Matters. WCC is involved in legal proceedings, including litigation
in the ordinary course of business. These proceedings are not expected to have a
material adverse effect on WCC.
Properties. WCC's corporate headquarters are located in Portland, Oregon
and consist of approximately 25,000 square feet of office space leased from
WREIT, for an aggregate annual rental of approximately $280,000 or $11.20 per
square foot plus a portion of the expenses incurred by the lessor in connection
with the operation of the building. The lease expires September 2002.
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<PAGE>
Selected Historical Financial Information of WCC
The following tables present selected historical financial information for
Wilshire Credit Corporation and certain combined companies at the dates and for
the periods indicated. The combined income statement and balance sheet data at
and for the years ended December 31, 1997 and 1996 have been derived from the
audited combined financial statements of the Wilshire Credit Corporation and
certain combined companies. The combined income statement and data presented for
the nine month periods ended September 30, 1998 and 1997 has been derived from
unaudited combined financial statements of the Wilshire Credit Corporation and
certain combined companies and include all adjustments, consisting only of
normal recurring accruals, which the Wilshire Credit Corporation and certain
combined companies consider necessary for a fair presentation of the Wilshire
Credit Corporation and certain combined companies' results of operations for
these periods. Operating results for the nine month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1998. The selected combined financial
information should be read in conjunction with, and is qualified in its entirety
by reference to, the combined financial statements and related notes included
herein. These combined financial statements include the financial statements of
WCC, WLL, Wilshire Servicing, Portland Servicing Corporation, Wilshire
Properties 1 Incorporated ("WP1") and Wilshire Properties 2 Incorporated
("WP2"). WP1 and WP2 were established to hold certain real estate investments of
Messrs. Wiederhorn and Mendelsohn, the assets of which were sold by Messrs.
Wiederhorn and Mendelsohn to WREIT in April 1998. The historical combined
financial statements of Wilshire Credit Corporation and certain combined
companies include WP1 and WP2. However, WP1 and WP2 are not being transferred to
WFSG as part of the WCC Restructuring and have only minimal assets or
liabilities.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------- -----------------------
1998 1997 1997 1996
------- -------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Servicing fees............... $ 13,799 $ 13,426 $ 17,942 $ 7,799
Interest and dividend income 5,962 3,403 5,305 18,056
Gain on sale of loans........ -- -- -- 3,154
Rent and finance lease income 375 842 1,085 798
Other revenues (expense)..... 3,624 383 472 120
-------- --------- -------- ---------
Total revenue.............. $ 23,760 $ 18,054 $ 24,804 $ 29,927
-------- --------- -------- ---------
Expenses:
Interest..................... 14,142 9,895 13,791 17,372
Write off of carrying value
of loans and other assets... -- 12,480 12,480 --
Loss on sales of loans....... -- 2,098 2,098 --
Compensation and benefits.... 12,566 7,202 12,169 8,373
General and administrative... 4,113 4,669 6,711 6,874
-------- --------- -------- ---------
Total expenses............. 30,821 36,344 47,249 32,619
--------- --------- -------- ---------
Net (loss) income.............. $ (7,061) $ (18,290) $ (22,445) $ (2,692)
========= ========== ========== =========
Balance Sheet Data:
Cash and cash equivalents.... $ 85,808 $ 72,254 $ 58,839 $ 6,203
Securities................... 30,646 47,671 51,458 35,842
Discounted loans, net........ 5,976 3,126 2,867 150,128
Non-Discounted loans, net.... -- 3,078 -- 99,923
Commercial notes receivable.. 866 7,626 13,153 11,328
Borrowings..................... 154,201 124,278 145,987 207,173
Stockholders' deficit.......... (109,828) (68,380) (86,530) (52,052)
</TABLE>
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<PAGE>
WCC's Management's Discussion and Analysis of Financial Position and Results of
Operations
The following discussion should be read in conjunction with the
consolidated financial statements of WCC and certain combined companies and the
notes thereto included elsewhere herein.
WCC is a specialty servicing company that currently services the Company's
loan portfolio and for third parties and provides administrative services to the
Company and its affiliates, Wilshire Leasing, a company that employs all of the
employees of WCC, Wilshire Securities, a company formed to engage in
broker/dealer activities, Portland Servicing, an owner of loan portfolios and
part owner of 11 special-purpose entities which were formed for financings and
to effect securitizations and WP1 and WP2, companies that were established to
hold certain real estate investments. In April 1998, the assets of WP1 and WP2
were sold to WREIT.
WCC was, like WFSG, adversely affected by the recent market events. WCC
services assets primarily for WFSG and its subsidiaries including First Bank and
for WREIT and as WFSG and WREIT sold assets in response to collateral calls,
such companies had less assets to service resulting in less servicing fees for
WCC. This decline in servicing revenues brought into question WCC's ability to
service and repay its existing indebtedness. Accordingly, the Company entered
into concurrent negotiations with the owners of WCC and the principal creditor
of WCC, CCI, to move the servicing operations of WCC into the WFSG group and
resolve WCC's debt burden in a manner acceptable to all parties.
Results of Operations -- Nine Months Ended September 30, 1998 Compared to the
Nine Months Ended September 30, 1997
Net Loss
WCC and the combined companies (the "Wilshire Private Companies") had a net
loss of approximately $7.1 million for the nine months ended September 30, 1998
compared to net loss of approximately $18.3 million for the nine months ended
September 30, 1997. The decrease in net loss for the nine months ended September
30, 1998 compared to the similar period for 1997 is primarily due to a $12.5
million write off of carrying value of loans and other assets and a $2.1 million
loss on sale of loans during the nine months ended September 30, 1997.
Revenues
The Wilshire Private Companies' revenues totaled approximately $23.8
million for the nine months ended September 30, 1998 compared to approximately
$18.1 million for the nine months ended September 30, 1997, an increase of
31.6%, primarily attributable to an increase in interest and dividend income, an
increase in servicer collections and other revenues.
Interest Income. The Wilshire Private Companies' interest income was
approximately $6.0 million for the nine months ended September 30, 1998 compared
to approximately $3.4 million for the nine months ended September 30, 1997, an
increase of 75.2%. The increase in the Wilshire Private Companies' interest
income was due primarily to an increase in the average balance of interest
earning assets (including servicing accounts) and changes in the Wilshire
Private Companies' changed their method of investing excess operating cash and
cash equivalents to take advantage of higher returns offered in overnight sweep
accounts.
Other Revenue. The Wilshire Private Companies' other revenue was
approximately $3.6 million for the nine months ended September 30, 1998 compared
to income of approximately $0.4 million for the nine months ended September 30,
1997, the increase was primarily attributable to a gain on sale of real
properties by WP1 and WP2 during the nine months ended September 30, 1998.
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Expenses
The Wilshire Private Companies' expenses totaled approximately $30.8
million for the nine months ended September 30, 1998 compared to approximately
$36.3 million for the nine months ended September 30, 1997, a decrease of 15.2%,
primarily attributable to a decrease in write offs of the carrying value of
loans and other assets and loss on sale of loans, offset in part, by an increase
in compensation and benefits and interest expense.
Interest Expense. The Wilshire Private Companies' interest expense was
approximately $14.1 million for the nine months ended September 30, 1998
compared with approximately $9.9 million for the nine months ended September 30,
1997, an increase of 42.9%. The increase in interest expense resulted from an
increase in the Wilshire Private Companies' interest-bearing liabilities,
principally obligations to CCI as agent for their investors, to approximately
$154.2 million at September 30, 1998 from approximately $124.3 million at
September 30, 1997.
Write Off of Carrying Value of Loans and Other Assets. During the nine
months ended September 30, 1997, in connection with the transfer of several
portfolios of loans to WFSG, management performed an evaluation of the carrying
value of such loans and certain related assets. Based upon the results of this
evaluation process, management determined it was necessary to write off in 1997
approximately $12.5 million of costs previously recorded on its Combined
Statements of Financial Condition. In the opinion of management, the write off
of such costs properly pertains to events and conditions that arose in 1997. The
write off of such costs is referred to in the accompanying Combined Statements
of Operations as Write Off of Carrying Value of Loans and Other Assets.
Compensation and Benefits. Compensation and employee benefits were
approximately $12.6 million for the nine months ended September 30, 1998,
compared to approximately $7.2 million for the nine months ended September 30,
1997, an increase of 74.5%. The increase was primarily due to the expansion of
business operations and infrastructure necessary to accommodate anticipated
growth.
General and Administrative Expenses. General and administrative expenses
decreased from approximately $4.7 million for the nine months ended September
30, 1997 to approximately $4.1 million for the nine months ended September 30,
1998, a decrease of 11.9%, due primarily to a reduction in depreciation
resulting from the sales of real estate properties and reduced professional
services.
Results of Operations--1997 Compared to 1996
Net (loss) Income
WCC had a net loss of approximately $22.4 million for 1997 compared to a
net loss of approximately $2.7 million for 1996. The increase in net loss was
primarily attributable to a $12.5 million write-off of loans and other assets, a
$2.1 million loss on sale of loans and a $3.8 million increase in compensation
and benefits during 1997.
Revenues
The Wilshire Private Companies' total revenues were approximately $24.8
million for 1997 compared to approximately $29.9 million for 1996, a decrease of
approximately 17.1%. WCC's asset base was significantly smaller in 1997 as a
result of WCC's sale of loans with a book value of approximately $113.9. In
addition, in December 1996, WCC entered into an agreement with the Company
pursuant to which it agreed to cease all further loan acquisition activity.
Servicing fees. WCC's servicing fees were approximately $17.9 million for
1997 compared to approximately $7.8 million for 1996, an increase of
approximately 130.1%. The increase in servicing fees of approximately $10.1
million in 1997 was primarily the result of contracting for servicing rights on
loan portfolios owned by the Company and unaffiliated third parties.
Interest and dividend income. WCC's interest and dividend income was
approximately $5.3 million for 1997 compared to approximately $18.1 million for
1996, a decrease of 127.3%. The decrease in WCC's interest and dividend
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income was due primarily to a decrease in WCC's interest earning assets from
approximately $303.5 million in 1996 to approximately $126.3 million at December
31, 1997, which was in part due to WCC's sale of loans with a book value of
approximately $113.9 million during 1997.
Rent and finance lease income. WCC's rent and finance lease income was
approximately $1.1 million in 1997 compared to approximately $0.8 million in
1996, an increase of approximately 35.9%. WCC's rental and finance lease income
is derived from operating leases on real estate and cellular and portable
telephone rentals. The increase was primarily attributable to an increase in
leased real estate.
Expenses
Interest. WCC's interest expense was approximately $13.8 million for 1997
compared with approximately $17.4 million for 1996, a decrease of 20.6%. The
decrease in interest expense resulted from a decrease in WCC's interest-bearing
liabilities to approximately $146.0 million at December 31, 1997, from
approximately $207.7 million at December 31, 1996.
Write off of carrying value of loans and other assets. Write off of
carrying value of loans and other assets for 1997 was approximately $12.5
million. This compares with no write off of carrying value of loans and other
assets for 1996. During the year ended December 31, 1997, in connection with the
transfer of several portfolios of loans to the Company, management performed an
evaluation of the carrying value of such loans and related assets. Based on the
results of this evaluation process, management determined it was necessary to
write off in 1997 approximately $12.5 million of the cost.
Loss on sale of loans. WCC realized a $2.1 million loss on the sale of
loans in 1997 resulting from the sale of certain loans that were previously
securitized by the Wilshire Private Companies. The securitization had been
accounted for as a financing transaction. The securitization was called by WCC
and the related loans sold.
Compensation and benefits. Compensation and benefits was approximately
$12.2 million for 1997, compared to approximately $8.4 million for 1996, an
increase of 45.3%. The increase was primarily due to an increase in the average
number of full-time equivalent employees, reflecting the expansion of loan
servicing activities.
Changes in Financial Condition -- September 30, 1998 Compared to September 30,
1997
From December 31, 1997 to September 30, 1998, total assets decreased from
$137.4 million to $124.5 million. The decrease was primarily due to the sales of
certain securities, commercial notes and real estate. Total liabilities
increased from $223.9 million to $234.4 million due to an increase in borrowings
of $8.2 million and an increase in accounts payable and other accrued
liabilities of $30.0 million, offset in part, by a decrease in due to affiliates
of $27.7 million.
Securities. The Wilshire Private Companies' holdings of securities
decreased approximately $20.8 million during the nine months ended September 30,
1998 primarily as a result of the sale of approximately $27.5 million of
securities available for sale, partially offset by, a $3.2 million non-cash
transfer of commercial notes receivable to securities available for sale. For
accounting purposes, the Corporations' securities are classified as available
for sale and held to maturity.
Discounted Loans, net. The Wilshire Private Companies' portfolio of
Discounted Loans increased by approximately $3.1 million during the nine months
ended September 30, 1998 primarily as a result of $4.1 million of loan
acquisitions, offset in part, by $1.0 million of principal payments.
Commercial Notes Receivable, net. Commercial Notes Receivable, net,
decreased by approximately $13.2 million during the nine months ended September
30, 1998 primarily as the result of prepayment of commercial notes of $10.6
million, and a $3.2 million non-cash transfer to securities, available for sale.
Property and Equipment, net. Property and equipment, net decreased by
approximately $8.3 million during the nine months ended September 30, 1998
primarily as a result of the sale of certain real estate properties to WREIT.
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Borrowings. Borrowings increased by approximately $8.2 million during the
nine months ended September 30, 1998, resulting from additional borrowings,
offset in part, by repayment of borrowings secured by properties sold to WREIT.
Due to Affiliates. Due to Affiliates of approximately $15.6 million at
September 30, 1998 was primarily attributable to payments received in the normal
course of servicing operations, which were not yet due to be remitted to the
Company.
Accounts payable and accrued liabilities. Accounts payable and accrued
liabilities of approximately $62.2 million at September 30, 1998 was primarily
attributable to amounts payable to investors for servicing collections held in
custody as of that date.
Liquidity and Capital Resources
Liquidity is the measurement of the Wilshire Private Companies' ability to
meet potential cash requirements, including ongoing commitments to repay
borrowings, fund investments and for general business purposes. The Company's
sources of cash flow include servicing fees and borrowings from lenders,
including CCI. In certain limited circumstances, the Company also has borrowed
money from related parties. The Wilshire Private Companies' liquidity is
actively managed on a daily basis and reviewed periodically by the Wilshire
Private Companies' directors. This process is intended to ensure the maintenance
of sufficient funds to meet the needs of the Wilshire Private Companies,
including adequate cash flows for off-balance sheet instruments.
At September 30, 1998, the Wilshire Private Companies' sources of borrowing
included CCI and certain other sources. The Wilshire Private Companies'
borrowings have either (a) repayment terms tied to cash receipts of the related
collateral, or (b) borrowing bases tied to the relative value of the collateral,
including servicing fees received.
The Wilshire Private Companies' uses of cash include the payment of
interest expenses, repayment of loans, operating and administrative expenses,
income taxes and capital expenditures. Capital expenditures the Wilshire Private
Companies have not been material.
The Wilshire Private Companies believe that cash flow from operations after
the restructuring will be sufficient to fund current operating needs,
commitments and capital expenditures in the near term.
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MANAGEMENT
Directors and Executive Officers of WFSG
The name, age, present principal occupation or employment, and the material
occupations, positions, offices or employments for the past five years, of each
person who is an executive officer or director of WFSG are set forth below. For
a list of the directors and executive officers of Reorganized Company, see "--
The Reorganized Company -- Directors and Management of Reorganized Company."
Name Age Office
Andrew A. Wiederhorn........ 32 Chairman of the Board, Chief Executive
Officer, Secretary and Treasurer of the
Company
Lawrence A. Mendelsohn...... 37 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 First Bank
Chris Tassos................ 41 Executive Vice President and Chief Financial
Officer of the Company
Phillip D. Vincent.......... 44 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................ 44 Senior Vice President of the Company and
Chief Financial Officer of WFC
Peter O'Kane................ 32 Senior Vice President, Loan Acquisitions
of the Company
Mark Peterman............... 51 Senior Vice President and Legal Counsel 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
Andrew A. Wiederhorn is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Mr. Wiederhorn founded WCC and continues to
serve as the Chief Executive Officer, Treasurer, Secretary and sole director of
WCC. Mr. Wiederhorn received his B.S. degree in Business Administration from the
University of Southern California.
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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 WCC. 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 First Bank. Ms. Morehead was Senior
Vice President, S&L Group of the Company and Chief Executive Officer of First
Bank 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/Sao Paulo 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 WCC. 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 WCC. 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 WCC. 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.
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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.
Peter O'Kane is Senior Vice President, Loan Acquisitions. Mr. O'Kane was
Vice President, Loan Acquisitions from October 1996 until June 1997. From May
1994 until October 1996, Mr. O'Kane was the Vice President, Loan Acquisitions of
WCC. 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.
Mark Peterman is Senior Vice President and Legal Counsel of the Company.
From January 1976 until July 1998, Mr. Peterman was a partner of Stoel Rives
LLP, a law firm. Mr Peterman has an undergraduate degree from the University of
Michigan and a Juris Doctor from Columbia University.
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
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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.
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. Under the Plan, new directors will be
appointed. See "The Plan of Reorganization."
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. David Dale Johnson and Don
Coleman also received $62,300 and $110,700 for their work on various committees
of the Board in 1998. There is no assurance that the compensation of directors
of Reorganized WFSG will be as set forth herein.
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 WREIT.
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. First
Bank subleases 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.
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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
Savings Bank, F.S.B. ("Girard"), which was subsequently merged into First Bank,
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 WCC pursuant to
which WCC acts as sub-servicer for the Company and provides loan portfolio
management services, including billing, portfolio administration and collection
services for the Company's pools of loans. The Company pays the WCC a servicing
fee at the prevailing market rates for each pool of loans that WCC is servicing
for the Company. First Bank is a party to a loan servicing agreement with WCC
pursuant to which WCC provides loan portfolio management services, including
billing, portfolio administration and collection services, for all loans owned,
acquired or made by First Bank.
Certain executive officers of the Company, including Andrew A. Wiederhorn,
Lawrence A. Mendelsohn, Kenneth Kepp, Donald Berchtold, Chris Tassos and Phillip
Vincent, are continuing to serve as executive officers of WCC and receive
minimal compensation from WCC.
The Company and the WCC are parties to an Administrative Services Agreement
pursuant to which WCC 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.
In the first quarter of 1997, WCC assigned the servicing rights to a
portfolio of home equity loans, second lien mortgages, consumer loans and
mortgage-backed securities (the "Institutional Portfolio") to the Company.
Thereafter, the Company purchased the Institutional Portfolio from a major
institutional investor at a discount that resulted in the Company's receipt of a
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 31, 1997, the Company purchased $128.4
million aggregate principal amount of mortgage and other loans from WCC. The
indentures for the Notes and Series B 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 WCC 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 WCC aggregating
approximately $27.1 million and cash in the amount of approximately $400,000.
The holders of the PIK Preferred Stock had a preference with respect to payment
of dividends and distributions on liquidation. Dividends on the PIK Preferred
Stock were payable in additional shares of PIK Preferred Stock rather than cash.
The Company has 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 Notes and the Series A Notes. The PIK Preferred Stock was
redeemed in 1998.
During the quarter ended September 30, 1998, the Company loaned
approximately $15.6 million to WREIT. These loans are secured by operating real
estate with loan to value ratios of up to 85%, are due on October 1, 2008 and
bear interest at 10% per annum. WREIT also made a loan to the Company in the
amount of $17.7 million during the quarter ended September 30, 1998. This loan
is included as an offset due from affiliates, net in the Company's consolidated
statement of financial condition as of September 30, 1998, bears interests at
13% per annum is due with thirty days notice and a part of the $18.4 million
Compromised WREIT/WREP Claim.
During 1998, the Company made payments of approximately $3,900,000 to its
two principal stockholders. These amounts have been reimbursed to the Company by
offsetting other amounts due to an affiliated entity owned by the principal
stockholders.
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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.
The Company loaned Robert G. Rosen $435,000 which is secured by a mortgage
on Mr. Rosen's principal residence. Such indebtedness bears interest at 7.78%
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, 1996 and
1997 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, 1997 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 1997 $ 300,000 -- 730,000 --
Treasurer................ 1996 $ 65,000(1)
Lawrence A. Mendelsohn
President................ 1997 $ 300,000 -- 365,000 --
1996 $ 73,494(1) -- -- --
Bo G. Aberg(2)
Senior Vice-President,
European Operations...... 1997 $ 372,168 $ 246,765 5,000 --
1996 $ 51,420(3) $ 41,925(3)
Sheryl A. Morehead
Executive Vice President,
S&L Group................ 1997 $ 277,655 $ 100,000 -- --
1996 $ 36,907(2) $ 25,000 15,000 --
Chris Tassos
Executive Vice-President
and Chief Financial
Officer.................. 1997 $ 168,400(3) $ 90,000(3) 60,000 --
1996 $ 13,125(3) --(3)
</TABLE>
- ----------
(1) Represents amounts paid by WCC. Mr. Wiederhorn and Mr. Mendelsohn elected in
the past to receive minimal compensation from WCC to maintain capital in WCC
and have received Shareholder Distributions from WCC to fund the acquisition
and growth of First Bank and certain other expenses.
(2) Ms. Morehead was hired in November 1996.
(3) Represents amounts paid by the Company. Does not include amounts paid by
Wilshire Private Companies.
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<PAGE>
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, 1997 to each of the Named
Executive Officers.
<TABLE>
<CAPTION>
% of total
Options/SARs
Number of Granted to
Securities Employees in Potential Realizable Value at
Underlying Year ended Exercise or Assumed Annual Rates of Stock
Options/SARs December 31, Base price Expiration Price Appreciation for Option
Name Granted(#) 1997 ($/sh) Date Term(1)
- ----------------------- ------------ ------------- ----------- ---------- ------------------------------
5% 10%
------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.. -- -- -- -- -- --
Lawrence A. Mendelsohn -- -- -- -- -- --
Bo G. Aberg........... 15,000 5.7% 25.48 2007 0 0
Sheryl A. Morehead.... 15,000 5.7% 25.48 2007 0 0
Chris Tassos.......... 60,000 22.7% 27.18 2007 0 0
</TABLE>
Under the Plan, all existing stock options described above will be
extinguished. In its discretion, the Board of Directors of the Reorganized WFSG
will introduce a new employee stock compensation plan subject to consent of the
Unofficial Noteholders' Committee and shareholder approval as provided by law.
The Unofficial Noteholders' Committee has agreed that the new stock option
program should be reflective of a policy of rewarding the contribution of
management to the long term financial performance of the Company and consistent
with employee incentive programs for similarly situated companies.
Employment Agreements
As part of the Plan, the Company's existing employment agreements with Mr.
Wiederhorn and Mr. Mendelsohn will be terminated without liability and will be
replaced with new employment agreements. The following describes the existing
and new employment agreements with Mr. Wiederhorn and Mr. Mendelsohn.
Existing 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 provides that the annual bonus may be paid quarterly in
advance based on quarterly earnings. For the first and second quarter of 1998,
Mr. Wiederhorn and Mr. Mendelsohn received payments reflecting the high level of
earnings for such periods. Immediately following the end of the third quarter,
Mr. Wiederhorn and Mr.
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<PAGE>
Mendelsohn also received quarterly payments based on the then anticipated
earnings for the third quarter. As the market deteriorated in October and the
Company was forced to sell assets, the Company reviewed its then anticipated
third quarter earnings and determined that assets as of the end of the third
quarter would need to be written down in light of market events, resulting in a
substantial third quarter loss. Following such losses, Mr. Wiederhorn and
Mendelsohn through a company controlled by them, repaid the Company for such
quarterly payments.
Each agreement also provides that during the Employment Term and
thereafter, the Company will indemnify the Executive to the fullest extent
permitted by law, in connection with any claim against the Executive as a result
of the Executive serving as an officer or director of the Company or in any
capacity at the request of the Company in or with regard to any other entity,
employee benefit plan or enterprise. Following the Executive's termination of
employment, the Company will continue to indemnify the Executive even if the
Executive has ceased to serve in such capacity.
If any payment to the Executive together with certain other amounts paid to
the Executive, exceeds certain threshold amounts and results from a change in
ownership as defined in Section 280G(b)(2) of the Code, the agreements provide
that the Executive will receive an additional amount to cover the federal excise
tax and any interest, penalties or additions to tax with respect thereto on a
"grossed up" basis.
Each agreement may be terminated by the Executive for good reason at any
time or with or without good reason during the change in control protection
period (if a change in control occurs) or by the Company at any time with or
without cause. If the Executive terminates his employment with the Company under
these circumstances or if the Executive is terminated without cause or the
Executive's employment terminates as a result of the Company giving notice of
nonextension of the Employment Term, the Executive will receive severance pay
(i) in an amount equal to three times base salary in effect at termination and
three times the highest annual bonus paid or payable for any of the previous
three years, (ii) accelerated full vesting under all outstanding equity-based
and long-term incentive plans, (iii) any other amounts or benefits due under
then applicable employee benefit plans of the Company (in accordance with such
plan, policy or practice), (iv) three years of additional service credit that
the Executive would otherwise have been credited under any pension type
qualified or 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.
New Employment Agreements
Prior to the Filing Date, the Company will enter into substantially similar
employment agreements with Mr. Wiederhorn (as Chief Executive Officer) and Mr.
Mendelsohn (as President) through the one year anniversary of the Effective
Date. The agreements provide for an annual base salary of $33,333 for Mr.
Wiederhorn and $166,667 for Mr. Mendelsohn and a guaranteed annual bonus of
$150,000 for each to be advanced in quarterly installments in arrears. In
addition, each of Mr. Wiederhorn and Mr. Mendelsohn may earn additional
performance bonuses as follows: (i) a capital bonus equal to 1% of all equity
capital contributions in excess of $9,999,999 with a maximum capital bonus of
$500,000; (ii) an earnings bonus equal to 3% of adjusted annual after-tax
earnings with a maximum earning bonus of $300,000; and (iii) a discretionary
bonus to be determined by the board of directors in good faith, which would not
be
126
<PAGE>
less than $125,000. Any compensation to Mr. Wiederhorn or Mr. Mendelsohn in
excess of $683,333 and $816,667, respectively, will be paid in New Common Stock.
In the event that Mr. Wiederhorn or Mr. Mendelsohn is terminated other than
for cause prior to December 31, 1999 or his employment agreement is not renewed
on substantially the same terms, the Company will make a payment to CCI for the
account of Mr. Wiederhorn and/or Mr. Mendelsohn, as the case may be. Reorganized
WFSG shall recoup bonuses payable to Mr. Wiederhorn and Mr. Mendelsohn from the
CCI payment. Mr. Wiederhorn and Mr. Mendelsohn will also be entitled to certain
health or other benefits on termination, and shall be entitled to
indemnification for certain claims related to their employment.
In addition, under these employment agreements, Mr. Wiederhorn and Mr.
Mendelsohn will receive options equivalent to 2% and 1%, respectively, of the
fully diluted New Common Stock at a strike price equal to 110% of the market
price of New Common Stock calculated at the earlier of: (i) 90 days after the
Effective Date and (ii) a public announcement by Reorganized WFSG of a binding
equity capital commitment by a third party, but in no event sooner than the
thirtieth day following the Effective Date. Such options shall vest in equal
proportions over a period of three years and shall remain outstanding for a 5
year term. In addition, Andrew A. Wiederhorn and Lawrence A. Mendelsohn shall
receive options equivalent to 5% of the full diluted New Common Stock (Andrew A.
Wiederhorn shall receive 2/3 and Lawrence A. Mendelsohn shall receive 1/3), at a
price per share equal to (a) the aggregate allowed claims (principal and accrued
and unpaid interest at filing) of the Old Notes plus interest as if accrued and
compounded bi-annually at a rate of 13% per annum to the date of exercise of the
option, divided by (b) the number of shares of New Common Stock received by the
Senior Notes. If either such employee's employment is terminated by WFSG, all
otherwise unvested options of such employee shall immediately vest and be
exercisable for a period of 90 days following the later of termination or, if
applicable, the pricing of such options.
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. Under the Plan, any awards under this Stock Plan will
be extinguished.
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.
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
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<PAGE>
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 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.
128
<PAGE>
Deductibility of Executive Compensation. Under Section 162(a) of the
Internal Revenue 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."
Security Ownership of Certain Beneficial Owners and Management
The following table shows as of November 30, 1998 the beneficial ownership
of Old Common Stock with respect to (i) each person who was known by the Company
to own beneficially more than 5% of the outstanding shares of Common Stock, (ii)
each director, (iii) each executive officer named in the Summary Compensation
Table that is currently an officer of the Company, and (iv) directors and
executive officers as a group. This table does not reflect any share options,
since those options will be extinguished as part of the Plan.
Name and Address of Amount of Beneficial
Beneficial Owner Ownership Percent of Class
- ---------------- -------------------- ----------------
Andrew Wiederhorn .................... 3,272,152 30.06%
Lawrence Mendelsohn .................. 1,299,831 11.94%
Bo Aberg ............................. 10 *
Donald Berchtold...................... 8,379 0.08
Alexander Hamilton.................... 0 *
Kenneth Kepp ......................... 2,014 0.02
Sheryl Anne Morehead.................. 0 *
Glenn Ohl............................. 0 *
Peter O'Kane.......................... 0 *
Mark Peterman......................... 952 0.01
Robert Rosen.......................... 6,000 0.06
Scott Stevenson ...................... 2,036 0.02
James Svinth ......................... 0 *
Chris Tassos ......................... 4,771 0.04
Phil Vincent ......................... 840 0.01
Don H. Coleman ....................... 11,223 0.10
Philip G. Forte....................... 1952 0.02
David Dale-Johnson.................... 12,222 0.11
Wellington Management Company, LLP.... 393,200 3.61%
129
<PAGE>
DESCRIPTION OF INDEBTEDNESS
The following summary of the principal terms of the indebtedness of the Company
does not purport to be complete and is qualified in its entirety by reference to
the documents governing such indebtedness, including the definitions of certain
terms therein, copies of which have been filed as exhibits to various WFSG
public filings with the SEC. Whenever particular provisions of such documents
are referred to herein, such provisions are incorporated by reference, and the
statements are qualified in their entirety by such reference.
Existing WFSG Indebtedness
Warehouse Facility and Repurchase Agreements. For a description of the
Company's warehouse Facility and repurchase agreements, see "Business -- Sources
of Funding."
The Notes. The Notes were issued under an indenture dated as of December
24, 1996 among the Company and Bankers Trust Company, as trustee. The 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 Notes outstanding at
September 30, 1997 totaled $84,250,000.
The 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 Notes mature on
January 1, 2004.
The Notes may not be redeemed prior to January 1, 2002 except as described
below. On or after such date, the Notes may be redeemed, in whole or in part, at
the following redemption prices (expressed as a percentage of the principal
amount) plus accrued and unpaid interest to (but excluding) the redemption date,
if redeemed during the 12-month period beginning January of the years indicated
below:
Year Redemption
---- ----------
Price
-----
2002............................................... 106.50%
2003............................................... 103.25%
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 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 Notes redeemed, plus accrued and unpaid
interest thereon; provided, however, that at least 65% of the original aggregate
principal amount of the Notes must remain outstanding after each such
redemption. No proceeds from the Offering will be used to redeem Notes.
The 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 shareholders) 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 Notes
will be effectively subordinate to the claims of creditors of the Company's
subsidiaries.
The Notes indenture contains certain covenants that, among other things,
require the Company to maintain certain levels of consolidated net worth, 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 Notes indenture also restricts
the Company's ability to merge, consolidate or sell all of its assets.
130
<PAGE>
In the event of certain payment or other defaults with respect to the
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 trustees or the holders of not less
than 25% in principal amount of the Notes then outstanding may declare all of
the Notes to be immediately due and payable.
The Series B Notes. The Series B Notes were issued under an indenture dated
as of August 15, 1997 among the Company and Bankers Trust Company, as trustee.
The Series B Notes were limited in aggregate principal amount to $100 million.
The Series B Notes outstanding at September 30, 1997 totaled $100 million.
The Series B Notes bear interest at the rate of 13% per annum, payable
semi-annually in arrears on August 15 and February 15 of each year, commencing
February 15, 1998, to the holders of record at the close of business on August 1
and February 1, as the case may be, next preceding the interest payment date.
The Series B Notes mature on August 15, 2004.
The Series B Notes may not be redeemed prior to August 15, 2002 except as
described below. On or after such date, the Series B 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:
Year Redemption
---- ----------
Price
-----
2002............................................... 106.50%
2003............................................... 103.25%
In addition, the Company may redeem, at its option, up to 35% of the
original aggregate principal amount of the Series B 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% of the principal amount of the Series B Notes redeemed,
plus accrued and unpaid interest thereon; provided, however, that at least 65%
of the original aggregate principal amount of the Series B Notes must remain
outstanding after each such redemption. No proceeds from the Offering will be
used to redeem the Series B Notes.
The Series B Notes are 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 the Notes. 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 Series
B Notes will be effectively subordinate to the claims of creditors of the
Company's subsidiaries.
The Series B Notes indenture contains certain covenants that, among other
things, require the Company to maintain certain levels of consolidated net
worth, 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 Series B
Notes indenture also restricts the Company's ability to merge, consolidate or
sell all of its assets.
In the event of certain payment or other defaults with respect to the
Series B 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, then the trustee or the holders
of not less than 25% in principal amount of the Series B Notes then outstanding
may declare all of the Series B Notes to be immediately due and payable.
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<PAGE>
Interim Facility. In January 1999, WAC, a wholly-owned subsidiary of the
Company, entered into a secured interim credit facility with WREP to provide a
$5.0 million interim facility under which the Company borrows funds on a
short-term basis to finance its operations and other general corporate purposes
(the "Interim Facility"). Borrowings under the Interim Facility bear interest at
a rate of 12.0% per annum. The Interim Facility is guaranteed by the Company and
is secured by a first priority pledge of all of the stock of First Bank;
provided, however, if WFSG obtains one or more commitments from other lenders
meeting certain conditions and WREP declines to make a comparable loan, WREP
agrees to subordinate its security interest in the shares of First Bank to those
of such other lender up to a maximum amount of such indebtedness. This facility
matures on February 29, 2004 and will be repaid through fully amortizing
principal and interest payments commencing on February 29, 2000. Notwithstanding
the foregoing, the first advance under the DIP Facility referred to below shall
be used to repay the Interim Facility together with accrued and unpaid interest.
The funding of the Interim Facility is subject to a number of conditions,
including WREP having sufficient available funds to make disbursements under the
Interim Facility. There can be no assurance that any portion of the Interim
Facility will be funded.
Reorganized Company Indebtedness
Warehouse Facility and Repurchase Agreements. The Company expects that
indebtedness under certain of its warehouse Facility and Repurchase Agreements
will remain outstanding following the confirmation of the Plan and will become
indebtedness of the Reorganized Company. For further information on the
Company's existing warehouse Facility and Repurchase Agreements, see "Business
- -- Sources of Funds."
The DIP Facility. Set forth below is a summary of the DIP Facility for
which the Company has obtained a written commitment in connection with the Plan.
Such commitment is subject to, among other conditions, the negotiation
subsequent to the date of this Solicitation Statement of definitive agreements
among the Company, WAC and WREP.
The Company has requested and received a commitment for debtor in
possession financing (the "DIP Facility") in the aggregate amount of up to $10
million from WREP. Subject to the approval of the Bankruptcy Court, the Company
will use the funds provided by WREP under the DIP Facility to repay the loan
from WAC, which shall in turn repay all amounts outstanding under the Interim
Facility, and to operate its business during the pendency of the reorganization.
The WREP commitment is subject to the terms and conditions set forth in the
letter agreement dated January 19, 1999 among WREP, WFSG and WAC and to the
negotiation and execution of definitive documentation with respect to the DIP
Facility.
Under the DIP Facility, the borrower will be WFSG. The obligations under
the DIP Facility will be secured and constitute an allowed administrative
expense of the Reorganization Cases having priority over all administrative
expenses of the kind specified in sections 503(b) or 507(b) of the Bankruptcy
Code and all unsecured claims other than a "carve-out" for certain expenses
pertaining to the administration of the Reorganization Case, such carve-out to
be limited in dollar amount after the occurrence and during the continuance of
an event of default under the applicable DIP Facility (the "Carve-Out"). The DIP
Facility will provide to the Company an amount not to exceed $10 million. The
DIP Facility will be secured by liens on the capital stock of WAC held by WFSG
and the capital stock of First Bank held by WAC, subject to the Carve-Out and to
pre-existing valid and perfected liens (including the liens securing the Interim
Facility). Notwithstanding the foregoing, if WFSG obtains one or more
commitments from other lenders meeting certain conditions and WREP declines to
make a comparable loan, WREP agrees to subordinate its security interest to
those of such other lender. The DIP Facility will also contain covenants and
events of default that are customarily found in credit agreements involving
debtors in possession.
The DIP Facility will bear interest at a rate of 12% per annum. This
facility is not required to be repaid on the Effective Date and instead matures
on February 29, 2004 and will be repaid through fully amortizing principal and
interest payments commencing on February 29, 2000. Prior to February 29, 2000,
interest only will be payable on the Interim Facility. The DIP Facility does not
provide for the payment of any commitment or other fees by the Company to WREP.
The funding of the DIP Facility is subject to a number of conditions, including
WREP having sufficient
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available funds to make disbursements under the DIP Facility, the restructuring
of one of WREP's outstanding borrowings, and the sale by WREP of a large loan in
its portfolio. There can be no assurance that the DIP Facility will be funded.
Description of the New 6% Notes. The New 6% Notes are expected to be issued
to the Holder of the Compromised WREIT/WREP Claims on the Effective Date and
will have a principal amount equal to the amount of the Compromised WREIT/WREP
Claims (i.e. approximately $18.4 million); provided, however, that to the extent
that such Holder does not fund 100% of the DIP Facility, the amount of the New
6% Notes will be reduced in proportion to the percentage of the DIP Facility
funded and the remaining balance of the Compromised WREIT/WREP Claims will be
treated pari passu with Noteholder Claims. See "Description of the Plan --
Treatment of Claims and Interests under the Plan." The New 6% Notes will bear
interest at a rate of 6% per annum, payable monthly in arrears; provided,
however that at the option of the Reorganized Company, interest payments due
during the twelve (12) month period following the Effective Date may be paid by
issuing on the related payment date payment-in-kind notes ("PIK Notes") in a
principal amount equal to the interest payment then due and otherwise having
substantially the same terms as the New 6% Notes. In the event that the
Reorganized Company exercises its option to issue PIK Notes, such issuance will
be effected by increasing the principal amount of the New 6% Notes on each
relevant interest payment date by the amount of interest then due. The New 6%
Notes will mature on the seventh anniversary of the Effective Date; provided,
however, the Reorganized Company may, at its option, redeem all of the
outstanding New 6% Notes at any time within two years of the Effective Date at a
redemption price equal to the present value of the remaining scheduled interest
and principal payments discounted at an annual rate of 13.5% (together with any
due and unpaid interest); provided, further, that on receipt of any notice of
redemption the holder of the New 6% Notes may, at its option, convert the then
outstanding principal amount of the New 6% Notes (less any PIK interest which
has been added to principal) to the number of shares of New Common Stock equal
to the number of shares that would have been received for Compromised WREIT/WREP
Claims in an amount equal to such principal amount had such Claim been treated
in the same class as the claims of Holders of the Old Notes.
Description of the MLMC Note. The MLMC Note has the terms set forth above
under "The Plan of Reorganization."
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DESCRIPTION OF OLD EQUITY SECURITIES
The following summary description of WFSG's capital stock does not purport
to be complete and is qualified in its entirety by reference to WFSG's
Certificate of Incorporation and Bylaws, copies of which are available, upon
request, from the Company.
General
The following description of all material terms of the Company's capital
stock does not purport to be complete and is qualified in its entirety by
reference to (i) applicable provisions of Delaware law, and (ii) the provisions
of the Company's Certificate of Incorporation and By-Laws.
The authorized capital stock of the Company consists of (i) 10,000,000
shares of preferred stock and (ii) 50,000,000 shares of Old Common Stock. The
issued and outstanding shares of Old Common Stock have been duly authorized,
validly issued, fully paid and nonassessable.
Common Stock
Holders of shares of Old Common Stock shall be entitled to one vote per
share on all matters to be voted upon by the stockholders of the Company.
Holders of Old Common Stock casting a plurality of the votes of stockholders
entitled to vote in an election of directors may elect all of the directors.
Shares of Old Common Stock do not have cumulative voting rights with respect to
the election of directors.
Holders of shares of Old Common Stock are entitled, in the event of
liquidation, dissolution or winding up of the affairs of the Company, to share
ratably in all assets remaining after payment of liabilities and preferences
applicable to the Preferred Stock outstanding at the time. Holders of Old Common
Stock do not have any preemptive rights or rights to subscribe for additional
securities of the Company. Shares of Old Common Stock are not redeemable and
there are no sinking fund provisions.
Subject to preferences applicable to the Preferred Stock outstanding at the
time, holders of shares of Old Common Stock are entitled to dividends if, when
and as declared by the Board of Directors from funds legally available therefor.
The Company currently intends to retain its earnings to support its future
growth strategy and does not anticipate paying dividends in the foreseeable
future. In addition, under the indentures relating to the Notes and the Series B
Notes, dividends on the Old Common Stock can be paid only in certain
circumstances and up to a maximum amount.
Transfer Agent
The transfer agent and registrar for the Old Common Stock is The Bank of
New York. Its address is 101 Barclay St., New York, New York 10286, attn:
Investor Relations, 11E. Its telephone number is 800-524-4458 and its facsimile
number is 212-815-3201.
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DESCRIPTION OF NEW COMMON STOCK
The Reorganized Company
As of the Effective Date, the Reorganized Company will have 90 million
authorized shares of New Common Stock, par value $0.01 per share and (ii) 10
million authorized shares of preferred stock. Twenty (20) million shares of New
Common Stock and no shares of preferred stock will be issued in connection with
the Plan. All of the New Common Stock issued and outstanding as of the Effective
Date will be fully paid and nonassessable.
The following summary description of the New Common Stock does not purport
to be complete and is qualified in its entirety by this reference to the
Reorganized Company's Certificate of Incorporation and Bylaws and the Plan. The
Reorganized Company's Certificate of Incorporation and Bylaws are attached to
the Plan as Exhibits "D" and "E", respectively.
The holders of validly issued and outstanding shares of Common Stock will
be entitled to one vote per share of record on all matters to be voted upon by
the Reorganized Company's stockholders. At a meeting of stockholders at which a
quorum is present, a majority of the votes cast will decide all questions,
unless the matter is one upon which a different vote is required by express
provision of law or the Reorganized Company's Certificate of Incorporation or
Bylaws. There will be no cumulative voting with respect to the election of
directors (or any other matter). The holders of a majority of the shares at a
meeting at which a quorum is present will be able to elect all of the directors
to be elected.
The holders of New Common Stock will have no preemptive rights and have no
rights to convert the New Common Stock into any other securities.
The holders of New Common Stock will be entitled to receive ratably such
dividends as the Board of Directors may declare out of funds legally available
therefor, when and if so declared.
The WCC Restructuring Agreement provides the right, under certain
conditions, to convert the Class B Common Stock of the New Servicer to shares of
New Common Stock under the Exchange Rights granted thereunder. See "Description
of WCC Restructuring."
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences expected to result from the consummation of the Plan. This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended (the "Tax Code"), applicable Treasury Regulations, judicial authority
and current administrative rulings and pronouncements of the Internal Revenue
Service (the "Service"). There can be no assurance that the Service will not
take a contrary view, and no ruling from the Service has been or will be sought.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to Holders, the Company and the Reorganized
Company. It cannot be predicted at this time whether any tax legislation will be
enacted or, if enacted, whether any tax law changes contained therein would
affect the tax consequences to the Holders, the Company and the Reorganized
Company.
The following summary is for general information only. The tax treatment of
a Holder may vary depending upon such Holder's particular situation. This
discussion assumes that Holders of Old Notes or Old Common Stock have held such
property as "capital assets" within the meaning of Section 1221 of the Tax Code
(generally, property held for investment) and will also hold the New Common
Stock as capital assets. This summary does not address all of the tax
consequences that may be relevant to a Holder, nor does it address the federal
income tax consequences to Holders subject to special treatment under the
federal income tax laws, such as brokers or dealers in securities or currencies,
certain securities traders, tax-exempt entities, financial institutions,
insurance companies, foreign corporations, Holders who are not citizens or
residents of the United States, Holders that hold the Old Notes or Old Common
Stock as a position in a "straddle" or as part of a "synthetic security,"
"hedging," "conversion" or other integrated instrument, Holders that have a
"functional currency" other than the United States dollar and Holders that have
acquired Old Notes or Old Common Stock in connection with the performance of
services. EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO IT OF THE PLAN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS.
Federal Income Tax Consequences to the Company
Cancellation of Indebtedness and Reduction of Tax Attributes. The Company
generally will realize cancellation of indebtedness ("COI") income to the extent
that the fair market value of the New Common Stock received by Holders of Old
Notes is less than the adjusted issue price, including accrued but unpaid
interest but only to the extent previously deducted, of such Old Notes
discharged thereby. Under Section 108 of the Tax Code, however, COI income will
not be recognized if the COI income occurs in a case brought under the
Bankruptcy Code, provided the taxpayer is under the jurisdiction of a court in
such case and the cancellation of indebtedness is granted by the court or is
pursuant to a plan approved by the court. Accordingly, because the cancellation
of the Company's indebtedness will occur in a case brought under the Bankruptcy
Code, the Company will be under the jurisdiction of the court in such case and
the cancellation of the Old Notes will be pursuant to the Plan, the Company will
not be required to recognize any COI income realized as a result of the
implementation of the Plan.
Under Section 108(b) of the Tax Code, however, the Company will be required
to reduce certain tax attributes, including its net operating losses and loss
carryforwards ("NOLs") (and certain other losses, credits and carryforwards, if
any) and tax basis in assets (but not below the amount of liabilities remaining
immediately after the discharge of indebtedness), in an amount equal to the
amount of COI income excluded from income as described in the preceding
paragraph (subject to certain modifications). Any reduction in tax attributes
should occur on a separate company basis even though the Company files a federal
consolidated income tax return. The Service has held in private letter rulings
that where a member of a consolidated group is permitted to exclude from income
COI income pursuant to Section 108 of the Tax Code, Section 108(b) only requires
that such member reduce its own separate company tax attributes without having
to reduce the tax attributes of any other member of the consolidated group.
Although such rulings may not be relied upon by other taxpayers as binding
authority, they do provide some indication of the Service's position regarding
an issue. In addition, there does not appear to be any contrary authority with
respect to this issue. Thus, although not entirely free from doubt, because the
Old Notes are obligations of WFSG, only WFSG's separate company tax attributes,
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including possibly the basis of its stock in its subsidiaries and receivables
from subsidiaries, should have to be reduced pursuant to Section 108(b) of the
Tax Code.
The Company anticipates that it will generate a substantial NOL for the
1998 tax year that will precede the Effective Date. A portion of all such NOLs
is attributable to WFSG and the remainder is attributable to other members of
the WFSG consolidated group. Any such NOLS, however, are subject to audit and
possible challenge by the Service and thus may ultimately vary from any specific
amounts indicated herein. As a result of the application of Section 108(b) of
the Tax Code, the Company believes that most, if not all, of WFSG's NOLs (and
certain other losses, credits and carryforwards, if any) will be eliminated
after consummation of the Plan. In addition, the Reorganized Company may be
required to reduce its tax basis in its assets as of the beginning of the
taxable year following consummation of the Plan (but not below the amount of
liabilities remaining immediately after the consummation of the Plan) to the
extent that WFSG's COI income exceeds the amount of NOLs and any other losses,
credits and carryovers so reduced (subject to certain modifications).
Section 382 Limitations on NOLs. Under Section 382 of the Tax Code, if a
corporation with NOLs (a "Loss Corporation") undergoes an "ownership change,"
the use of such NOLs (and certain other tax attributes) will generally be
subject to an annual limitation as described below. In general, an "ownership
change" occurs if the percentage of the value of the Loss Corporation's stock
owned by one or more direct or indirect "five percent shareholders" has
increased by more than 50 percentage points over the lowest percentage of that
value owned by such five percent shareholder or shareholders at any time during
the applicable "testing period" (generally, the shorter of (i) the three-year
period preceding the testing date or (ii) the period of time since the most
recent ownership change of the corporation).
A Loss Corporation's use of NOLs (and certain other tax attributes) after
an "ownership change" will generally be limited annually to the product of the
long-term tax-exempt rate (published monthly by the Service) and the value of
the Loss Corporation's outstanding stock immediately before the ownership change
(excluding certain capital contributions) (the "Section 382 Limitation").
However, the Section 382 Limitation for a taxable year any portion of which is
within the five-year period following the Effective Date will be increased by
the amount of any "recognized built-in gains" for such taxable year. The
increase in a year cannot exceed the "net unrealized built-in gain" (which is
zero unless such gain exists immediately before the "ownership change" and
exceeds a statutorily-defined threshold amount) reduced by recognized built-in
gains from prior years ending during such five-year period. In addition, any
"recognized built-in losses" for a taxable year any portion of which is within
the five-year period following the Effective Date will be subject to limitation
in the same manner as if such loss was an existing NOL to the extent such
recognized built-in losses do not exceed the "net unrealized built-in loss"
(which is zero unless such loss exists immediately before the "ownership change"
and exceeds a statutorily-defined threshold amount) reduced by recognized
built-in losses for prior taxable years ending during such five-year period. At
this time, the Company is unable to predict whether it will have a "net
unrealized built-in gain" or a "net unrealized built-in loss" that will exceed
the statutorily-defined threshold amount at the Effective Date. Finally, if the
Reorganized Company does not continue the Company's historic business or use a
significant portion of the Company's business assets in a new business for two
years after the "ownership change," the Section 382 Limitation would be zero
(except as increased by recognized built-in gains, as described above).
Two alternative bankruptcy exceptions for Loss Corporations undergoing an
ownership change pursuant to a bankruptcy proceeding are provided for in the Tax
Code. The first exception, Section 382(1)(5) of the Tax Code, applies where
qualified (so-called "old and cold") creditors (and shareholders) of the debtor
receive at least 50% of the vote and value of the stock of the reorganized
debtor in a case under the Bankruptcy Code. Under this exception, a debtor's
pre-change NOLs are not subject to the Section 382 Limitation but are instead
reduced by the amount of any interest deductions allowed during the three
taxable years preceding the taxable year in which the ownership change occurs,
and during the part of the taxable year prior to and including the effective
date of the bankruptcy reorganization, in respect of the debt converted into
stock in the reorganization. Moreover, if this exception applies, any further
ownership change of the debtor within a two-year period will preclude the
debtors utilization of any pre-change losses at the time of the subsequent
ownership change against future taxable income.
An "old and cold" creditor includes a creditor who has held the debt of the
debtor for at least eighteen months prior to the date of the filing of the case
or who has held "ordinary course indebtedness" at all times it has been
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outstanding. However, any debt owned immediately before an ownership change by a
creditor who does not become a direct or indirect 5% shareholder of the
reorganized debtor generally will be treated as always having been owned by such
creditor, except in the case of any creditor whose participation in formulating
the plan of reorganization makes evident to the debtor that such creditor has
not owned the debt for such period. Because a portion of the Old Notes will have
been outstanding for less than eighteen months before the Filing Date and
because such Notes do not appear to constitute "ordinary course indebtedness,"
the Company should not be eligible to use the Section 382(l) (5) exception with
respect to the Notes.
The second bankruptcy exception, Section 382(l)(6) of the Tax Code,
requires no reduction of pre-ownership change NOLs as required by Section
382(l)(5) of the Code but provides relief in the form of a relaxed computation
of the Section 382 Limitation. In that regard, Section 382(l)(6) of the Tax Code
provides that the value of the Loss Corporation's outstanding stock for purposes
of computing the Section 382 Limitation will be increased to reflect the
cancellation of indebtedness in the bankruptcy case (but the value of such stock
as adjusted may not exceed the value of the Company's gross assets immediately
before the ownership change (subject to certain adjustments)).
The Plan will trigger an ownership change of the Company consolidated group
on the Effective Date. Due to the inapplicability of Section 382(l)(5), the
Company intends to apply Section 382(l)(6) to such ownership change.
Accordingly, the Reorganized Company's use of pre-ownership change NOLs and
certain other tax attributes (if any), to the extent remaining after the
reduction thereof as a result of the cancellation of indebtedness of the
Company, will be limited and generally will not exceed each year the product of
the long-term tax-exempt rate and the value of the Reorganized Company's stock
increased to reflect the cancellation of indebtedness pursuant to the Plan.
Federal Income Tax Consequences to Holders of Old Notes
Under the Plan, Holders of Old Notes will receive New Common Stock and
pursuant to the Market Liquidity Reallocation will reallocate a portion of the
New Common Stock received to the Holders of Old Common Stock. Although not
entirely clear, the Company believes that Holders of Old Notes will be treated
as receiving an amount of New Common Stock net of the portion of New Common
Stock distributed to the Holders of Old Common Stock. However, a Holder of Old
Notes or the Service possibly could assert that on the distribution, such Holder
is required to recognize capital gain or loss as if such New Common Stock was
disposed of in a taxable disposition. See generally, "Sale or Other Taxable
Disposition of New Common Stock," and "Federal Income Tax Consequences to
Holders of Old Common Stock."
Exchange of Old Notes for New Common Stock. Whether the exchange of Old
Notes for New Common Stock pursuant to the Plan will be a nontaxable
recapitalization under the Tax Code will depend in part upon whether the Old
Notes are considered to be "securities" within the meaning of the provisions of
the Tax Code governing reorganizations. The test as to whether a debt instrument
is a "security" involves an overall evaluation of the nature of the debt
instrument, with the term of the debt instrument usually regarded as one of the
most significant factors. Generally, debt instruments with a term of five years
or less have not qualified as "securities," whereas debt instruments with a term
of ten years or more generally have qualified as "securities."
Although the treatment of the Old Notes is not entirely certain because the
stated term of such instruments is less than ten years, the Old Notes should be
treated as "securities" for federal income tax purposes. Accordingly, the
exchange of Old Notes for New Common Stock should constitute a recapitalization
for federal income tax purposes and, as a result, exchanging Holders should not
recognize any gain or loss (except to the extent the New Common Stock is
attributable to accrued but unpaid interest on the Old Notes, in which event
Holders would generally be required to treat such amounts as payment of interest
includible in income in accordance with the Holder's method of accounting for
tax purposes (see "Accrued Interest" below)). A Holder's adjusted tax basis in
the Old Notes will be allocated to the New Common Stock received in exchange for
the Old Notes. The Holders holding period for such New Common Stock will include
the Holder's holding period for the Old Notes.
If the Old Notes were determined not to constitute "securities" for federal
income tax purposes, then an exchanging Holder would recognize gain or loss
equal to the difference between (i) the fair market value of the New Common
Stock received (except to the extent attributable to accrued but unpaid
interest) and (ii) the Holders' adjusted
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tax basis in the Old Notes exchanged therefor. Any such gain or loss would
generally be long-term capital gain or loss (subject to the market discount
rules) if the Old Notes had been held for more than one year. In this event, a
Holder's initial tax basis in the New Common Stock received would be equal to
their fair market value on the Effective Date, and the holding period for the
New Common Stock would begin on the day immediately after the Effective Date.
Market Discount
Market discount is generally the amount by which the purchase price of a
debt obligation is less than the stated redemption price at maturity of the debt
(or the revised issue price in the case of a debt obligation issued with
original issue discount). Generally, unless an election is made or special rules
apply, any gain realized on the disposition of such an obligation with market
discount is treated as ordinary income to the extent of the market discount
accrued during the holder's period of ownership.
In the event the exchange of the Old Notes for the New Common Stock
constitutes a recapitalization, any accrued market discount on the Old Notes
will not be recognized as income. On a subsequent taxable disposition of the New
Common Stock, a portion of any gain recognized will be treated as ordinary
income to the extent of the accrued but not previously recognized market
discount.
If the Old Notes were determined not to constitute "securities" for federal
income tax purposes, then the exchange of Old Notes for New Common Stock would
be treated as a taxable transaction. To the extent there is any gain recognized
on such exchange, the portion of such gain that does not exceed the accrued
market discount would be treated as ordinary income.
Federal Income Tax Consequences to Holders of New Common Stock
Dividends for New Common Stock. A Holder generally will be required to
include in gross income as ordinary dividend income the amount of any
distributions paid on the New Common Stock to the extent that such distributions
are paid out of the Reorganized Company's current or accumulated earnings and
profits as determined for federal income tax purposes. Distributions in excess
of such earnings and profits will reduce the Holder's tax basis in its New
Common Stock and, to the extent such excess distributions exceed such tax basis,
will be treated as gain from a sale or exchange of such New Common Stock.
Corporate Holders may be entitled to a dividends received deduction (generally
at a 70% rate) with respect to distributions out of earnings and profits and are
urged to consult their tax advisors in this regard.
Sale or Other Taxable Disposition of New Common Stock
Upon the sale or other disposition of New Common Stock, a Holder generally
will recognize capital gain or loss equal to the difference between the amount
of cash and fair market value of any property received on the sale and such
Holder's adjusted tax basis in the New Common Stock. Capital gain or loss
recognized upon the disposition of the New Common Stock will be long-term if, at
the time of the disposition, the holding period for the New Common Stock exceeds
one year.
However, under Section 108(e)(7) of the Tax Code, a creditor that receives
stock in exchange for debt is required, to the extent that gain is recognized
upon a subsequent disposition of such stock, to "recapture" as ordinary income
any bad debt deductions taken by the creditor with respect to such debt and any
ordinary loss claimed by the creditor upon the receipt of the stock in
satisfaction of such debt, reduced by any amount included in income upon the
receipt of the stock. In addition, as discussed above, if any Old Notes held by
a Holder has accrued but not recognized market discount at the Effective Date,
then any gain recognized by such Holder upon the disposition of New Common Stock
would have to be treated as ordinary income to the extent of such accrued market
discount that is allocated to the New Common Stock on the Effective Date.
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Federal Income Tax Consequences to Holders of Old Common Stock
Under the Plan, the Old Common Stock will be canceled. Pursuant to the
Market Liquidity Reallocation, a portion of the New Common Stock otherwise to be
distributed to the Holders of Old Notes who accept the Plan will be reallocated
to the Holders whose Old Common Stock was canceled. Although not entirely clear,
the Company believes that a Holder of Old Common Stock who receives New Common
Stock pursuant to the Market Liquidity Reallocation should not recognize any
gain or loss for federal income tax purposes. The Holder's holding period in the
New Common Stock should include the Holder's holding period in the Old Common
Stock and a Holder's basis in the New Common Stock should be equal to the
Holder's adjusted tax basis in the Old Common Stock. Although not free from
doubt, however, a Holder whose Old Common Stock is canceled pursuant to the Plan
might assert that as a result of such cancellation, such Holder may recognize a
loss in an amount equal to its tax basis in the Old Common Stock. Such loss will
generally be long term capital loss if the Old Common Stock had been held for
more than one year. In that event, such Holder will also recognize income upon
the receipt of the New Common Stock in the amount of the fair market value of
the New Common Stock received.
New Common Stock. For the tax consequences of New Common Stock, see
generally "Federal Income Tax Consequences to Holders of New Common Stock"
above.
Federal Income Tax Consequences to Holders of Other Claims
A Holder of a claim in a class not discussed above will generally recognize
gain or loss equal to any cash received (plus the fair market value of any other
property received) with respect to its claim (other than for accrued but unpaid
interest) less its adjusted basis in its claim (other than for accrued but
unpaid interest). The character of such gain or loss as long-term or short-term
capital gain or loss or as ordinary income or loss will be determined by a
number of factors, including the tax status of the Holder, whether the claim
constitutes a capital asset in the hands of the Holder, whether the claim has
been held for more than one year, whether the claim was purchased at a discount,
and whether and to what extent the Holder had previously claimed a bad debt
deduction.
Accrued Interest
Holders will be treated as receiving a payment of interest (includible in
income in accordance with the Holder's method of accounting for tax purposes) to
the extent that any cash or other property received pursuant to the Plan is
attributable to accrued but unpaid interest, if any, on such claims. The extent
to which the receipt of cash or other property should be attributable to accrued
but unpaid interest is unclear. The Company intends to take the position that
such cash or property distributed pursuant to the Plan will first be allocable
to the principal amount of a claim and then, to the extent necessary, to any
accrued but unpaid interest thereon. Each Holder should consult its tax advisor
regarding the determination of the amount of consideration received under the
Plan that is attributable to interest (if any). A Holder generally will be
entitled to recognize a loss to the extent any accrued interest was previously
included in its gross income and is not paid in full.
If any property received pursuant to the Plan is considered attributable to
accrued but unpaid interest, a Holder's basis in such property should be equal
to the amount of interest income treated as satisfied by the receipt of such
property. The holding period in such property should begin on the day
immediately after the Effective Date.
Backup Withholding and Information Reporting
A Holder of New Common Stock may be subject to backup withholding at the
rate of 31% with respect to dividends paid on, and gross proceeds from a sale of
the New Common Stock unless (i) such Holder is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding and complies with applicable requirements
of the backup withholding rules. A Holder of New Common Stock who does not
provide the Reorganized Company with his or her correct taxpayer identification
number may be subject to penalties imposed by the Service. Amounts withheld
under the backup withholding rules may be credited against a Holder's tax
liability, and
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a Holder may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the Service.
The Reorganized Company will report to Holders of the New Common Stock and
to the Service the amount of any "reportable payments" (including any dividends
paid on the New Common Stock) on, and any amount withheld with respect to, the
New Common Stock during the calendar year.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS IS
FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH
HOLDER SHOULD CONSULT ITS TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF
THE PLAN DESCRIBED HEREIN AND THE CONTINUING OWNERSHIP AND DISPOSITION OF THE
NEW COMMON STOCK AND THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
NEITHER THE PROPONENTS NOR THEIR PROFESSIONALS SHALL HAVE ANY LIABILITY TO ANY
PERSON OR HOLDER ARISING FROM OR RELATED TO THE FEDERAL, STATE OR LOCAL TAX
CONSEQUENCES OF THE PLAN OR THE FOREGOING DISCUSSION.
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INDEPENDENT ACCOUNTANTS
The consolidated statements of financial condition of WFSG and its
subsidiaries at December 31, 1997, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year then
ended included in this Solicitation Statement have been audited by Arthur
Andersen LLP, independent public accountants to the extent and for the periods
indicated in their report dated March 12, 1998, appearing herein. It should be
noted that Arthur Andersen LLP has not audited any financial statements of WFSG
since December 31, 1997.
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INDEX TO FINANCIAL STATEMENTS
Wilshire Financial Services Group Inc. and Subsidiaries
Audited Consolidated Financial Statements
Report of Independent Accountants.................................. F-2
Consolidated Balance Sheets at December 31, 1997 and 1996.......... F-4
Consolidated Statements of Income for each of the three years in
the period Ended December 31, 1997........................... F-5
Consolidated Statements of Cash Flows for each of the three years
in the period Ended December 31, 1997........................ F-6
Notes to the Consolidated Financial Statements..................... F-9
Unaudited Interim Consolidated Financial Statements
Interim Consolidated Balance Sheets at September 30, 1998
and 1997 .................................................... F-34
Interim Consolidated Statements of Income for the nine months
ended September 30, 1998 and 1997............................ F-35
Interim Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997............................ F-36
Notes to the Consolidated Financial Statements..................... F-38
Wilshire Credit Corporation and Combined Affiliates
Audited Combined Financial Statements
Combined Balance Sheets at December 31, 1997 and 1996.............. F-46
Combined Statements of Income for each of the three years in the
period Ended December 31, 1997............................... F-47
Combined Statements of Cash Flows for each of the three years in
the period Ended December 31, 1997........................... F-49
Notes to the Combined Financial Statements. ....................... F-51
Unaudited Interim Combined Financial Statements
Interim Combined Balance Sheets at September 30, 1998 and 1997... F-63
Interim Combined Statements of Income for the nine months ended
September 30, 1998 and 1997.................................. F-64
Interim Combined Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997............................ F-66
Notes to the Combined Financial Statements......................... F-67
F-1
<PAGE>
[INTENTIONALLY LEFT BLANK]
F-2
EXHIBIT I
[FORM OF PLAN]
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
- ------------------------------------------x
:
In re: : Chapter 11
:
:
WILSHIRE FINANCIAL : Case No.
SERVICES GROUP INC., :
:
:
Debtor. :
- ------------------------------------------x
WILSHIRE FINANCIAL SERVICES GROUP INC.'S
PREPACKAGED PLAN OF REORGANIZATION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Dated: March 3, 1999
Wilmington, Delaware
<PAGE>
TABLE OF CONTENTS
Page
I. INTRODUCTION...........................................................1
II. DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION..................1
A. Definitions........................................................1
B. Interpretation and Computation of Time............................12
1. Defined Terms.................................................12
2. Rules of Interpretation.......................................12
3. Time Periods..................................................12
III. DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS;
IDENTIFICATION OF IMPAIRED AND UNIMPAIRED CLAIMS AND
INTERESTS AND VOTING..................................................12
A. General...........................................................13
B. Designation of Classes............................................13
C. Unimpaired Classes................................................14
D. Impaired Classes..................................................14
E. Cramdown of Class 6 Interest......................................14
F. Elimination of Classes............................................14
G. Voting Instructions...............................................14
H. Voting Deadline and Extensions....................................15
IV. GENERAL PROVISIONS FOR TREATMENT OF CLAIMS AND INTERESTS..............15
A. Unclassified Claims...............................................15
1. Administrative Claims.........................................15
2. Priority Tax Claims...........................................17
B. Treatment of Claims Against and Interests in the Debtor...........17
1. Class 1 (Lender Secured Claims)...............................17
2. Class 2 (Other Secured Claims)................................18
3. Class 3 (Priority Claims).....................................18
4. Class 4 (Noteholder Claims)...................................18
5. Class 5 (General Unsecured Claims)............................19
6. Class 6 (Interests of Holders of Old Common Stock)............19
C. Confirmability of Plan and Cramdown...............................20
D. Modification of Treatment of Claims...............................20
V. MEANS OF EXECUTION AND IMPLEMENTATION.................................20
A. Corporate Structure...............................................20
B. Corporate Action..................................................20
1. Cancellation of Old Securities and Instruments................20
2. Issuance of New Common Stock..................................21
i
<PAGE>
3. Market Liquidity Reallocation.................................21
4. Certificate of Incorporation and Bylaws for Reorganized WFSG..21
5. Post-Reorganization Board of Directors and Officers...........22
C. WCC Restructuring.................................................22
D. Compromised WREIT/WREP Claim; Compromised MLMC Claim..............22
E. DIP Facility......................................................22
F. Employment Agreements.............................................22
G. Management Compensation and Stock Option Plan.....................22
H. Executory Contracts and Unexpired Leases..........................23
I. Section 1145 Exemption............................................23
J. Section 1146 Exemption............................................23
K. Implementation and Carrying Out the Terms of This Plan............24
L. Payment of Statutory Fees.........................................24
M. Payment of Fees and Expenses of Unofficial Noteholders'
Committee's Counsel...............................................24
N. Term of Injunctions or Stays......................................24
O. No Interest.......................................................25
P. Retiree Benefits..................................................25
VI. DISTRIBUTIONS, DISPUTED CLAIMS AND SETOFF.............................25
A. Disbursing Agent..................................................25
B. Distribution Record Date..........................................25
C. Timing of Disbursement of Funds...................................26
D. Methods of Distributions; Delivery................................26
1. Cash Payments.................................................26
2. Issuance and Transfers of New Common Stock....................26
3. Delivery of Distributions.....................................26
4. Withholding Taxes.............................................27
E. Surrender of Canceled Instruments or Securities...................27
F. Unclaimed Property................................................28
G. Procedures for Treating Disputed Claims...........................28
1. Disputed Claims...............................................28
2. Objections to Claims and Interests............................28
3. No Distributions Pending Allowance............................29
H. Setoffs...........................................................29
VII. CONFIRMATION AND EFFECTIVE DATE CONDITIONS............................29
A. Conditions to Confirmation........................................29
B. Conditions to Effective Date......................................30
C. Waiver of Conditions to Confirmation and Effective Date...........30
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<PAGE>
VIII. EFFECTS OF PLAN CONFIRMATION..........................................31
A. Discharge of Debtor and Injunction................................31
B. Limitation of Liability...........................................32
C. Releases..........................................................32
D. Indemnification...................................................33
E. Vesting of Assets.................................................34
F. Waiver of Subordination...........................................34
G. Preservation of Causes of Action..................................34
H. Retention of Bankruptcy Court Jurisdiction........................34
I. Failure of Bankruptcy Court to Exercise Jurisdiction..............36
J. Official Committees...............................................36
IX. MISCELLANEOUS PROVISIONS..............................................37
A. Final Order.......................................................37
B. Modification of this Plan.........................................37
C. No Liability for Solicitation or Participation....................37
D. Revocation of this Plan...........................................38
E. Severability of Plan Provisions...................................38
F. Notices...........................................................38
G. Successors and Assigns............................................39
H. Saturday, Sunday or Legal Holiday.................................39
I. Post-Effective Date Effect of Evidences of Claims or Interests....39
J. Governing Law.....................................................39
K. Inconsistency.....................................................39
iii
<PAGE>
I.
INTRODUCTION
Wilshire Financial Services Group Inc. ("WFSG" or the "Debtor") hereby
proposes the following prepackaged plan of reorganization (this "Plan") for the
resolution of the Debtor's outstanding creditor Claims and Interests and
requests Confirmation of this Plan pursuant to Section 1129 of the Bankruptcy
Code.
All Holders of Claims and Interests are encouraged to read this Plan and
the accompanying solicitation materials in their entirety.
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, ALL STATEMENTS IN THIS
PLAN AND THE ACCOMPANYING SOLICITATION MATERIALS CONCERNING THE HISTORY OF THE
DEBTOR'S BUSINESS, THE PAST OR PRESENT FINANCIAL CONDITION OF THE DEBTOR,
TRANSACTIONS TO WHICH THE DEBTOR WAS OR IS A PARTY, OR THE EFFECT OF
CONFIRMATION OF THIS PLAN ON SECURED CREDITORS, UNSECURED CREDITORS OR EQUITY
INTEREST HOLDERS ARE ATTRIBUTABLE EXCLUSIVELY TO THE DEBTOR AND NOT TO ANY OTHER
PARTY.
II.
DEFINITIONS, INTERPRETATION AND RULES OF CONSTRUCTION
A. Definitions
In addition to such other terms as are defined in other Sections of this
Plan, the following terms have the following meanings as used in this Plan.
1. "ADDITIONAL RELEASEES" shall have the meaning ascribed to such term in
Section VIII(C) of this Plan.
2. "ADMINISTRATIVE CLAIMS" means any and all Claims Allowed under Section
503(b) of the Bankruptcy Code and entitled to priority under Section 507(a)(1)
of the Bankruptcy Code including, without limitation (a) any actual and
necessary costs and expenses of preserving the Estate and administering the
Reorganization Case, (b) any actual and necessary costs and expenses of
operating the business of the Debtor, (c) fees and expenses of professionals to
the extent Allowed by a Final Order of the Bankruptcy Court under Sections 330,
331 or 503 of the Bankruptcy Code and (d) all fees and charges assessed against
the Estate pursuant to 28 U.S.C. ss. 1930.
3. "ALLOWED" means with reference to a Claim against or Interest in the
Debtor (a) for which a proof of such Claim or Interest was timely Filed and
served upon the Debtor and no
<PAGE>
objection to the Claim or Interest, or motion to estimate the Claim or Interest
for purposes of allowance, is timely Filed; or (b) for which a proof of such
Claim or Interest is deemed Filed under applicable law or pursuant to a Final
Order of the Bankruptcy Court and no objection to the Claim or Interest is Filed
within the time fixed by the Bankruptcy Court for such objections; or (c) which
a Claim or Interest has been listed by the Debtor in its schedules of assets and
liabilities Filed with the Bankruptcy Court and (i) is not listed as disputed,
contingent or unliquidated and (ii) is not a Claim or Interest as to which a
proof of Claim or Interest has been Filed; or (d) that is otherwise Allowed or
deemed Allowed pursuant to this Plan. If the Debtor Files an objection to a
proof of Claim or Interest within a time fixed by the Bankruptcy Court, the
Claim or Interest shall be Allowed only to the extent of (i) any amount of such
Claim or Interest to which the Debtor did not object, (ii) any amount otherwise
authorized by Final Order or this Plan and (iii) any amount temporarily Allowed
by an Order for purposes of voting on this Plan (which amount shall not be
binding with respect to distributions to which the Holder of such Claim or
Interest shall be entitled under this Plan).
4. "BALLOT" means a ballot or master ballot to be used for voting to
accept or reject this Plan.
5. "BANKRUPTCY CODE" means title 11 of the United States Code, as now in
effect or hereafter amended if such amendments are made applicable to the
Reorganization Case.
6. "BANKRUPTCY COURT" means the United States Bankruptcy Court for the
District of Delaware, the United States District Court for the District of
Delaware, or such other court or adjunct thereof that exercises jurisdiction
over the Reorganization Case.
7. "BANKRUPTCY RULES" means the Federal Rules of Bankruptcy Procedure, as
applicable from time to time in the Reorganization Case.
8. "BUSINESS DAY" means any day other than a Saturday, a Sunday or a legal
holiday as such term is defined in Bankruptcy Rule 9006(a).
9. "CANCELED INSTRUMENTS" shall have the meaning ascribed to such term in
Section VI(E)(a) of this Plan.
10. "CASH" means currency, a certified check, a cashier's check or a wire
transfer of immediately available funds from any source, or a check drawn on a
domestic bank from Reorganized WFSG or any other Person making any distribution
under this Plan.
11. "CCI" means Capital Consultants, Inc., an Oregon corporation, for
itself and as agent for its investors.
12. "CCI GUARANTY CLAIM" means any Claim under that certain limited
Guaranty dated October 15, 1998, granted by WFSG in favor of CCI and any other
Claim, interest, right or demand of CCI against or in the Debtor arising out of,
relating to or in connection with the CCI
2
<PAGE>
Guaranty, WCC Restructuring or any lending by CCI to WCC, which claims are being
released by CCI pursuant to the WCC Restructuring Agreement on the satisfaction
of the conditions stated therein. WFSG and the Unofficial Noteholders' Committee
dispute the validity and enforceability of the CCI Guaranty Claim.
13. "CLAIM" means a claim against the Debtor, whether or not asserted or
Allowed, as defined in Section 101(5) of the Bankruptcy Code, which shall
include (a) a right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal equitable, secured or unsecured or (b) a right to an
equitable remedy for breach of performance if such breach gives rise to payment,
whether or not such right to an equitable remedy is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal equitable, secured or unsecured.
14. "CLASS" means a class of Claims or Interests designated pursuant to
this Plan.
15. "CLASS B COMMON STOCK" means the non-voting class B common stock of
New Servicer granted to Capital Wilshire Holdings, Inc., a company designated by
CCI, under the WCC Restructuring Agreement, which will be convertible into New
Common Stock.
16. "CLERK" means the Clerk of the Bankruptcy Court.
17. "COMPROMISED MLMC CLAIM" means all Claims of MLMC represented by,
relating to, arising under, or in connection with the MLMC Promissory Note and
the MLMC Forbearance Agreement, giving effect to the compromise and settlement
effected pursuant to the MLMC Letter Agreement.
18. "COMPROMISED WREIT/WREP CLAIM" means all Claims of WREIT and WREP
giving effect to the compromise and settlement set forth in the WREP Financing
Agreement.
19. "CONFIRMATION" means the entry by the Bankruptcy Court of the
Confirmation Order.
20. "CONFIRMATION DATE" means the date on which the Clerk enters the
Confirmation Order on the Docket.
21. "CONFIRMATION HEARING" means the hearing on Confirmation of this Plan,
as this Plan may be modified hereafter.
22. "CONFIRMATION ORDER" means the Order of the Bankruptcy Court
confirming this Plan under Section 1129 of the Bankruptcy Code.
23. "DEBTOR RELEASEES" shall have the meaning ascribed to such term in
Section VIII(C) of this Plan.
3
<PAGE>
24. "DEBTOR" means WFSG, as a debtor and Debtor-In-Possession.
25. "DEBTOR-IN-POSSESSION" means the Debtor, when acting in the capacity
of a representative of the Estate in the Reorganization Case.
26. "DIP CLAIMS" means the Claims of the DIP Lender arising under the DIP
Facility.
27. "DIP FACILITY" means the Debtor-In-Possession term facility in the
aggregate principal amount of up to $10,000,000 pursuant to the WREP Financing
Agreement.
28. "DIP LENDER" means WREP.
29. "DISBURSING AGENT" means, collectively, one or more Persons
responsible for making distributions under this Plan in accordance with Sections
VI(A)-(F) of this Plan, and includes Reorganized WFSG and/or such other Persons
as the Debtor may employ in its sole discretion to serve as Disbursing Agent.
30. "DISCLOSURE STATEMENT" means the disclosure statement pursuant to
Section 1125 or Section 1126(b) of the Bankruptcy Code with respect to this Plan
(and all exhibits and schedules annexed thereto or referred to therein), also
referred to therein as the "Solicitation Statement," as it may be amended or
supplemented from time to time.
31. "DISPUTED CLAIM" means a Claim, not otherwise Allowed or paid pursuant
to this Plan, to the extent such Claim is the subject of a pending application,
motion, complaint, objection or other legal proceeding seeking to disallow,
subordinate or estimate such Claim.
32. "DISPUTED INTEREST" means an Interest to the extent such Interest is
the subject of a pending application, motion, complaint, objection or other
legal proceeding seeking to disallow, subordinate or estimate such Interest.
33. "DISTRIBUTION RECORD DATE" means the date or dates fixed by the
Bankruptcy Court as the record date for determining the Holders of Old Notes who
are entitled to receive distributions under this Plan and, if no such date is
fixed, means the Confirmation Date.
34. "DOCKET" means the docket or dockets in the Reorganization Case
maintained by the Clerk.
35. "EFFECTIVE DATE" means the date which is 11 calendar days after the
Confirmation Date, or if such date is not a Business Day, the next succeeding
Business Day; provided, however, that if, as of such date, all conditions to the
occurrence of the Effective Date as set forth herein have not been satisfied or,
if permitted, waived by the Debtor, then the first Business Day on which all
such conditions have been satisfied or waived.
4
<PAGE>
36. "EMPLOYMENT AGREEMENTS" means, collectively, the employment agreements
to be entered into between Wiederhorn and Mendelsohn, respectively, and WFSG,
containing the terms summarized in the Disclosure Statement.
37. "ESTATE" means the estate created in the Debtor's Reorganization Case
under Section 541 of the Bankruptcy Code.
38. "FILE," "FILED" or "FILING" means filed, or filing, with the Clerk of
the Bankruptcy Court in the Reorganization Case.
39. "FILING DATE" means the date on which the Debtor Filed its voluntary
Chapter 11 petition with the Bankruptcy Court commencing the Reorganization
Case.
40. "FINAL ORDER" means an order or judgment of the Bankruptcy Court, as
entered on the Docket in the Reorganization Case, which has not been reversed,
stayed, modified or amended, and as to which (a) the time to appeal, seek
certiorari or request reargument or further review or rehearing has expired and
no appeal, petition for certiorari or request for reargument or further review
or rehearing has been timely filed or (b) any appeal that has been or may be
taken or any petition for certiorari or request for reargument or further review
or rehearing that has been or may be filed has been resolved by the highest
court to which the order or judgment was appealed, from which certiorari was
sought or to which the request was made.
41. "FINANCING ORDERS" means, collectively, the interim and final orders
entered by the Bankruptcy Court in connection with the DIP Facility, including
the repayment of the Interim Facility.
42. "GENERAL UNSECURED CLAIMS" means all Unsecured Claims against the
Debtor, other than Administrative Claims, Priority Tax Claims, Priority Claims,
Lender Secured Claims, Other Secured Claims and Noteholder Claims, and includes,
without limitation, the Compromised WREIT/WREP Claim, the Compromised MLMC
Claim, the Guaranty Claims, the Trade Claims and the Intercompany Claims.
43. "GUARANTY CLAIMS" means all contingent Claims arising under or
relating to any guarantees under which the Debtor is a guarantor, excluding the
CCI Guaranty Claim which is to be released and discharged in the WCC
Restructuring.
44. "HOLDER" means a Person who holds a Claim or Interest in such Person's
capacity as the Holder of such Claim or Interest. Where the identity of the
Holder of a Claim or Interest is set forth on a register or other record
maintained by or at the direction of the Debtor, the Holder of such Claim or
Interest shall be deemed to be the Holder as identified on such register or
record unless the Debtor is otherwise notified in a writing authorized by such
Holder.
45. "IMPAIRED" shall have the definition given to it in Section 1124 of
the Bankruptcy Code. An Impaired Class is entitled to vote on this Plan;
provided, however, that Classes of Claims
5
<PAGE>
and Interests that do not receive or retain any property under this Plan on
account of such Claims and Interests are deemed to have rejected this Plan and
are not entitled to vote.
46. "INDEMNITEES" shall have the meaning ascribed to such term in Section
VIII(D) of this Plan.
47. "INDENTURE TRUSTEE" means Bankers Trust Company, as indenture trustee
for the Notes and the Series B Notes.
48. "INDENTURE TRUSTEE CHARGING LIEN" means any lien or other priority in
payment available to the Indenture Trustee pursuant to the Old Indentures or
applicable law, for the payment of fees and expenses incurred by the Indenture
Trustee (including the fees and expenses of counsel retained by the Indenture
Trustee), whether incurred prior or subsequent to the Filing Date, to the extent
not otherwise paid pursuant to the applicable terms of this Plan.
49. "INFORMATION AGENT" shall have the meaning ascribed to such term in
Section III(H) of this Plan.
50. "INSTRUMENT" means any share of stock, security, promissory note or
other "INSTRUMENT," within the meaning of that term, as defined in Section
9-105(l)(i) of the UCC.
51. "INTERCOMPANY CLAIMS" means any and all Claims and causes of action
held by WSC, WFC, First Bank of Beverly Hills, F.S.B., WMFC 1997-1 Inc., WMFC
1997-2 Inc., or other affiliates against the Debtor excluding WREIT and WREP to
the extent of the Compromised WREIT/WREP Claim and Claims arising under, related
to and in connection with the WCC Restructuring.
52. "INTEREST" means the Holder of an equity Interest in the Debtor,
whether or not asserted, as defined in Section 101(17) of the Bankruptcy Code.
53. "INTERIM FACILITY" means the interim term facility under the WREP
Financing Agreement and the WREP Interim Financing Agreement wherein WREP, as
lender, will loan up to an aggregate principal amount of $5,000,000 to WAC.
54. "LENDERS" means Salomon Brothers Inc, as agent for Salomon Brothers
International Limited and any other similar lender under any and all Repurchase
Agreements.
55. "LENDER SECURED CLAIMS" means all Claims of the Lenders represented
by, relating to, arising under or in connection with the Repurchase Agreements.
56. "LOCAL BANKRUPTCY RULES" means the local rules of the Bankruptcy
Court, as applicable from time to time in the Reorganization Case.
6
<PAGE>
57. "MARKET LIQUIDITY REALLOCATION" shall mean the reallocation of a number
of shares of New Common Stock to Holders of Allowed Interests in Class 6 from
New Common Stock otherwise to be distributed to Holders of Allowed Claims in
Class 4 who accept this Plan to be effected pursuant to Section V(B)(3) of this
Plan for the purpose of fostering the development of, and improving conditions
in, the trading market for New Common Stock following the Effective Date.
58. "MARKET LIQUIDITY REALLOCATION AMOUNT" shall have the meaning ascribed
to such term in Section V(B)(3) of this Plan.
59. "MENDELSOHN" means Lawrence A. Mendelsohn, the President of WFSG.
60. "MLMC" means Merrill Lynch Mortgage Capital Inc.
61. "MLMC FORBEARANCE AGREEMENT" means that certain forbearance agreement
dated as of February 1, 1999, between the Debtor and MLMC.
62. "MLMC LETTER AGREEMENT" means that certain letter agreement dated
August 19, 1998, between the Debtor and MLMC.
63. "MLMC PROMISSORY NOTE" means that certain promissory note dated as of
February 1, 1999, executed by the Debtor in favor of MLMC in the principal
amount of $2,604,137.
64. "NEW COMMON STOCK" means the common stock of Reorganized WFSG, par
value $0.01 per share, which may be issued by Reorganized WFSG on and after the
Effective Date pursuant to this Plan or otherwise.
65. "NEW SERVICER" means the newly organized servicing subsidiary of
Reorganized WFSG to be formed on the Effective Date.
66. "NEW 6% NOTE" means the 6% promissory note to be issued by the Debtor
on the Effective Date in favor of WREIT and WREP in the principal amount of
$18,433,000 on the terms set forth in the WREP Financing Agreement.
67. "NOTEHOLDER" means any Holder of a Claim represented by, relating to,
arising under or in connection with the Old Notes.
68. "NOTEHOLDER CLAIMS" means all Claims of the Noteholders represented
by, relating to, arising under or in connection with the Old Notes.
69. "NOTEHOLDER RESTRUCTURING AGREEMENT" means that certain letter
agreement dated November 23, 1998 and term sheet annexed thereto by and between
Capital Research and Management Company, Capital Guardian Trust Company, Ryback
Management Corporation and American Express Financial Corporation, all as
members of the Unofficial
7
<PAGE>
Noteholders' Committee and in the capacities designated therein, WREIT and WFSG,
as such agreement was amended pursuant to a further agreement dated January 19,
1999.
70. "NOTE INDENTURE" means the indenture, dated as of December 24, 1996,
as amended or supplemented from time to time in accordance with the terms
thereof, by and between WFSG and Bankers Trust Company, as indenture trustee,
pursuant to which the Notes were issued.
71. "NOTES" means the 13% notes due January 1, 2004, CUSIP 971867 AA4
issued pursuant to the Note Indenture.
72. "OFFICIAL COMMITTEE" means any statutory committee of creditors or
equity Interest Holders of the Debtor appointed by the United States Trustee
pursuant to Section 1102 of the Bankruptcy Code.
73. "OLD EMPLOYMENT AGREEMENTS" means, collectively (a) the employment
agreement dated as of November 15, 1996 by and between the Debtor and Wiederhorn
and (b) the employment agreement dated as of November 15, 1996 by and between
the Debtor and Mendelsohn.
74. "OLD INDENTURES" means, collectively, the Note Indenture and the
Series B Note Indenture.
75. "OLD NOTES" means, collectively, the Notes and the Series B Notes.
76. "OLD SECURITIES" means, collectively, the Old Notes and the Old Common
Stock.
77. "OLD COMMON STOCK" means the common stock of WFSG, par value $.01 per
share and any options or other existing forms of securities convertible into
common stock of WFSG.
78. "ORDER" means an order or judgment of the Bankruptcy Court as entered
on the Docket.
79. "OTHER SECURED CLAIMS" means all Secured Claims other than Lender
Secured Claims.
80. "PERSON" means any individual, corporation, general partnership,
limited partnership, limited liability partnership, limited liability company,
association, joint stock company, joint venture, governmental entity or
political subdivision thereof, Official Committee, unofficial committee of
creditors or equity Interest Holders, including the Unofficial Noteholders'
Committee or other "entity" (as defined in the Bankruptcy Code).
81. "PLAN" means this prepackaged plan of reorganization for the Debtor in
the Reorganization Case and as such may be amended, modified or supplemented
from time to time.
8
<PAGE>
82. "POST-PETITION TAX CLAIMS" means Administrative Claims and other
Claims by a governmental unit for taxes (and for interest and/or penalties
related to such taxes) for any tax year or period, to the extent such Claim
accrues within the period from and including the Filing Date through and
including the Effective Date.
83. "POST-REORGANIZATION BOARD" means the Board of Directors of Reorganized
WFSG established in accordance with Section V(B)(5) of this Plan which shall
function and serve as of and after the Effective Date in accordance with the
Reorganized WFSG Certificate of Incorporation and the Reorganized WFSG Bylaws.
84. "PRIORITY CLAIMS" means Claims entitled to priority under Sections
507(a)(3) through 507(a)(7) or 507(a)(9) of the Bankruptcy Code, but excludes
Priority Tax Claims.
85. "PRIORITY TAX CLAIMS" means Claims for an amount entitled to priority
under Section 507(a)(8) of the Bankruptcy Code.
86. "PRO RATA" means proportionately so that, with respect to any Class,
the ratio of (a) the amount of consideration distributed on account of a
particular Allowed Claim or Allowed Interest to (b) the amount of such
particular Allowed Claim or Allowed Interest, is the same as the ratio of (i)
the amount of consideration distributed on account of all Allowed Claims or
Allowed Interests of the Class in which the particular Allowed Claim or Allowed
Interest is included to (ii) the aggregate amount of all Allowed Claims or
Allowed Interests of that Class.
87. "PSC" means Portland Servicing Corporation, a Nevada corporation.
88. "REINSTATE" means, with respect to any Allowed Claim or Allowed
Interest, that such Claim or Interest shall be treated as Unimpaired as of the
Effective Date.
89. "REORGANIZATION CASE" means the Debtor's case under Chapter 11 of the
Bankruptcy Code.
90. "REORGANIZED WFSG" means WFSG, as it will be reorganized as of the
Effective Date in accordance with this Plan and having such name as shall be
determined prior to the Confirmation Date by the Board of Directors of WFSG.
91. "REORGANIZED WFSG BYLAWS" means the amended and restated bylaws of
Reorganized WFSG that will be filed with the Bankruptcy Court on or prior to the
hearing on Confirmation of the Plan.
92. "REORGANIZED WFSG CERTIFICATE OF INCORPORATION" means the amended and
restated certificate of incorporation of Reorganized WFSG that will be filed
with the Bankruptcy Court on or prior to the hearing on Confirmation of the
Plan.
9
<PAGE>
93. "REPURCHASE AGREEMENTS" means, collectively (a) the Global Master
Repurchase Agreement dated August 31, 1998, between the Debtor and Salomon
Brothers Inc , agent for Salomon Brothers International Limited, as such may
have been or may hereafter be amended or supplemented, all written Confirmations
(as such term is defined therein) and any other documents relating to such
agreement and (b) any other similar agreement entered into by the Debtor at any
time, including after February 1, 1999, which are disclosed to the Court
pursuant to or at the Confirmation Hearing.
94. "SECURED CLAIMS" means any and all Claims that are secured by a lien
on property in which the Estate has an interest or that are subject to setoff
under Section 553 of the Bankruptcy Code, to the extent of the value of the
Claim Holder's interest in the Estate's interest in such property or to the
extent of the amount subject to setoff, as applicable, as determined pursuant to
Section 506(a) or 1111(b) of the Bankruptcy Code including, without limitation,
the Lender Claims.
95. "SERIES B NOTE INDENTURE" means the indenture, dated as of August 15,
1997, as amended or supplemented from time to time in accordance with the terms
thereof, by and between WFSG and Bankers Trust Company, as indenture trustee,
under which the Series B Notes were issued.
96. "SERIES B NOTES" means the 13% notes due August 15, 2004, CUSIP 971867
AE6, issued pursuant to the Series B Note Indenture.
97. "TRADE CLAIMS" means any Unsecured Claim against the Debtor arising
from the delivery of goods or services to the Debtor in the ordinary course of
the Debtor's business excluding the Compromised MLMC Claim, the Compromised
WREIT/WREP Claim, the CCI Guaranty Claim and any Claims arising under the Old
Employment Agreements.
98. "UCC" means the Delaware Uniform Commercial Code, as in effect at any
relevant time.
99. "UNIMPAIRED" means, with reference to a Class of Claims or Interests,
that the Class is not Impaired. An Unimpaired Class is not entitled to vote on
this Plan.
100. "UNOFFICIAL NOTEHOLDERS' COMMITTEE" means the unofficial committee of
Holders of Old Notes in existence as of the Filing Date, which members include
Capital Research and Management Company, Capital Guardian Trust Company, Ryback
Management Corporation and American Express Financial Corporation.
101. "UNSECURED CLAIM" means any Claim that is not an Administrative
Claim, Priority Claim, Priority Tax Claim or Secured Claim.
102. "VOTING DEADLINE" means the date on which Ballots must be received by
the Information Agent at the address set forth on the applicable Ballot. For
purposes of this Plan, the
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Voting Deadline is 5:00 p.m., New York City Time, March 1, 1999, or, if the
Debtor extends the Voting Deadline pursuant to Section III(H), the latest date
on which a Ballot will be accepted.
103. "WAC" means Wilshire Acquisitions Corporation, a Nevada corporation.
104. "WCC" means Wilshire Credit Corporation, a Nevada corporation.
105. "WCC RESTRUCTURING" means that certain restructuring implemented
substantially in accordance with the terms of the WCC Restructuring Agreement.
The WCC Restructuring provides for, among other things (a) the transfer of the
assets and liabilities (other than certain indebtedness owed to CCI) of WCC to
the New Servicer, which will be owned 50.01% by the Debtor in the form of voting
class A common stock and 49.99% by Capital Wilshire Holdings, Inc., a company
controlled by a designee of CCI and (b) the compromise, settlement and release
of the CCI Guaranty. The terms of the WCC Restructuring are set forth in more
detail in the Disclosure Statement.
106. "WCC RESTRUCTURING AGREEMENT" means that certain Amended and Restated
Restructuring Agreement dated as of January 19, 1999 between WCC, WFSG, WSC,
WFC, PSC, Wiederhorn, Mendelsohn and CCI.
107. "WFC" means Wilshire Funding Corporation, a Delaware corporation.
108. "WIEDERHORN" means Andrew A. Wiederhorn, Chairman, Chief Executive
Officer and Secretary of WFSG.
109. "WLL" means Wilshire Leasing Limited, a Nevada corporation.
110. "WREIT" means Wilshire Real Estate Investment Trust Inc., a Maryland
corporation.
111. "WREP" means Wilshire Real Estate Partnership L.P., a Delaware
limited partnership.
112. "WREP FINANCING AGREEMENT" means that certain letter agreement dated
January 19, 1999 respecting, among other things, the DIP Facility.
113. "WSC" means Wilshire Servicing Corporation, a Delaware corporation.
114. "WREP INTERIM FINANCING AGREEMENT" means the Interim Financing Loan
Agreement and related documents containing the definitive terms of the Interim
Facility.
115. "WSECC" means Wilshire Securities Corporation, a Nevada corporation.
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B. Interpretation and Computation of Time
1. Defined Terms
Any term used in this Plan that is not defined in this Plan, either in
Section II(A) or elsewhere, but that is defined in the Bankruptcy Code, the
Bankruptcy Rules or the Local Bankruptcy Rules, shall have the meaning ascribed
to that term in the Bankruptcy Code, the Bankruptcy Rules or the Local
Bankruptcy Rules, as the case may be.
2. Rules of Interpretation
For purposes of this Plan (a) whenever it appears appropriate from
the context, each term, whether stated in the singular or the plural, shall
include both the singular and the plural, (b) any reference in this Plan to a
contract, Instrument, release or other agreement or document being in a
particular form or on particular terms and conditions means that such document
shall be substantially in such form or substantially on such terms and
conditions; provided, however, that any change to such form, terms or conditions
which is material to a party to such document shall not be made without such
party's consent, (c) any reference in this Plan to an existing document or
exhibit Filed or to be Filed means such document or exhibit, as it may have been
or (to the extent otherwise permitted, hereafter) may be amended, modified or
supplemented from time to time, (d) unless otherwise specified in a particular
reference, all references in this Plan to sections, articles and exhibits are
references to sections, articles and exhibits of or to this Plan, (e) the words
"herein," "hereof," "hereto," "hereunder" and others of similar import refer to
this Plan in its entirety rather than to a particular portion of this Plan only,
(f) captions and headings under in this Plan are inserted for convenience of
reference only and are not intended to be a part of or to affect the
interpretations of this Plan, (g) the rules of construction set forth in Section
102 of the Bankruptcy Code shall apply and (h) any and all exhibits to this Plan
are incorporated into this Plan, and shall be deemed to be included in this
Plan.
3. Time Periods
In computing any period of time prescribed or allowed by this Plan,
the provisions of Bankruptcy Rule 9006(a) shall apply.
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III.
DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS;
IDENTIFICATION OF IMPAIRED AND UNIMPAIRED
CLAIMS AND INTERESTS AND VOTING
A. General
The following is a designation of the Classes of Claims and Interests
under this Plan. In accordance with Section 1123(a)(1) of the Bankruptcy Code,
Administrative Claims and Priority Tax Claims have not been classified and are
excluded from the following Classes. A Claim or Interest is classified in a
particular Class only to the extent that the Claim or Interest qualifies within
the description of that Class, and is classified in another Class or Classes to
the extent that any remainder of the Claim or Interest qualifies within the
description of such other Class or Classes. A Claim or Interest is classified in
a particular Class only to the extent that the Claim or Interest is an Allowed
Claim or Allowed Interest in that Class and has not been paid, released or
otherwise satisfied before the Effective Date. A Claim or Interest which is not
an Allowed Claim or Allowed Interest is not in any Class. A Disputed Claim or
Disputed Interest, to the extent that it subsequently becomes an Allowed Claim
or Allowed Interest, shall be included in the Class for which it would have
qualified had it not been disputed. Notwithstanding anything to the contrary
contained in this Plan, no distribution shall be made on account of any Claim or
Interest to the extent such Claim or Interest is not an Allowed Claim or an
Allowed Interest.
B. Designation of Classes
Class 1 - Lender Secured Claims Class 1 consists of all Allowed Lender
Secured Claims against the Debtor.
Class 2 - Other Secured Claims Class 2 consists of all Allowed Secured
(other than Lender Secured Claims against the Debtor other than
Claims in Class 1) Lender Secured Claims specified in
Class 1.
Class 3 - Priority Claims Class 3 consists of all Allowed Priority
Claims against the Debtor.
Class 4 - Noteholder Claims Class 4 consists of all Allowed Unsecured
Claims of the Holders of Old Notes
against the Debtor.
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Class 5 - General Unsecured Claims Class 5 consists of all Allowed Unsecured
(other than the Unsecured Claims (including the Compromised
Claims in Classes 3 and 4) WREIT/WREP Claim, the Compromised MLMC
Claim, the Guaranty Claims, the Trade
Claims and the Intercompany Claims)
against the Debtor other than the
Unsecured Claims in Class 4.
Class 6 - Interests of Holders of Old Class 6 consists of all Allowed
Common Stock Interests in WFSG of Holders of Old
Common Stock.
C. Unimpaired Classes
Each of Classes 1, 2, 3 and 5 is Unimpaired under this Plan and, pursuant
to Section 1126(f) of the Bankruptcy Code, Holders of Claims in each such Class
are conclusively presumed to accept this Plan and, therefore, are not entitled
to vote.
D. Impaired Classes
Each Holder of an Allowed Claim in an impaired Class of Claims against the
Debtor shall be entitled to vote to accept or reject this Plan. Class 4 is
Impaired under this Plan, and only the Holders of Claims in such Class are
entitled to vote on this Plan.
E. Cramdown of Class 6 Interests
The Class of Holders of Old Common Stock is not receiving or retaining any
property under this Plan, and is therefore deemed to have rejected this Plan.
Accordingly, the Debtor will request that the Bankruptcy Court confirm this Plan
under Section 1129(b)(2) of the Bankruptcy Code. The two principal shareholders
of the Debtor, Wiederhorn and Mendelsohn, own approximately 3,272,152 shares or
30%, and 1,299,831 shares or 11.99%, respectively, of the Old Common Stock and
support this Plan.
F. Elimination of Classes
Any Class of Claims that is not occupied as of the date of the
commencement of the Confirmation Hearing by an Allowed Claim or a Claim
temporarily Allowed under Rule 3018 of the Bankruptcy Rules shall be deemed
deleted from this Plan for all purposes.
G. Voting Instructions
Each Holder of an Allowed Claim in Class 4 is entitled to vote on this
Plan and will receive a Ballot. Only the Holders of Allowed Claims in Class 4
will receive Ballots for voting on this Plan. The Ballot will contain one box
indicating acceptance of this Plan and the other box indicating rejection of
this Plan. Holders of Allowed Claims who elect to vote on this Plan must mark
one or the other box and execute the Ballot, all pursuant to the instructions
contained thereon. Any
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executed Ballot that does not indicate acceptance or rejection of this Plan will
be deemed to be an acceptance of this Plan.
H. Voting Deadline and Extensions
THE VOTING DEADLINE IS MARCH 1, 1999, 5:00 P.M., NEW YORK CITY TIME.
Ballots must be received by the "INFORMATION AGENT" designated on the Ballots at
the address set forth on the applicable Ballot. To be counted for purposes of
voting on this Plan, all of the information requested on the applicable Ballot
must be provided. The Debtor reserves the right, in its sole discretion, to
extend the Voting Deadline, in which case the term "Voting Deadline" shall mean
the latest date on which a Ballot will be accepted. To extend the Voting
Deadline, the Debtor will make an announcement thereof (via a press release),
prior to 9:00 a.m., New York City Time, not later than the next Business Day
immediately after the previously scheduled Voting Deadline. Such announcement
may state that the Debtor is extending the Voting Deadline for a specified
period of time or on a daily basis until 5:00 p.m., New York City Time, on the
date on which sufficient acceptances required to obtain Confirmation of this
Plan have been received.
IV.
GENERAL PROVISIONS FOR TREATMENT OF CLAIMS AND INTERESTS
A. Unclassified Claims
1. Administrative Claims
(a) General
Subject to certain additional requirements for professionals and
certain other entities set forth below, Reorganized WFSG shall pay to each
Holder of an Allowed Administrative Claim, on account of its Administrative
Claim and in full satisfaction thereof, Cash equal to the amount of such
Allowed Administrative Claim on, or as soon as practicable after, the later
of the Effective Date and the day on which such Claim becomes an Allowed
Claim, unless (i) the Holder of such Allowed Administrative Claim and the
Debtor or Reorganized WFSG agree or shall have agreed to other treatment of
such Claim or (ii) an Order of the Bankruptcy Court provides for other
terms; provided, that, if incurred in the ordinary course of business or
otherwise assumed by the Debtor pursuant to this Plan (including
Administrative Claims of governmental units for taxes), an Allowed
Administrative Claim will be assumed on the Effective Date and paid,
performed or settled by Reorganized WFSG when due in accordance with the
terms and conditions of the particular agreement(s) governing the
obligation in the absence of the Reorganization Case.
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(b) Statutory Fees Under 28 U.S.C. ss. 1930
On or before the Effective Date, all fees payable pursuant to 28
U.S.C. ss. 1930, as determined by the Bankruptcy Court at the Confirmation
Hearing, shall be paid in Cash equal to the amount of such Administrative
Claim.
(c) Professional Fees
All professionals or other Persons requesting compensation or
reimbursement of expenses pursuant to Sections 327, 328, 330, 331, 503(b)
or 1103 of the Bankruptcy Code for services rendered to the Debtor or an
Official Committee on or before the Effective Date (including, without
limitation, any compensation requested by any professional or any other
Person for making a substantial contribution in the Reorganization Case)
shall File and serve on Reorganized WFSG and counsel for Reorganized WFSG,
an application for final allowance of compensation and reimbursement of
expenses no later than (i) sixty (60) days after the Effective Date or (ii)
such later date, if any, as the Bankruptcy Court orders upon application
made prior to the end of such 60-day period. Objections to applications of
professionals or other Persons for compensation or reimbursement of
expenses must be Filed and served on Reorganized WFSG, counsel for
Reorganized WFSG and the requesting professional or other Person on or
before the later of (x) ninety (90) days after the Effective Date and (y)
thirty (30) days after such date as the Bankruptcy Court establishes as the
deadline for Filing such applications.
(d) Indenture Trustee Fees
On or as soon as reasonably practicable after the Effective Date,
Reorganized WFSG shall pay the contractual Claims of the Indenture Trustee
for its fees and expenses including its reasonable attorneys' fees and
expenses, if any. Such payments to the Indenture Trustee shall be in full
satisfaction of any Indenture Trustee Charging Liens. Upon such payments,
any Indenture Trustee Charging Liens shall be released. To the extent,
after being furnished with normal supporting documents for such fees and
expenses, Reorganized WFSG disputes the reasonableness of any such fees and
expenses, Reorganized WFSG shall pay such fees and expenses as are not
disputed, and shall submit to the Indenture Trustee a written list of
specific fees and expenses viewed by Reorganized WFSG as not being
reasonable. To the extent that Reorganized WFSG and the Indenture Trustee
are unable to resolve the dispute, the dispute shall be resolved by the
Bankruptcy Court. The Indenture Trustee shall not attach or set off any of
its fees and expenses against distributions to Holders of Old Notes and
shall not otherwise withhold or delay any such distributions.
(e) Post-Petition Tax Claims
All requests for payment of Post-Petition Tax Claims must be
Filed on or before the later of (i) sixty (60) days following the Effective
Date and (ii) 120 days following the filing of the tax return for such
taxes for such tax year or period with the applicable
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governmental unit. Any Holder of any Post-Petition Tax Claim that is
required to File a request for payment of such taxesand that does not File
such a Claim by the applicable bar date shall be forever barred from
asserting any such Post-Petition Tax Claim against the Debtor, Reorganized
WFSG or any of their respective properties, whether any such Post-Petition
Tax Claim is deemed to arise prior to, on, or subsequent to, the Effective
Date.
(f) DIP Claims
All DIP Claims will be paid in full in accordance with the WREP
Financing Agreement and the Financing Orders. Pursuant to the WREP
Financing Agreement, Reorganized WFSG shall not be required to repay the
DIP Facility on the Effective Date and shall be entitled to assume and
repay all obligations under the DIP Facility following the Effective Date
on the terms set forth in the DIP Facility.
2. Priority Tax Claims
Unless otherwise agreed to by the Debtor or Reorganized WFSG and a
Holder of a Priority Tax Claim, each Holder of an Allowed Priority Tax Claim
shall receive, at the sole option of Reorganized WFSG (a) Cash equal to the
unpaid portion of such Allowed Priority Tax Claim on the later of the Effective
Date and the date on which such Claim becomes an Allowed Priority Tax Claim, or
as soon thereafter as is practicable or (b) equal quarterly Cash payments in an
aggregate amount equal to such Allowed Priority Tax Claim, together with
interest at a fixed annual rate to be determined by the Bankruptcy Court or
otherwise agreed to by Reorganized WFSG and such Holder, over a period through
the sixth anniversary of the date of assessment of such Allowed Priority Tax
Claim, or upon such other terms determined by the Bankruptcy Court to provide
the Holder of such Allowed Priority Tax Claim deferred Cash payments having a
value, as of the Effective Date, equal to such Allowed Priority Tax Claim. The
Holders of Allowed Priority Tax Claims are not entitled to vote on this Plan.
Pursuant to Section 1123(a)(1) of the Bankruptcy Code, Priority Tax Claims are
not designated a Class of Claims for purposes of this Plan.
B. Treatment of Claims Against and Interests in the Debtor
1. Class 1 (Lender Secured Claims)
Class l consists of all Allowed Lender Secured Claims against the
Debtor represented by, relating to, arising under or in connection with the
Repurchase Agreements. Each Allowed Lender Secured Claim against the Debtor will
be treated as follows (a) this Plan shall leave unaltered the legal, equitable
and contractual rights to which such Claim entitles the Holder; or (b) (i) the
Debtor shall cure any default with respect to such Claim that occurred before or
after the Filing Date (other than a default of a kind specified in Section
365(b)(2) of the Bankruptcy Code), (ii) the maturity of such Claim shall be
Reinstated as such maturity existed before any such default, (iii) the Holder of
such Claim shall be compensated for any damages incurred as a result of any
reasonable reliance by the Holder on any right to accelerate its Claim (as may
be determined by order of the Bankruptcy Court) and (iv) the legal, equitable
and contractual rights of such Holder will not
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otherwise be altered; or (c) such Claim shall receive such other treatment to
which the Holder shall consent. Class 1 Claims are Unimpaired and, accordingly,
will be deemed to have accepted this Plan.
2. Class 2 (Other Secured Claims)
Class 2 consists of all Allowed Secured Claims against the Debtor
other than Lender Secured Claims in Class 1. These primarily include Claims
represented by, relating to, arising under or in connection with capital leases
to which the Debtor is a party. Each Allowed Other Secured Claim against the
Debtor will be treated as follows (a) this Plan shall leave unaltered the legal,
equitable and contractual rights to which such Claim entitles the Holder; or (b)
(i) the Debtor shall cure any default with respect to such Claim that occurred
before or after the Filing Date (other than a default of a kind specified in
Section 365(b)(2) of the Bankruptcy Code), (ii) the maturity of such Claim shall
be Reinstated as such maturity existed before any such default, (iii) the Holder
of such Claim shall be compensated for any damages incurred as a result of any
reasonable reliance by the Holder on any right to accelerate its Claim (as may
be determined by order of the Bankruptcy Court) and (iv) the legal, equitable
and contractual rights of such Holder will not otherwise be altered; or (c) such
Claim shall receive such other treatment to which the Holder shall consent.
Class 2 Claims are Unimpaired and, accordingly, will be deemed to have accepted
this Plan.
3. Class 3 (Priority Claims)
Class 3 consists of the Allowed Priority Claims against the Debtor.
Each Holder of an Allowed Class 3 Claim shall be entitled to receive (a) Cash
equal to the amount of such Claim, unless the Holder of such Claim and
Reorganized WFSG agree to a different treatment, on the latest of (i) the
Effective Date or as soon as practicable thereafter, (ii) the date such Claim
becomes an Allowed Priority Claim and (iii) the date that such Claim would be
paid in accordance with any terms and conditions of any agreements or
understandings relating thereto between the Debtor and the Holder of such Claim,
and/or (b) such other treatment, as determined by the Bankruptcy Court, required
to render such Claim Unimpaired. Class 3 Claims are Unimpaired and, accordingly,
will be deemed to have accepted this Plan.
4. Class 4 (Noteholder Claims)
Class 4 consists of the Allowed Unsecured Claims against the Debtor of
Holders of Old Notes (including all Claims and causes of action arising
therefrom or in connection therewith). As of the Effective Date, the Old Notes,
the Old Indentures and any other Instruments relating thereto shall be
terminated, canceled, annulled and extinguished. The Claim of each Holder of
Notes or Series B Notes on the Distribution Record Date shall be Allowed in the
aggregate amount of unpaid principal and accrued interest (through the Filing
Date) of such Holder's Old Note or Old Series B Note. On the Effective Date or
as soon as practicable thereafter and assuming that WREP funds 100% of the DIP
Facility, each Holder of an Allowed Class 4 Claim will receive on account of
such Allowed Claim a Pro Rata portion of --- million shares of New Common Stock,
equal to 100% of the New Common Stock to be issued by Reorganized WFSG on the
Effective Date (i.e.,
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- ---- shares of New Common Stock for each $1,000 of principal amount of Old
Notes) less the number of shares (not in excess of 0.5% of such New Common
Stock) reallocated to Holders of Old Common Stock pursuant to the Market
Liquidity Reallocation. To the extent that WREP does not fund the full amount of
the DIP Facility, only a percentage of the Compromised WREIT/WREP Claim (in
dollar terms) equal to the percent funded will be treated as entitled to receive
the New 6.00% Notes and the remaining percentage (in dollar terms) will be
treated the same as Holders of an Allowed Class 4 claim. Assuming that WREP does
not fund any portion of the DIP Facility, the shares of New Common Stock
distributed to each Holder will be reduced, but in no event will the shares of
New Common Stock be less than ------% of the New Common Stock to be outstanding
on the Effective Date (i.e. ------- shares of New Common Stocks for each $1,000
of principal amount of Old Notes) less the number of shares reallocated pursuant
to the Market Liquidity Reallocation. As a result, the percentage ownership of
Holders of Allowed Class 4 Claims will vary according to the percentage of the
DIP Facility funded. The New Common Stock issued pursuant to this Section
IV(B)(4) will be subject to dilution pursuant to the Employment Agreements, any
management compensation and stock option plan and upon any conversion of the
Class B Common Stock of New Servicer pursuant to the WCC Restructuring. Class 4
Claims are Impaired and, accordingly, Holders of Allowed Class 4 Claims are
entitled to vote on this Plan.
5. Class 5 (General Unsecured Claims)
Class 5 consists of all Allowed Unsecured Claims against the Debtor
other than the Unsecured Claims in Class 4 and includes, among others, the
Compromised MLMC Claim, the Compromised WREIT/WREP Claim, the Guaranty Claims,
the Trade Claims and the Intercompany Claims. The legal, equitable and
contractual rights of each Holder of an Allowed Class 5 Claim will not be
altered by this Plan. All Allowed Class 5 Claims shall be paid in full in Cash
(with interest to the extent required by order of the Bankruptcy Court) on the
latest of (a) the Effective Date, (b) the date a Class 5 Claim becomes an
Allowed Claim, (c) the date an Allowed Class 5 Claim becomes due and payable in
the ordinary course of the Debtor's business consistent with the Debtor's
ordinary payment practices or pursuant to any agreement between the Debtor and
the Holder of an Allowed Class 5 Claim or (d) on such other date as may be
agreed to by the Debtor and the Holder of such Allowed Class 5 Claim. Class 5
Claims are Unimpaired and, accordingly, will be deemed to have accepted this
Plan.
6. Class 6 (Interests of Holders of Old Common Stock)
Class 6 consists of the Allowed Interests of Holders of Old Common
Stock. As of the Effective Date, the Old Common Stock shall be terminated,
canceled, annulled and extinguished and the Holders of Old Common Stock will
neither receive nor retain any property under the Plan. Pursuant to the Market
Liquidity Reallocation, however, such Holders will receive Pro Rata a
reallocated amount of New Common Stock, not to exceed 0.5% of the New Common
Stock outstanding on the Effective Date, which would have otherwise been
distributed to the Holders of the Old Notes who accept the Plan. The maximum
amount of New Common Stock to be reallocated pursuant to the Market Liquidity
Reallocation described above will be reduced if WREP does not fund the full
amount of the DIP Facility. The New Common Stock issued pursuant to this Section
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IV(B)(6) is subject to dilution pursuant to the Employment Agreements, any stock
option plan ofthe Company and the conversion of the Class B Common Stock.
Class 6 Interests are not entitled to vote on this Plan.
C. Confirmability of Plan and Cramdown
In the event that Class 4 votes to accept this Plan the Debtor will
request that the Bankruptcy Court confirm this Plan under the "cramdown"
provisions of Section 1129(b) of the Bankruptcy Code as to the Class of Interest
in Claim 6.
D. Modification of Treatment of Claims
The Debtor reserves for itself and Reorganized WFSG the right to modify
the treatment of any Allowed Claim or Interest in any manner adverse only to the
Holder of such Claim or Interest at any time after the Effective Date upon the
consent of the Holder of such Claim or Interest whose Allowed Claim or Interest,
as applicable, is being adversely affected.
V.
MEANS OF EXECUTION AND IMPLEMENTATION
In addition to the provisions set forth elsewhere in this Plan regarding
the means of execution, the following shall constitute the means of execution of
this Plan.
A. Corporate Structure
On the Effective Date, WFSG will become Reorganized WFSG.
B. Corporate Action
1. Cancellation of Old Securities and Instruments
Upon the Effective Date, all securities, Instruments and agreements
governing any Claims or Interests Impaired hereby including, without limitation
(a) the Old Notes, (b) the Old Indentures and (c) the Old Common Stock shall be
deemed terminated, canceled, annulled and extinguished. Except as otherwise
provided herein, the Debtor, on the one hand, and the Indenture Trustee, on the
other hand, shall be released from any and all obligations relating to or
arising under the Old Notes and the Old Indentures, except with respect to the
payments required to be made to the Indenture Trustee as provided herein. The
Debtor shall also be released from any and all obligations relating to or
arising under the Old Common Stock.
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2. Issuance of New Common Stock
Upon the Effective Date, or as soon as practicable thereafter, the
Disbursing Agent shall, in accordance with this Plan, issue the New Common Stock
less a number of shares of New Common Stock equal to the Market Liquidity
Reallocation Amount (as defined in 3 below) to the Holders of the Allowed Class
4 Claims. On the Effective Date (i) all securities, Instruments and agreements
entered into pursuant to this Plan including, without limitation, the New Common
Stock, shall become effective and binding in accordance with their respective
terms and conditions upon the parties thereto without further act or action
under applicable law, regulation, order, rule or otherwise; and (ii) the
Disbursing Agent shall issue the shares of New Common Stock reallocated to
Holders of Interests in Class 6 pursuant to the Market Liquidity Reallocation.
3. Market Liquidity Reallocation
In order to foster the development of and to improve conditions in
the trading market for New Common Stock following the Effective Date, and for
the benefit of the Holders of Allowed Claims in Class 4, Reorganized WFSG and/or
the Disbursing Agent shall reallocate and distribute Pro Rata among all Holders
of Allowed Interests in Class 6 an amount of shares of New Common Stock equal to
0.5% (or 1/200th) of the shares of New Common Stock otherwise to be distributed
to Holders of Allowed Claims in Class 4 who have accepted the Plan (the "Market
Liquidity Reallocation Amount"). Acceptance of the Plan by such Holders shall be
deemed an irrevocable direction to Reorganized WFSG and/or the Disbursing Agent
to effectuate the Market Liquidity Reallocation.
4. Certificate of Incorporation and Bylaws for Reorganized WFSG
On the Effective Date, Reorganized WFSG shall be deemed to have
adopted the Reorganized WFSG Certificate of Incorporation and the Reorganized
WFSG Bylaws pursuant to applicable non-bankruptcy law and Section 1123(a)(5)(I)
of the Bankruptcy Code. The Reorganized WFSG Certificate of Incorporation will,
among other provisions (a) authorize the issuance of the New Common Stock, (b)
increase the number of shares authorized to be issued and (c) prohibit the
issuance of nonvoting equity securities to the extent required by Section
1123(a)(6) of the Bankruptcy Code. The Reorganized WFSG Certificate of
Incorporation and the Reorganized WFSG Bylaws each of which shall be Filed with
the Bankruptcy Court prior to the Confirmation Hearing will become effective
upon the later of (i) the occurrence of the Effective Date and (ii) the filing
with the Delaware Secretary of State of the Reorganized WFSG Certificate of
Incorporation.
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5. Post-Reorganization Board of Directors and Officers
As of the Effective Date, the operation of Reorganized WFSG shall be the
responsibility of the Post-Reorganization Board, in accordance with applicable
law. The initial Post-Reorganization Board will consist of seven members. Two of
the seven members will be Wiederhorn and Mendelsohn, and the remaining five will
be named by the Unofficial Noteholders' Committee. In addition, at the option of
the Unofficial Noteholders' Committee, two additional board seats may be created
and filled by current, independent directors of the Debtor. All members of the
Post-Reorganization Board shall be deemed elected, and such elections shall be
deemed effective as of the Effective Date, without any requirement of further
action by stockholders of the Debtor or Reorganized WFSG. The names of the seven
members of the initial Post-Reorganization Board and the initial officers of
Reorganized WFSG shall be Filed with the Bankruptcy Court at or prior to the
Confirmation Hearing in accordance with Section 1129(a)(5) of the Bankruptcy
Code.
C. WCC Restructuring
On or prior to the Effective Date, the WCC Restructuring shall have been
implemented.
D. Compromised WREIT/WREP Claim; Compromised MLMC Claim
On or prior to the Effective Date, the Debtor shall have implemented the
transactions necessary to effectuate the settlement and compromise of the
Compromised WREIT/WREP Claim and the Compromised MLMC Claim.
E. DIP Facility
On or prior to the Effective Date, the DIP Facility shall have been funded
in whole or in part in accordance with the terms of the WREP Financing Agreement
and the Financing Orders. Subject to the Bankruptcy Court's approval, a portion
of the DIP Facility shall have been utilized to repay the Interim Facility in
full.
F. Employment Agreements
On or prior to the Effective Date, the Employment Agreements shall have
been executed and shall become effective in accordance with their terms.
G. Management Compensation and Stock Option Plan
Prior to or following the Effective Date, Reorganized WFSG may adopt, with
the consent of the Holders of New Common Stock, a management compensation and
stock option plan.
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H. Executory Contracts and Unexpired Leases
Except as otherwise provided herein, or in any contract, Instrument,
release, indenture or other agreement or document entered into in connection
with this Plan, on the Effective Date, pursuant to Section 365 of the Bankruptcy
Code, the Debtor will assume each executory contract and unexpired lease entered
into by the Debtor prior to the Filing Date that has not previously (a) expired
or terminated pursuant to its own terms or (b) been assumed or rejected pursuant
to Section 365 of the Bankruptcy Code. The Confirmation Order will constitute an
Order of the Bankruptcy Court approving the assumptions described in this
Section V(F), pursuant to Section 365 of the Bankruptcy Code, as of the
Effective Date.
Any monetary amounts by which each executory contract and unexpired lease
to be assumed pursuant to this Plan is in default will be satisfied, pursuant to
Section 365(b)(1) of the Bankruptcy Code, at the option of the Debtor or
Reorganized WFSG (a) by payment of the default amount in Cash on the Effective
Date or as soon as practicable thereafter or (b) on such other terms as are
agreed to by the parties to such executory contract or unexpired lease. If there
is a dispute regarding (i) the amount of any cure payments, (ii) the ability of
Reorganized WFSG to provide "adequate assurance of future performance" (within
the meaning of Section 365 of the Bankruptcy Code) under the contract or lease
to be assumed or (iii) any other matter pertaining to assumption, the cure
payments required by Section 365(b)(1) of the Bankruptcy Code will be made
following the entry of a Final Order resolving the dispute and approving the
assumption.
I. Section 1145 Exemption
The offer of New Common Stock under this Plan in exchange for the
cancellation of certain existing securities previously issued by the Debtor has
not been registered under the securities act or similar state securities or
"blue sky" laws. The offering of the New Common Stock shall be deemed to be made
in reliance on and in accordance with Section 1145(a) of the Bankruptcy Code.
J. Section 1146 Exemption
In accordance with Section 1146(c) of the Bankruptcy Code (a) the
issuance, transfer, or exchange of any security under this Plan or the making or
delivery of any Instrument of transfer pursuant to, in implementation of, or as
contemplated by this Plan, including any merger agreements or agreements of
consolidation, deeds, bills of sale, or assignments executed in connection with
any of the transactions contemplated under this Plan, or the revesting,
transfer, or sale of any real or personal property of the Debtor pursuant to, in
implementation of, or as contemplated by this Plan, (b) the making, delivery,
creation, assignment, amendment or recording of any note or other obligation for
the payment of money or any mortgage, deed of trust, or other security interest
under, in furtherance of, or in connection with this Plan, the issuance,
renewal, modification or securing of indebtedness by such means and (c) the
making, delivery or recording of any deed or other Instrument of transfer under,
in furtherance of, or in connection with, this Plan including, without
limitation, the Confirmation Order, shall not be subject to any document
recording tax, stamp tax, conveyance fee or other similar fee, tax or
governmental assessment. Consistent with the foregoing,
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each clerk, recorder or similar official for any county, city or governmental
unit in which any Instrument hereunder is to be recorded shall, pursuant to the
Confirmation Order, be ordered and directed to accept such Instrument, without
requiring the payment of any such fee or tax.
K. Implementation and Carrying Out the Terms of This Plan
The Debtor and Reorganized WFSG are hereby authorized and directed to take
all necessary steps, execute any documents and perform all necessary acts, to
consummate the terms and conditions of this Plan on the Effective Date. On or
before the Effective Date, the Debtor may file with the Bankruptcy Court such
agreements and other documents as may be necessary or appropriate to effectuate
or further evidence the terms and conditions of this Plan and the other
agreements referred to herein. Pursuant to Section 303 of the Delaware General
Corporation Law, all terms of, and actions contemplated by, this Plan may be put
into effect and carried out, without further action by the directors or
shareholders of the Debtor or Reorganized WFSG, who shall be deemed to have
unanimously approved this Plan, all Exhibits hereto and all transactions
provided for hereunder or contemplated herein.
L. Payment of Statutory Fees
All fees payable pursuant to 28 U.S.C. ss. 1930 as determined by the
Bankruptcy Court at the Confirmation Hearing shall be paid by the Debtor on or
before the Effective Date.
M. Payment of Fees and Expenses of Unofficial Noteholders' Committee's
Counsel
Subject to the approval of the Bankruptcy Court upon any dispute by
Reorganized WFSG as set forth below, and whether or not the U.S. Trustee
appoints an Official Committee, the reasonable fees and expenses of counsel and
financial advisors to the Unofficial Noteholders' Committee incurred through and
including the Effective Date will be paid on or as soon as practicable after the
Effective Date. To the extent, after being furnished with normal supporting
documents for such fees and expenses, Reorganized WFSG disputes the
reasonableness of any such fees and expenses, Reorganized WFSG shall pay such
fees and expenses as are not disputed, and shall submit to the Unofficial
Noteholders' Committee a written list of specific fees and expenses viewed by
Reorganized WFSG as not being reasonable. To the extent that Reorganized WFSG
and the Unofficial Noteholders' Committee are unable to resolve the dispute, the
dispute shall be resolved by the Bankruptcy Court.
N. Term of Injunctions or Stays
Unless provided in the Confirmation Order or otherwise, all injunctions or
stays imposed in or related to the Reorganization Case pursuant to Sections 105
and 362 of the Bankruptcy Code or otherwise in effect on the Confirmation Date
shall remain in full force and effect until the Effective Date.
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O. No Interest
Except as expressly provided herein, no Holder of an Allowed Claim or
Allowed Interest shall receive interest on the distribution to which such Holder
is entitled hereunder, regardless of whether such distribution is made on the
Effective Date or thereafter.
P. Retiree Benefits
On and after the Effective Date, to the extent required by Section
1129(a)(13) of the Bankruptcy Code, Reorganized WFSG shall continue to pay all
retiree benefits, if any (as the term "retiree benefits" is defined in Section
1114(a) of the Bankruptcy Code), maintained or established by the Debtor prior
to the Confirmation Date.
VI.
DISTRIBUTIONS, DISPUTED CLAIMS AND SETOFF
A. Disbursing Agent
Reorganized WFSG or such Person(s) as the Debtor may employ in its sole
discretion, will act as Disbursing Agent under this Plan. The Disbursing Agent
shall make all distributions of Cash and New Common Stock required to be
distributed under the applicable provisions of this Plan. The Disbursing Agent
may employ or contract with other entities to assist in or make the
distributions required by this Plan. The Disbursing Agent will serve without
bond, and each Disbursing Agent, other than Reorganized WFSG, will receive,
without further Bankruptcy Court approval, reasonable compensation for
distribution services rendered pursuant to this Plan and reimbursement of
reasonable out-of-pocket expenses incurred in connection with such services from
Reorganized WFSG on terms acceptable to Reorganized WFSG.
B. Distribution Record Date
As of the close of business on the Distribution Record Date, the transfer
registers for the Old Notes and the Old Common Stock maintained by the Debtor,
the Indenture Trustee or their respective agents, will be closed. The Debtor,
Disbursing Agent, the Indenture Trustee and their respective agents will have no
obligation to recognize the transfer of any of the Old Notes or the Old Common
Stock occurring after the Distribution Record Date, and will be entitled for all
purposes relating to this Plan to recognize and deal only with those Holders of
record as of the close of business on the Distribution Record Date.
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C. Timing of Disbursement of Funds
Except as otherwise provided in this Plan with respect to any particular
Class, Claim or Interest, property to be distributed hereunder or under the
Market Liquidity Reallocation to Holders of Allowed Claims and Allowed Interests
in an Impaired Class (a) shall be distributed on the Effective Date or as soon
as practicable thereafter to each Holder of an Allowed Claim or an Allowed
Interest in that Class that is an Allowed Claim or an Allowed Interest as of the
Effective Date and (b) shall be distributed to each Holder of an Allowed Claim
or an Allowed Interest of that Class that becomes an Allowed Claim or Allowed
Interest after the Effective Date, as soon as practicable after the Order of the
Bankruptcy Court allowing such Claim or Interest becomes a Final Order. Except
as otherwise provided in this Plan with respect to any particular Class or
Claim, property to be distributed under this Plan on account of Claims in a
Class that are not Impaired or on account of an Administrative Claim shall be
distributed on the later of (i) the Effective Date or as soon as practicable
thereafter, or if any Claim is not an Allowed Claim as of the Effective Date, on
the date the Order allowing such Claim becomes a Final Order or as soon as
practicable thereafter and (ii) the date on which the distribution to the Holder
of the Claim would have been due and payable in the ordinary course of business
or under the terms governing payment of the Claim.
D. Methods of Distributions; Delivery
1. Cash Payments
Any Cash payments made pursuant to this Plan will be in U.S. dollars.
Cash payments made pursuant to this Plan in the form of checks issued by
Reorganized WFSG shall be null and void if not cashed within 90 days of the date
of the issuance thereof.
2. Issuance and Transfers of New Common Stock
Notwithstanding any other provision of this Plan, only whole numbers
of shares of New Common Stock will be issued or transferred, as the case may be,
pursuant to this Plan. When any distribution on account of an Allowed Claim or
Allowed Interest pursuant to this Plan would otherwise result in the issuance or
transfer of a number of shares of New Common Stock that is not a whole number,
the actual distribution of such New Common Stock will be rounded to the next
higher or lower whole number as follows (i) fractions of 1/2 or greater will be
rounded to the next higher whole number and (ii) fractions of less than 1/2 will
be rounded to the next lower whole number. The total number of shares of New
Common Stock to be distributed to a Class of Claims or Interests will be
adjusted as necessary to account for the rounding provided for in this Section.
No consideration will be provided for fractional shares that are rounded down.
3. Delivery of Distributions
Subject to Bankruptcy Rule 9010, all distributions to any Holder of an
Allowed Claim under the Plan or an Allowed Interest under the Market Liquidity
Reallocation shall be made to the address of such Holder on the books and
records of the Debtor or its agents, unless the Debtor or
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Reorganized WFSG, as applicable, has been notified in writing of a change of
address. If the distribution to any Holder of an Allowed Claim or Allowed
Interest is returned to the Disbursing Agent as undeliverable, the Disbursing
Agent shall use reasonable efforts to determine the current address of such
Holder, but no distribution shall be made to such Holder unless and until the
Disbursing Agent has determined or is notified in writing of such Holder's then
current address, at which time such distribution shall be made to such Holder
without interest. Undeliverable distributions shall remain in the possession of
Reorganized WFSG or the Disbursing Agent pursuant to Section VI(F) of this Plan
until such time as a distribution becomes deliverable. Any interest paid, and
any other amounts earned, with respect to such undeliverable Cash pending its
distribution in accordance with this Plan shall be the property of Reorganized
WFSG.
Pending the distribution of any New Common Stock pursuant to this
Plan, Reorganized WFSG or the Disbursing Agent shall cause the New Common Stock
held by it in its capacity as Disbursing Agent to be (a) represented in person
or by proxy at each meeting of the stockholders of Reorganized WFSG and (b)
voted with respect to any matter of Reorganized WFSG proportionally with the
votes cast by other stockholders of Reorganized WFSG.
4. Withholding Taxes
Reorganized WFSG and/or the Disbursing Agent shall be entitled to
deduct any federal, state or local withholding taxes from any payments made with
respect to Allowed Claims or Allowed Interests, as appropriate.
E. Surrender of Canceled Instruments or Securities
(a) As a condition precedent to receiving any distribution pursuant to this
Plan on account of an Allowed Claim evidenced by the Old Notes or under the
Market Liquidity Reallocation on account of an Allowed Interest evidenced by the
Old Common Stock canceled pursuant to this Plan (the "CANCELED INSTRUMENTS"),
the Holder of such Allowed Claim or Allowed Interest will tender such Canceled
Instruments evidencing such Allowed Claim or Allowed Interest to the Disbursing
Agent. Any Cash or New Common Stock to be distributed pursuant to this Plan or
the Market Liquidity Reallocation on account of any such Allowed Claim or
Allowed Interest, respectively, will, pending such surrender, be treated as an
undeliverable distribution pursuant to Section VI(F) of this Plan.
(b) Except as provided in Section VI(E)(c) hereof, each Holder of an
Allowed Claim or Allowed Interest will tender such Canceled Instrument to the
Disbursing Agent, together with a letter of transmittal to be provided to such
Holders by the Disbursing Agent, as promptly as practicable on or following the
Effective Date. The letter of transmittal will include, among other provisions,
customary provisions with respect to the authority of the Holder of the Canceled
Instrument to act and the authenticity of any signatures required thereon. All
surrendered Canceled Instruments will be marked as canceled by the Disbursing
Agent, and delivered to Reorganized WFSG.
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(c) In addition to any requirements under applicable law, any Holder of an
Allowed Claim or Allowed Interest evidenced by Old Notes, Old Common Stock or
other Instrument that has been lost, stolen, mutilated or destroyed will, in
lieu of surrendering such Instrument, deliver to the Disbursing Agent (i)
evidence satisfactory to the Disbursing Agent of such loss, theft, mutilation or
destruction and (ii) such security or indemnity as may be required by the
Disbursing Agent to hold Reorganized WFSG and the Disbursing Agent harmless from
any damages, liabilities or costs incurred in treating such individual as a
Holder of a Claim or Interest. Upon compliance with this Section VI(E)(c) by a
Holder of a Claim or Interest evidenced by such Instrument, such Holder will for
all purposes under this Plan be deemed to have surrendered such Instrument.
F. Unclaimed Property
Any Person who fails to claim any Cash or New Common Stock to be
distributed hereunder or under the Market Liquidity Reallocation within one year
from the Effective Date or from such other date as a Claim or Interest becomes
an Allowed Claim or an Allowed Interest shall forfeit all rights to any such
distributions under this Plan. Upon forfeiture, such Cash (including interest
thereon) and New Common Stock shall be the property of Reorganized WFSG and all
such New Common Stock shall be canceled. Persons who fail to claim Cash or New
Common Stock shall forfeit their rights thereto and shall have no Claim
whatsoever against the Debtor, Reorganized WFSG or any Holder of an Allowed
Claim or Allowed Interest to whom distributions are made.
G. Procedures for Treating Disputed Claims
1. Disputed Claims
Holders of Claims and Interests hereunder need not file proofs of
Claims or Interests in order to receive the treatment provided in this Plan and
will be subject to Bankruptcy Court process only to the extent provided in this
Plan or by order of the Bankruptcy Court. The Debtor does not intend to ask the
Bankruptcy Court to set any deadlines for the filing proofs of Claims or
Interests. On and after the Effective Date, except as otherwise provided herein,
all Claims shall be paid in the ordinary course of business of Reorganized WFSG.
If the Debtor disputes any Claim or Interest, such dispute shall be determined,
resolved or adjudicated, as the case may be, under applicable law, and such
Claim or Interest shall survive the Effective Date to the extent that such Claim
or Interest has not been Allowed and has not received the treatment afforded the
Class of Claims or Interests in which such Claim or Interest is classified under
this Plan on or before the Effective Date. Among other things, the Debtor may
elect, at its sole option, to object or seek estimation under Section 502 of the
Bankruptcy Code with respect to any proof of Claim or Interest filed by or on
behalf of a Holder of a Claim or Interest.
2. Objections to Claims and Interests
Except insofar as a Claim or Interest is Allowed hereunder,
Reorganized WFSG shall be entitled and reserve the right to object to Claims and
Interests. Except as otherwise provided herein or as otherwise ordered by the
Bankruptcy Court, objections to any Claim or Interest
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including, without limitation, Administrative Claims, shall be Filed and served
upon the Holder of such Claim or Interest no later than the later of (a) 60 days
after the Effective Date and (b) 60 days after a proof of Claim or Interest or
request for payment of such Claim or Interest is Filed, unless such period is
extended by the Bankruptcy Court, which extension may be granted on an ex parte
basis without notice or hearing. After the Confirmation Date, only the Debtor
and Reorganized WFSG shall have the authority to File, settle, compromise,
withdraw or litigate to judgment objections to Claims and Interests. From and
after the Confirmation Date, the Debtor and Reorganized WFSG may settle or
compromise any Disputed Claim or Disputed Interest without approval of the
Bankruptcy Court. Except as (i) specified otherwise herein or (ii) ordered by
the Bankruptcy Court, all Disputed Claims or Disputed Interests shall be
resolved by the Bankruptcy Court.
3. No Distributions Pending Allowance
Notwithstanding any other provisions of this Plan, no payments or
distributions will be made on account of a Disputed Claim or a Disputed Interest
until such Claim or Interest becomes an Allowed Claim or Allowed Interest.
H. Setoffs
Except with respect to Claims Allowed pursuant to this Plan or Claims of
the Debtor or Reorganized WFSG released pursuant to this Plan or any contract,
Instrument, release, indenture or other agreement or document created in
connection with this Plan, the Debtor or Reorganized WFSG may, pursuant to
Section 553 of the Bankruptcy Code or applicable nonbankruptcy law, set off
against any Allowed Claim and the distributions to be made pursuant to this Plan
on account of such Claim (before any distribution is made on account of such
Claim), the claims, rights and causes of action of any nature that the Debtor or
Reorganized WFSG may hold against the Holder of such Allowed Claim; provided,
however, that neither the failure to effect such a setoff nor the allowance of
any Claim hereunder shall constitute a waiver or release by the Debtor or
Reorganized WFSG of any such claims, rights and causes of action that the Debtor
or Reorganized WFSG may possess against such Holder.
VII.
CONFIRMATION AND EFFECTIVE DATE CONDITIONS
A. Conditions to Confirmation
Confirmation of this Plan cannot occur until the Bankruptcy Court finds
that all of the substantive confirmation requirements under the Bankruptcy Code
have been satisfied pursuant to Section 1129 of the Bankruptcy Code. In
addition, the Bankruptcy Court will not enter the Confirmation Order unless the
Confirmation Order is acceptable in form and substance to the Debtor, and the
Confirmation Order expressly authorizes and directs the Debtor and Reorganized
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WFSG to perform those actions specified herein. Finally, it shall be a condition
to Confirmation that each of the events and actions required by this Plan to
occur or to be taken prior to Confirmation shall have occurred or been taken, or
the Debtor, or the party whose obligations are conditioned upon such occurrences
or actions, as applicable, shall have waived such occurrences or actions and the
Bankruptcy Court shall confirm this Plan without such occurrence or action.
B. Conditions to Effective Date
The Effective Date will not occur and this Plan will not be consummated
unless and until each of the following conditions has been satisfied or waived
by the Debtor with, where applicable, the consent of the Unofficial Noteholders'
Committee:
1. The Confirmation Date shall have occurred and the Confirmation Order
shall have become a Final Order.
2. The Confirmation Order authorizes and directs that WFSG or Reorganized
WFSG take all actions necessary or appropriate to enter into, implement
and consummate the contracts, Instruments and other agreements or
documents created in connection with this Plan, including those actions
set forth in Section V of this Plan.
3. The WCC Restructuring shall have been effectuated including, without
limitation, the release of the CCI Guaranty Claims.
4. The Employment Agreements between Reorganized WFSG and Wiederhorn and
Mendelsohn shall have been executed and delivered prior to the Filing Date
and remain in full force and effect as of the Effective Date.
5. All other actions and documents necessary to implement the provisions
of this Plan shall have been effected or executed or, if waivable, waived
by the Person or Persons entitled to the benefit thereof.
C. Waiver of Conditions to Confirmation and Effective Date
Except for condition 1 above, each of the other conditions to Confirmation
and the Effective Date may be waived in whole or in part by the Debtor at any
time, without notice or an Order of the Bankruptcy Court. The failure to satisfy
or to waive any condition may be asserted by the Debtor regardless of the
circumstances giving rise to the failure of such condition to be satisfied
(including any action or inaction by the Debtor). The failure of the Debtor to
exercise any of the foregoing rights will not be deemed a waiver of any other
rights and each such right will be deemed an ongoing right that may be asserted
at any time.
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VIII.
EFFECTS OF PLAN CONFIRMATION
A. Discharge of Debtor and Injunction
Except as otherwise provided in this Plan or the Confirmation Order (1) on
the Effective Date, the Debtor shall be deemed discharged and released to the
fullest extent permitted by Section 1141 of the Bankruptcy Code from all Claims
and Interests including, but not limited to, demands, liabilities, Claims and
Interests that arose before the Effective Date (and specifically all Claims
arising out of, related to or in connection with the CCI Guaranty, the WCC
Restructuring or any lending by CCI to WCC, Wiederhorn or Mendelsohn, the
Compromised WREIT/WREP Claim and the Compromised MLMC Claim), Claims and all
debts of the kind specified in Sections 502(g), 502(h) or 502(i) of the
Bankruptcy Code, whether or not (a) a proof of Claim or proof of Interest based
on such debt or Interest is Filed or deemed Filed pursuant to Section 501 of the
Bankruptcy Code, (b) a Claim or Interest based on such debt or Interest is
Allowed pursuant to Section 502 of the Bankruptcy Code or (c) the Holder of a
Claim or Interest based on such debt or Interest has accepted this Plan and (2)
all Persons shall be precluded from asserting against the Debtor and Reorganized
WFSG, their respective successors, or their respective assets or properties any
other or further Claims or Interests based upon any act or omission,
transaction, or other activity of any kind or nature that occurred prior to the
Effective Date. Except as otherwise provided in this Plan or the Confirmation
Order, the Confirmation Order shall act as a discharge of any and all Claims
against and all debts and liabilities of the Debtor, as provided in Sections 524
and 1141 of the Bankruptcy Code, and such discharge shall void any judgment
against the Debtor at any time obtained to the extent that it relates to a Claim
or Interest discharged.
Except as otherwise provided in this Plan or the Confirmation Order, on
and after the Effective Date, all Persons who have held, currently hold or may
hold a debt, Claim or Interest discharged pursuant to the terms of this Plan are
permanently enjoined from taking any of the following actions on account of any
such discharged debt, Claim or Interest (i) commencing or continuing in any
manner any action or other proceeding against the Debtor, Reorganized WFSG or
their respective successors or their respective properties, (ii) enforcing,
attaching, collecting or recovering in any manner any judgment, award, decree or
order against the Debtor, Reorganized WFSG or their respective successors or
their respective properties, (iii) creating, perfecting or enforcing any lien or
encumbrance against the Debtor, Reorganized WFSG or their respective successors
or their respective properties and (iv) commencing or continuing any action, in
any manner, in any place that does not comply with or is inconsistent with the
provisions of this Plan or the Confirmation Order. Any Person injured by any
willful violation of such injunction shall recover actual damages, including
costs and attorneys' fees, and, in appropriate circumstances, may recover
punitive damages, from the willful violator.
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B. Limitation of Liability
None of the Debtor, Reorganized WFSG, the members of the Unofficial
Noteholders' Committee, the Indenture Trustee or any of their respective
employees, officers, directors, agents or representatives, or any professional
persons employed by any of them, shall have any responsibility, or have or incur
any liability, to any Person whatsoever (1) for any matter expressly approved or
directed by the Confirmation Order or (2) under any theory of liability (except
for any claim based upon willful misconduct or gross negligence) for any act
taken or omission made in good faith directly related to formulating,
implementing, confirming or consummating this Plan, the Disclosure Statement or
any contract, Instrument, release or other agreement or document created in
connection with this Plan; provided, that nothing in this Section VIII(B) shall
limit the liability of any Person for breach of any express obligation it has
under the terms of this Plan or under any agreement or other document entered
into by such Person either post-Filing Date or in accordance with the terms of
this Plan (except to then extent expressly provided in the Confirmation Order)
or for any breach of a duty of care owed to any other Person occurring after the
Effective Date.
C. Releases
On the Effective Date, the Debtor shall release unconditionally, and
hereby is deemed to release unconditionally (1) the Debtor's then current and
former officers, directors, shareholders and employees (solely in their capacity
as such) (collectively, the "DEBTOR RELEASEES"), (2) the Unofficial Noteholders'
Committee and, solely in their capacity as members or representatives of the
Unofficial Noteholders' Committee or of such members, each member, consultant,
attorney, accountant or other representative of the Unofficial Noteholders'
Committee or any member thereof and (3) the Indenture Trustee, in its respective
capacity as Indenture Trustee (collectively the parties in (2) and (3) above
being referred to as the "ADDITIONAL RELEASEES") from any and all claims,
obligations, suits, judgments, damages, rights, causes of action and liabilities
whatsoever, whether known or unknown, foreseen or unforeseen, existing or
hereafter arising, in law, equity or otherwise, based in whole or in part upon
any act or omission, transaction, event or other occurrence taking place on or
prior to the Effective Date in any way relating to the Reorganization Case, this
Plan, the Notes or the Disclosure Statement.
On the Effective Date (i) each Holder of a Claim or Interest shall be
deemed to have unconditionally released the Debtor, the Debtor Releasees, the
Debtor's advisors and professionals and the Additional Releasees from any and
all claims, obligations, suits, judgments, damages, rights, causes of action and
liabilities whatsoever which any such Holder may be entitled to assert, whether
known or unknown, foreseen or unforeseen, existing or hereafter arising, in law,
equity or otherwise, based in whole or in part upon any act or omission,
transaction, event or other occurrence taking place on or prior to the Effective
Date in any way relating to the Debtor, the Reorganization Case, this Plan or
the Disclosure Statement and (ii) the Debtor and the Debtor Releasees, on the
one hand, and the Additional Releasees, on the other hand, shall, or shall be
deemed to, unconditionally mutually release each other, from any and all claims,
obligations, suits, judgments, damages, rights, causes of action and liabilities
whatsoever which any such Holder may be entitled to assert, whether known or
unknown, foreseen or unforeseen, existing or hereafter arising, in law, equity
or otherwise,
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based in whole or in part upon any act or omission, transaction, event or other
occurrence taking place on or prior to the Effective Date in any way relating to
the Debtor, the Reorganization Case, this Plan or the Disclosure Statement.
D. Indemnification
The obligations of the Debtor as of the Filing Date to indemnify their
present and former directors or officers, respectively, against any obligations
pursuant to the Debtor's certificates of incorporation or by-laws, applicable
state law or specific agreement, or any combination of the foregoing, shall
survive confirmation of this Plan, remain unaffected thereby, be assumed by
Reorganized WFSG and not be discharged. Reorganized WFSG shall assume the
Debtor's obligations to indemnify any Person by reason of the fact that he or
she is or was a director, officer, employee, agent, attorney, member or other
authorized representative (in each case, as applicable) of the Debtor, the
Unofficial Noteholders' Committee and the Indenture Trustee (collectively, the
"INDEMNITEES") against any claims, liabilities, actions, suits, damages, fines,
judgments or expenses (including reasonable attorneys' fees and expenses),
arising during the course of, or otherwise in connection with or in any way
related to, the negotiation, preparation, formulation, solicitation,
dissemination, implementation, confirmation and consummation of this Plan and
the transactions contemplated thereby and the Disclosure Statement in support
thereof; provided, however, that the foregoing indemnification shall not apply
to any liabilities arising from the gross negligence or willful misconduct of
any Indemnitee. If any claim, action or proceeding is brought or asserted
against an Indemnitee in respect of which indemnity may be sought from
Reorganized WFSG, the Indemnitee shall promptly notify Reorganized WFSG in
writing and Reorganized WFSG shall assume the defense thereof including the
employment of counsel reasonably satisfactory to the Indemnitee, and the payment
of all expenses of such Indemnitee. The Indemnitee shall have the right to
employ separate counsel in any such claim, action or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the Indemnitee unless (1) Reorganized WFSG has agreed
to pay the fees and expenses of such counsel, (2) Reorganized WFSG shall have
failed to assume promptly the defense of such claim, action or proceeding or to
employ counsel reasonably satisfactory to the Indemnitee in any such claim,
action or proceeding or (3) the named parties in any such claim, action or
proceeding (including any impleaded parties) include both the Indemnitee and
Reorganized WFSG and the Indemnitee believes, in the exercise of its business
judgment and in the opinion of its legal counsel, reasonably satisfactory to
Reorganized WFSG that the joint representation of Reorganized WFSG and the
Indemnitee will likely result in a conflict of interest (in which case, if the
Indemnitee notifies Reorganized WFSG in writing that it elects to employ
separate counsel at the expense of Reorganized WFSG shall not have the right to
assume the defense of such action or proceeding on behalf of the Indemnitee). In
addition, Reorganized WFSG shall not effect any settlement or release from
liability in connection with any matter for which the Indemnitee would have the
right to indemnification from Reorganized WFSG unless such settlement contains a
full and unconditional release of the Indemnitee, or a release of the Indemnitee
reasonably satisfactory in form and substance to the Indemnitee.
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E. Vesting of Assets
Except as otherwise provided in this Plan or the Confirmation Order, on
the Effective Date, all property of the Debtor's Estate shall vest in
Reorganized WFSG free and clear of all Claims, liens, encumbrances and
Interests. From and after the Effective Date, Reorganized WFSG may operate its
business and use, acquire and dispose of property and settle and compromise
claims or interests arising on or after the Effective Date without supervision
by the Bankruptcy Court and free of any restrictions of the Bankruptcy Code, the
Bankruptcy Rules or the Local Bankruptcy Rules, other than those restrictions
expressly imposed by this Plan or the Confirmation Order.
F. Waiver of Subordination
The classification and manner of satisfying all Claims and Interests under
this Plan and the distributions hereunder take into consideration all
contractual, legal and equitable subordination rights, whether arising under any
agreement, general principles of equitable subordination, Section 510 of the
Bankruptcy Code or otherwise, that a Holder of a Claim or Interest may have
against other Claim or Interest Holders with respect to any distribution made
pursuant to this Plan. On the Effective Date, all contractual, legal or
equitable subordination rights that such Holder may have with respect to any
distribution to be made pursuant to this Plan shall be deemed to be waived,
discharged and terminated, and all actions related to the enforcement of such
subordination rights will be permanently enjoined. Accordingly, distributions
pursuant to this Plan to Holders of Allowed Claims and Allowed Interests shall
not be subject to payment to a beneficiary of such terminated subordination
rights, or to levy, garnishment, attachment or other legal process by any
beneficiary of such terminated subordination rights.
G. Preservation of Causes of Action
Except as otherwise provided herein, or in any contract, Instrument,
release or other agreement entered into in connection with this Plan, in
accordance with Section 1123(b) of the Bankruptcy Code, Reorganized WFSG shall
retain (and may enforce) any claims, rights (including rights of set-off) and
causes of action that the Debtor or the Estate may hold against any Person
including, among other things and without limitation, any claims, rights or
causes of action under Sections 544 through 550 of the Bankruptcy Code or any
similar provisions of state law, or any other statute or legal theory; provided,
however, that in the event that Class 4 votes to accept this Plan, any such
claims, rights or causes of action against Holders of Allowed Claims or Allowed
Interests in such Classes (solely in their capacities as such) shall be
released, discharged and extinguished on the Effective Date.
H. Retention of Bankruptcy Court Jurisdiction
To the maximum extent permitted by the Bankruptcy Code or other applicable
law, the Bankruptcy Court shall have jurisdiction of all matters arising out of,
and related to, the Reorganization Case and this Plan pursuant to, and for the
purpose of, Sections 105(a) and 1142 of the Bankruptcy Code including, without
limitation, jurisdiction to:
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1. Allow, disallow, determine, liquidate, classify, estimate or establish
the priority or secured or unsecured status of any Claim or Interest, including
the resolution of any request for payment of any Administrative Claim, the
resolution of any objections to the allowance or priority of Claims or Interests
and the resolution of any dispute as to the treatment necessary to Reinstate a
Claim pursuant to this Plan;
2. Grant or deny any applications for allowance of compensation or
reimbursement of expenses authorized pursuant to the Bankruptcy Code or this
Plan, for periods ending before the Effective Date;
3. Resolve any matters related to the assumption or rejection of any
executory contract or unexpired lease to which the Debtor is a party or with
respect to which the Debtor may be liable, and to hear, determine and, if
necessary, liquidate any Claims arising therefrom;
4. Ensure that distributions to Holders of Allowed Claims or Allowed
Interests are accomplished pursuant to the provisions of this Plan;
5. Decide or resolve any motions, adversary proceedings, contested or
litigated matters and any other matters and grant or deny any applications
involving the Debtor or Reorganized WFSG that may be pending on the Effective
Date;
6. Enter such Orders as may be necessary or appropriate to implement or
consummate the provisions of this Plan and all contracts, Instruments, releases,
indentures and other agreements or documents created in connection with this
Plan, the Disclosure Statement or the Confirmation Order, except as otherwise
provided herein;
7. Resolve any cases, controversies, suits or disputes that may arise in
connection with the consummation, interpretation or enforcement of this Plan or
the Confirmation Order, including the release and injunction provisions set
forth in and contemplated by this Plan and the Confirmation Order, or any
entity's rights arising under or obligations incurred in connection with this
Plan or the Confirmation Order;
8. Subject to any restrictions on modifications provided herein or in any
contract, Instrument, release, indenture or other agreement or document created
in connection this Plan, modify this Plan before or after the Effective Date
pursuant to Section 1127 of the Bankruptcy Code or modify the Disclosure
Statement, the Confirmation Order or any contract, Instrument, release,
indenture or other agreement or document created in connection with this Plan,
the Disclosure Statement or the Confirmation Order, or remedy any defect or
omission or reconcile any inconsistency in any Bankruptcy Court Order, this
Plan, the Disclosure Statement, the Confirmation Order or any contract,
Instrument, release, indenture or other agreement or document created in
connection with this Plan, the Disclosure Statement or the Confirmation Order,
in such manner as may be necessary or appropriate to consummate this Plan, to
the extent authorized by the Bankruptcy Code;
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9. Issue injunctions, enter and implement other Orders or take such other
actions as may be necessary or appropriate to restrain interference by any
entity with consummation, implementation or enforcement of this Plan or the
Confirmation Order;
10. Enter and implement such Orders as are necessary or appropriate if the
Confirmation Order is for any reason modified, stayed, reversed, revoked or
vacated;
11. Except as otherwise provided in this Plan, or with respect to specific
matters, in the Confirmation Order or any other Order entered in connection with
the Reorganization Case, determine any other matters that may arise in
connection with or relating to this Plan, the Disclosure Statement, the
Confirmation Order or any contract, Instrument, release, indenture or other
agreement or document created in connection with this Plan, the Disclosure
Statement or the Confirmation Order; and
12. Enter an Order or Orders closing the Reorganization Case.
I. Failure of Bankruptcy Court to Exercise Jurisdiction
If the Bankruptcy Court abstains from exercising or declines to exercise
jurisdiction, or is otherwise without jurisdiction over any matter arising out
of the Reorganization Case including the matters set forth in Section VIII(H)
above, Section VIII(H) shall not prohibit or limit the exercise of jurisdiction
by any other court having competent jurisdiction with respect to such matter.
J. Official Committees
On the Effective Date, all Official Committees, if any, and the Unofficial
Noteholders' Committee shall be dissolved and the members of such Official
Committees or the Unofficial Noteholders' Committee and their respective
professionals shall be released and discharged from all further rights and
duties arising from or related to the Reorganization Case. The professionals
retained by such Official Committees and the Unofficial Noteholders' Committee
and the members thereof shall not be entitled to compensation or reimbursement
of expenses incurred for services rendered after the Effective Date other than
for services rendered pursuant to this Plan, to enforce the terms of this Plan
or in connection with other activities reserved to such Official Committees, the
Unofficial Noteholders' Committee or their respective professionals under this
Plan or the Confirmation Order or in connection with any application for
allowance of compensation and reimbursement of expenses pending as of, or Filed
after, the Effective Date.
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IX.
MISCELLANEOUS PROVISIONS
A. Final Order
Any requirement in this Plan that an Order be a Final Order may be waived
by the Debtor; provided, that nothing contained herein or elsewhere in this Plan
shall prejudice the right of any party-in-interest to seek a stay pending appeal
with respect to such Order.
B. Modification of this Plan
The Debtor reserves the right to modify this Plan at any time prior to the
Confirmation Date in the manner provided for by Section 1127 of the Bankruptcy
Code or as otherwise permitted by law without additional disclosure pursuant to
Section 1125 of the Bankruptcy Code, except as the Bankruptcy Court may
otherwise order. If any of the terms of this Plan is modified prior to the
Voting Deadline in a manner determined by the Debtor to constitute a material
adverse change as to Holders of any of the Old Securities, the Debtor will
promptly disclose any such modification in a manner reasonably calculated to
inform the Holders of the affected Old Securities of such modification and the
Debtor reserves the right to extend the solicitation period for acceptances of
this Plan for a period which the Debtor, in its sole discretion, deems
appropriate, depending upon the significance of the modification and the manner
of disclosure to Holders of the affected Old Securities.
If, after receiving sufficient acceptances but prior to Confirmation of
this Plan, the Debtor seeks to modify this Plan, the Debtor can use such
previously solicited acceptances only to the extent permitted by applicable law.
The Debtor reserves the right to use acceptances of this Plan received during
its pre-petition solicitation of acceptances under any other circumstances
including in connection with a case under the Bankruptcy Code for the Debtor
commenced by the filing of one or more involuntary petitions, subject to
approval of the Bankruptcy Court.
The Debtor reserves the right after the Confirmation Date and before the
Effective Date to modify the terms of this Plan or waive any conditions to the
effectiveness thereof if and to the extent the Debtor determines that such
modifications or waivers are necessary or desirable to consummate this Plan. The
Debtor will give such Holders of Claims and Interests notice of such
modifications or waivers as may be required by applicable law and the Bankruptcy
Court, and any such modifications shall be subject to the approval of the
Bankruptcy Court to the extent required by, and in accordance with, Section 1127
of the Bankruptcy Code.
C. No Liability for Solicitation or Participation
As specified in Section 1125(e) of the Bankruptcy Code, Persons that
solicit acceptances or rejections of this Plan and/or that participate in the
offer, issuance, sale or purchase of securities offered or sold under this Plan,
in good faith and in compliance with the applicable provisions of the
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Bankruptcy Code, shall not be liable, on account of such solicitation or
participation, for violation of any applicable law, rule or regulation governing
the solicitation of acceptances or rejections of this Plan or the offer,
issuance, sale or purchase of securities.
D. Revocation of this Plan
The Debtor reserves the right to revoke or withdraw this Plan prior to the
Confirmation Date. If the Debtor revokes or withdraws this Plan, or if
Confirmation does not occur for any reason, then this Plan shall be null and
void, and all of the Debtor's respective obligations with respect to the Claims
and Interests shall remain unchanged and nothing contained herein or in the
Disclosure Statement shall be deemed an admission or statement against interest
or to constitute a waiver or release of any claims by or against the Debtor or
any other Person or to prejudice in any manner the rights of the Debtor or any
Person in any further proceedings involving the Debtor or any Person.
E. Severability of Plan Provisions
If, prior to Confirmation, any term or provision of this Plan is held by
the Bankruptcy Court to be invalid, void or unenforceable, the Bankruptcy Court
will have the power, upon the request of the Debtor, to alter and interpret such
term or provision to make it valid or enforceable to the maximum extent
practicable, consistent with the original purpose of the term or provision held
to be invalid, void or unenforceable, and such term or provision shall then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of this
Plan shall remain in full force and effect and shall in no way be affected,
impaired or invalidated by such holding, alteration or interpretation. The
Confirmation Order shall constitute a judicial determination and shall provide
that each term and provision of this Plan, as it may have been altered or
interpreted in accordance with the foregoing, is valid and enforceable pursuant
to its terms.
F. Notices
All notices, requests or demands for payments provided for in this Plan
shall be in writing and shall be deemed to have been given when personally
delivered by hand or deposited in any general or branch post office of the
United States Postal Service or received by telex or telecopier. Notices,
requests and demands for payments shall be addressed and sent, postage prepaid
or delivered, in the case of notices, requests or demands for payments to
Wilshire Financial Services Group Inc., 1776 SW Madison Street, Portland, Oregon
97205, Attn: Mark Peterman, with a copy to Proskauer Rose LLP, 1585 Broadway,
New York, New York 10036, Attn: Sheldon I. Hirshon, Esq. and James M.
Waddington, Esq., and Latham & Watkins, 633 West Fifth Street, Los Angeles,
California 90071, Attn: Bennett J. Murphy, Esq., and/or at any other address
designated by the Debtor by notice to each Holder of a Claim or Interest, and,
in the case of notices to Holders of Claims and Interests, at the last known
address according to the Debtor's books and records or at any other address
designated by a Holder of a Claim or Interest on its proof of Claim or Interest
Filed with the Bankruptcy Court, provided that any notice of change of address
shall be effective only upon receipt.
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G. Successors and Assigns
The rights, benefits and obligations of any Person named or referred to in
this Plan shall be binding on, and shall inure to the benefit of, any heir,
executor, trustee, administrator, successor or assign of such Person.
H. Saturday, Sunday or Legal Holiday
If any payment or act under this Plan is required to be made or performed
on a date that is not a Business Day, then the making of such payment or the
performance of such act may be completed on the next succeeding Business Day,
but shall be deemed to have been completed as of the required date.
I. Post-Effective Date Effect of Evidences of Claims or Interests
Except as otherwise specified herein, notes, bonds, stock certificates and
other evidences of Claims against or Interests in the Debtor, and all
Instruments of the Debtor (in either case, other than those executed and
delivered as contemplated hereby in connection with the consummation of this
Plan), shall, effective upon the Effective Date, represent only the right to
participate in the distributions contemplated by this Plan.
J. Governing Law
Unless a rule of law or procedure is supplied by (1) federal law
(including the Bankruptcy Code, the Bankruptcy Rules or the Local Bankruptcy
Rules), (2) an express choice of law provision in any agreement, contract,
Instrument or document provided for, or executed in connection with, this Plan
or (3) applicable non-bankruptcy law, the rights and obligations arising under
this Plan and any agreements, contracts, documents and Instruments executed in
connection with this Plan shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York without giving effect to the
principles of conflict of laws thereof.
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K. Inconsistency
In the event of any inconsistency between this Plan and the Disclosure
Statement, or any other Instrument or document created or executed pursuant to
this Plan, this Plan shall govern.
DATED: February 1, 1999
WILSHIRE FINANCIAL SERVICES GROUP INC.
By: ______________________________________________
Name: Andrew A. Wiederhorn
Title: Chief Executive Officer and
Secretary
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