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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to Commission
file number 1-4923
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WESTMINSTER CAPITAL, INC.
(Exact name of the Registrant as Specified in its Charter)
Delaware 95-2157201
(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
9665 Wilshire Boulevard, M-10
Beverly Hills, California 90212
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (310) 278-1930
Title of Each Class
Common Stock, Name of Each Exchange on which Registered
$1.00 Par Value Per Share Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. /X/
The aggregate market value of the voting stock held by non affiliates of the
Registrant, based upon the closing sale price on the Pacific Stock Exchange of
its common stock on March 15, 1995 was approximately $6,263,000. For purposes
of the foregoing calculation, certain persons that have filed reports on
Schedule 13D with the Securities and Exchange Commission with respect to the
beneficial ownership of more than 5% of the Registrant's outstanding voting
stock and directors and executive officers of the Registrant have been excluded
from the group of stockholders deemed to be nonaffifliates of the Registrant.
The number of shares of common stock, $1.00 par value per share, of the
Registrant outstanding as of March 15, 1995, was 7,814,607.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for 1995 Annual Meeting of Stockholders is incorporated in Part
III of this Report
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WESTMINSTER CAPITAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1994
CONTENTS
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 5
ITEM 3. LEGAL PROCEEDINGS 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 7
PART II
ITEM 5. MARKET FOR THE CORPORATION'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 7
ITEM 6. SELECTED FINANCIAL DATA 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
CORPORATION 26
ITEM 11. EXECUTIVE COMPENSATION 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 26
Index to Exhibits 30
2
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PART I
ITEM 1. BUSINESS
GENERAL
Until 1991 the business of Westminster Capital, Inc. (the "Corporation")
primarily consisted of the operations of a subsidiary, FarWest Savings and Loan
Association (the "Association").
In January 1991 the Resolution Trust Corporation (hereafter RTC) took
possession of the Association as sole conservator pursuant to an order issued by
the Office of Thrift Supervision (hereafter OTS). The conservatorship did not
apply to the Corporation. Subsequently, the conservatorship was converted to a
receivership under the control of the RTC. Pursuant to that receivership, the
assets and liabilities of the Association have been liquidated, the
Association's branches have been sold or closed and the Association has been
effectively eliminated as a going concern. For this reason, operating results
of the Association have not been included with those of the Corporation and will
not be so included in the future.
Since the RTC took possession of the Association, the Corporation has
purchased and disposed of a controlling interest in a furniture rental company
(see "Furniture Rental Business" below), increased its investment in, operated
and sold an apartment house complex located in Las Vegas, Nevada (see "Apartment
House Business" below), made several loans secured by real property mortgage
loans (see "Mortgage Lending" below) and acquired an interest in a local
telephone service company (see "Telephone Company Investment" below).
The Corporation is a Delaware corporation formed in 1959. The executive
office of the Corporation is located at 9665 Wilshire Boulevard, Suite M-10,
Beverly Hills, California 90212 and its telephone number is (310) 278-1930.
FURNITURE RENTAL BUSINESS
In June 1992 the Corporation purchased all of the issued and outstanding
shares of Class B Common Stock of Express Rental, Inc. ("Express"), a closely
held corporation engaged in the business of renting furniture for residential
and business purposes in Southern California. In connection with the stock
purchase the Corporation also loaned Express $1,800,000. The shares of Class B
Common Stock purchased by the Corporation constituted 50% of the equity of
Express represented by all outstanding shares of common stock and gave the
Corporation the right to elect a majority of the Express directors.
In June 1993 the Corporation sold its equity investment in Express for an
amount equal to its cost ($200,000), payable $125,000 in cash and the balance
pursuant to a promissory note payable in two years and secured by a pledge of
all of the outstanding shares of Common Stock of Express. In connection with
the sale of the Express stock, Express also repaid the outstanding principal
balance and accrued interest under the loan which had been made by the
Corporation. The Consolidated Statements of Operations for 1993 and 1992
reflect the income or loss for those periods in loss from discontinued
operations.
APARTMENT HOUSE BUSINESS
In 1988 the Corporation invested in a real estate partnership which
developed, owned and operated a 432 unit apartment project in a suburb of Las
Vegas, Nevada. The investment was made through two wholly-owned subsidiaries.
To stay foreclosure proceedings initiated by the construction lender, the
partnership filed for protection under the Federal Bankruptcy Law in May
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1991. A plan of reorganization was subsequently confirmed which required the
Corporation to advance to the partnership approximately $1 million to enable the
partnership to pay various fees and satisfy miscellaneous claims. As part of
the plan, the construction lender extended the maturity of the existing
financing to October 31, 1993. The additional $1 million investment brought the
Corporation's total equity investment in the partnership to $3.25 million.
As a result of the default by certain of the partners on obligations owed
to a subsidiary of the Corporation, that subsidiary exercised its rights on
default and acquired the interest of those partners. In October 1993 the
apartment house project was sold for an aggregate purchase price of $18,050,000,
which resulted in a pre-tax loss of $1,245,000 to the Corporation.
MORTGAGE LENDING
On September 3, 1993 the Corporation purchased 70 mortgage loans for a
purchase price of $375,000. The loans had an interest rate of 9% per annum and
were secured by first mortgages on single family residences. The loans were
sold to an unaffiliated party for $530,270, including accrued interest, on
October 29, 1993.
During the period from September 1993 through January 1994 the Corporation
made four loans which aggregated approximately $6,560,000 and are secured by
mortgages or deeds of trust on residential and commercial properties as well as
notes secured by mortgages and deeds of trust on residential and commercial
properties. As of December 31, 1994, the Corporation has received payments of
$5,844,000 which reduced the outstanding balance to $716,000. These loans bear
interest at rates ranging from 6.05% to 15.86% and are all payable within one
year. The largest of these loans, involving approximately $5,200,000, was made
in January 1994, bears interest at 10% and is secured by mortgages on a pool of
motels and residential and commercial properties. In connection with the loans
the Corporation will receive loan fees aggregating $1,150,000. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Past Due Loans."
TELEPHONE COMPANY INVESTMENT
The Company acquired a limited partnership interest in Global
Telecommunications Systems, LTD. ("Global Telecommunications") in October 1993
and had invested $390,000 in that partnership at December 31, 1993 to fund a
telephone accessing network on two military bases. During 1994, the Company
invested an additional $875,000 in Global Telecommunications, including $185,000
in the two ongoing projects and $690,000 in a network for two additional
military bases. Under the Global Telecommunications partnership agreement the
Company is entitled to 75% of the partnership distributions (which is
proportional to its investment) until it receives a return of its investment
plus a 10% per annum return thereon. Thereafter the Company is entitled to 60%
of all distributions with respect to the first two projects and 67.5% of all
distributions with respect to the last two projects. All four of the projects
have been completed and were profitable during 1994. The consolidated financial
statements include this investment on a consolidated basis.
EMPLOYEES
As of December 31, 1994, the Corporation had four salaried employees, two
of whom are executive officers.
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ITEM 2. PROPERTIES
The executive office of the Corporation is located at 9665 Wilshire
Boulevard, Suite M-10, Beverly Hills, California 90212, telephone (310) 278-
1930. The Corporation's executive office is leased for a five year term ending
in 1997.
ITEM 3. LEGAL PROCEEDINGS
During 1994, the Corporation received approximately $3.5 million in net
proceeds from a settlement of claims asserted on behalf of the Corporation
against Drexel Burnham Lambert Inc. ("Drexel"), Michael Milken ("Milken") and
other related parties in an action filed in the Los Angeles County Superior
Court in 1989. The action involved claims of various violations of federal and
state securities laws by Drexel, Milken and the other parties. The $3.5 million
represents an award of approximately $5.4 million, less court directed
attorneys' fees of approximately $1.9 million. During 1993, the Corporation
received approximately $16.8 million in net proceeds which represents an award
of approximately $25.9 million, less court directed attorneys' fees of
approximately $9.1 million.
Also in December 1993 the Los Angeles County Superior Court approved a
settlement of derivative litigation brought on behalf of the Corporation against
its officers, directors and certain other parties in 1989. The action, which
was entitled GOLDMAN V. FARWEST FINANCIAL CORPORATION ET AL., alleged a broad
ranging conspiracy to engage in certain investments and other activities to the
detriment of the Corporation and for the personal gain of certain defendants.
The Corporation agreed to settle the claims against the officers and directors
of the Corporation and certain other parties by paying $1,500,000, of which
$1,000,000 was to be paid by the Corporation's insurance carrier and the balance
was to be paid by the Corporation. The Corporation had established a $1,000,000
reserve for this litigation in 1991. The terms of the settlement agreement
state that the settling defendants vigorously deny any liability or wrongdoing
and agree to the settlement to eliminate the burden and expense of further
litigation. As a result of the settlement, all claims against the directors and
officers of the Corporation have been dismissed. The terms of the settlement
require that the Board of Directors of the Corporation establish an Investment
Committee which will be required to approve the design and implementation and to
monitor the use of internal controls designed and intended to prevent the
purchase of unusually high risk securities by the Corporation and to promote
sound securities investment practices by the Corporation. A majority of the
members of the Committee are required to be outside directors. The Investment
Committee has been established and consists of Barbara C. George, Dwight C. Baum
and Keenan Behrle.
On April 15, 1994 the Corporation received notice from the RTC that the RTC
had decided to commence an action against the Corporation and three of its
present and former directors relating to transactions involving the association.
On February 14, 1995 a Settlement Agreement and Release was entered into by and
between the RTC and the Corporation and three of its present and former
directors ("Directors"). The Settlement Agreement provides for payment of $4
million by the Corporation to the RTC, requires the RTC to cooperate with the
Corporation in connection with the pending proceedings to recover tax payments
made by the Corporation to the State of California, and releases all claims
among the parties. The Settlement Agreement, which specifically acknowledges
that the Corporation and Directors have consistently denied any liability to the
RTC, was entered into for purposes of compromising the claims and avoiding the
cost of a time consuming and potentially lengthy legal battle that would take
management time, effort and resources. The $4 million settlement was provided
for in the 1994 consolidated financial statements.
5
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A wholly-owned subsidiary of the Corporation is a party to litigation
entitled BURES V. SILVER RIDGE APARTMENTS, LTD. filed in March 1993 and pending
in the Eighth Judicial District Court of Clark County, Nevada. The case relates
to the apartment house project described above under "Business - Apartment House
Business," which was sold in October 1993. The plaintiff, who is a creditor of
a former general partner of the partnership that owned the apartment house
project, alleges that he acquired a 69% interest in the partnership prior to the
sale of the project as a result of judgment enforcement proceedings against the
prior general partner. The prior general partner had given the Corporation's
wholly-owned subsidiary a security interest in its partnership interest, that
security interest was foreclosed and, as a result, the partnership interest was
acquired by the Corporation's wholly-owned subsidiary. The Corporation believes
that the judicial enforcement proceedings brought by the plaintiff were improper
and had no legal effect on the ownership of the general partnership interest and
that the security interest held by the Corporation's wholly-owned subsidiary was
senior in priority to the interest claimed by the plaintiff, which means that
the Corporation's wholly-owned subsidiary would own the general partnership
interest in any event. The plaintiff is seeking an order declaring that he is
the general partner of the partnership and entitled to possession of its
property, and a judgment quieting title to general and limited partnership
interests representing a 69% interest in the partnership and other relief
determined by the court to be appropriate. The matter presently has no trial
date in State District Court but may be recalendared in the near future. The
Corporation believes that the claims asserted are without merit and intends to
vigorously contest the case.
6
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE CORPORATION'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Corporation's Common Stock is traded on the Pacific Stock Exchange
under the symbol "WI." The following table sets forth the range of high and low
sales prices for the Common Stock of the Corporation for the periods indicated,
as reported by the Pacific Stock Exchange.
HIGH LOW
---- ---
1994
----
First Quarter 1 7/16 1 1/8
Second Quarter 1 1/4 7/8
Third Quarter 1 1/8 7/8
Fourth Quarter 1 3/8 1 1/4
1993
----
First Quarter 3/4 5/16
Second Quarter 3/4 9/16
Third Quarter 3/4 9/16
Fourth Quarter 2 11/16
The Corporation had approximately 1,125 holders of record of its Common
Stock as of December 31, 1994.
The Corporation has not paid cash dividends since 1989 and intends to
retain all cash resulting from its business operations for future acquisitions
and investments.
ITEM 6. SELECTED FINANCIAL DATA
Because the Corporation does not have access to audited financial data with
respect to the Association for any period subsequent to December 31, 1989, the
financial data for the Association is omitted for 1990 and subsequent years.
The RTC took possession of the Association on January 11, 1991.
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SELECTED FINANCIAL DATA
(excluding the Association)
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Total assets $31,427 $27,311 $29,058 $15,034 $15,304
Cash and cash
equivalents 845 23,257 6,166 8,267 7,188
Loans receivable, net 716 1,410 92 496 86
Investment securities
available for sale 25,402 - 1 1 807
Income tax refunds
receivable 1,954 1,954 1,954 3,907 5,177
Telephone systems, net 1,579 546 - - -
Investment in real estate - - 18,757 2,250 2,000
Total liabilities 9,944 4,015 18,196 1,147 701
Shareholders' equity 21,483 23,296 10,862 13,887 14,603
--------------------------------------------
--------------------------------------------
EARNINGS DATA:
Interest income $ 1,214 $ 219 $ 277 $ 858 $ 136
Gain on sale of
investments - - - 890 114
Unrealized loss on
investment securities - - - - (528)
Gain on sale of loans - 150 - - -
Lawsuit settlement, net 3,528 16,819 - - -
Telephone systems revenue 1,102 14 - - -
Refund of litigation costs 757 - - - -
Income (loss) from
continuing operations (1,608) 12,844 (2,874) (716) 1,505
(Loss) from discontinued
operations - (410) (151) - (83,603)
Net income (loss) (1,608) 12,434 (3,025) (716) (82,098)
--------------------------------------------
--------------------------------------------
PER SHARE DATA:
Net income (loss) per share
from continuing operations $(.21) $1.64 $(.37) $(.09) $ .19
Net (loss) per share from
discontinued operations - $(.05) $(.02) - $(10.70)
Net income (loss) per
share $(.21) $1.59 $(.39) $(.09) $(10.51)
Book value per share
(end of period) $2.78 $2.98 $1.39 $1.78 $ 1.87
Weighted average shares
outstanding 7,815 7,815 7,815 7,815 7,815
Cash dividends per share - - - - -
--------------------------------------------
--------------------------------------------
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Corporation's financial statements for the years 1992 through 1994 do
not include the operations or assets and liabilities of the Association because
the Association was seized by the RTC on January 11, 1991. See "Business -
General".
At December 31, 1994 the Corporation's principal assets consisted of cash
and cash equivalents, investment securities available for sale, an investment in
Global Telecommunications, a limited partnership engaged in constructing and
operating local telephone services for military residential quarters (See
"Business - Telephone Company Investment"), certain loans made by the
Corporation and secured by mortgages, deeds of trust and mortgage loans (See
"Business - Mortgage Lending").
The Corporation's major source of on-going income is limited to the
interest earned on its cash and cash equivalent positions, interest on
investment securities, interest on its loan portfolio and income from Global
Telecommunications.
RESULTS OF OPERATIONS
Revenues for 1994 were $6,706,000 compared to $17,250,000 for 1993. The
large decrease primarily resulted from a significant reduction in the amounts
received from the Drexel, Milken litigation. See "Legal Proceedings". In 1994,
the Corporation received $3,528,000 net of attorneys' fees as compared to
$16,819,000, net of attorneys' fees in 1993.
The large decrease was partially offset by increases in interest and fees
on loans of $437,000, interest on investment securities of $558,000, telephone
system revenue of $1,088,000 and a $757,000 refund of litigation costs incurred
in prior years. Interest income increased because of the investment of funds
received in late 1993 from the same lawsuit settlement. Telephone system
revenue, which consists entirely of billings for telephone charges, increased
significantly due to the expanded operations of Global Telecommunications.
Revenues for 1993 were $17,250,000, up substantially from the $319,000 for
1992 as a result of the $25,947,000 settlement received in the litigation
pending against Drexel, Milken and others. This settlement amount was reduced by
court-awarded attorneys' fees of $9,128,000 and the net amount received by the
Corporation, $16,819,000 is reflected in the Corporation's Statement of
Operations.
The income from the litigation settlement was partially offset by a pre-tax
loss of approximately $1,245,000 on the October 1993 sale of the Las Vegas,
Nevada apartment project described under "Business - Apartment House Business."
Additionally the Corporation realized a pretax gain of $150,000 on the sale of
certain mortgage loans in 1993.
Revenues for 1992 declined as compared to 1991 because of the reduction in
prevailing interest rates and because the amounts invested were substantially
lower in 1992. In addition, income in 1991 was higher as a result of the
recognition of approximately $387,000 in interest on income tax refunds
receivable and approximately $890,000 in gains on the sale of investments.
Total expenses for 1994 were $6,422,000 compared to $720,000 for 1993. The
large increase was due to a $4,000,000 regulatory settlement in 1994 (See "Legal
Proceedings"), an increase in telephone time charges of $508,000 and an increase
of $1,194,000 in general and administrative expenses. Telephone time charges
increased because of the expansion of Global Telecommunications in 1994.
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General and administrative expenses for the years 1992 through 1994
consisted principally of legal fees incurred in defending litigation pending
against the Corporation and its officers and directors (see "Legal Proceedings")
as well as salaries, occupancy expense, accounting and related fees and other
costs. The significant increase in general and administrative expenses for 1994
as compared to 1993 resulted from an increase in legal expenses of approximately
$423,000 and increases in most expense categories. Legal expenses increased
because of the RTC potential litigation which was settled in 1995. All other
expense categories increased due to the significant increase in the
Corporation's activities during 1994. The significant decrease in general and
administrative expenses for 1993 as compared to 1992 and 1992 as compared to
1991 was primarily due to a reduction in legal costs.
The 1994 provision for income taxes primarily reflects a provision for
unresolved tax issues. The 1993 provision primarily reflects a deferred
provision for the settlement of the Drexel and Milken claims, offset by net
operating loss carryforwards of the Corporation. The 1992 provision reflects a
reduction in the value at which income tax refunds receivable are reflected as
assets on the balance sheet as of the end of the year.
The loss from discontinued operations, net of tax, of $151,000 for 1992
reflects the loss incurred by Express for the seven months ended December 31,
1992 during which the Corporation owned a controlling interest in Express. The
Corporation's investment in Express was sold in June 1993. See "Business -
Furniture Rental Business." This $151,000 loss for 1992 compares with a loss
from discontinued operations for 1993 of $410,000, net of tax, which represents
the loss from the Las Vegas apartment house complex and the Corporation's
portion of Express's loss for that portion of 1993 before they were sold.
In the fourth quarter of 1994, the Corporation received the preliminary
results provided by the Franchise Tax Board with respect to its refund claim for
approximately $3.9 million (including accrued interest of $1.2 million). Those
audit findings propose to deny the refund claim. The Corporation has filed a
protest with the California Franchise Tax Board which sets forth its position
with respect to the refund claims. While the Corporation remains convinced that
it will eventually recover all or a substantial portion of its refund claim, in
1992 the Corporation established a valuation allowance of 50%, adjusting the
carrying value of this asset to $1,954,000 at December 31, 1992, against the
recovery of this refund to reflect the uncertainties attributable to the
California Franchise Tax Board's position. Due to continuing uncertainties and
the length of time it will take to resolve this matter, management recorded a
provision for unresolved tax issues of $1,954,000 during 1994. The provision is
included in liabilities and accrued expenses in the 1994 Consolidated Statement
of Financial Condition and in the provision for income taxes in the 1994
Statement of Operations.
PAST DUE LOANS
Of the $716,000 of loans receivable outstanding at December 31, 1994,
$613,000 are secured by mortgage loans on residential and commercial properties.
These loans bear interest rates which range from 6.05% to 15.86% and all matured
during 1994.
In addition to the past due principal of $613,000 at December 31, 1994,
there was also past due accrued interest receivable of $206,000. There was also
unrecognized past due loan fees at December 31, 1994 of $275,000. These loan
fees will only be recognized in the consolidated financial statements on a cash
basis after all principal and interest has been received.
Management believes that there is adequate collateral value to cover the
past due principal balance and all past due interest. Accordingly, no allowance
for loan losses has been established nor has the accrual of interest ceased. In
January, 1995 the combined principal balance and past due accrued interest was
reduced by approximately $200,000.
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LIQUIDITY
The principal changes in the Company's financial condition at December 31,
1994 as compared to December 31, 1993 are the increase in the accumulated
deficit of $1,608,000 resulting from the net loss for the year ended December
31, 1994, an increase of $1,033,000 in telephone systems due to the increased
investment by Global Telecommunications, Inc. and the significant decrease in
cash and cash equivalents which was accompanied by a significant increase in the
amount invested in short and intermediate term, municipal fixed income
securities. Since these municipal securities have a weighted average maturity
of approximately 10 months, the Company continues to maintain a very strong
liquidity position.
The Company acquired a limited partnership interest in Global
Telecommunications in October 1993 and had invested $390,000 in that partnership
at December 31, 1993 to fund a telephone accessing network on two military
bases. During 1994, the Company invested an additional $875,000 in Global
Telecommunications, including $185,000 in the two ongoing projects and $690,000
in a network for two additional military bases. Under the Global
Telecommunications partnership agreement the Company is entitled to 75% of the
partnership distributions (which is proportional to its investment) until it
receives a return of its investment plus a 10% per annum return thereon.
Thereafter the Company is entitled to 60% of all distributions with respect to
the first two projects and 67.5% of all distributions with respect to the last
two projects. All four of the projects have been completed and were profitable
during 1994. The consolidated financial statements include this investment on a
consolidated basis.
The Company's financial position at December 31, 1994 remained strong.
Shareholders' equity was $21,483,000 (as compared to $23,296,000 at December 31,
1993), and the Company had no debt, although it did have $3,099,000 in deferred
income tax liabilities, and $6,350,000 in liabilities and accrued expenses. The
deferred income tax liabilities primarily consist of tax provisions for the
settlements received in connection with the Drexel and related litigation
(partially offset by net operating loss carryfowards). Liabilities and accrued
expenses increased significantly due to the $4,000,000 Settlement Agreement and
Release entered into by and between the RTC, the Corporation and three of its
present and former directors and the provison for unresolved tax issues of
$1,954,000.
The Company continues to seek the acquisition of one or more businesses and
anticipates the possibility of further investment in Global Telecommunications,
although no assurances can be given that any such acquisitions or investments
will be made or, if made, that they will be successful.
11
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Westminster Capital, Inc.
Beverly Hills, California:
We have audited the accompanying consolidated statements of financial condition
of Westminster Capital, Incorporated and subsidiaries (the "Corporation") as of
December 31, 1994 and 1993, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1994. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of
Westminster Capital, Incorporated and subsidiaries as of December 31, 1992 and
for the year then ended, were audited by other auditors whose report thereon
dated March 25, 1993, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westminster Capital,
Incorporated and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in note 2 of the notes to the consolidated financial statements,
the Corporation adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," on January 1, 1994.
/s/ KPMG Peat Marwick
Los Angeles, California
March 17, 1995
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Westminster Capital, Inc.
Beverly Hills, California:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Westminster Capital, Incorporated and
subsidiaries (formerly FarWest Financial Corporation ) (the "Company") for the
year ended December 31, 1992. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Westminster
Capital, Incorporated and subsidiaries for the year ended December 31, 1992, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
March 25, 1993
13
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
ASSETS 1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 845,000 $23,257,000
Investment securities available
for sale, at market 25,402,000 -
Loans receivable, net 716,000 1,410,000
Accounts receivable 257,000 12,000
Income tax refunds receivable 1,954,000 1,954,000
Accrued interest receivable 611,000 39,000
Telephone systems, net 1,579,000 546,000
Office furniture and equipment, net 58,000 56,000
Other assets 5,000 37,000
-----------------------------------
TOTAL ASSETS $31,427,000 $27,311,000
-----------------------------------
-----------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------
LIABILITIES:
Deferred income taxes $ 3,099,000 $ 3,412,000
Liabilities and accrued expenses 6,350,000 474,000
Minority interest in limited partnership 495,000 129,000
-----------------------------------
TOTAL LIABILITIES 9,944,000 4,015,000
-----------------------------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value:
30,000,000 shares authorized:
7,815,000 shares issued and
outstanding in 1994 and 1993 7,815,000 7,815,000
Capital in excess of par value 55,946,000 55,946,000
Accumulated deficit (42,073,000) (40,465,000)
Unrealized holding losses on
investment securities available
for sale, net of taxes (205,000) -
-----------------------------------
TOTAL SHAREHOLDERS' EQUITY 21,483,000 23,296,000
-----------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $31,427,000 $27,311,000
-----------------------------------
-----------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
INCOME: 1994 1993 1992
------ ---- ---- ----
<S> <C> <C> <C>
Interest and fees on loans
receivable $ 497,000 $ 60,000 $ 38,000
Interest on investment
securities available for sale
and money market funds 717,000 159,000 239,000
Lawsuit settlement, net 3,528,000 16,819,000 -
Telephone system revenue 1,102,000 14,000 -
Refund of litigation costs 757,000 - -
Gain on sale of loans held
for sale - 150,000 -
Other, net 105,000 48,000 42,000
------------------------------------------
Total Revenues 6,706,000 17,250,000 319,000
------------------------------------------
EXPENSES:
--------
Regulatory settlement 4,000,000 - -
Telephone time charges 519,000 11,000 -
General and administrative 1,903,000 709,000 1,237,000
------------------------------------------
Total Expenses 6,422,000 720,000 1,237,000
------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST 284,000 16,530,000 (918,000)
INCOME TAX PROVISION (1,778,000) (3,687,000) (1,956,000)
MINORITY INTEREST IN (INCOME)
LOSS OF CONSOLIDATED PARTNERSHIP (114,000) 1,000 -
------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (1,608,000) 12,844,000 (2,874,000)
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX - (410,000) (151,000)
------------------------------------------
NET INCOME (LOSS) $(1,608,000) $ 12,434,000 $ (3,025,000)
------------------------------------------
------------------------------------------
INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS $ (0.21) $1.64 $ (0.37)
LOSS PER SHARE FROM
DISCONTINUED OPERATIONS - (0.05) (0.02)
------------------------------------------
NET INCOME (LOSS) PER SHARE $ (0.21) $ 1.59 $ (0.39)
------------------------------------------
------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Unrealized Holding
Capital in Losses on Securities
Common Excess of Accumulated Available for Sale,
Stock Par Value Deficit Net of Taxes
---------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991 $7,815,000 $55,946,000 $(49,874,000) $ -
Net loss - - (3,025,000) -
---------------------------------------------------------
BALANCE, DECEMBER 31, 1992 7,815,000 55,946,000 (52,899,000) -
Net income - - 12,434,000 -
---------------------------------------------------------
BALANCE, DECEMBER 31, 1993 7,815,000 55,946,000 (40,465,000) -
Net loss - - (1,608,000) -
Unrealized holding
losses on securities
available for sale,
net of taxes - - - (205,000)
---------------------------------------------------------
BALANCE, DECEMBER 31, 1994 $ 7,815,000 $55,946,000 $(42,073,000) $(205,000)
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
WESTMINSTER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS/OPERATING ACTIVITIES:
Net income (loss) $(1,608,000) $12,434,000 (3,025,000)
Adjustment to reconcile net
income (loss) to net cash
provided by operating
activities:
Provision for loan losses 31,000 - -
Depreciation and
amortization 354,000 18,000 20,000
Increase in accounts receivable (245,000) - -
Increase in accrued interest
receivable (572,000) - -
Gain on sale of loans - (150,000) -
Loss from discontinued
operations, net of minority
interest - 410,000 151,000
Net change in deferred income
taxes (176,000) 3,687,000 1,954,000
Net change in other assets 32,000 (166,000) (162,000)
Net change in liabilities and
accrued expenses 5,876,000 (2,238,000) 1,542,000
Net change in minority interest 366,000 129,000 -
--------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 4,058,000 14,124,000 480,000
--------------------------------------
CASH FLOWS/INVESTING ACTIVITIES
Purchase of investment
securities (58,958,000) - -
Proceeds from maturities of
investment securities 11,795,000 - -
Proceeds from sales of
investment securities 21,247,000 - -
Purchase of loans held for sale - (375,000) -
Proceeds from sale of
loans held for sale - 525,000 -
Loan originations (5,247,000) (1,350,000) -
Principal collected on loans
receivable 5,910,000 32,000 404,000
Purchase of telephone systems
and office equipment (1,217,000) (571,000) (27,000)
Net proceeds from disposition
of discontinued operations. - 4,706,000 (1,958,000)
Investment in real estate - - (1,000,000)
---------------------------------------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (26,470,000) 2,967,000 (2,581,000)
---------------------------------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (22,412,000) 17,091,000 (2,101,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 23,257,000 6,166,000 8,267,000
---------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 845,000 $ 23,257,000 $ 6,166,000
---------------------------------------
---------------------------------------
Supplemental schedule of non cash investing and financing activities for the
year:
Assumption of liability in
connection with the investment
in Silver Ridge - - $ 15,507,000
Tax effect of unrealized loss
on investment securities $ (137,000) - -
---------------------------------------
---------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
WESTMINSTER CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1994
(See Independent Auditors' Report)
1. BASIS OF PRESENTATION
On January 11, 1991, the Resolution Trust Corporation (the "RTC") took
possession of FarWest Savings and Loan Association (the "Association") as sole
conservator. Substantially all of the operations of the Corporation were
discontinued in 1991. On February 15, 1991, the RTC was appointed receiver for
the Association. Although the conservatorship with respect to the Association
was imposed subsequent to December 31, 1990, from the date of the imposition of
the conservatorship, Westminster Capital, Inc. (formerly FarWest Financial
Corporation) (the "Corporation") has not had access to financial or other
information regarding the Association's operations, including the Association's
operations for the year ended December 31, 1990.
On June 5, 1992, the Corporation acquired 50% of the outstanding common stock of
Express Rental, Inc. ("Express"), a company that rents office and residential
furniture to individuals and businesses in Southern California. In February
1993, the Corporation announced its intent to dispose of Express. Accordingly,
the consolidated statements of operations for 1993 and 1992 reflect the income
or loss for those periods in loss from discontinued operations. In 1993, through
the date of sale, the Corporation recorded pre-tax earnings from discontinued
operations of $54,000 and also recorded a loss from discontinued operations for
the seven months ended December 31, 1992 of $151,000.
In June 1993, the Corporation sold its equity investment in Express for an
amount equal to its cost, $200,000. The Corporation received $125,000 in cash
and the balance is payable pursuant to a note for $75,000. In addition, the
Corporation received payment in full on a loan to Express upon the close of the
sale. The note is secured by all of the outstanding shares of common stock of
Express.
The Company acquired a limited partnership interest in Global Telecommunications
in October 1993 and had invested $390,000 in that partnership at December 31,
1993 to fund a telephone accessing network on two military bases. During 1994,
the Company invested an additional $875,000 in Global Telecommunications,
including $185,000 in the two ongoing projects and $690,000 in a network for two
additional military bases. Under the Global Telecommunications partnership
agreement, the Company is entitled to 75% of the partnership distributions
(which is proportional to its investment) until it receives a return of its
investment plus a 10% per annum return thereon. Thereafter the Company is
entitled to 60% of all distributions with respect to the first two projects and
67.5% of all distributions with respect to the last two projects. The
consolidated financial statements include this investment on a consolidated
basis.
On February 14, 1995 a Settlement Agreement and Release was entered into by and
between the RTC , the Corporation, and three of its present and former directors
("Directors"). The Settlement Agreement provides for payment of $4 million by
the Corporation to the RTC, requires the RTC to cooperate with the Corporation
in connection with the pending proceedings to recover tax payments made by the
Corporation to the State of California, and releases all claims among the
parties. The $4 million settlement was provided for in the 1994 consolidated
financial statements.
18
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF ACCOUNTING AND CONSOLIDATION - The consolidated financial
statements include the accounts of the Corporation and its wholly owned
subsidiaries, FarWest Financial Insurance Agency, Silver Ridge Apartments, G.P.,
Inc. and Silver Ridge Apartments, L.P., Inc. FarWest Financial Insurance Agency
has been inactive since 1991 and Silver Ridge Apartments G.P., Inc., and Silver
Ridge Apartments L.P., Inc., have been inactive since 1993. The consolidated
financial statements also include the accounts of Global Telecommunications, a
limited partnership in which the Corporation has a 75% limited partnership
interest. All material intercompany accounts and transactions have been
eliminated. References to the Corporation may include one or more of its wholly
owned subsidiaries.
At December 31, 1990, the Corporation's principal operating subsidiary was the
Association. The Association previously represented substantially all of the
consolidated assets, liabilities and operations of the consolidated entity. In
January 1991, the RTC took possession of the Association (see Note 1).
Accordingly, the accompanying consolidated financial statements do not include
any of the accounts of the Association.
CASH EQUIVALENTS - Cash equivalents are short-term, highly liquid investments
that are both readily convertible to known amounts of cash and are so near
maturity that no significant risk of changes in value exists because of changes
in interest rates.
INVESTMENT SECURITIES AVAILABLE FOR SALE - The Corporation adopted Statement of
Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES (SFAS 115) at January 1, 1994. In accordance with
SFAS 115, the Corporation classified its investment securities as held to
maturity securities, trading securities and available for sale securities, as
applicable. The Corporation did not hold any held to maturity securities or
trading securities at December 31, 1994.
Investment securities available for sale are carried at market value. The
Corporation classifies securities as available for sale when it determines that
such securities may be sold at a future date or if there are foreseeable
circumstances under which the Corporation would sell such securities.
Changes in the market value of investment securities available for sale are
included in shareholders' equity as unrealized holding gains or losses, net of
the related tax effect. Unrealized losses, on available for sale securities
reflecting a decline in value judged to be other than temporary, are charged to
income in the Consolidated Statement of Operations. Realized gains or losses on
available for sale securities are computed on a specific identification basis.
Amortized premiums and accreted discounts are included in interest on investment
securities available for sale and money market funds.
TELEPHONE SYSTEMS - Telephone systems are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets which is seven years. Telephone system
revenue is recognized on the accrual basis for charges incurred on a monthly
basis.
LOAN FEES - Nonrefundable loan fees associated with loans secured by trust deeds
or mortgages are recognized on the cash basis after all principal payments and
interest have been received.
INCOME (LOSS) PER SHARE - Income (loss) per common share is computed using the
weighted average number of common shares outstanding. Common stock equivalents
have been excluded from the computation because the effect is anti-dilutive.
19
<PAGE>
INCOME TAX MATTERS - The Corporation joins with its subsidiaries in filing
consolidated federal income and state franchise tax returns. In the tax
returns, taxable income or loss is consolidated with the taxable income or loss
of the subsidiaries. Prior to 1993, Federal and state income tax expense was
provided based on Statement of Financial Accounting Standards No. 96.
The Corporation adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109") as of January 1, 1993 and applied it
retroactively to 1991. There was no impact on the Corporation's financial
statements as a result of adoption. Under the asset and liability method of
SFAS 109, income tax expense (benefit) is recognized by establishing deferred
tax assets and liabilities for the estimated future tax consequences
attributable to the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Corporation's evaluation of the realizability of deferred
tax assets includes consideration of the amount and timing of future reversals
of existing temporary differences.
In December 1991, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS, (SFAS 107) which is effective for fiscal years ending
after December 15, 1992 (December 15, 1995 in the case of entities with less
than $150 million in total assets, such as the Corporation). SFAS 107 requires
disclosure, either in the body of the financial statements or in the
accompanying notes, the "fair value" of financial instruments for which it is
"practicable to estimate that value." SFAS No. 107 defines "fair value" as the
amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Quoted market prices, if available, are deemed the best evidence of the fair
value of such instruments. Management does not expect this pronouncement to
have a material impact on the Consolidated Statements of Financial Condition and
Results of Operations.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consist entirely of State and Municipal
obligations which are tax exempt for Federal income tax purposes. At December
31, 1994 and 1993 these securities are carried at market. The weighted average
maturity of these securities is approximately ten months. The portfolio had a
gross unrealized loss of $341,000 at December 31, 1994. During 1994, the
Corporation sold $21,247,000 in investment securities which resulted in no
realized gains or losses.
4. LOANS RECEIVABLE
The composition of the Corporation's loans receivable at December 31, 1994 and
1993 is as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Loans secured by trust
deeds or mortgages $ 613 $ 1,220
Express Rental 50 75
Other 53 115
----------------------
Total $ 716 $ 1,410
----------------------
----------------------
</TABLE>
The loans secured by trust deeds or mortgages made by the Corporation are
collateralized by residential and commercial properties. These properties are
located throughout the United States,
20
<PAGE>
with the primary concentration in Florida, Maine, Pennsylvania, New Jersey,
Alabama and California. The Corporation's loans bear interest rates which range
from 6.05% to 15.86% and all matured during 1994.
In addition to the past due principal of $613,000 at December 31, 1994, there
was also past due accrued interest receivable of $206,000. There was also
unrecognized past due loan fees at December 31, 1994 of $275,000. These loan
fees will only be recognized in the consolidated financial statements on a cash
basis after all principal and interest has been received.
These loans are secured by the aforementioned real properties and management
believes that there is adequate collateral value to cover the past due principal
balance and all past due interest. Accordingly, no allowance for loan losses
has been established nor has the accrual of interest ceased. In January, 1995
both the principal balance and past due accrued interest were reduced by
approximately $100,000.
As discussed in Note 1, the Corporation has a loan outstanding to the purchasers
of Express. This loan is secured by all of the common stock of Express.
Interest payments are based on a rate of one percent over the Reference Rate of
Bank of America, and are payable quarterly. The loan will mature in 1995.
During the third quarter of 1993, the Corporation purchased $375,000 of loans
and recorded them as held for sale. The loans were subsequently sold during the
fourth quarter of 1993. The Corporation recorded a gain on sale of loans of
$150,000.
5. TELEPHONE SYSTEMS, NET
The following is a summary of telephone systems, net at December 31, 1994 and
1993 ( in thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Telephone systems $ 1,746 $ 549
Less accumulated depreciation (167) ( 3)
-------- ------
Telephone systems, net $ 1,579 $ 546
-------- ------
-------- ------
</TABLE>
Depreciation expense of telephone systems was approximately $164,000 and $3,000
for the years ended December 31, 1994 and 1993, respectively.
6. INVESTMENT IN REAL ESTATE
The investment in real estate represented the Corporation's investment in Silver
Ridge Apartments Ltd. ("Silver Ridge"), a real estate partnership (the
"Partnership") which was acquired in 1988. The Partnership owned a 432 unit
apartment project in a suburb of Las Vegas, Nevada. The Corporation's
investment was sold in October of 1993, resulting in a pre-tax loss on sale of
$1,245,000, which is included in loss from discontinued operations.
Additionally, during 1993, the Corporation recorded pre-tax earnings from
discontinued operations of $506,000.
Significant financial statement information of Silver Ridge for the year ended
December 31, 1992 consisted of a net loss from operations of $109,000
(unaudited), based on rental revenue of $1,354,000 (unaudited).
21
<PAGE>
7. INCOME TAXES
The Corporation made no income tax payments during 1994, 1993 or 1992, except
for the minimum state franchise tax.
The provision (benefit) for income taxes for the years ended December 31, 1994,
1993, and 1992 includes the following ( in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Current tax provision $ - $ - $ -
Deferred tax provision (benefit)
Federal (308) $ 2,307 -
State (5) 1,105 -
--------------------------------------
Total (313) 3,412
Provision for unresolved tax issues 1,954 - 1,956
--------------------------------------
Total provision for income taxes $ 1,641 $ 3,412 $ 1,956
--------------------------------------
--------------------------------------
Total allocated to continuing
operations $ 1,778 $ 3,687 $ 1,956
Total allocated to equity (137) - -
Total allocated discontinued operations - (275) -
--------------------------------------
Total provision for income taxes $ 1,641 $ 3,412 $ 1,956
--------------------------------------
--------------------------------------
</TABLE>
The income tax provisions for 1994 and 1992 consist primarily of provisions for
unresolved tax issues. The 1993 income tax provision is primarily composed of a
deferred tax liability, related to a lawsuit settlement of $16,819,000. The
1993 income tax provision was reduced through the utilization of the
Corporation's net operating loss carryforwards which consisted of $7,957,000 for
federal income tax purposes and $3,970,000 for California Franchise Tax
purposes. The Corporation's deferred tax receivables resulting from the
utilization of net operating loss carryforwards are offset in future years by
deferred tax payables. The Corporation's net operating loss carryforwards,
expire at various dates through 2008 for Federal income tax purposes and through
1998 for state income tax purposes.
The income tax provision from continuing operations reflected an effective rate
of 626%, 22%, and 213% for the years ended December 31, 1994, 1993, and 1992 on
the earnings (loss) before income taxes, respectively. The income tax provision
(benefit) differed from the amounts computed by applying the statutory Federal
income tax rate of 34% for 1994, 1993, and 1992 to the income (loss) before
income taxes for the following reasons (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense (benefit) at statutory Federal
income tax rate $ 97 $5,621 $ (312)
California franchise tax, net of Federal
benefit 9 727 -
State and municipal securities interest (243) - -
Minority interest (39) - -
Utilization of net operating loss
carryforward - (2,705) -
Non utilization of net operating loss
carryforward - - 312
Provision for unresolved tax issues 1,954 - 1,956
Other, net - 44 -
-------------------------------------------------------------------------------------
$1,778 $3,687 $1,956
-------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
In the fourth quarter of 1994, the Corporation received preliminary results
provided by the Franchise Tax Board with respect to its refund claim for
approximately $3.9 million (including accrued interest of $1.2 million). Those
audit findings propose to deny the refund claim. The Corporation has filed a
protest with the California Franchise Tax Board which sets forth its position
with respect to the refund claims. While the Corporation remains convinced that
it will eventually recover all or a substantial portion of its refund claim, in
1992 the Corporation established a valuation allowance of 50%, adjusting the
carrying value of this asset to $1,954,000 at December 31, 1992, against the
recovery of this refund to reflect the uncertainties attributable to the
California Franchise Tax Board's position. Due to continuing uncertainties and
the length of time it will take to resolve this matter, management established a
provison for unresolved tax issues of $1,954,000 during 1994. This provision is
included in liabilities and accrued expenses in the Consolidated Statements of
Financial Condition.
At December 31, 1994 and 1993 the Corporation had cumulative deferred taxes
payable of $3,099,000 and $3,412,000, respectively. Tabulated below are the
significant components of the net deferred tax liability at December 31, 1994
and 1993:
<TABLE>
<CAPTION>
1994 1993
---------------------------
<S> <C> <C>
Components of the deferred tax asset:
Settlement with the RTC $ (1,732) $ -
Net operating loss carryforward (3,284) (3,475)
State taxes (399) (396)
Unrealized holding loss on investment
securities available for sale (137) -
Other (159) -
---------------------------
Deferred tax asset (5,711) (3,871)
---------------------------
Components of the deferred tax liability:
Legal settlements 8,810 7,283
---------------------------
Deferred tax liability 8,810 7,283
---------------------------
Net deferred tax liability $ 3,099 $ 3,412
---------------------------
---------------------------
Net state deferred tax liability $ 1,090 $ 1,104
Net federal deferred tax liability 2,009 2,308
---------------------------
$ 3,099 $ 3,412
---------------------------
---------------------------
</TABLE>
In evaluating the realizability of its deferred tax assets, management has
considered the turnaround of deferred tax liabilities during the periods in
which those temporary differences become deductible. Additionally, the
Corporation has not considered income from future operations in evaluating
realizability of its deferred tax assets.
23
<PAGE>
8. LAWSUIT SETTLEMENT
During 1994, the Corporation received approximately $3.5 million in net proceeds
from the settlement of claims asserted on behalf of the Corporation against
Drexel Burnham Lambert, Inc. ("Drexel"), Michael Milken ("Milken") and other
related parties. In 1993, the Corporation received approximately $16.8 million
in net proceeds from the same settlement.
9. COMMITMENTS AND CONTINGENCIES
The Corporation maintains two stock option plans: the 1986 Incentive Stock
Option Plan and the 1986 Non-statutory Stock Option Plan (the "Plans"). An
aggregate of one million shares of the Corporation's common stock may be issued
under both Plans, provided that no more than 750,000 shares may be issued to
directors.
At December 31, 1994, there were options outstanding for 195,000 shares of
common stock which were granted in 1986 at an option price of $12.875 per share.
All of these options were exercisable at December 31, 1994 and expire on October
21, 1996.
During 1994, options were granted for 50,000 shares of common stock at $.875 per
share, which was equal to the market price on the date of grant. The options
are execisable in five equal annual installments commencing with the first
anniversary of the grant date. None of these options were exercisable at
December 31, 1994.
No options were exercised during the three year period ended December 31, 1994
and no options were granted during the two year period ended December 31, 1993.
The Corporation is a defendant in various lawsuits arising from the normal
course of business. Management believes, based upon the opinion of legal
counsel, that the ultimate resolution of the pending litigation will not have a
material effect upon the financial condition of the Corporation.
10. LEASE COMMITMENTS
The Corporation leases office space for its corporate offices under a non-
cancelable operating lease. Minimum rental commitments under this lease are
$67,720 for both of the years ending December 31, 1995 and 1996, and $55,138 for
the year ending December 31, 1997. The Corporation recorded $73,364 in rent
expense for the year ended December 31, 1994.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
KPMG Peat Marwick was engaged by the Corporation to be its independent certified
public accountants for 1993 in July 1993 and was selected by the Corporation's
Board of Directors to continue to serve as the accountants for the Corporation
for 1994. During the two fiscal years ended December 31, 1992 and 1991 and the
subsequent interim period though July 16, 1993, there was a disagreement with
Deloitte & Touche that arose in connection with their 1992 audit with respect to
the ultimate collectability of an income tax refund claim pending with the State
of California. After review of the matter with the Corporation's Board of
Directors and Deloitte & Touche, the Corporation established a valuation
allowance for the refund claim. This resolution
24
<PAGE>
was satisfactory to Deloitte & Touche. The Corporation has authorized Deloitte
& Touche to fully discuss the matter with KPMG Peat Marwick. No reportable
events of the type described in subsection (v) of item 304 (a)(1) of Regulation
S-K have arisen during the two fiscal years ended December 31, 1991 and 1992,
and the subsequent interim period through July 16, 1993.
The audit report of Deloitte & Touche, dated March 25, 1993 on the consolidated
statement of operations of Westminster Capital, Inc. and subsidiaries for the
year ended December 31, 1992 did not contain any adverse opinion or disclaimer
of opinion, nor were they qualified or modified as to audit scope or accounting
principles.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION.
Incorporated by reference to the Corporation's definitive Proxy Statement
for its 1995 Annual Meeting of Stockholders pursuant to instruction G(3) to
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Corporation's definitive Proxy Statement
for its 1995 Annual Meeting of Stockholders pursuant to instruction G(3) to
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Corporation's definitive Proxy Statement
for its 1995 Annual Meeting of Stockholders pursuant to instruction G(3) to Form
10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Corporation's definitive Proxy Statement
for its 1995 Annual Meeting of Stockholders pursuant to instruction G(3) to
Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Item 8:
Consolidated Statements of Financial
Condition as of December 31, 1994 and 1993
Consolidated Statements of Operations
for the Three Years Ended December 31, 1994
Consolidated Statements of Shareholders'
Equity for the Three Years Ended December 31, 1994
Consolidated Statements of Cash Flows
for the Three Years Ended December 31, 1994
Notes to Consolidated Financial Statements
for the Three Years Ended December 31, 1994
(a)(2) Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or
is presented in the consolidated financial statements or related notes.
(b) Reports of Form 8-K
No reports were filed on Form 8-K during the fourth quarter of 1994.
On February 14, 1995 the Corporation filed a Current Report on Form 8-K
reporting under Item 5 (Other Events) that a Settlement Agreement and Release
was entered into by and between
26
<PAGE>
the RTC and the Corporation and three of its present and former directors
referred to in "Legal Proceedings"
(c) Exhibits
See "Index to Exhibits."
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTMINSTER CAPITAL, INC.
March 24, 1995 By: /s/ William Belzberg
--------------------
William Belzberg,
Chairman of the Board and
Chief Executive Officer
By: /s/ Philip J. Gitzinger
-----------------------
Philip J. Gitzinger,
Executive Vice President and
Chief Financial Officer
28
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES CAPACITY DATE
/s/William Belzberg Chairman of the Board March 24, 1995
-------------------- of Directors and
William Belzberg Chief Executive Officer
/s/Dwight C. Baum Director March 24, 1995
--------------------
Dwight C. Baum
/s/Keenan Behrle Director March 24, 1995
--------------------
Keenan Behrle
/s/Barbara C. George Director March 24, 1995
--------------------
Barbara C. George
/s/Monty Hall Director March 24, 1995
--------------------
Monty Hall
/s/Lester Ziffren Director March 24, 1995
--------------------
Lester Ziffren
29
<PAGE>
INDEX OF EXHIBITS
EXHIBIT
NO. SEQUENTIALLY NUMBERED DESCRIPTION
3.1 Certificate of Incorporation of the Registrant as amended through
July 12, 1992.
Certificate of amendment of Certificate of Incorporation of the
Registrant dated July 13, 1992.
3.2 By-Laws of the Registrant as amended in their entirety effective March
25, 1994.
10.1 Settlement Agreement and Release entered into by and between the
Resolution Trust Corporation, the Registrant and three of the
Registrant's present and former directors dated February 14, 1995.
21 Subsidiaries of Registrant.
27 Financial Data Schedule.
30
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
of
FAR WEST FINANCIAL CORPORATION
--------------
FIRST: The name of the corporation is FAR WEST FINANCIAL
CORPORATION.
SECOND: Its principal office in the State of Delaware is located at
No. 129 South State Street, in the City of Dover, County of Kent. The name and
address of its resident agent is United States Corporation Company, No. 129
South State Street, Dover, Delaware.
THIRD: The nature of the business or objects or purposes to be
transacted, promoted or carried on by the corporation are as follows:
1. To acquire by purchase, subscription, underwriting or otherwise,
and to own, hold for investment or otherwise and to use, sell, assign,
transfer, mortgage, pledge, exchange or otherwise dispose of real and
personal property of every sort and description and wheresoever situated
including shares of stock, bonds, debentures, notes, scrip, securities,
evidences of indebtedness, contracts or obligations of any corporations,
associations, trust estates, domestic or foreign, or of the United States
or any State, territory or dependency of the United States or any foreign
country or any municipality or local authority within or without the United
States and to pay therefor in whole or in part in cash, property or by
exchanging therefor
<PAGE>
-2-
stocks, bonds or other securities or evidences of indebtedness of the
corporation, and, while the holder or owner of any such property, to
receive, collect and dispose of the interest, dividends and income on or
from such property and to possess and exercise in respect thereto all of
the rights, powers and privileges of ownership including voting thereon;
2. To transact a general real estate agency and brokerage business
and to act as agents, brokers or attorneys-in-fact for any person, firm or
corporation in buying, selling and dealing in real property and any and
every estate or interest therein, including but not limited to, the
entering into any transactions involving the financing of subdivisions,
homesites or other properties;
3 To acquire, lease, buy, hold, develop, own, improve, rent,
manage, control, sell and deal, generally in real property and any and
every estate or interest therein, including, but not limited to, the
acquiring, financing and developing of subdivisions, homesites or other
properties;
4. To carry on the business of general brokers, dealers and
underwriters in stocks, bonds, securities, mortgages and other choses in
action, including the acquisition thereof by original subscription,
underwriting or otherwise howsoever; to make investment in such properties;
and to hold, manage, mortgage, pledge, sell and dispose of the same in like
manner as individuals do;
5. To aid in any manner any corporation, association or trust
estate, domestic or foreign, or any firm or individual, any shares of stock
in which, or any bonds, debentures, notes, securities, evidences of
indebtedness, contracts or obligations of which, are held by or for the
corporation, directly or indirectly, or in which, or in the welfare of
which the corporation shall have any interest and to do any actions
designed to protect, preserve, improve or enhance the value of any property
at any time held or controlled by the corporation or in which it may be at
any time interested, directly or indirectly or through other corporations
or otherwise; and to organize or promote or facilitate the organization of
subsidiary companies;
6. To acquire by purchase, lease or otherwise, upon such terms and
conditions and in such manner as the Board of Directors of the corporation
shall determine or agree to, and to the extent to which the same may be
allowed by law, all or any part of the property, real and personal,
tangible or intangible, of any nature whatsoever, including the good will,
business and rights of all kinds, of any other corporation or of any
person, firm, or association, which
<PAGE>
-3-
may be useful or convenient in the business of the corporation and to pay
for the same in cash, stocks, bonds or in other securities of the
corporation, or partly in cash and partly in such stocks, bonds or other
securities, or in such other manner as may be agreed, and to hold, possess
and improve such properties, and to assume in connection with the
acquisition of any such property any liabilities of any such corporation,
person, firm or association, and to conduct in any legal manner the whole
or any part of any business so acquired, and to pledge, mortgage, sell or
otherwise dispose of the same;
7. To do a general commission merchant's and selling agent's
business and to buy, hold, own, manufacture, produce, sell, import, export,
and generally deal in and with, and dispose of, either as principal or
agent, and upon commission or otherwise, all kinds of personal property
whatsoever, without limit as to amount; to make and enter into all manner
and kinds of contracts, agreements and obligations by or with any person or
persons, corporation or corporations, for the purchasing, acquiring,
manufacturing, producing, completing and selling of any articles of
personal property of any kind or nature whatsoever, and generally with full
power to perform any and all acts connected therewith or arising therefrom
or incidental thereto, and all acts proper or necessary for the purposes of
the business;
8. To obtain, purchase, or otherwise acquire, to hold, own, use,
sell, assign or otherwise dispose of, to grant licenses in respect of or
otherwise exploit and turn to account, any and all inventions and
improvements and any letters patent or application therefor, including
design patents, of the United States or other countries and to obtain and
hold licenses or other patent rights; to devise, adopt, use, own, purchase
or otherwise acquire and to sell, assign or otherwise dispose of, any and
all processes, formulae, trade secrets, devices of all kinds, copyrights,
trademarks, trade names and trademark rights and registrations or
applications for registration therefor in the United States or in other
countries, and when purchasing, acquiring or otherwise obtaining any such
processes, formulae, trade secrets, devices of all kinds, copyrights,
trademarks, trade names or trademark rights, to take over and acquire the
good will, assets and business in connection with which said processes,
formulae, trade secrets, devices of all kinds, copyrights, trademarks,
trade names or trademark rights are or have been used; and to use, exercise
and develop the same useful, necessary or convenient to the purposes and
objects of the corporation;
<PAGE>
-4-
9. To borrow money for any of the purposes of the corporation from
time to time without limit, and from time to time, to make, accept,
endorse, execute and issue bonds, debentures, promissory notes, drafts,
bills of exchange and other negotiable and/or non-negotiable obligations of
the corporation for moneys borrowed or in payment for property acquired or
for any of the other objects or purposes of the corporation or its
business, and to secure the payment thereof and the interest thereon of any
such obligations by mortgage, pledge, deed, indenture, agreement or other
instrument of trust, or by other lien upon, assignment of, or agreement in
regard to, all or any part of the real and/or personal property, rights,
privileges or franchises of the corporation wheresoever situated, whether
now owned or hereafter to be acquired, to provide that any such bonds,
debentures, notes or other obligations shall be convertible into, or
exchangeable for stock of the corporation upon such terms and conditions
(so far as may be permitted by law) as the Board of Directors shall
determine and cause to be specified therein and to sell, pledge or
otherwise dispose of such obligations of the corporation for its corporate
purposes;
10. To make any guaranty respecting stocks, dividends, securities,
indebtedness, interest, contracts or other obligations so far as the same
may be permitted to be done by a corporation organized under the laws of
Delaware;
11. To apply for, purchase or acquire, and to exercise and enjoy any
license, power, authority, franchise, right or privilege which any
government or authority or any corporation or other public body shall
enact, make or grant;
12. To subscribe to, purchase, acquire, hold, own, invest in, sell,
assign, transfer, mortgage, pledge or otherwise dispose of or deal in the
stocks, bonds, debentures or other securities and obligations of any other
corporation, domestic or foreign; and also to issue in exchange therefor
its stocks, bonds and other obligations and to possess and exercise in
respect thereof all the rights, powers and privileges of individual owners
thereof including any and all voting powers;
13. Out of funds legally available for such purpose, to purchase,
hold and reissue the shares of its own capital stock, its bonds and other
securities; provided that shares of its own capital stock belonging to it
shall not be voted upon directly or indirectly;
14. To enter into, make, perform and carry out contracts for any
lawful purpose pertaining to its business, without limit as to amount, with
any person, firm, association or corporation;
<PAGE>
-5-
15. To exercise any of its powers itself, or through the medium of
subsidiary corporations, organized under the laws of the United States of
America or of any state thereof or of any foreign government or country or
subdivision thereof;
16. To enter into partnership or into any arrangement for sharing of
profits, union of interests, co-operation, joint adventure, reciprocal
concession or otherwise, with any person or company carrying on or engaged
in or about to carry on or engage in any business or transaction which the
company is authorized to carry on or engage in, or any business or
transaction capable of being conducted so as directly or indirectly to
benefit the company.
17. To carry out all or any part of the foregoing objects and
purposes in any and all parts of the world and to conduct business in all
or any of its branches as principal, factor, agent, contractor or
otherwise, either alone or through or in conjunction with any corporations,
associations, partnerships, firms, trustees, syndicates, individuals,
organizations and other entities located in or organized under the laws of
any part of the world, and, in carrying out, conducting or performing its
business and attaining or furthering any of its objects and purposes, to
maintain offices, branches and agencies in any part of the world, to make
and perform any contracts and to do any acts and things, and to carry on
any business, and to exercise any powers suitable, convenient or proper for
the accomplishment of any of the objects and purposes herein enumerated or
incidental to the powers herein specified or which at any time may appear
conducive to or expedient for the accomplishment of any of such objects and
purposes and which might be engaged in or carried on by a corporation
formed under the General Corporation Law and to have and exercise all of
the powers conferred by the laws of the State of Delaware upon corporations
formed under the General Corporation Law;
18. To do everything necessary, proper, advisable or convenient for
the accomplishment of any of the purposes or the attainment of any of the
objects or the furtherance of any of the power herein provided for and to
do every other act and thing incidental thereto in connection therewith,
provided the same be not forbidden by the laws of Delaware.
The foregoing clauses shall be construed as powers as well as objects and
purposes, and the matters expressed in each clause shall, except if otherwise
expressly provided, be in no
<PAGE>
-6-
wise limited by reference to or inference from the terms of any other clause,
but shall be regarded as independent objects, purposes and powers; and the
enumeration of specific objects, purposes and powers shall not be construed to
limit or restrict in any manner the general powers of the corporation or the
meaning of general terms, nor shall the expression of one thing be deemed to
exclude another not expressed, although it be of like nature.
The corporation shall be authorized to exercise and enjoy all other
powers, rights and privileges granted by an Act of the General Assembly of the
State of Delaware entitled "An Act providing a General Corporation Law,"
approved March 10, 1899, to corporations of this character and all the powers
conferred upon such corporations by any other laws of the State of Delaware, in
force from time to time, so far as not in conflict herewith, or which may be
conferred by all acts heretofore or hereafter amendatory of or supplemental to
said Act or said Laws, and the enumeration of certain powers as herein specified
is not intended as exclusive of, or as a waiver of, any of the powers, rights or
privileges granted or conferred by said Act or said laws now or hereafter in
force; provided, however, that the corporation shall not in any State,
Territory, District, Possession or Country carry on any business or exercise any
powers not permitted to it under the laws thereof.
Nothing herein contained shall be construed as giving
<PAGE>
-7-
the corporation any rights, powers or privileges not permitted to it by law.
The corporation shall not have power to construct, maintain and/or operate
public utilities within the State of Delaware.
FOURTH: The total number of shares of capital stock that the
corporation shall have authority to issue is 40,000,000 shares, consisting of
(a) 30,000,000 shares of common stock having a par value of $1 per share
("Common Stock"), and (b) 10,000,000 shares of preferred stock havings a par
value of $1 per share ("Preferred Stock").
The powers, preferences and rights, and the qualifications, limitations and
restrictions thereof, of each class of stock that the corporation has authority
to issue, and the express grant of authority to the corporation's board of
directors (the "Board of Directors") to fix by resolution or resolutions the
designations and the powers, preferences and rights of each share of Preferred
Stock and the qualifications, limitations and restrictions thereof that are not
fixed by this certificate of incorporation, are as follows:
COMMON SHARES.
Each share of the Common Stock shall entitle the holder thereof to one vote
at all meetings of the corporation's stockholders, except meetings at which only
holders of another specified class or series of shares are entitled to vote.
Subject to any preference rights with respect to the payment of dividends
attaching to the Preferred Stock or any series
<PAGE>
-8-
thereof, the holders of Common Stock shall be entitled to receive, as and when
declared by the Board of Directors, dividends that may be paid in money,
property or by the issuance of fully paid shares of the corporation. In the
event of a liquidation, dissolution or winding up of the corporation or other
distribution of the corporation's assets among stockholders for the purpose of
winding up its affairs, whether voluntary or involuntary, and subject to the
rights, privileges, conditions and restrictions attaching to the Preferred Stock
or any series thereof, the Common Stock shall entitle the holders thereof to
receive the remaining property of the corporation. Upon this Article Fourth
becoming effective, each outstanding share of capital stock shall be, by virtue
of such effectiveness, one share of Common Stock.
PREFERRED STOCK.
1. Shares of Preferred Stock may be issued from time to time in one or
more series. All shares of Preferred Stock shall be of equal rank and shall be
identical in all respects except in respect of the particulars that may be fixed
by the Board of Directors in the manner set forth in paragraph 2 below. Each
share of each series of Preferred Stock shall be identical in all respects with
the other shares of such series except that shares of any one series with
cumulative dividend rights that are issued at different times may differ as to
the dates from which dividends thereon may be cumulative.
<PAGE>
-9-
2. The Board of Directors is hereby authorized to create and provide for
the issuance of shares of Preferred Stock in series by resolution or resolutions
and, in connection with the creation of each such series, to fix by resolution
or resolutions providing for the creation and issuance of such shares, in the
manner and to the extent now or hereafter permitted by Delaware law, the
designation, powers, preferences and rights of the shares of each series, and
the qualifications, limitations and restrictions thereof, so far as not
inconsistent with the provisions of this Article Fourth applicable to all Series
of Preferred Stock. The authority of the Board of Directors with respect to
each series of Preferred Stock shall include, but not be limited to,
determination of:
(a) the designation of such series and the number of shares which shall
constitute such series;
(b) any provisions for dividends on shares of such series, including the
dividend rate, the conditions upon which and the date when such dividends shall
be payable, and whether dividends shall be cumulative and if so the date or
dates from which dividends shall be cumulative;
(c) whether shares of such series may be redeemed and, if redeemable, the
time or times when, the price or prices at which and the other terms and
conditions upon which shares of such series may be redeemed;
(d) the amount payable per share of such series upon any voluntary or
involuntary dissolution, liquidation or winding up of the corporation;
<PAGE>
-10-
(e) the terms and amount of any sinking or purchase fund to be provided
for the purchase, redemption or retirement of the shares of such series;
(f) the rights, if any, of the holders of shares of such series to
convert such shares into or exchange such shares for shares of Common Stock or
of any other series of Preferred Stock, and the terms and conditions of such
conversion or exchange;
(g) the voting rights, if any, of shares of such series; and
(h) any other preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, of any
shares of such series.
FIFTH: The minimum amount of capital with which the corporation
shall commence business is One Thousand Dollars ($1,000.).
SIXTH: The names and places of residence of the incorporators are
as follows:
<TABLE>
<CAPTION>
Names Residences
----- ----------
<S> <C>
Charles N. Caldwell 50 Broad Street, New York 4, N.Y.
Garvin P. Kiernan 50 Broad Street, New York 4, N.Y.
Thomas A. McCarthy 50 Broad Street, New York 4, N.Y.
John E. Quinn 50 Broad Street, New York 4, N.Y.
John Kirchner 50 Broad Street, New York 4, N.Y.
</TABLE>
SEVENTH: The corporation is to have perpetual existence.
<PAGE>
-11-
EIGHTH: The private property of the stockholders shall not be
subject to the payment of corporate debts to any extent whatever.
NINTH: All corporate powers of the corporation shall be exercised
by the Board of Directors except as otherwise by law or herein provided:
(a) Directors need not be stockholders of the corporation;
(b) At all elections of Directors of the corporation, each stockholder
shall be entitled to as many votes as shall equal the number of votes which
(except for this provision as to cumulative voting) he would be entitled to cast
for the election of Directors with respect to his shares of stock multiplied by
the number of Directors to be elected, and that he may cast all of such votes
for a single Director or may distribute them among the number to be voted for,
or for any two or more of them as he may see fit, which right when exercised,
shall be termed cumulative voting.
(c) The number of directors which shall constitute the whole Board of
Directors of the corporation shall be such as from time to time shall be fixed
by, or in the manner provided in, the by-laws, but in no case shall the number
be less than three. In case of any increase in the number of directors, the
vacancy or vacancies created by such increase shall be filled in the manner
provided in the by-laws;
(d) Subject to any limitation contained in the by-laws made by the
stockholders, the Board of Directors may make
<PAGE>
-12-
by-laws and from time to time may alter, amend or repeal any by-laws, but any
by-laws made by the Board of Directors may be altered, amended or repealed by
the stockholders at any meeting of stockholders by the affirmative vote of the
holders of a majority of the stock present and voting at such meeting, provided
notice that an amendment is to be considered and acted upon is inserted in the
notice or waiver of notice of such meeting;
(e) The Board of Directors shall have power from time to time to fix and
determine and to vary the amount of the working capital of the corporation, to
direct and determine the use and disposition thereof, to set apart out of any
funds of the corporation available for dividends a reserve or reserves for any
proper purposes and to abolish any such reserve in the manner in which it was
created and to fix the times for the declaration and payment of dividends.
(f) The Board of Directors may from time to time determine whether and to
what extent and at which times and places and under what conditions and
regulations the accounts and books of the corporation, or any of them, shall be
open to the inspection of the stockholders, and no stockholder shall have any
right to inspect any account, book or document of the corporation except as
conferred by statute or as authorized by the Board of Directors;
(g) In the absence of fraud, no contract or other
<PAGE>
-13-
transaction between the corporation and any other corporation, and no act of the
corporation, shall in any way be affected or invalidated by the fact that any of
the directors of the corporation are pecuniarily or otherwise interested in, or
are directors or officers of, such other corporation; and, in the absence of
fraud, any director, individually, or any firm of which any director may be a
member, may be a party to, or may be pecuniarily or otherwise interested in, any
contract or transaction of the corporation; provided, in any case, that the fact
that he or such firm is so interested shall be disclosed or shall have been
known to the Board of Directors or a majority thereof; and any director of the
corporation who is also a director or officer of any such other corporation, or
who is also interested, may be counted in determining the existence of a quorum
at any meeting of the Board of Directors of the corporation which shall
authorize any such contract, act or transaction and may vote thereat to
authorize any such contract, act or transaction, with like force and effect as
if he were not such director or officer of such other corporation, or not so
interested;
(h) Any contract, act or transaction of the corporation or of the
directors may be ratified by a vote of a majority of the shares having voting
powers at any meeting of stockholders, or at any special meeting called for such
purpose, and such ratification shall, so far as permitted by law and by this
certificate of incorporation, be as valid and as binding as though ratified by
every stockholder of the corporation;
<PAGE>
-14-
(i) The Board of Directors may from time to time formulate, establish,
promote, and carry out, and amend, alter, change, revise, recall, repeal, or
abolish a plan or plans for the participation by all or any of the employees,
including directors and officers of the corporation, or of any corporation,
company, association, trust, or organization in which or in the welfare of which
the corporation has any interest, and those actively engaged in the conduct of
the corporation's business, in the profits, gains, or business of the
corporation or of any branch or division thereof, as part of the corporation's
legitimate expenses, for the granting of stock options to such employees,
directors, officers or persons and for the furnishing to such employees,
directors, officers, or persons, or any of them, at the corporation's expense,
of medical services, insurance against accident, sickness or death, pensions
during old age, disability or unemployment, education, housing, social services,
recreation or other similar aids for their relief or general welfare, in such
manner and upon such terms and conditions as the Board of Directors shall
determine.
TENTH: No holder of stock of the corporation shall be entitled as
of right to purchase or subscribe for any part of any unissued stock of the
corporation or any additional stock to be issued by reason of any increase of
the authorized capital stock of the corporation of any class, or any bonds,
<PAGE>
-15-
certificates of indebtedness, debentures or other securities convertible into
stock of the corporation, but any such unissued stock or such additional
authorized issue of new stock, or such securities convertible into stock, may be
issued and disposed of pursuant to resolution of the Board of Directors to such
persons, firms, corporations or associations, and upon such terms as may be
deemed advisable by the Board of Directors in the exercise of their discretion.
ELEVENTH: Whenever a compromise or arrangement is proposed between
this corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or
<PAGE>
-16-
arrangement and to any reorganization of this corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.
TWELFTH: The corporation reserves the right to amend, alter, change
or repeal any provision contained in this certificate in the manner now or
hereafter prescribed by statute; and all rights herein conferred upon the
stockholders are granted subject to this reservation.
THIRTEENTH: Meetings of stockholders may be held without the State
of Delaware, if the by-laws so provide. The books of the corporation may be
kept (subject to any provision contained in the statutes) outside of the State
of Delaware at such place or places as may be from time to time designated by
the Board of Directors.
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore
named for the purpose of forming a corporation in pursuance of the General
Corporation Law of the State of Delaware and the acts amendatory thereof and
supplemental thereto, do make and file this certificate of incorporation hereby
declaring and certifying that the facts herein stated are true, and accordingly
have hereunto set our hands and seals this 12th day of November, 1959.
0126N
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 07/17/1992
921995128 - 544219
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
FAR WEST FINANCIAL CORPORATION, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
FIRST: That the Board of Directors of the Corporation, acting by
unanimous written consent in accordance with Section 141(f) of the General
Corporation Law of the State of Delaware, adopted a resolution proposing and
declaring advisable the following amendment to the Certificate of Incorporation
of the Corporation:
"NOW, THEREFORE, BE IT RESOLVED, that, subject to
approval of the Corporation's Stockholders at the 1992
Annual Meeting of Stockholders, Article First of the
Corporation's Certificate of Incorporation is hereby amended
to read in its entirety as follows:
'FIRST: The name of the Corporation is WESTMINSTER
CAPITAL, INC.'"
SECOND: That at the 1992 Annual Meeting of the Stockholders of the
Corporation, duly held and convened on July 7, 1992, by a vote of the majority
of shares present and entitled to vote at such meeting, the stockholders of the
Corporation approved said amendment.
THIRD: That the aforesaid amendment was duly adopted in accordance
with the applicable provisions of Sections 242 and 222 of the General
Corporation Law of the State of Delaware.
FOURTH: That the capital of said Corporation will not be reduced
under or by reason of said amendment.
IN WITNESS WHEREOF, said FAR WEST FINANCIAL CORPORATION has caused its
corporate seal to be hereunto affixed and this certificate to be signed by its
Chairman of the Board and Chief Executive Officer and its Secretary this 13th
day of July, 1992.
By: /s/ William Belzberg
------------------------------------
William Belzberg,
Chairman of the Board and
Chief Executive Officer
(SEAL)
ATTEST: /s/ Bruce M. Lloyd
--------------------------------
Bruce M. Lloyd,
Secretary
<PAGE>
STATE OF DELAWARE Page 1
[LOGO]
OFFICE OF SECRETARY OF STATE
----------------------
I, MICHAEL RATCHFORD, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "FAR WEST FINANCIAL CORPORATION" FILED IN THIS OFFICE ON THE
SEVENTEENTH DAY OF JULY, A.D. 1992, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO KENT COUNTY
RECORDER OF DEEDS ON THE SEVENTEENTH DAY OF JULY, A.D. 1992 FOR RECORDING.
* * * * * * * * * *
(SEAL)
/s/ Michael Ratchford
---------------------------------------
SECRETARY OF STATE
AUTHENTICATION: *3523535
921995128 DATE: 07/17/1992
<PAGE>
BY-LAWS
OF
WESTMINSTER CAPITAL, INCORPORATED
AS AMENDED IN THEIR ENTIRETY
EFFECTIVE MARCH 25, 1994
<PAGE>
BY-LAWS
OF
WESTMINSTER CAPITAL, INCORPORATED
AS AMENDED IN THEIR ENTIRETY
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Dover, County of
Kent, State of Delaware.
Section 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the Board of directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of the
directors shall be held in the city of Los Angeles, State of California, at such
place as may be fixed from time to time by the board of directors, or at such
other place either within or without the State of Delaware as shall be
designated from time to time by the board of directors and stated in the notice
of the meeting. Meeting of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year 1972,
shall be held on the last Thursday of May, if not a legal holiday, and if a
legal holiday, then on the next secular day following, at 10:00 a.m., or at such
other date and time as shall be designated from time to time by the board of
directors and stated in the notice of the meeting, at which they shall elect by
a plurality vote by a written ballot a board of directors, and transact such
other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting
<PAGE>
not less than ten or more than sixty days before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
the stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, showing the address of and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city, town or village where the meeting is
to be held, which place shall be specified in the notice of the meeting, or, if
not so specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the President or Secretary and shall be called
by the President or Secretary at the request in writing of a majority of the
Board of Directors, or at the request in writing of stockholders owning twenty-
five percent in amount of the entire capital stock of the Corporation issued and
outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
Section 6. Written notice of the special meeting stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not less than ten or more than sixty days before the date
of the meeting, to each stockholder entitled to vote at such meetings.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. The holder of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
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<PAGE>
present in person or represented by proxy, shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the Certificate of Incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the Certificate of Incorporation,
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of capital stock having voting power
held by such stockholder, but no proxy shall be voted on or after three years
from its date unless the proxy provides for a longer period. At all elections
of Directors of the Corporation, each stockholder having voting power shall be
entitled to exercise the right of cumulative voting as provided in the
Certificate of Incorporation. No shareholder may present any matter for
shareholder action within 45 days of any annual or special meeting of
shareholders at which such matter is to be considered [Amended by resolution
adopted June 16, 1993].
Section 11. Unless otherwise provided in the Certificate of Incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the Corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all the shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporation action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
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<PAGE>
Section 12. At all meetings of the stockholders, the president, who may
defer to the chairman of the board, or, in the absence of the president and the
chairman of the board, a chairman (who shall be one of the vice presidents, if
any of them is present) chosen by a majority in interest of the stockholders
entitled to vote present or represented by proxy, shall act as chairman and
presiding officer of the meeting and the order and manner in which the business
thereof shall be disposed of, in the absence of a contrary vote by stockholders
owning a majority of the stock of the Corporation present and voting at the
meeting, whether in person or represented by proxy, shall be determined by the
presiding officer. The secretary of the Corporation, or, in his absence, an
assistant secretary, shall act as secretary at all meetings of the stockholders.
The board of directors shall have the power to prescribe, by regulation, other
procedures to insure orderly and expeditious stockholders' meetings.
Section 13. All votes at any meeting of stockholders shall be conducted by
judges appointed for that purpose either by the board of directors or by the
chairman of the meeting. The judges shall receive and, once the meeting has
commenced, take in charge from the secretary all proxies; all ballots shall be
received and counted; and all questions touching the qualifications of voters,
the validity of proxies, and the acceptance or rejection of votes shall be
decided by the judges. The judges shall be sworn faithfully to perform their
duties, and shall in writing certify to the returns, if the chairman so directs.
If any judge so appointed shall be absent or shall refuse to act, or if his
office shall become vacant and not be filled by the board of directors, the
chairman may appoint one or more judges of election for such meeting. No
candidate for election as a director shall be appointed or act as a judge.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole board
shall be six. [Amended by resolution adopted June 1, 1992 by unanimous written
consent.] The number of directors shall be determined by a resolution of the
board of directors or by the stockholders at the annual meeting. The directors
shall be elected at the annual meeting of the stockholders, except as provided
in Section 2 of this Article, and each director elected shall hold office until
his successor is elected and
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<PAGE>
qualified or until his earlier resignation or removal. Directors need not be
stockholders.
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced.
Section 3. The business of the Corporation shall be managed by its Board
of Directors which may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws directed or required to be exercise or done by
the stockholders.
Section 4. Any director or directors may be removed either for or without
cause at any time by the affirmative vote of the holders of a majority of all
the shares of stock outstanding and entitled to vote, at a special meeting of
the stockholders called for that purpose provided, however, unless the entire
board is removed, an individual director shall not be removed if the number of
shares voted against the resolution for his removal exceeds the quotient arrived
at when the total number of outstanding shares entitled to vote is divided by
one plus the authorized number of directors.
MEETINGS OF THE BOARD OF DIRECTORS
Section 5. The Board of Directors of the Corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 6. The first meeting of each newly elected Board of Directors
shall be held immediately following the adjournment of the annual meeting of
stockholders at the Corporation's office at 9665 Wilshire Boulevard, Beverly
Hills, California, or at such other time and place as shall be fixed by
resolution of the Board of Directors prior to the annual meeting of
stockholders, and no notice of such meeting shall be necessary to the newly
elected directors in order to legally constitute the meeting, provided a quorum
shall be present. In the event that the first meeting of each newly elected
Board of Directors is not held immediately following the adjournment of the
meeting of stockholders and the Board of Directors fail to fix the time and
place of such first meeting, or in the event such
5
<PAGE>
meeting is not held at the time and place so fixed by the Directors, the meeting
may be held at such time and place as shall be specified in a notice given as
hereinafter provided for special meeting of the Board of Directors, or it shall
be specified in a written waiver signed by all of the Directors.
Section 7. Regular meetings of the Board if Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board.
Section 8. Special meetings of the board may be called by the President or
by the Secretary on two days' notice to each director, either personally or by
mail or by telegram; special meetings shall be called by the President or
Secretary in like manner and on like notice on the written request of four
directors.
Section 9. At all meetings of the Board one-third of the total number of
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the Certificate of Incorporation. If a
quorum shall not be present at any meeting of the board of directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
[Amended by resolution adopted October 27, 1982]
Section 10. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, any action required or permitted to be taken at
any meeting of the Board of Directors or any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and such written consent is filed with the minutes
of proceedings of the Board or committee.
Section 11. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, members of the Board of Directors or any
committee thereof may participate in a meeting of such Board or committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participate in a meeting pursuant to this Section shall constitute presence in
person at such meeting.
6
<PAGE>
COMMITTEES OF DIRECTORS
Section 12. The Board of Directors may, by resolution passed by a majority
of the whole Board, designate one or more committees, each committee to consist
of one or more of the directors of the Corporation. The Board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In the absence
or disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the By-Laws of the Corporation; and,
unless the resolution or the Certificate of Incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 13. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 14. Unless otherwise restricted by the Certificate of
Incorporation, the Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
7
<PAGE>
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Effective January 1, 1994 the outside directors of Westminster Capital,
Inc. shall receive a monthly fee of $500 for services provided to the Board of
Directors or committee thereof and shall receive a fee of $500 per meeting
attended of the Board of Directors or committee thereof. [Amended as of March
25, 1994 retroactive to January 1, 1994].
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation, or of these By-Laws, notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or of these
By-Laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the Board of
Directors and shall be a chairman of the Board, a President, one or more Vice
Presidents, a secretary and a Treasurer. The Board of Directors may also choose
one or more Assistant Secretaries and Assistant Treasurers. Any number of
offices may be held by the same person, unless the Certificate of Incorporation
or these By-Laws otherwise provide.
Section 2. The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose a
8
<PAGE>
President, one or more Vice Presidents, a Secretary and a Treasurer, and may
choose a Chairman of the Board.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4. The salaries of all officers and agents of the Corporation
shall be fixed by the Board of Directors.
Section 5. The officers of the Corporation shall hold office until their
successors are chosen and qualify. Any officers elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if one be elected, shall preside at
all meetings of the Board of Directors and he shall have and perform such other
duties as from time to time may be assigned to him by the Board of Directors.
If at any time the office of President shall be vacant, the Chairman of the
Board shall be the chief executive office of the Corporation and shall have the
other powers of the President, unless the Board if Directors shall by resolution
determine that some other officer shall have and exercise such powers.
THE PRESIDENT
Section 7. The President shall be the chief executive officer of the
Corporation, shall preside at all meetings of the stockholders and in the
absence or non-election of a Chairman of the Board, at all meetings of the Board
of Directors, shall have general and active management of the business of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect.
Section 8. He shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the Corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the
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<PAGE>
Board of Directors to some other office of agent of the Corporation.
THE VICE-PRESIDENTS
Section 9. In the absence of the President or in the event of his
inability or refusal to act, the Vice-President, (or in the event there be more
than one Vice-President, the Vice Presidents in the order designated, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President. The Vice-President
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe. The Board of Directors may designate
an Executive Vice President, and if an Executive Vice President is designated by
the Board, he shall be senior to the other Vice Presidents and shall be the
Chief Operating Officer of the Corporation.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 10. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the Corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors, the
Chairman of the Board, if any, or the President, under whose supervision he
shall be. He shall have custody of the corporate seal of the Corporation and
he, or an Assistant Secretary, shall have the authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by his signature
or by the signature of such Assistant Secretary. The Board of Directors may
give general authority to any other officer to affix the seal of the Corporation
and to attest the affixing by his signature.
Section 11. The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the Secretary or in the event of his inability of refusal to act,
perform the duties and exercise
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the powers as the Board of Directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 12. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors.
Section 13. He shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Chairman of the Board, if any, the
President and the Board of Directors, at its regular meetings, or when the Board
if Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the Corporation.
Section 14. If required by the Board of Directors. he shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 15. The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election), shall
in the absence of the Treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Every holder of stock in the Corporation shall be entitled to
have a certificate, signed by, or in the name of the Corporation by, the
Chairman of the Board, or the President or a Vice-President and the Treasurer or
an
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<PAGE>
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by him in the Corporation.
Section 2. Any or all the signatures on the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give to the Corporation a bond in such shall require and/or to give to
the Corporation a bond in such sum as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
TRANSFERS OF STOCK
Section 4. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the Corporation may determine the Stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or
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<PAGE>
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty nor less than ten days before
the date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice to or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting, provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the Capital Stock of the Corporation, subject to
the provisions of the Certificate of Incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividend such sum or sums as the
directors from time to time, in their absolute discretion, think proper for
working capital or as a reserve or reserves to meet contingencies, or for
equalizing dividends or for repairing or maintaining any property of the
Corporation, or for such other purpose as the directors shall think conducive to
the interest of the Corporation, and the directors may modify or abolish any
such reserve in the manner in which it was created.
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ANNUAL STATEMENT
Section 3. The Board of Directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
Corporation.
CHECKS
Section 4. All checks or demands for money and note of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
FISCAL YEAR
Section 5. The fiscal year of the Corporation shall be fixed by resolution
of the board of directors.
SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 7. Any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceedings,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
expressly including service as a director, officer, or in a similar position
with any exchange, board of trade, clearing corporation or similar institution
on which the Corporation or any other corporation a majority of the stock of
which is owned directly or indirectly by the Corporation has membership
privileges at the relevant time during which any such position was held, may be
indemnified by the Corporation, unless a similar indemnification is provided by
such other corporation or organization which may be involved (any funds received
by any person as a result of the provisions of this
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Article shall be deemed an advance against his receipt of any such other
indemnification from any such other corporation or organization), against
expenses (including attorney's fees) judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Any such person who could
be indemnified pursuant to the preceding sentence except for the fact that the
subject action or suit is or was by or in the right of the Corporation may be
indemnified by the Corporation against expenses (including attorneys' fees)
actually and reasonably incurred to him in connection with the defense or
settlement of such action or suit, except that no indemnification shall be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the Corporation unless and only to the extent that the Court of Chancery
of the State of Delaware or the court in which such action or suit was brought
shall determine upon application that despite the adjudication of liability but
in the view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnify for such expenses which the Court of Chancery
or other such court shall deem proper.
To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in the preceding paragraph of this
Article, or in defense of any claim, issue or matter therein, he shall be
indemnified by the Corporation against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith without the
necessity of any action being taken by the Corporation other than the
determination, in good faith, that such defense has been successful. In all
other cases wherein indemnification is provided by this Article, unless ordered
by a court, indemnification shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct specified in this Article. Such determination
shall be made (1) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding
or (2) if such a quorum is not obtainable, or,
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even if obtainable a quorum of disinterested directors so directors, by
independent legal counsel in a written opinion, or (3) by the holders of a
majority of the shares of Common Stock outstanding. A determination so made
shall be final and binding upon the director, officer, employee or agent in
question.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person seeking
indemnification did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation and
with respect to any criminal action or proceeding, has reasonable cause to
believe that his conduct was unlawful. Entry of a judgment by consent as part
of a settlement shall not be deemed a final adjudication of liability for
negligence or misconduct in the performance of duty, nor of any other issue or
matter.
Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding as authorized by the Board of Directors in the
specific case upon receipt of an undertaking by the director, officer, employee
or agent involved to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the Corporation.
The indemnification hereby provided shall not be deemed exclusive of any
other rights to which those seeking indemnification may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in an official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of
heirs, executors and administrators of such person.
By action of the Board of Directors, notwithstanding any interest of the
directors in the action, the Corporation may purchase and maintain insurance, in
such amounts as the Board of Directors deems appropriate, on behalf of any
person who is or was a director, officer or employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture trust or other enterprise against any liability asserted
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against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation shall have the power to indemnify
him against such liability under the provisions of this Article.
ARTICLE VIII
AMENDMENTS
Section 1. These By-Laws may be altered, amended or repealed or new
by-laws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the Certificate of
Incorporation, at any regular meeting of the stockholders or the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
By-Laws be contained in the notice of such special meeting.
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INTRODUCTION TO AND REVIEW OF RTC'S CLAIMS
The following introduction and review of the RTC's investigation, proposed
claims, the responses to the claims, and the proposed settlement agreement is
set forth in accompaniment to our opinion, of which it is an integral part. We
express no opinion on the completeness or accuracy of the information furnished
to us. We have only relied upon this information to determine the legal issues
on which we are rendering this opinion.
REPRESENTATION BY COUNSEL. As you know, Westminster and the Named
Directors have been represented by Martin C. Washton, of the law firm of Gibson,
Dunn & Crutcher, 333 South Grand Avenue, Los Angeles, California 90071-3197. In
connection with the RTC's investigation, the RTC retained a private outside law
firm, Preuss Walker & Shanagher, 595 Market Street, 16th Floor, San Francisco,
California 94105. The RTC also employed its own internal counsel, Robert W.
Helstowski, in the investigation.
THE TOLLING AGREEMENTS. On December 15, 1993, the RTC, Westminster
and the Named Directors entered into a series of agreements (the "Tolling
Agreements," attached as Attachment A), with respect to possible claims by the
RTC. The Tolling Agreements indicate that the RTC "is investigating and
considering whether claims should be asserted against [the Named Directors and]
Westminster] arising out of, based upon, or relating to [their] service as a
director/officer of FarWest Savings, its parent, affiliates and subsidiaries,
including FarWest Financial Corporation and/or a shareholder thereof....." The
Tolling Agreements further indicate that the RTC deferred final decision
regarding the filing of claims or causes of action and that the Tolling
Agreements were entered into in order to facilitate an orderly process of
investigation and potential settlement negotiations.
The Tolling Agreements identify the claims subject to its provisions (the
"Subject Claims") as "limited to those concerning the receipt and/or allocation
of tax refunds, overhead or other expenses by FarWest Financial and/or [the]
Named Directors], as well as loans, subordinated debt, corporate securities and
high-yield bonds extended or purchased by FarWest in the 1987 - January 11, 1991
time period."
The Tolling Agreements provide that the running of statutes of limitations
and other periods governing the assertion of the Subject Claims are suspended
during the term of the Tolling Agreements. The term was initially set to expire
on June 30, 1994. The expiration date has been extended by agreement of the
parties from time to time, with the most recent extension set to expire on
February 15, 1995. The Tolling Agreements specified that no claims which had
expired before the Tolling Agreements would be revived by them.
The Tolling Agreements require that, prior to filing a suit on the
Subject Claims and before April 15, 1994, the RTC will provide notice of the
decision to commence an action, itemizing all claims in sufficient detail to
allow Westminster and the Named Directors to submit a factual and legal
response. The Tolling Agreements also required the RTC to provide Westminster
and the Named Directors access to all of the business records of FarWest Savings
<PAGE>
and FarWest Financial to permit them an opportunity to present a detailed
defense submission during the term of the Tolling Agreements.
THE RTC'S INVESTIGATION. We have learned of certain aspects of the RTC's
investigation described in the Tolling Agreements which may bear on your
consideration.
The RTC subpoenaed Westminster for documents relating to its investigation.
After a thorough search for documents responsive to the subpoena, Mr. Washton
wrote to the RTC to indicate that none of the subpoenaed records were in the
possession, custody or control of Westminster, and were believed to be in the
possession of the RTC, "since all such documents were seized by the RTC in
connection with documents taken from the Newport Beach and Century City offices
of FarWest Financial Corporation and FarWest Savings. SEE Mr. Washton's May 20,
1994 letter, and the declaration of Lillian Cremeans, attached to this letter as
Attachment B.
In addition to those documents, the RTC also requested documents in the
possession of Mr. Washton's firm concerning accounting records from Deloitte &
Touche in connection with a 1992 document production (as part of the GOLDMAN V.
BELZBERG litigation).
In addition to the documents subpoenaed from Westminster and these
individuals, the RTC interviewed numerous individuals, including the following:
Messrs. Kemper, Green, Kayne, Lyon, Behrle, Charles "Chic" Hall, and Frank
Henry, and a loan file paralegal. Each individual was asked for any documents
pertaining to their service.
In addition to the interviews conducted by the RTC, formal depositions
under oath were taken in front of a court reporter of at least William Belzberg
and Jack Herz.
According to the transcript of the deposition of Mr. Belzberg, the RTC
inquired of Mr. Belzberg about various subjects, including the following: the
present business of Westminster, various business entities owned or controlled
by Mr. Belzberg's brothers, Mr. Belzberg's financial statement and asset
disclosure, the GOLDMAN V. BELZBERG litigation and settlement, why FarWest
Savings failed, FarWest Savings' management structure from the mid-'80's
forward, the line of authority for approval of new loans, the role and function
of the Executive Committee before and after Mr. Kayne was hired, FarWest
Savings' high-yield bond portfolio, the BRT loans by FarWest Savings, FarWest
Savings' responses to reports of examination, the reliability of board minutes,
the Butterfield & Mason loan, the Dove Valley loan, the Hidden Lake loan, J.H.
Financial and the relationship with Jack Herz, Mr. Behrle's responsibilities and
compensation in connection with J.H. Financial, the proposed going-private
transaction for FarWest Financial, loans made outside of California, insurance
coverage for the costs in connection with the RTC claims, indemnification of
Directors, commercial versus residential lending, Executive Committee review of
loan submissions, Executive Committee procedures, overhead and payroll
allocation between FarWest Savings and FarWest Financial, income tax allocation
between FarWest Savings and FarWest Financial, the sale of the Newport Beach
headquarters building, and numerous
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borrowers or their principals (including Edward Matthews, Inawell Corporation,
Lincor, Aldo and Karen Baccala, J.L. Construction, Bill Walters, Yehuda Netanel,
IDM, Mike Chaupen, Continental American, Preferred Entity, Extra Low, Pacific
Savings Bank, California Communities, Charles Blutch, Cooper Fellman, Stratham,
Seaview Associates, Warmington, Wellsford, Warren Ashmann, Paul Hoekenga,
Robertson Homes, Western Village Lakewood Associates, Pacific Scene, Cambio,
Murray Properties, Jan Developments, Stuart Nolan, Aaron Katz, Rosenberg &
Bortz, Binaford, Unified Capital, Robert Van Santen, RWR Developments, U.S.
Homes, Regent Properties, Drever McIntosh, Rancho Verde Village, American
Investors, Guaranty Service Corp., Bristol House Partnership, Stonemark Islander
Limited Partnership, Richard Hall, Vista Poinsettia Park Apartments, Bayfront
Development, and John Baldwin).
THE RTC CLAIMS. On April 15, 1994, the RTC gave notice of the RTC's
decision to commence an action against Westminster and the Named Directors. A
copy of the RTC's "Claims Notice" is attached as C. You are urged to review the
Claims Notice carefully for a complete statement of the claims and their basis.
The following is a brief review of the Claims Notice.
The RTC stated it intended to bring an action against Westminster and the
Named Directors "arising out of, based upon or relating to their status as
majority shareholder, director and/or officer of FarWest Savings, its parent,
affiliates and subsidiaries." The Claims Notice stated that
[t]he claims ... relate to [FarWest Savings'] overpayment of interest to']
Westminster on certain subordinated debt, the RTC's right to a portion of
tax refunds paid or to be paid Westminster, allocation of expenses, and
losses related to certain loans and investments undertaken by [FarWest]
Savings] prior to its closure, including loans/investments with Butterfield
& Mason, J.L. Construction Company and Jack Herz.
In general, the claims and amounts were based upon the following
allegations.
1. Subordinated Debt. The RTC claims that Westminster purchased
$5.2 million of FarWest Savings' subordinated debt, originally issued in
1984, commencing in 1988. The RTC alleges the debt was purchased for the
purpose of retirement, but that interest continued to be paid on the debt
until it was retired at year end 1989. The total amount of interest
"overpayment" alleged "is expected to exceed $1.4 million."
2. Tax Refunds and Overhead Allocation. The RTC claims that there
were tax overpayments in the years 1986-1991, and that it is entitled to a
portion of the refunds that have been claimed or received. The RTC alleges
there were no tax allocation agreements between Westminster and FarWest
Savings and its subsidiaries and that tax payments were made with funds
obtained primarily from FarWest Savings. Additionally, the RTC claims that
there were no allocation agreements with respect to legal, accounting and
other professional services, and that most of Westminster's employees
during Mr.
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Kayne's tenure occupied offices in Century City, where expenses were paid
by FarWest Savings, including rent, utilities, security, office equipment
and certain salaries. The RTC claimed in excess of $1 million for the
overhead, and a proportionate share of the tax refunds in an amount to be
determined.
3. The RTC claimed that FarWest Savings incurred losses on certain
loans and acquisitions that were "extremely risky and uncertain, and
incompatible with [FarWest Savings'] balance sheet and deteriorating']
capital position." The RTC alleged that "[t]he failure of Messrs.
Belzberg, Kayne and Behrle to insist on primarily loan committee review of
certain of these projects eliminated virtually all peer review, resulting
in the [alleged] losses."
a. Butterfield & Mason. FarWest Savings entered into a
$5,000,000 line of credit agreement with Butterfield & Mason Mortgage
Company, Inc. ("Butterfield & Mason"). This corporation was formed
and owned by Warren Ashmann. The RTC alleges that the "loan appears
to have been based solely on the recommendation/direction of Fred
Kayne and his relationship with Warren Ashmann." The initial line of
credit was $5 million, but it was increased over time to a total of
$35 million, and that a total of $37.75 million was extended. The RTC
alleges that the purpose of the line of credit was the financing of
Butterfield & Mason's real estate loans secured by real estate in
California and western states. The RTC further alleges that (1) the
line was to be secured by a collateral assignment of Butterfield &
Mason's assets, (2) 20% of the commitment would be backed by outside
collateral, and (3) Mr. Ashmann would give a guarantee of 50% of the
deficiency following exhaustion of collateral. In addition, the terms
of the credit line provided for quarterly interest payments and an
annual payment of 50% of Butterfield & Mason's profits.
The RTC alleges that, in early 1990, Butterfield & Mason's loans
were in various states of default, but FarWest Savings did not advise
Mr. Ashmann that it would discontinue making advances until July of
1990. In October of 1990, Butterfield & Mason failed to make its
quarterly interest payment, and the loan was put on a non-accrual
status and classified as substandard. In July 1992, Butterfield &
Mason filed a petition under Chapter 11 of the Bankruptcy Code.
The RTC alleges that "Farwest did not conduct its normal
underwriting analysis with respect to this very risky line of credit."
Further, the RTC alleges that FarWest Savings did not obtain updated
financial information during the period when the credit line was
increased several times, that the value of pledged collateral did not
support the indebtedness, and that not all of the pledged collateral
had been properly assigned to FarWest Savings, as required.
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The RTC alleges that $17 million of the $37.75 million advanced
on the line was repaid, and after further payments and collateral
recoveries, there remained an estimated principal loss of
approximately $16.8 million. Expenses to carry the collateral
properties plus lost interest raised the potential total damages to in
excess of $25 million.
b. J.H. Financial Investments. Beginning in April 1988, the
RTC alleged, FarWest Savings contracted with a real estate broker
named Jack Herz (and his company, J.H. Financial) to acquire
properties to "flip" for immediate profit. Under this arrangement,
allegedly, Mr. Herz was to locate investment opportunities, FarWest
Savings (through its subsidiary American Capital Fidelity Corp.) would
take title to the property and provide any equity funds necessary to
complete the transaction, and Mr. Herz, through J.H. Financial, would
provide all management for the purchased real estate.
As a part of the transaction, the RTC alleges that Mr. Behrle was
to receive 5% of the net profit upon sale of the properties and that
First City Industries, a company in the Belzberg ownership chain,
invoiced FarWest Savings and was paid 75% of the cost of Behrle's
staff for their work on these investments. The total paid in these
regards was $181,942.32, the RTC alleges.
The RTC alleges that the transactions under this arrangement were
approved by the Executive Committee but were not run through the
normal channels of supervision and underwriting; that the
documentation was inadequate; that management did not conduct
feasibility studies, market analyses, and internal asset reviews;
and that when the properties were acquired, in no case was a buyer
committed to purchasing the property. The RTC alleges that four
properties were purchased by FarWest Savings under some portion of
this arrangement, that none were profitable, and that Mr. Herz
received a total of $478,660 from FarWest for advances on profits and
office expenses. One of the properties purchased under this
arrangement is a three-story office building located at 10350 Santa
Monica Boulevard, in Los Angeles, California. The RTC alleges that
the total loss over time is $4.15 million.
c. Panorama Partners. In November 1988, FarWest Savings
entered into a partnership entitled Panorama Partners to purchase a
vacant department store in Panorama City, Los Angeles County, for a
purchase price of $9 million. The RTC alleges FarWest Savings
contributed $7 million, that the transaction was, like the Herz
transactions, intended to be "flipped," but there was not a signed
resale contract when the property was acquired. The RTC alleges that
one of FarWest Savings' partners was Mark Mandelbaum, who is a "Behrle
associate." The RTC estimates the loss at $4 million in connection
with this acquisition.
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d. J.L. Construction. The RTC alleged that, beginning in 1988,
FarWest entered into a lending relationship with J.L. Construction
Company, owned by James Franklin. FarWest Savings allegedly extended
a total of five loans totalling approximately $48.6 million between
March and September of 1989, and a sixth loan of $5.5 million was
extended to a "straw borrower" of Franklin's, Aldo Baccala, at FarWest
Savings' suggestion, in October of 1989 in order to avoid loan-to-one-
borrower regulations. The RTC alleges that although FarWest Savings
"followed standard underwriting procedures with respect to these
loans, the Executive Committee ignored the excessive concentration of
credit to a young developer with a history of aggressive risk-taking
and inability to complete projects on budget." The RTC identified
anticipated losses on the J.L. Construction loans, including the
Baccala loan, totalling $18,473,510.
With regard to the Baccalas, the RTC alleged that J.L.
Construction assigned all of its interest in a purchase agreement to
the Baccalas and on the same day, the Baccalas signed a loan
application with FarWest Savings. Subsequently, J.L. Construction and
the Baccalas signed an agreement whereby the Baccalas would acquire
the property as J.L. Construction's assignee, retaining $100,000 of
the proceeds of a second purchase loan in return for their
participation in the transaction.
Following receipt of the Claims Notice, Mr. Washton requested access to
"all business records of Far West and Far West Financial, and particularly those
which relate to the subordinated debt, tax refunds, overhead allocation, and the
specific loans and investments identified in [the Claims Notice]." A copy of Mr.
Washton's request is attached as Attachment __. A number of subsequent requests
were made by Mr. Washton in an attempt to obtain the documents.
The RTC ultimately -- albeit tardily -- complied with Mr. Washton's request
for access to documents. These documents remain in Mr. Washton's possession,
and are available for your review. In general, they contain copies of certain
minutes of Westminster and FarWest Savings Board of Directors meetings, copies
of certain policies and procedures manuals of FarWest Savings, copies from the
loan files of Butterfield & Mason, copies from the files of J.L. Construction
and the J.H. Financial transactions, among others.
THE RESPONSE TO THE RTC'S CLAIMS. Following Gibson, Dunn & Crutcher's
investigation, Mr. Washton prepared and submitted a 59-page, single-spaced
response to the Claims Notice on July 18, 1994. This "Claims Response" is
attached as Attachment E. You are urged to review the Claims Response carefully.
In short, the Claims Response denied liability, and asserted that the RTC,
as receiver for FarWest Savings, was liable to Westminster for in excess of
$12.4 million, based upon the following findings and allegations.
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The Claims Response stated that 20 binders of indices of FarWest Savings
documents had been reviewed, that the contents of 150 boxes of materials had
been reviewed, and that more than 30 boxes of documents had been copied in order
to evaluate the RTC's claims. In addition, former FarWest Savings employees
knowledgeable about the issues raised by the RTC were solicited for assistance.
Mr. Washton asserted that the RTC must not have been able to spend the time
examining the pertinent records before drafting the Claims Notice or did not
know where to look in FarWest Savings' records. The RTC "has chosen only a
handful of transactions, which represent less than 1% of the assets of the
entire association - which exceed $4 billion. Nor has the RTC given any
indication that it considered the plethora of profitable transactions which made
millions for FarWest Savings, or the fact that FarWest was constantly subject to
detailed oversight by the Office of Thrift Supervision and state regulatory
agencies during its operations."
The Claims Response argued that the RTC disregarded the extensive banking
and business experience of the Executive Committee members of FarWest Financial,
as well as its diligence. Similarly, the Claims Response stated that the RTC
ignored the substantial investment stake of some of the members of the Executive
Committee in the success of FarWest. The Claims Response addressed the
substantive merit of the claims without any significant treatment of purely
legal defenses, such as the lapse of the statute of limitation before the
parties entered into the tolling agreement. But, referring to a recent United
States Supreme Court decision, the Claims Response argued that state (rather
than federal) statutes of limitations will likely apply, and that the California
limitations period for "common law negligence claims of the type you have
alleged" expired before the Tolling Agreements became effective.
Concerning each of the RTC's allegations, Mr. Washton responded as follows:
1. Subordinated Debt. "FarWest Financial purchased $6.2 million of
subordinated notes from FarWest Savings for investment purposes in 1988 and
1989. FarWest Savings paid interest on these notes to FarWest Financial,
just as it did to others who purchased the notes. Effective at the end of
1989, and not before, FarWest Financial made a capital contribution to
FarWest Savings by legally retiring the debt. From that time on, no more
interest payments were made by FarWest Savings on the notes." The Claims
Response noted that because FarWest Savings and FarWest Financial are
different legal entities, under SEC and GAAP requirements for reporting for
consolidated accounting, inter-company transactions were eliminated for
accounting purposes only, but that such payments continued to be made
lawfully.
The Claims Response indicated that "decision to legally retire
the debt was first discussed as early as late November 1989," citing a
memorandum from Charles Green to Fred Kayne dated November 24, 1989. The
contribution is discussed in the December 1989 Board Book, under "Financial
Highlights," which stated "effective December 31, 1989, the Company made a
capital contribution to the Association in the form of the Association's
subordinated notes formerly purchased by the Company. The
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notes were effectively retired by the Association." The Claims Response
also identified consolidated statements of financial condition contained in
FarWest Savings' December 31, 1988 10-K, March 31, 1989 10-Q, June 30, 1989
10-Q, September 30, 1989 10-Q, which show the entire $65 million face value
of the subordinated note as a liability until the December 31, 1989 10-K,
when they were retired, as indicated in Note 11 to the December 31, 1989
10-K.
2. Tax Refunds. The Claims Response stated that "[f]rom 1987 on,
FarWest Financial made ALL state and federal tax payments for FarWest
Savings with its own funds, and thus any tax refunds appropriately belonged
to FarWest Financial. Indeed, given that FarWest Financial paid millions
of dollars of tax obligations of FarWest Savings which have not been
reimbursed, FarWest Financial presently is owed said reimbursement by
FarWest Savings and fully intends to pursue a claim in this regard for $4.6
million."
The Claims Response stated that it had "conducted an extensive
investigation of the RTC's claims by examining general ledger transactions,
account analysis documents, cash accounts reconciliations, cancelled checks
and check copies, tax returns as filed with taxing authorities, and various
other materials." Thus, the Claims Response indicated that FarWest
Financial was entitled to all of the $2.2 million refund received by
FarWest Financial on or about December 31, 1990 from the California
Franchise Tax Board for tax payments made in 1989. In addition, the Claims
Response noted that FarWest Financial has federal refund applications
pending for tax year 1988 and California State tax refunds for the years
1987, 1988 and 1989. Having paid all these taxes, FarWest Financial
claimed it was entitled to the refunds, and that if the refunds were not
adequate, it would look to FarWest Savings for the remainder of the amount
advanced on its behalf.
3. Allocation of Overhead Expenses. The Claims Response states that
"FarWest Financial had its own financial resources, including over $40
million in stock proceeds, and kept its expenses separate from those of
FarWest Savings." In addition, the Claims Response stated that "FarWest
Financial paid a significant amount of its expenses using checks drawn on
its operating checking account which was maintained with FarWest Savings."
The Claims Response attached backup information from "check copies of these
accounts and found payments for rent, utilities, supplies, inter-company
liabilities, equipment, and similar expense items." The Claims Response
stated "FarWest Financial used its own corporate resources when issuing
these checks, not those of FarWest Savings."
With respect to FarWest Financial's expenses paid using checks drawn
on FarWest Savings funds, entries were made as inter-company accounts
receivable and payable on the books of the individual entities "to
acknowledge the temporary advance of funds as owing between the two
entities" and that "management attempted to settle" the intercompany
receivables and payables through the actual writing of checks on a regular
basis.
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"Review of General Ledger #2995-0550134 (FarWest Financial payable to
FarWest Savings) during the 1989-90 time frame shows the above-described
activity," the Claims Response concluded.
The Claims Response stated that the inter-company transactions and
payroll expenses were paid using FarWest Savings checks (as a "common
paymaster") and adjusted between the companies by inter-company accounts.
"FarWest Financial used its available financial resources, such as its
operating checking account and the stock proceeds deposit account, to
regularly retire its obligations to FarWest Savings.
4. J.H. Financial Investments. The Claims Response states that
there were three, not four, properties purchased in association with J.H.
Financial (specifically, 500 South Sepulveda Boulevard, 19935 Ventura
Boulevard and 10350 Santa Monica Boulevard). "Numerous other transactions
proposed by J.H. Financial were rejected because, after review by Keenan
Behrle, they were not considered appropriate."
The Claims Response reviewed, over 14 single-spaced pages, documents
and information located pertaining to each of these three properties,
detailing the origination of each transaction, the due diligence performed,
the offers made and received, and the funds spent and received. The Claims
Response asserted that "two of the subject transactions generated
significant positive cash flow for FarWest [Savings], resulting in profits
of about a half million dollars (after taking into consideration FULL
recoupment of all overhead, profits and commissions paid to J.H.
Financial)." They also provided additional benefits, in that FarWest's
Valley office was relocated to the Ventura Boulevard location and the Santa
Monica property was considered for the future corporate headquarters for
FarWest Savings, given that there were no options for additional space at
FarWest Savings' Century City location.
In the remaining transaction (at Santa Monica Boulevard), the Claims
Response asserted that the transaction could in no way be considered
reckless. Offers were received for more than the purchase price in place
before the transaction, offers for more than the purchase price were
received afterward, another transaction in a less desirable location (on
Sepulveda) returned a higher price, and a building across the street from
the subject property sold about the same time for substantially more (per
square foot).
Concerning Mr. Behrle, the Claims Response pointed out a resolution
unanimously approved at FarWest Savings' Board meeting on February 8, 1989.
A copy of the minutes of that meeting and that resolution are attached to
this letter as Attachment F. According to the resolution, Mr. Behrle's role
and compensation had been discussed and approved by the Board (after he was
asked to leave the room). The following members were present and voted
their approval of the resolution: Messrs. Belzberg, Green, Baum, Hall,
Indick, Kayne, Muh and Nathan and Mrs. George (Mr. Ziffren was absent).
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Mr. Behrle, the resolution noted, had engaged and would continue to
engage in extensive "efforts in identifying certain properties which made
attractive investments for the Association," including "consulting,
analytic, advisory, managerial and other services," and, although he was a
Director and member of the Executive Committee, his efforts "are not and
have not been adequately compensated." Mr. Behrle's interest was in
"realized profit only." Thus, the Claims Response stated, "Mr. Behrle's
interest was directly aligned with that of FarWest -- to engage in
profitable transactions." The resolution concluded "the bonus was fair and
reasonable under the circumstances." Mr. Behrle's efforts on behalf of the
Association were described (some 30% of his time). The Claims Response
stated that Mr. Behrle's total earnings were $14,000 under this plan.
Mr. Behrle's staff also devoted time and efforts to the projects, the
Claims Response stated. Thus, "30% of Mr. Behrle's payroll and related
office expenses were paid by FarWest Savings because this was the amount of
time 'dedicated' to the work for FarWest."
5. Panorama Partners. The Claims Response pointed out that the
purchase of this property in August, 1990, was the result of a great deal
of research, including, among other things, inspection reports, visits by
Executive Committee members, and market research performed by the partners
who were experienced in real estate investments. There was a signed resale
contract (together with joint escrow instructions) at the time the purchase
by Panorama Partners was made and the institution was in a very positive
financial position (before FIRREA). Subsequently there were many offers
and four contracts to purchase the property for more than the $9 million
purchase price. An appraisal two years after the purchase of the property
valued the property at $1.39 million over the purchase price. The Claims
Response stated that the RTC declined a $12 million offer in February 1991,
and has not responded to subsequent offers.
6. The Baccalas' Loan and J.L. Construction. The Claims Response
noted that the RTC had withdrawn its claims regarding all J.L. Construction
loans (for River Run, Metro Center II and Dublin Meadows). The RTC
declined Westminster's and the Named Directors' request to review those
loan files. The remaining claim concerned the Baccala Loan.
The Claims Response denied that the Baccala loan was reckless. The
loan amount was $5.55 million, while the purchase price was $11.27 million
(I.E., there was a 50.75% equity to cost ratio and a 58% loan to value
ratio). The loan was approved following all underwriting standards, as the
RTC acknowledged in the Claims Notice. The loan was approved by the
Executive Committee, according to the minutes of the September 19, 1989
meeting, which stated "[t]he strength of the transaction is the low LTV
[loan to value ratio] of 58%. Underwriting performed a limited economic
analysis using Borrower's proforma rents and expenses. Based upon these
numbers, an NOI of 10.9% and DSC of 1.04 were calculated."
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<PAGE>
The Executive Committee, the Claims Response states, had no knowledge
whatsoever that J.L. Construction may have been involved, as there is
nothing the executive summary prepared by the Major Loans Group that
mentions J.L. Construction Company, and there is similarly nothing in the
Major Loans Group's recommendation to the Executive Committee. There was
no FarWest Savings construction loan commitment. No interest of J.L.
Construction was recorded on the property. The equity of $5.72 million was
provided by SLGH Investments, Inc., which took a second trust deed on the
property, and by Property Mortgage Company, Inc., which took a third trust
deed in the property. There was no evidence that the Executive Committee
knew of the contract between the Baccalas and J.L. Construction. In fact,
the first document that appears in the file mentioning the agreement is a
letter from J.L. Construction's legal counsel dated April 9, 1991, after
the RTC took over FarWest Savings. The RTC contacted J.L. Construction in
July, 1991 to obtain a copy of the referenced agreement, which was, in
fact, executed after the loan was made to the Baccalas.
An RTC internal memorandum questioned the appropriateness of the loan
because of a discrepancy between two appraisals, but the Claims Response
pointed out that each appraisal was based upon different total land areas.
Last, the Baccala loan would not, the Claims Response argued, have
violated loan-to-one-borrower regulations, and that such regulations had
not been proposed, let alone finalized, by the Office of Thrift Supervision
as of the date of the loan.
7. Butterfield & Mason Line of Credit. The Claims Response stated
that the Butterfield & Mason proposal was received in the ordinary course
of business on July 7, 1988, and that Warren Ashmann was not a personal or
social friend of Mr. Kayne, although Mr. Kayne knew him as a member of the
business community and through charitable affairs. Mr. Kayne, along with
Charles Green, Chief Financial Officer and Executive Vice President (and a
member of the Executive Committee), met with Mr. Ashmann, and presented the
proposal to the Executive Committee. Mr. Belzberg also met with Mr.
Ashmann. The Executive Committee approved the proposed transaction.
Mr. Green was charged with negotiating the terms and documentation of
the transaction. He hired the Manatt, Phelps law firm to assist him. In
November 1988, after three months of negotiation, the transaction was
documented in a 29-page agreement (totalling 100 pages with exhibits), a
21-page guarantee, and related documents. The due diligence that had been
performed included credit and related reports from Murphy and Maconachy,
Inc. and Research Reports, Inc., as well as financial statements and tax
returns for Warren Ashmann and all of his interests, totalling some two
inches thick.
Mr. Ashmann and his wife guaranteed 50% of the "Repayment Deficiency"
as that term was defined in the guarantee. To further secure the loan the
Ashmanns granted a security interest in collateral originally worth $2.0
million, and the stock of Butterfield
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<PAGE>
& Mason, as well as a first priority lien in the underlying collateral.
FarWest Savings was to receive interest at the prime rate plus 1.5%, plus
FarWest Savings would be paid 50% of the net profits annually. FarWest
Savings received $1.0 million for the first year's profits. The Ashmann's
security and eligible collateral increased proportionately to the increases
in the credit line, the Claims Response stated.
The subsequent increases in the line were reviewed and approved by
Charles Hall and Charles Green and/or Fred Kayne. As the Claims Response
noted, each modification was accompanied by appropriate analyses, charts of
"Eligible Collateral" and "Eligible Loans," portfolio summaries, default
rates, collateral valuation worksheets, and status reports. Modification F
in April 26, 1990 noted that "[s]ince inception, there have not been any
losses associated with Butterfield & Mason's direct lending program."
According to the Claims Response, necessary documentation for each
advance was assembled and reviewed by the Servicing Department, as with any
other loan. Mr. Hall had extensive personal involvement in reviewing the
properties on which loans were made, and Mr. Green met with Butterfield &
Mason personnel and visited properties, according to the Claims Response.
The Claims Response drew attention to the manner in which further
advances on the line were terminated; the fact that threats of litigation
followed; and Butterfield & Mason's proposed settlement and workout that
the RTC did not accept. In August 1990, Mr. Ashmann was informed that
FIRREA prevented FarWest Savings from making further advances. He insisted
that FarWest had to honor its obligation to provide funds, which were
needed to work out some of the loans. When Butterfield & Mason defaulted,
it informed FarWest Savings that it was using its funds for workouts. On
January 8, 1991, Butterfield & Mason submitted a five-page 14-point
settlement proposal. An "Analysis of Proposed Settlement Agreement" was
performed by the RTC by a special FarWest Savings work-out group, which
reviewed the proposal favorably. The RTC also received a legal evaluation
of the transaction by the firm of Neumeyer Landrum & Dillion, and a
detailed estimate of value of the primary and secondary collateral.
Nevertheless, the RTC did not accept the proposed settlement.
Subsequently, the RTC appointed a workout specialist, Robert D.
Saunders, who placed primary responsibility for deficiencies on Butterfield
& Mason, not FarWest Savings. Mr. Saunders stated that it was a "principal
issue" whether FarWest Savings should have advanced more money under the
line of credit, not whether existing advances could be justified. Mr.
Saunders also conducted an extensive review of the books and records of
Butterfield & Mason and a search for assets of the Ashmanns, which revealed
complete financial information and disclosures about assets. The RTC
ultimately kept Mr. Ashmann in place, subject to provisions of a July 1,
1991 Modification and Settlement Agreement. The Claims Response concluded
its review of the Butterfield &
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<PAGE>
Mason loan by questioning how, in light of the RTC's conduct, it could make
accusations against the Named Directors.
8. FarWest Financial's (Westminster's) Claims. The Claims Response
claimed the RTC was liable on three matters to FarWest Financial
(Westminster). First, the taxes (summarized above), in the amount of $4.6
million, plus interest for four years or more, as reduced by the
anticipated refunds. Second, FarWest Financial had accounts with FarWest
Savings which never paid interest, and had the secondary stock offering
proceeds (originally $41 million) in an intercompany payable account, on
which it received no interest. The amount of interest owed was estimated
at nearly $7 million, plus interest for four or more years. Third, FarWest
Financial funded $1.3 million in total bonus accruals, only $517,000 of
which was ever paid. The excess amount of $791,300 is due to FarWest
Financial, with interest for four years.
THE CLAIMS REPLY. On September 1, 1994, the RTC sent a reply to Mr.
Washton ("The Claims Reply," which is Attachment G), addressing the arguments in
the Claims Response.
THE PROPOSED SETTLEMENT AGREEMENT. Following the Claims Reply, Mr. Washton
met with representatives and lawyers for the RTC beginning on September 14,
1994, and on numerous subsequent occasions. Following these meetings, a
proposed settlement agreement and release (the "Proposed Settlement Agreement"
is attachment H) emerged. You are urged to review the Proposed Settlement
Agreement carefully.
The Settlement Agreement contains the following terms (this description is
not a substitute for a careful reading of the entire agreement). Westminster
will pay to the RTC $4.0 million. The parties will mutually release all claims
(including unknown claims) relating to the claims asserted in the Claims Notice,
the Named Directors' service as directors and/or officers of FarWest Savings,
and/or Westminster's status as a shareholder of FarWest Savings. Westminster
and the Named Directors waive the right to any dividends from the RTC's
resolution of FarWest Savings. The RTC retains rights against all debtors to
FarWest Savings and against other officers or directors of FarWest Savings and
attorneys, accounts, officials and other professionals. The RTC does not
release anyone from criminal liability or restitution or administrative or other
governmental action. The RTC pledges specific cooperation in obtaining tax
refunds. There is no admission of liability or violation of any law.
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<PAGE>
TOLLING AGREEMENT
This Tolling Agreement, effective as of the 15th day of December, 1993 (the
"Effective Date"), is made by and between Westminster Capital ("Westminster")
and the Resolution Trust Corporation, in all of its capacities, including but
not limited to its corporate capacity its capacity as conservator or receiver
of FarWest Savings and Loan Association ("FarWest"), and its other capacities as
set forth in 12 U.S.C. Section 1821(d), (collectively the "RTC").
WHEREAS, the RTC is investigating and considering whether claims should be
asserted against Westminster arising out of, based upon or relating to
Westminster's status as the parent corporation of FarWest, its affiliates and
subsidiaries, under its prior name FarWest Financial Corporation, and
WHEREAS, in reliance upon this Tolling Agreement, the RTC is continuing its
investigation and deferring final decision regarding the filing of claims or
causes of action against Westminster respecting FarWest.
NOW, THEREFORE, in order to facilitate an orderly process of investigation
and potential settlement negotiations, the RTC and Westminster, in consideration
of the mutual promises and covenants set forth herein and for other good and
valuable consideration, the sufficiency and receipt of which is hereby
acknowledged, agree as follows:
1. The term of this Tolling Agreement (the "Term") shall be from
December 15, 1993, through the earlier of June 30, 1994, or the 30th day after
the date of written notice of termination is given by either party.
2. The claims covered by this Tolling Agreement ("Subject Claims")
shall be limited to those concerning the receipt and/or allocation of tax
refunds, overhead or other expenses by FarWest Financial and/or Westminster, as
well as loans, subordinated debt, corporate securities and high-yield bonds
extended or purchased by FarWest in the 1987-January 11, 1991 time period.
3. Westminster agrees that the running of any statute of
limitations, laches or any other period relating to the timing of assertion of
the Subject Claims by the RTC against Westminster shall be suspended during the
Term of this Tolling Agreement as to any lawsuit or claim which RTC files
against Westminster.
4. Westminster agrees that the running of any statute of
limitations, laches or any other period relating to the timing of assertion of
claims by the RTC against Westminster shall be suspended during the Term of this
1
<PAGE>
Agreement as to any lawsuit or claim which RTC files against Westminster within
thirty (30) days after the expiration or termination of the Term hereof arising
out of or related to FarWest ("RTC Suit").
5. If RTC does not commence suit against Westminster before the
expiration or termination of the Term hereof, or any later date mutually agreed
on by the parties in a written amendment to this Tolling Agreement, then
Westminster may assert in defense any defense based upon any statute of
limitations, laches or any other period relating to the timing of assertion of
claims that it has or would have had including, but not limited to, the
expiration of any statute of limitations during the tolling period of this
Agreement.
6. Prior to filing a Suit on the Subject Claims, and no later than
April 15, 1994, RTC will provide Westminster written notice of its decision to
commence such an action. Such notice shall itemize all claims in sufficient
detail to allow Westminster to submit a legal and factual response to the
claims.
7. The RTC shall provide Westminster and its counsel access to all
of the business records of FarWest and FarWest Financial Corporation so as to
afford it an opportunity to present a detailed defense submission to the RTC
during the term of this Tolling Agreement. Westminster shall provide the RTC
and its counsel access to all of its business records relating to FarWest or
FarWest Financial in connection with the RTC's ongoing investigation.
8. Prior to filing any lawsuit on the Subject Claims against any
party, the RTC will provide Westminster with an opportunity to meet with the
senior RTC legal and business representatives who would have to approve the
filing of claims for purposes of presenting legal and factual defenses
consistent with any written submission made by Westminster.
9. Any notice to be provided to Westminster in connection with this
Agreement shall be addressed as follows and delivered by confirmed facsimile
transmission, messenger or overnight mail service to:
Martin C. Washton, Esq.
GIBSON, DUNN & CRUTCHER
333 South Grand Avenue
Los Angeles, CA 90071
Any notice to be provided to the RTC in connection with this Tolling Agreement
shall be addressed as follows and delivered by confirmed facsimile
transmission, messenger or overnight mail service to:
2
<PAGE>
Robert Helstowski, Esq.
RESOLUTION TRUST CORPORATION
Legal Department
4000 MacArthur Blvd., 5th Floor
Newport Beach, CA 92260
10. No RTC Suit will be filed during the Term of this Tolling
Agreement.
11. This Tolling Agreement shall not in any manner revive any claims
or causes of action that may be barred by, or limit in any way, the assertion of
any defense based upon, any statute of limitations, laches or any other period
relating to the timing of assertion of claims prior to December 15, 1993. Nor
shall this Agreement revive any claim or cause of action brought as assignee
that was barred prior to assignment. This Tolling Agreement shall not in any
way effect the RTC's right to assert the revival of applicable statutes of
limitations by operation of law or statute.
12. In computing any period of time prescribed by this Tolling
Agreement, the day of the act or event from which the designated period of time
begins to run shall not be included.
13. The parties hereto represent and warrant that the terms, extent
and duration of this Tolling Agreement are reasonable and that they will not
challenge or contest the authority of the parties to agree to suspend the
running of or waiver or not to assert the defense of any applicable statute of
limitations, laches period or other period relating to timing as set forth
therein.
14. By entering into this Tolling Agreement, Westminster does not
admit that RTC has rights in the capacities listed herein, and this Tolling
Agreement shall not be construed as an admission by either party that valid
claims or defenses exist against either party.
15. Westminster represents and warrants that it and the person
executing this Tolling Agreement have the authority to execute this Tolling
Agreement and that the signature which appears below binds Westminster to the
terms of this Tolling Agreement.
16. The RTC represents and warrants that it and the person executing
this Tolling Agreement have the authority to execute this Tolling Agreement, and
that the signature which appears below binds the RTC to the terms of this
Tolling Agreement.
3
<PAGE>
17. The provisions of this Tolling Agreement will be binding and
effective with respect to any successor in interest of the RTC (including, but
not limited to, any acquiror of the business or assets of the RTC).
16. The provisions of this Tolling Agreement will be binding and
effective with respect to any successor in interest of FarWest Financial
Corporation and/or Westminster (including, but not limited to, any acquiror of
the business or assets of FarWest Financial Corporation or Westminster).
19. Nothing in this Tolling Agreement shall prejudice the rights of
the RTC or Westminster to assert any claims or defenses, including statute of
limitations, laches and other defenses based on timing of assertion of claims
against any person or entity other than the RTC and Westminster.
20. This Tolling Agreement, including its terms, shall remain
confidential by and between the parties hereto and their attorneys. Westminster
agrees to provide the RTC with a list of Westminster's shareholders within five
days of signing this Tolling Agreement in order to allow for verification of the
confidentiality of said Tolling Agreement.
21. This Tolling Agreement contains the full and complete agreement
of the parties hereto and may not be altered or amended, except in writing
executed by representatives of both the RTC and Westminster.
22. In entering into this Tolling Agreement, the parties represent
that they have been represented by counsel who are the attorneys of each party's
own choice in the negotiation and drafting of this agreement. Accordingly, this
Tolling Agreement shall not be strictly construed against any party, and the
rule of construction of contracts resolving any ambiguities against the drafting
party shall be inapplicable. The parties further represent that the terms of
this Tolling Agreement have been completely read and explained to them by their
attorneys, and that those terms are fully understood and voluntarily accepted by
them.
23. This Tolling Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but also which together
will constitute one and the same instrument.
4
<PAGE>
WESTMINSTER CAPITAL
By: /s/ W. Belzberg Date: 12/30/93
---------------------------------- ----------------------------
Name: William Belzberg
-------------------------------
Title: Chairman
-------------------------------
RESOLUTION TRUST CORPORATION,
in all of its capacities:
By: Date:
---------------------------------- ----------------------------
Robert W. Helstowski Esq.
Title: Its Attorney
5
<PAGE>
TOLLING AGREEMENT
This Tolling Agreement, effective as of the 15th day of December, 1993 (the
"Effective Date"), is made by and between William Belzberg ("Belzberg") and the
Resolution Trust Corporation, in all of its capacities, including but not
limited to its corporate capacity, its capacity as conservator or receiver of
FarWest Savings and Loan Association ("FarWest"), and its other capacities as
set forth in 12 U.S.C. Section 1821(d), (collectively the "RTC").
WHEREAS, the RTC is investigating and considering whether claims should be
asserted against Belzberg arising out of, based upon or relating to Belzberg's
service as a director/officer of FarWest, its parent, affiliates and
subsidiaries, including FarWest Financial Corporation and/or a shareholder
thereof (hereinafter collectively "FarWest").
WHEREAS, in reliance upon this Tolling Agreement, the RTC is continuing its
investigation and deferring final decision regarding the filing of claims or
causes of action against Belzberg respecting FarWest.
NOW, THEREFORE, in order to facilitate an orderly process of investigation
and potential settlement negotiations, the RTC and Belzberg, in consideration of
the mutual promises and covenants set forth herein and for other good and
valuable consideration, the sufficiency and receipt of which is hereby
acknowledged, agree as follows:
1. The term of this Tolling Agreement (the "Term") shall be from
December 15, 1993, through the earlier of June 30, 1994, or the 30th day after
the date of written notice of termination is given by either party.
2. The claims covered by this Tolling Agreement ("Subject Claims")
shall be limited to those concerning the receipt and/or allocation of tax
refunds, overhead or other expenses by FarWest Financial and/or Belzberg, as
well as loans, subordinated debt, corporate securities and high-yield bonds
extended or purchased by FarWest in the 1987-January 11, 1991 time period.
3. Belzberg agrees that the running of any statute of limitations,
laches or any other period relating to the timing of assertion of the Subject
Claims by the RTC against Belzberg shall be suspended during the Term of this
Tolling Agreement as to any lawsuit or claim which RTC files against Belzberg.
4. Belzberg agrees that the running of any statute of limitations,
laches or any other period relating to the timing of assertion of claims by the
RTC against Belzberg shall be suspended during the Term of this Agreement as to
any
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<PAGE>
lawsuit or claim which RTC files against Belzberg within thirty (30) days after
the expiration or termination of the Term hereof arising out of or related to
FarWest ("RTC Suit").
5. If RTC does not commence suit against Belzberg before the
expiration or termination of the Term hereof, or any later date mutually agreed
on by the parties in a written amendment to this Tolling Agreement, then
Belzberg may assert in defense any defense based upon any statute of
limitations, laches or any other period relating to the timing of assertion of
claims that it has or would have had including, but not limited to, the
expiration of any statute of limitations during the tolling period of this
Agreement.
6. Prior to filing a Suit on the Subject Claims, and no later than
April 15, 1994, RTC will provide Belzberg written notice of its decision to
commence such an action. Such notice shall itemize all claims in sufficient
detail to allow Belzberg to submit a legal and factual response to the claims.
7. The RTC shall provide Belzberg and his counsel access to all of
the business records of FarWest and FarWest Financial Corporation so as to
afford him an opportunity to present a detailed defense submission to the RTC
during the term of this Tolling Agreement. Belzberg shall provide the RTC and
its counsel access to all of his business records relating to FarWest or FarWest
Financial in connection with the RTC's ongoing investigation.
8. Prior to filing any lawsuit on the Subject Claims against any
party, the RTC will provide Belzberg with an opportunity to meet with the senior
RTC legal and business representatives who would have to approve the filing of
claims for purposes of presenting legal and factual defenses consistent with any
written submission made by Belzberg.
9. Any notice to be provided to Belzberg in connection with this
Agreement shall be addressed as follows and delivered by confirmed facsimile
transmission, messenger or overnight mail service to:
Martin C. Washton, Esq.
GIBSON, DUNN & CRUTCHER
333 South Grand Avenue
Los Angeles, CA 90071
Any notice to be provided to the RTC in connection with this Tolling Agreement
shall be addressed as follows and delivered by confirmed facsimile transmission,
messenger or overnight mail service to:
2
<PAGE>
Robert Helstowski, Esq.
RESOLUTION TRUST CORPORATION
Legal Department
4000 MacArthur Blvd., 5th Floor
Newport Beach, CA 92260
10. No RTC Suit will be filed during the Term of this Tolling
Agreement.
11. This Tolling Agreement shall not in any manner revive any claims
or causes of action that may be barred by, or limit in any way, the assertion of
any defense based upon, any statute of limitations, laches or any other period
relating to the timing of assertion of claims prior to December 15, 1993. Nor
shall this Agreement revive any claim or cause of action brought as assignee
that was barred prior to assignment. This Tolling Agreement shall not in any
way effect the RTC's right to assert the revival of applicable statutes of
limitations by operation of law or statute.
12. In computing any period of time prescribed by this Tolling
Agreement, the day of the act or event from which the designated period of time
begins to run shall not be included.
13. The parties hereto represent and warrant that the terms, extent
and duration of this Tolling Agreement are reasonable and that they will not
challenge or contest the authority of the parties to agree to suspend the
running of or waiver or not to assert the defense of any applicable statute of
limitations, laches period or other period relating to timing as set forth
therein.
14. By entering into this Tolling Agreement, Belzberg does not admit
that RTC has rights in the capacities listed herein, and this Tolling Agreement
shall not be construed as an admission by either party that valid claims or
defenses exist against either party.
15. Belzberg represents and warrants that he has the authority to
execute this Tolling Agreement and that the signature which appears below binds
Belzberg to the terms of this Tolling Agreement.
16. The RTC represents and warrants that it and the person executing
this Tolling Agreement have the authority to execute this Tolling Agreement, and
that the signature which appears below binds the RTC to the terms of this
Tolling Agreement.
3
<PAGE>
17. The provisions of this Tolling Agreement will be binding and
effective with respect to any successor in interest of the RTC (including, but
not limited to, any acquiror of the business or assets of the RTC).
18. The provisions of this Tolling Agreement will be binding and
effective with respect to any successor in interest of Belzberg (including, but
not limited to, any acquiror of the business or assets of Belzberg).
19. Nothing in this Tolling Agreement shall prejudice the rights of
the RTC or Belzberg to assert any claims or defenses, including statute of
limitations, laches and other defenses based on timing of assertion of claims
against any person or entity other than the RTC and Belzberg.
20. This Tolling Agreement, including its terms, shall remain
confidential by and between time parties hereto and their attorneys.
21. This Tolling Agreement contains the full and complete agreement
of the parties hereto and may not be altered or amended, except in writing,
executed by representatives of both the RTC and Belzberg.
22. In entering into this Tolling Agreement, the parties represent
that they have been represented by counsel who are the attorneys of each party's
own choice in the negotiation and drafting of this agreement. Accordingly, this
Tolling Agreement shall not be strictly construed against any party, and the
rule of construction of contracts resolving any ambiguities against the drafting
party shall be inapplicable. The parties further represent that the terms of
this Tolling Agreement have been completely read and explained to them by their
attorneys, and that those terms are fully understood and voluntarily accepted by
them.
4
<PAGE>
23. This Tolling Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but also which together
will constitute one and the same instrument.
WILLIAM BELZBERG
By: /s/ W. Belzberg Date: 12/30/93
---------------------------------- ----------------------------
Name:
-------------------------------
Title:
-------------------------------
RESOLUTION TRUST CORPORATION,
in all of its capacities:
By: Date:
---------------------------------- ----------------------------
Robert W. Helstowski Esq.
Title: Its Attorney
5
<PAGE>
TOLLING AGREEMENT
This Tolling Agreement, effective as of the 15th day of December, 1993 (the
"Effective Date"), is made by and between Keenan Behrle ("Behrle") and the
Resolution Trust Corporation, in all of its capacities, including but not
limited to its corporate capacity, its capacity as conservator or receiver of
FarWest Savings and Loan Association ("FarWest"), and its other capacities as
set forth in 12 U.S.C. Section 1821(d), (collectively the "RTC").
WHEREAS, the RTC is investigating and considering whether claims should be
asserted against Behrle arising out of, based upon or relating to Behrle's
service as a director/officer of FarWest, its parent, affiliates and
subsidiaries, including FarWest Financial Corporation and/or a shareholder
thereof (hereinafter collectively "FarWest").
WHEREAS, in reliance upon this Tolling Agreement, the RTC is continuing its
investigation and deferring final decision regarding the filing of claims or
causes of action against Behrle respecting FarWest.
NOW, THEREFORE, in order to facilitate an orderly process of investigation
and potential settlement negotiations, the RTC and Behrle, in consideration of
the mutual promises and covenants set forth herein and for other good and
valuable consideration, the sufficiency and receipt of which is hereby
acknowledged, agree as follows:
1. The term of this Tolling Agreement (the "Term") shall be from
December 15, 1993, through the earlier of June 30, 1994, or the 30th day after
the date of written notice of termination is given by either party.
2. The claims covered by this Tolling Agreement ("Subject Claims")
shall be limited to those concerning the receipt and/or allocation of tax
refunds, overhead or other expenses by FarWest Financial and/or Behrle, as well
as loans, subordinated debt, corporate securities and high-yield bonds extended
or purchased by FarWest in the 1987-January 11, 1991 time period.
3. Behrle agrees that the running of any statute of limitations,
laches or any other period relating to the timing of assertion of the Subject
Claims by the RTC against Behrle shall be suspended during the Term of this
Tolling Agreement as to any lawsuit or claim which RTC files against Behrle.
4. Behrle agrees that the running of any statute of limitations,
laches or any other period relating to the timing of assertion of claims by the
RTC against Behrle shall be suspended during the Term of this Agreement as to
any
1
<PAGE>
lawsuit or claim which RTC files against Behrle within thirty (30) days after
the expiration or termination of the Term hereof arising out of or related to
FarWest ("RTC Suit").
5. If RTC does not commence suit against Behrle before the
expiration or termination of the Term hereof, or any later date mutually agreed
on by the parties in a written amendment to this Tolling Agreement, then Behrle
may assert in defense any defense based upon any statute of limitations, laches
or any other period relating to the timing of assertion of claims that it has or
would have had including, but not limited to, the expiration of any statute of
limitations during the tolling period of this Agreement.
6. Prior to filing a Suit on the Subject Claims, and no later than
April 15, 1994, RTC will provide Behrle written notice of its decision to
commence such an action. Such notice shall itemize all claims in sufficient
detail to allow Behrle to submit a legal and factual response to the claims.
7. The RTC shall provide Behrle and his counsel access to all of the
business records of FarWest and FarWest Financial Corporation so as to afford
him an opportunity to present a detailed defense submission to the RTC during
the term of this Tolling Agreement. Behrle shall provide the RTC and its
counsel access to all of his business records relating to FarWest or FarWest
Financial in connection with the RTC's ongoing investigation.
8. Prior to filing any lawsuit on the Subject Claim against any
party, the RTC will provide Behrle with an opportunity to meet with the senior
RTC legal and business representatives who would have to approve the filing of
claims for purposes of presenting legal and factual defenses consistent with any
written submission made by Behrle.
9. Any notice to be provided to Behrle in connection with this
Agreement shall be addressed as follows and delivered by confirmed facsimile
transmission, messenger or overnight mail service to:
Martin C. Washton, Esq.
GIBSON, DUNN & CRUTCHER
333 South Grand Avenue
Los Angeles, CA 90071
Any notice to be provided to the RTC in connection with this Tolling Agreement
shall be addressed as follows and delivered by confirmed facsimile transmission,
messenger or overnight mail service to:
2
<PAGE>
Robert Helstowski, Esq.
RESOLUTION TRUST CORPORATION
Legal Department
4000 MacArthur Blvd., 5th Floor
Newport Beach, CA 92260
10. No RTC Suit will be filed during the Term of this Tolling
Agreement.
11. This Tolling Agreement shall not in any manner revive any claims
or causes of action that may be barred by, or limit in any way, the assertion of
any defense based upon, any statute of limitations, laches or any other period
relating to the timing of assertion of claims prior to December 15, 1993. Nor
shall this Agreement revive any claim or cause of action brought as assignee
that was barred prior to assignment. This Tolling Agreement shall not in any
way effect the RTC's right to assert the revival of applicable statutes of
limitations by operation of law or statute.
12. In computing any period of time prescribed by this Tolling
Agreement, the day of the act or event from which the designated period of time
begins to run shall not be included.
13. The parties hereto represent and warrant that the terms, extent
and duration of this Tolling Agreement are reasonable and that they will not
challenge or contest the authority of the parties to agree to suspend the
running of or waiver or not to assert the defense of any applicable statute of
limitations, laches period or other period relating to timing as set forth
therein.
14. By entering into this Tolling Agreement, Behrle does not admit
that RTC has rights in the capacities listed herein, and this Tolling Agreement
shall not be construed as an admission by either party that valid claims or
defenses exist against either party.
15. Behrle represents and warrants that he has the authority to
execute this Tolling Agreement and that the signature which appears below binds
Behrle to the terms of this Tolling Agreement.
16. The RTC represents and warrants that it and the person executing
this Tolling Agreement have the authority to execute this Tolling Agreement, and
that the signature which appears below binds the RTC to the terms of this
Tolling Agreement.
3
<PAGE>
17. The provisions of this Tolling Agreement will be binding and
effective with respect to any successor in interest of the RTC (including, but
not limited to, any acquiror of the business or assets of the RTC).
18. The provisions of this Tolling Agreement will be binding and
effective with respect to any successor in interest of Behrle (including, but
not limited to, any acquiror of the business or assets of Behrle).
19. Nothing in this Tolling Agreement shall prejudice the rights of
the RTC or Behrle to assert any claims or defenses, including statute of
limitations, laches and other defenses based on timing of assertion of claims
against any person or entity other than the RTC and Behrle.
20. This Tolling Agreement, including its terms, shall remain
confidential by and between the parties hereto and their attorneys.
21. This Tolling Agreement contains the full and complete agreement
of the parties hereto and may not be altered or amended, except in writing
executed by representatives of both the RTC and Behrle.
22. In entering into this Tolling Agreement, the parties represent
that they have been represented by counsel who are the attorneys of each party's
own choice in the negotiation and drafting of this agreement. Accordingly, this
Tolling Agreement shall not be strictly construed against any party, and the
rule of construction of contracts resolving any ambiguities against the drafting
party shall be inapplicable. The parties further represent that the terms of
this Tolling Agreement have been completely read and explained to them by their
attorneys, and that those terms are fully understood and voluntarily accepted by
them.
4
<PAGE>
23. This Tolling Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but also which together
will constitute one and the same instrument.
KEENAN BEHRLE
By: /s/ Keenan Behrle Date: 1/5/94
---------------------------------- ----------------------------
Name: Keenan Behrle
-------------------------------
Title:
-------------------------------
RESOLUTION TRUST CORPORATION,
in all of its capacities:
By: Date:
---------------------------------- ----------------------------
Robert W. Helstowski Esq.
Title: Its Attorney
5
<PAGE>
TOLLING AGREEMENT
This Tolling Agreement, effective as of the 15th day of December, 1993 (the
"Effective Date"), is made by and between Fred Kayne ("KAYNE") and the
Resolution Trust Corporation, in all of its capacities, including but not
limited to its corporate capacity, its capacity as conservator or receiver of
FarWest Savings and Loan Association ("FarWest"), and its other capacities as
set forth in 12 U.S.C. Section 1821(d), (collectively the "RTC").
WHEREAS, the RTC is investigating and considering whether claims should be
asserted against Kayne arising out of, based upon or relating to Kayne's service
as a director/officer of FarWest, its parent, affiliates and subsidiaries,
including FarWest Financial Corporation and/or a shareholder thereof
(hereinafter collectively "FarWest").
WHEREAS, in reliance upon this Tolling Agreement, the RTC is continuing its
investigation and deferring final decision regarding the filing of claims or
causes of action against Kayne respecting FarWest.
NOW, THEREFORE, in order to facilitate an orderly process of investigation
and potential settlement negotiations, the RTC and Kayne, in consideration of
the mutual promises and covenants set forth herein and for other good and
valuable consideration, the sufficiency and receipt of which is hereby
acknowledged, agree as follows:
1. The term of this Tolling Agreement (the "Term") shall be from
December 15, 1993, through the earlier of June 30, 1994, or the 30th day after
the date of written notice of termination is given by either party.
2. The claims covered by this Tolling Agreement ("Subject Claims")
shall be limited to those concerning the receipt and/or allocation of tax
refunds, overhead or other expenses by FarWest Financial and/or Kayne, as well
as loans, subordinated debt, corporate securities and high-yield bonds extended
or purchased by FarWest in the 1987-January 11, 1991 time period.
3. Kayne agrees that the running of any statute of limitations,
laches or any other period relating to the timing of assertion of the Subject
Claims by the RTC against Kayne shall be suspended during the Term of this
Tolling Agreement as to any lawsuit or claim which RTC files against Kayne.
4. Kayne agrees that the running of any statute of limitations,
laches or any other period relating to the timing of assertion of claims by the
RTC against Kayne shall be suspended during the Term of this Agreement as to
any
1
<PAGE>
lawsuit or claim which RTC files against Kayne within thirty (30) days after the
expiration or termination of the Term hereof arising out of or related to
FarWest ("RTC Suit").
5. If RTC does not commence suit against Kayne before the expiration
or termination of the Term hereof, or any later date mutually agreed on by the
parties in a written amendment to this Tolling Agreement, then Kayne may assert
in defense any defense based upon any statute of limitations, laches or any
other period relating to the timing of assertion of claims that it has or would
have had including, but not limited to, the expiration of any statute of
limitations during the tolling period of this Agreement.
6. Prior to filing a Suit on the Subject Claims, and no later than
April 15, 1994, RTC will provide Kayne written notice of its decision to
commence such an action. Such notice shall itemize all claims in sufficient
detail to allow Kayne to submit a legal and factual response to the claims.
7. The RTC shall provide Kayne and his counsel access to all of the
business records of FarWest and FarWest Financial Corporation so as to afford
him an opportunity to present a detailed defense submission to the RTC during
the term of this Tolling Agreement. Kayne shall provide the RTC and its counsel
access to all of his business records relating to FarWest or FarWest Financial
in connection with the RTC's ongoing investigation.
8. Prior to filing any lawsuit on the Subject Claims against any
party, the RTC will provide Kayne with an opportunity to meet with the senior
RTC legal and business representatives who would have to approve the filing of
claims for purposes of presenting legal and factual defenses consistent with any
written submission made by Kayne.
9. Any notice to be provided to Kayne in connection with this
Agreement shall be addressed as follows and delivered by confirmed facsimile
transmission, messenger or overnight mail service to:
Martin C. Washton, Esq.
GIBSON, DUNN & CRUTCHER
333 South Grand Avenue
Los Angeles, CA 90071
Any notice to be provided to the RTC in connection with this Tolling Agreement
shall be addressed as follows and delivered by confirmed facsimile transmission,
messenger or overnight mail service to:
2
<PAGE>
Robert Helstowski, Esq.
RESOLUTION TRUST CORPORATION
Legal Department
4000 MacArthur Blvd., 5th Floor
Newport Beach, CA 92260
10. No RTC Suit will be filed during the Term of this Tolling
Agreement.
11. This Tolling Agreement shall not in any manner revive any claims
or causes of action that may be barred by, or limit in any way, the assertion of
any defense based upon, any statute of limitations, laches or any other period
relating to the timing of assertion of claims prior to December 15, 1993. Nor
shall this Agreement revive any claim or cause of action brought as assignee
that was barred prior to assignment. This Tolling Agreement shall not in any
way effect the RTC's right to assert the revival of applicable statutes of
limitations by operation of law or statute.
12. In computing any period of time prescribed by this Tolling
Agreement, the day of the act or event from which the designated period of time
begins to run shall not be included.
13. The parties hereto represent and warrant that the terms, extent
and duration of this Tolling Agreement are reasonable and that they will not
challenge or contest the authority of the parties to agree to suspend the
running of or waiver or not to assert the defense of any applicable statute of
limitations, laches period or other period relating to timing as set forth
therein.
14. By entering into this Tolling Agreement, Kayne does not admit
that RTC has rights in the capacities listed herein, and this Tolling Agreement
shall not be construed as an admission by either party that valid claims or
defenses exist against either party.
15. Kayne represents and warrants that he has the authority to
execute this Tolling Agreement and that the signature which appears below binds
Kayne to the terms of this Tolling Agreement.
16. The RTC represents and warrants that it and the person executing
this Tolling Agreement have the authority to execute this Tolling Agreement, and
that the signature which appears below binds the RTC to the terms of this
Tolling Agreement.
3
<PAGE>
17. The provisions of this Tolling Agreement will be binding and
effective with respect to any successor in interest of the RTC (including, but
not limited to, any acquiror of the business or assets of the RTC).
18. The provisions of this Tolling Agreement will be binding and
effective with respect to any successor in interest of Kayne (including, but not
limited to, any acquiror of the business or assets of Kayne).
19. Nothing in this Tolling Agreement shall prejudice the rights of
the RTC or Kayne to assert any claims or defenses, including statute of
limitations, laches and other defenses based on timing of assertion of claims
against any person or entity other than the RTC and Kayne.
20. This Tolling Agreement, including its terms, shall remain
confidential by and between the parties hereto and their attorneys.
21. This Tolling Agreement contains the full and complete agreement
of the parties hereto and may not be altered or amended, except in writing
executed by representatives of both the RTC and Kayne.
22. In entering into this Tolling Agreement, the parties represent
that they have been represented by counsel who are the attorneys of each party's
own choice in the negotiation and drafting of this agreement. Accordingly, this
Tolling Agreement shall not be strictly construed against any party, and the
rule of construction of contracts resolving any ambiguities against the drafting
party shall be inapplicable. The parties further represent that the terms of
this Tolling Agreement have been completely read and explained to them by their
attorneys, and that those terms are fully understood and voluntarily accepted by
them.
4
<PAGE>
23. This Tolling Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but also which together
will constitute one and the same instrument.
FRED KAYNE
By: /s/ Fred Kayne Date: 1/5/94
---------------------------------- ----------------------------
Name: Fred Kayne
-------------------------------
Title:
-------------------------------
RESOLUTION TRUST CORPORATION,
in all of its capacities:
By: Date:
---------------------------------- ----------------------------
Robert W. Helstowski Esq.
Title: Its Attorney
5
<PAGE>
[PREUSS WALKER & SHANAGHER LETTERHEAD]
January 27, 1995
Martin C. Washton, Esq.
GIBSON, DUNN & CRUTCHER
333 South Grand Avenue
Los Angeles, CA 90071
RE: RTC: FARWEST SAVINGS
OUR FILE NO. 34253\0447
Dear Marty:
This will confirm the agreement between our respective clients to further
extend the Tolling Agreement between the RTC, Westminster Capital, Inc., William
Belzberg, Keenan Behrle and Fred Kayne until and including February 15, 1995.
We understand that you have conferred with each of your clients,
Westminster, Belzberg, Behrle and Kayne, and upon your signature and return of a
copy of this letter, represent that you are authorized on their behalf to enter
into this further extension agreement. Similarly, we have the authority from
the RTC to enter into this further extension. Bob Helstowski of the RTC will
also sign a copy of this letter.
Thank you for your courtesy and cooperation in this regard. Please sign
and return this letter by fax and mail. Please call with any questions or
comments.
Very truly yours,
/s/ Denis F. Shanagher
Denis F. Shanagher
DFS:shl
ACKNOWLEDGED AND AGREED:
Dated: 1/30 , 1995 Dated: , 1994
------------ --------------------
/s/ Robert W. Helstowski
----------------------------------- ---------------------------------------
ROBERT W. HELSTOWSKI MARTIN WASHTON
<PAGE>
[PREUSS WALKER & SHANAGHER LETTERHEAD]
January 27, 1995
Martin C. Washton, Esq.
GIBSON, DUNN & CRUTCHER
333 South Grand Avenue
Los Angeles, CA 90071
RE: RTC: FARWEST SAVINGS
OUR FILE NO. 34253\0447
Dear Marty:
This will confirm the agreement between our respective clients to further
extend the Tolling Agreement between the RTC, Westminster Capital, Inc., William
Belzberg, Keenan Behrle and Fred Kayne until and including February 15, 1995.
We understand that you have conferred with each of your clients,
Westminster, Belzberg, Behrle and Kayne, and upon your signature and return of a
copy of this letter, represent that you are authorized on their behalf to enter
into this further extension agreement. Similarly, we have the authority from
the RTC to enter into this further extension. Bob Helstowski of the RTC will
also sign a copy of this letter.
Thank you for your courtesy and cooperation in this regard. Please sign
and return this letter by fax and mail. Please call with any questions or
comments.
Very truly yours,
/s/ Denis F. Shanagher
Denis F. Shanagher
DFS:shl
ACKNOWLEDGED AND AGREED:
Dated: , 1994 Dated: 1/27 , 1994
------------ --------------------
/s/ Martin Washton
----------------------------------- ---------------------------------------
ROBERT W. HELSTOWSKI MARTIN WASHTON
<PAGE>
[GIBSON, DUNN & CRUTCHER LETTERHEAD]
May 20, 1994
VIA TELECOPY AND U.S. MAIL
(213) 229-7380 T 87126-00165
Robert W. Helstowski
Senior Attorney
Legal Division
Resolution Trust Corporation
4000 MacArthur Boulevard
Newport Beach, California 92660-2516
Re: Far West Savings
Your Reference No. 2188
-----------------------
Dear Mr. Helstowski:
This will respond to your letter dated May 13, 1994.
First, enclosed please find a copy of the subject declaration we
discussed. Please note that Westminster Capital, Inc. (erroneously served as
Westminster, Inc. with the wrong address) has caused a thorough search for
documents responsive to the subpoena to be performed and has not located any
documents responsive to the subpoena in its possession, custody or control.
Again, the documents responsive to the subject subpoena are believed to be in
the possession of the Resolution Trust Corporation, since all such documents
were seized by the RTC in connection with documents taken from the Newport Beach
and Century City offices of Far West Financial Corporation and Far West Savings
& Loan. The Century City office WAS open until RTC took over, and indeed for a
significant time afterwards as well.
Since Westminster Capital, Inc. would like to review the subject
records as soon as possible in order to reply to the letter from Mr. Shanagher
dated April 15, 1994, please provide Westminster with a copy of all documents
responsive to
<PAGE>
GIBSON, DUNN & CRUTCHER
Robert W. Helstowski
May 20, 1994
Page 2
the subpoena as soon as possible. This type of cooperation is anticipated in
the terms of the Tolling Agreement.
Second, I was not involved in the production by Deloitte & Touche in
1992. However, I have looked into the matter you raised. We appear to have in
our possession accounting records for both Far West Financial Corporation and
Far West Savings & Loan, and it is believed that these accounting records (for
both entities) were previously produced for your review. I thus would ask that
you review your records to confirm whether the accounting documents for Far West
Financial Corporation are already in your possession. Of course, we are willing
to make such records again available for your review at your convenience should
you not be able to locate them.
Thank you for your time and attention to these matters.
Very truly yours,
/s/ David A. Battaglia
David A. Battaglia
DAB/ayb
cc: Dennis F. Shanagher (via facsimile)
Martin C. Washton, Esq.
<PAGE>
DECLARATION OF LILLIAN CREMEANS
I, Lillian Cremeans, hereby declare as follows:
1. I am the Assistant Secretary of Westminster Capital, Inc.,
previously known as Far West Financial Corporation. I have worked at
Westminster Capital, Far West Financial Corporation, and Far West Savings & Loan
for over 17 years. My business address is 9665 Wilshire Boulevard, Suite M-10,
Beverly Hills, California 90212.
2. I have reviewed this subpoena addressed to Westminster, Inc.
dated April 26, 1994, issued by Robert W. Helstowski, senior attorney,
Resolution Trust Corporation. I have caused a search for the documents
responsive to the subpoena to be performed. The search has revealed no
documents responsive to the subpoena maintained at the offices of Westminster
Capital, Inc., or in the possession, custody, or control of Westminster Capital,
Inc.
3. It is believed that all documents responsive to the subject
subpoena are presently in the possession of the Resolution Trust Corporation.
It is believed that the documents responsive to the subpoena were seized by the
Resolution Trust Corporation in connection with documents taken from the Newport
Beach and Century City offices of Far West Financial Corporation and Far West
Savings & Loan.
I declare under penalty of perjury under the laws of the State of
California that the foregoing is true and correct and that this declaration was
executed on May 18, 1994, in Los Angeles, California.
/s/ Lillian Cremeans
---------------------------------------
Lillian Cremeans
1
<PAGE>
[PREUSS WALKER & SHANAGHER LETTERHEAD]
April 15, 1994
PRIVILEGED AND CONFIDENTIAL - FRE 408
VIA FACSIMILE
Martin Washton, Esq.
GIBSON, DUNN & CRUTCHER
333 South Grand Avenue
Los Angeles, CA 90071
RE: RTC: FARWEST SAVINGS
OUR FILE NO. 34253\0447
Dear Marty:
Pursuant to the terms of the Tolling Agreements currently in effect between
the Resolution Trust Corporation ("RTC") and your clients, Westminster Capital
("Westminster") and Messrs. William Belzberg, Keenan Behrle and Fred Kayne, the
purpose of this letter is to provide written notice of the RTC's decision to
commence an action against your clients following the termination of the Tolling
Agreements, arising out of, based upon or relating to their status as majority
shareholder, director and/or officer of FarWest Savings and Loan ("FarWest"),
its parent, affiliates and subsidiaries. This letter is submitted for the
purposes of settlement, and is considered confidential, privileged and subject
to the provisions of Federal Rules of Evidence Section 408.
The claims are itemized below. Is short summary, they relate to FarWest's
overpayment of interest to Westminster on certain subordinated debt, the RTC's
right to a portion of tax refunds paid or to be paid Westminster, allocation of
expenses, and losses related to certain loans and investments undertaken by
FarWest prior to its closure, including loans/investments with Butterfield &
Mason, J.L. Construction Company and Jack Herz. The RTC will provide you and
your clients access to the appropriate records of FarWest and FarWest Financial
in its possession so as to afford an opportunity to present a detailed
submission in defense of the claim during the term of the Tolling Agreements.
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 2
SUBORDINATED DEBT
In 1984, FarWest issued $35 million of fixed rate and $30 million of
variable rate subordinated debt through a public offering underwritten by Drexel
Burnham Lambert. Commencing in 1988, FarWest Financial (now Westminster) made
purchases of certain of this debt for the purpose of retirement thereof.
Westminster disclosed the retirement of the debt in its consolidated financial
statements. However, the RTC's records show that FarWest continued to pay
interest on that retired debt to Westminster.
As appears in Westminster's September 30, 1988 10-Q and its year-end 10-K,
Westminster purchased $5.2 million of the subordinated debt in the last half of
1988 including $1.1 million of fixed rate and $4.1 million of variable rate
notes. An additional $11.05 million of fixed rate debt was purchased and
retired by Westminster during 1989; $50,000.00 in the first quarter, $1 million
in the second quarter and $10 million in the third quarter. Although the debt
was purchased and retired in the quarters mentioned above, FarWest continued to
pay interest on that debt through year-end 1989. A total of $173,250.00 in
additional interest was paid on the fixed rate debt ostensibly retired in
September of 1988. An additional $604,032.50 was paid on the variable rate
notes repurchased at the same time. Between September 30, 1989 and year-end,
$592,893.26 in interest was paid to Westminster by FarWest in connection with
the $11.5 million in debt repurchased during that year. The additional amounts
of overpayment for the interim months has not been fully calculated at this
time. The total amount of interest overpayment is expected to exceed $1.4
million.
TAX REFUNDS AND OVERHEAD ALLOCATION
As you may be aware, there have been ongoing negotiations between the RTC,
Westminster and the state and federal tax authorities regarding the alleged
overpayment of taxes for the years 1986-1991. In late 1990, Westminster
received a refund in excess of $2.22 million from the California Franchise Tax
Board for year-end 1989, arising from additional losses attributable to American
Capital Fidelity Corporation ("ACFC"). That refund was provided to Westminster
and was not passed through to ACFC due to the alleged receivables due from ACFC
at the time. However, the RTC notes that there was not in place any tax
allocation agreement between Westminster and FarWest or any of its subsidiaries.
Moreover, it appears that tax payments were made with funds obtained primarily
from FarWest. Similarly, the RTC notes that there was no allocation agreement
between Westminster and FarWest for legal, accounting and other professional
services, and that most of Westminster's employees during Mr. Kayne's tenure
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 3
occupied offices in Century City. All expenses necessary for Westminster's
conduct of business at that location were paid by FarWest, including rent,
utilities, security, office equipment and certain salaries.
Westminster continues to pursue the recovery of refunds for the 1986-1989
tax years in connection with adjustments for loan fee income, negative
amortization of loan interest income, bad debt reduction and most significantly,
the lower of cost or market adjustments with respect to ACFC's inventory of
securities. In the absence of any tax allocation agreement, it is the RTC's
position that any tax refund should be appropriately allocated to the subsidiary
which generated the refund. In this instance, ACFC will have generated the
majority of the refunds and will be entitled to its proportionate share thereof.
At this point the actual amount of the share to be allocated to the RTC is
unknown since the taxing authorities have not yet decided the refund issue.
Likewise, FarWest paid significant Westminster expenses, in excess of $1
million, in violation of regulatory provisions that prohibit such payments,
including but not limited to Section 23A and B of the Federal Reserve Act.
LOANS AND INVESTMENTS
As FarWest's profits deteriorated in the late 1980's, certain of FarWest's
executive officers, namely Messrs. Belzberg, Behrle and Kayne, approved of and
engaged in increasingly speculative loan and investment transactions on behalf
of FarWest. These transactions were extremely risky and uncertain, and
incompatible with FarWest's balance sheet and deteriorating capital position.
In most instances, they were made outside of established lending and investment
procedures, without adequate underwriting, and solely upon the recommendation/
direction of one or more members of the executive committee. The failure of
Messrs. Belzberg, Kayne and Behrle to insist on primary loan committee review of
certain of these projects eliminated virtually all peer review, resulting in the
losses described below.
A. BUTTERFIELD & MASON
On November 3, 1988, Charles Green and Fred Kayne of FarWest approved a $5
million line of credit agreement with Butterfield & Mason Mortgage Company, Inc.
(BMMC), a corporation formed and owned by Warren Ashmann. The purpose of the
line of credit was to provide the funds for BMMC's financing of real estate
loans secured by real estate in California and other Western states. The line
was to be secured by 1) a collateral assignment of all assets owned or acquired
by BMMC, 2) a minimum of 20% of the commitment amount in outside
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 4
collateral, and 3) the personal guarantee of Mr. Ashmann to cover 50% of any
deficiency following exhaustion of the collateral. The terms provided for the
payment of interest quarterly and an annual distribution of 50% of BMMC's
profits.
On January 9, 1989, Kayne approved an increase in the line to $10 million
and a reduction in the interest rate from 2.0% over prime to 1.5%. On March 6,
1989, the loan amount was increased to $15 million. On April 5, 1989, the loan
amount was further increased to $20 million. Subsequent increases to $25
million and $30 million were made on May 5, 1989 and September 7, 1989,
respectively, with Kayne's approval and/or direction. It should also be noted
that on at least six different occasions FarWest consented to BMMC's extension
of credit in excess of the lending limit established under the operative
agreements. FarWest did not obtain updated financial information regarding BMMC
during this period. The security obtained by FarWest ranged from second to
sixth deeds of trust, apparently at the discretion of BMMC.
In early 1990 FarWest became aware that certain BMMC loans were in various
stages of default. However, it was not until July of 1990 that FarWest advised
Ashmann that it would discontinue making advances on the line of credit, noting
that the value of pledged collateral did not support the indebtedness and that
not all the pledged collateral bad been properly assigned to Far West as
required. BMMC was unable to make its quarterly interest payment on October 1,
1990. The loan was put on non-accrual status and classified as substandard at
that time. On July 2, 1992, BMMC filed a Chapter 11 bankruptcy petition.
In conducting its underwriting with respect to this loan arrangement,
FarWest received financial statements for entities in which Mr. Ashmann had
interests. There is no evidence that any of the asset values therein were
substantiated, liabilities matched with credit reports and/or tax returns, or
that any cash flow analysis was performed. FarWest did order a Business
Credibility Report on BMMC, which found no information. This should not have
been any surprise since BMMC was a newly formed entity for this venture. There
were no personal financial statements of Mr. Ashmann found in the credit file,
nor was there any documentation of any effort to verify or analyze any financial
information regarding Ashmann. FarWest did not require independent appraisals
of the properties it took as collateral for extensions of the line of credit.
Instead, FarWest accepted so-called internal appraisals from BMMC, apparently
performed by Mr. Ashmann, who himself lacked any appraisal credentials.
Collateral property types included retail and commercial shopping centers,
single family homes, apartments, vacant land and condominiums. Finally, FarWest
did not
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 5
attempt to obtain or approve financial statements from the underlying borrowers
prior to funding on the line. In short, there was no proper evaluation of the
sources of repayment on the line of credit, the borrower, the guarantor or the
collateral. FarWest did not conduct its normal underwriting analysis with
respect to this very risky line of credit. Instead, this loan appears to have
been based solely on the recommendation/direction of Fred Kayne and his
relationship with Warren Ashmann.
A total of $37.75 million was advanced on this line, secured by second,
third, fourth and even fifth or sixth collateral positions on approximately
twenty properties. Approximately $17 million was repaid to FarWest, leaving net
advances of approximately $20.75 million. Following BMMC's bankruptcy, the RTC
has received an additional approximately $.95 million, reducing net advances to
$19.7 million. Unfortunately, due to the amount of deficiencies and
insufficient equity, only four of the collateral properties appear to have any
hope of residual value. The RTC estimates the net realizable value of its
collateral to be $1.67 million. A further reduction for an RTC lien on certain
bank account proceeds results in an estimated principal loss of approximately
$16.8 million. The addition of the RTC's expenses to carry the collateral
properties and lost interest raises the total potential damages to in excess of
$25 million.
B. HERZ DIRECT INVESTMENTS
In April of 1988, FarWest contracted with real estate broker Jack Herz, an
associate of William Belzberg and Keenan Behrle, to acquire certain selected
real estate properties to "flip" for immediate profit. Herz was to locate an
investment opportunity, after which FarWest, through ACFC, would take title to
the property and provide any equity funds necessary to complete the transaction.
Herz, through his company JH Financial, was to provide all management for the
purchased real estate. There was an inherent conflict of interest in that
Keenan Behrle was to receive an additional 5% of the net profit upon sale of the
properties. In addition, First City Industries, a company in the Belzberg
ownership chain, invoiced FarWest and was paid 75% of the cost of Behrle's staff
for their "work" on these investments. The total paid in that regard was
$181,942.32.
All subsequent transactions involved properties that management expected to
resell within a short period of time at a gain; however in no case was a buyer
committed to purchasing the property when FarWest closed escrow on its purchase.
Investments were approved by the Executive Committee but were not run through
the normal channels of supervision and underwriting. Documentation of all
investments was inadequate and there is no indication that management
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 6
conducted a feasibility study, market analysis or an internal asset review.
Appraisals were not ordered prior to or upon acquisition of any of these
investments. It appears that complete reliance was placed upon the
representations of Jack Herz and his relationship with Messrs. Belzberg and
Behrle. Four properties were purchased by FarWest under some portion of this
arrangement. None were profitable, especially given that Herz received a total
of $478,660.00 from FarWest for advances on profits and office expenses.
One of the properties purchased in June of 1989 by FarWest pursuant to this
arrangement was a 3-story, 42,725 square foot office building located at 10350
Santa Monica Boulevard in Los Angeles, California. The purchase price was $10
million. After purchase, it developed that the property had a number of repair
and improvement items necessary to make it marketable. An appraisal in August
of 1990 estimated the value at only been $7.7 million to $8.3 million. The
property was ultimately sold as part of a bulk sale of assets in 1993. The RTC
received cash of approximately $1 million from the sale and the purchaser
assumed the $5.1 million trust deed debt. With the inclusion of carrying costs,
the total loss at this time appears to be $4.15 million.
In November of 1988, FarWest entered into a partnership entitled Panorama
Partners for the purchase of a 149,247 square foot vacant department store
located in Panorama City, Los Angeles County. The purchase price was $9
million, of which FarWest contributed $7 million. Although Mr. Herz was not
involved in this transaction, the concept was the same -- a purchase for
immediate resale, although there was no signed resale contract. The transaction
was located and brought to FarWest by Behrle. FarWest's partners included Mark
Mandelbaum, a Behrle associate. An appraisal was not ordered prior to or upon
purchase, and there was no underwriting of the project. FarWest again relied
upon the recommendation of Mr. Behrle. No buyer has ever entered into a
contract to purchase the property. Problems have developed regarding zoning
entitlements, as well as with asbestos removal. The value of the property is
considered minimal at this time, and the RTC is conservatively estimating a loss
in excess of $4 million.
C. LOANS TO J. L. CONSTRUCTION
Commencing in 1988, FarWest entered into a lender relationship with J.L.
Construction Company, owned by James Franklin. J. L. Construction was
essentially a sole proprietorship, to which FarWest later extended five loans
totalling approximately $48.6 million between March and September of 1989. A
sixth loan of $5.55 million was extended to a straw borrower of Franklin's, Aldo
Baccala, at FarWest's suggestion, in October of 1989 in order to avoid loan-to-
one
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 7
borrower regulations. By this time Mr. Kayne had promoted Frank Henry to
Executive Vice President for screening of the three loan production groups'
proposals, and to act at Kayne's close direction.
Although FarWest followed standard underwriting procedures with respect to
these loans, the executive committee ignored the excessive concentration of
credit to a young developer with a history of aggressive risk-taking and
inability to complete projects within budget. At the same time J.L.
Construction was obtaining more than the maximum credit from FarWest, it was
extending itself further with projects financed by other institutions. FarWest
did not monitor J.L. Construction's change in financial status from the date of
one loan to the next, the progress of projects or the extent of J.L.
Construction's total commitments. If this analysis had been undertaken, a
majority of the loans and subsequent losses would have been avoided since it was
clear that J.L. Construction did not have the experience or personnel to
complete projects located in both Northern and Southern California. While
FarWest was aware of J.L. Construction's equity partner, no effort was made to
ensure that J.L. Construction had money in any of the projects. The anticipated
losses on the J.L. Construction loans include the following: River Run -
$951,008.00; Metro Center II - $3,969,747.00; Dublin Meadows - $5,640,341.00;
and Corona Village (Baccala) - $7,912,414.00.
The Corona Village loan was particularly reckless. On May 15, 1989, J.L.
Construction Company entered into an agreement with Pacific Promenade, Ltd., to
purchase the collateral property. In subsequent conversations with FarWest
Executive officers concerning a loan on the property, James Franklin was
informed by Frank W. Henry that due to the loan-to-one-borrower regulations,
Franklin should get someone else into the deal that FarWest could put on title
and the loan. This turned out to be one of the only loans secured by raw land
made in California by FarWest.
On September 6, 1989, J.L. Construction Company assigned all its interest
in the purchase agreement to the Baccalas. On the same date, the Baccalas
signed a loan application with FarWest. On October 1, 1989, J.L. Construction
and the Baccalas signed an Agreement whereby, among other things, the Baccalas
would acquire the subject property as J.L. Construction Company's assignee; and
that the Baccalas would retain $100,000.00 of the proceeds of a second purchase
loan as consideration for their participation in the acquisition and subsequent
resale to J.L. Construction. There is no evidence that the Baccalas had any
involvement in the loan transaction other than signing the required loan
documents. James Franklin participated in all levels of obtaining the loan,
arranging required
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 8
documentation and arranging all secondary loans. The Baccalas never invested
any of their own money into this project.
As noted above, the RTC will provide you and your clients access to the
appropriate records in its possession so as to afford you an opportunity to
present a detailed response to the claims. In turn, the RTC desires to review
Westminster's records with respect to the issues indicated above at the earliest
opportunity. We look forward to discussing the mechanics in that regard at your
earliest convenience.
Very truly yours,
/s/ Denis F. Shanagher
Denis F. Shanagher
DFS:ahl
Encls.
cc: Robert W. Helstowski
<PAGE>
[GIBSON, DUNN & CRUTCHER LETTERHEAD]
April 19, 1994
VIA FACSIMILE
(213) 229-7418 T 87126-00165
Denis F. Shanagher, Esq.
Preuss Walker & Shanagher
595 Market Street
16th Floor
San Francisco, CA 94105
Re: RTC: Far West Savings
Your File No. 34253/0447
Dear Denis:
We are in receipt of your letter of April 15 and on behalf of our
clients we would like to request access to all business records of Far West and
Far West Financial, and particularly those which relate to the subordinated
debt, tax refunds, overhead allocation, and the specific loans and investments
identified in your letter. You have indicated that the documents are maintained
at the RTC's headquarters in Newport Beach. We are prepared to commence our
examination of those records on Monday, April 25, 1994. Please advise us when
and where the documents will be available for examination.
Thank you for your cooperation.
Sincerely,
/s/ Martin C. Washton
Martin C. Washton
MCW/mcq
LL941090.042
bcc: Mr. William Belzberg
Mr. Keenan Behrle
Mr. Fred Kayne
April McGandy Evans, Esq. (w/encls.)
David A. Battaglia (w/encls.)
<PAGE>
[GIBSON, DUNN & CRUTCHER LETTERHEAD]
December 23, 1994
OVERNIGHT EXPRESS
(213) 229-7396 T 87126-00165
Hunter T. Carter, Esq.
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, District Of Columbia 20036-5339
Re: RTC: Far-West Savings
Dear Mr. Carter:
Mr. Washton requested that the enclosed April 15, 1994, letter from
Denis Shanagher of RTC and Mr. Washton's July 18, 1994, response be sent to you.
Very truly yours,
/s/ Edward J. Perez
Edward J. Perez
Paralegal
EJP/ejp
cc: M. C. Washton, Esq.
<PAGE>
[PREUSS WALKER & SHANAGHER LETTERHEAD]
April 15, 1994
PRIVILEGED AND CONFIDENTIAL - FRE 408
VIA FACSIMILE
Martin Washton, Esq.
GIBSON, DUNN & CRUTCHER
333 South Grand Avenue
Los Angeles, CA 90071
RE: RTC: FARWEST SAVINGS
OUR FILE NO. 34253\0447
Dear Marty:
Pursuant to the terms of the Tolling Agreements currently in effect between
the Resolution Trust Corporation ("RTC") and your clients, Westminster Capital
("Westminster") and Messrs. William Belzberg, Keenan Behrle and Fred Kayne, the
purpose of this letter is to provide written notice of the RTC's decision to
commence an action against your clients following the termination of the Tolling
Agreements, arising out of, based upon or relating to their status as majority
shareholder, director and/or officer of FarWest Savings and Loan ("FarWest"),
its parent, affiliates and subsidiaries. This letter is submitted for the
purposes of settlement, and is considered confidential, privileged and subject
to the provisions of Federal Rules of Evidence Section 408.
The claims are itemized below. Is short summary, they relate to FarWest's
overpayment of interest to Westminster on certain subordinated debt, the RTC's
right to a portion of tax refunds paid or to be paid Westminster, allocation of
expenses, and losses related to certain loans and investments undertaken by
FarWest prior to its closure, including loans/investments with Butterfield &
Mason, J.L. Construction Company and Jack Herz. The RTC will provide you and
your clients access to the appropriate records of FarWest and FarWest Financial
in its possession so as to afford an opportunity to present a detailed
submission in defense of the claim during the term of the Tolling Agreements.
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 2
SUBORDINATED DEBT
In 1984, FarWest issued $35 million of fixed rate and $30 million of
variable rate subordinated debt through a public offering underwritten by Drexel
Burnham Lambert. Commencing in 1988, FarWest Financial (now Westminster) made
purchases of certain of this debt for the purpose of retirement thereof.
Westminster disclosed the retirement of the debt in its consolidated financial
statements. However, the RTC's records show that FarWest continued to pay
interest on that retired debt to Westminster.
As appears in Westminster's September 30, 1988 10-Q and its year-end 10-K,
Westminster purchased $5.2 million of the subordinated debt in the last half of
1988, including $1.1 million of fixed rate and $4.1 million of variable rate
notes. An additional $11.05 million of fixed rate debt was purchased and
retired by Westminster during 1989; $50,000.00 in the first quarter, $1 million
in the second quarter and $10 million in the third quarter. Although the debt
was purchased and retired in the quarters mentioned above, FarWest continued to
pay interest on that debt through year-end 1989. A total of $173,250.00 in
additional interest was paid on the fixed rate debt ostensibly retired in
September of 1988. An additional $604,032.50 was paid on the variable rate
notes repurchased at the same time. Between September 30, 1989 and year-end,
$592,893.26 in interest was paid to Westminster by FarWest in connection with
the $11.5 million in debt repurchased during that year. The additional amounts
of overpayment for the interim months has not been fully calculated at this
time. The total amount of interest overpayment is expected to exceed $1.4
million.
TAX REFUNDS AND OVERHEAD ALLOCATION
As you may be aware, there have been ongoing negotiations between the RTC,
Westminster and the state and federal tax authorities regarding the alleged
overpayment of taxes for the years 1986-1991. In late 1990, Westminster
received a refund in excess of $2.22 million from the California Franchise Tax
Board for year-end 1989, arising from additional losses attributable to American
Capital Fidelity Corporation ("ACFC"). That refund was provided to Westminster
and was not passed through to ACFC due to the alleged receivables due from ACFC
at the time. However, the RTC notes that there was not in place any tax
allocation agreement between Westminster and FarWest or any of its subsidiaries.
Moreover, it appears that tax payments were made with funds obtained primarily
from FarWest. Similarly, the RTC notes that there was no allocation agreement
between Westminster and FarWest for legal, accounting and other professional
services, and that most of Westminster's employees during Mr. Kayne's tenure
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 3
occupied offices in Century City. All expenses necessary for Westminster's
conduct of business at that location were paid by FarWest, including rent,
utilities, security, office equipment and certain salaries.
Westminster continues to pursue the recovery of refunds for the 1986-1989
tax years in connection with adjustments for loan fee income, negative
amortization of loan interest income, bad debt reduction and most significantly,
the lower of cost or market adjustments with respect to ACFC's inventory of
securities. In the absence of any tax allocation agreement, it is the RTC's
position that any tax refund should be appropriately allocated to the subsidiary
which generated the refund. In this instance, ACFC will have generated the
majority of the refunds and will be entitled to its proportionate share thereof.
At this point the actual amount of the share to be allocated to the RTC is
unknown since the taxing authorities have not yet decided the refund issue.
Likewise, FarWest paid significant Westminster expenses, in excess of $1
million, in violation of regulatory provisions that prohibit such payments,
including but not limited to Section 23A and B of the Federal Reserve Act.
LOANS AND INVESTMENTS
As FarWest's profits deteriorated in the late 1980's, certain of FarWest's
executive officers, namely Messrs. Belzberg, Behrle and Kayne, approved of and
engaged in increasingly speculative loan and investment transactions on behalf
of FarWest. These transactions were extremely risky and uncertain, and
incompatible with FarWest's balance sheet and deteriorating capital position.
In most instances, they were made outside of established lending and investment
procedures, without adequate underwriting, and solely upon the recommendation/
direction of one or more members of the executive committee. The failure of
Messrs. Belzberg, Kayne and Behrle to insist on primary loan committee review of
certain of these projects eliminated virtually all peer review, resulting in the
losses described below.
A. BUTTERFIELD & MASON
On November 3, 1988, Charles Green and Fred Kayne of FarWest approved a $5
million line of credit agreement with Butterfield & Mason Mortgage Company, Inc.
(BMMC), a corporation formed and owned by Warren Ashmann. The purpose of the
line of credit was to provide the funds for BMMC's financing of real estate
loans secured by real estate in California and other Western states. The line
was to be secured by 1) a collateral assignment of all assets owned or acquired
by BMMC, 2) a minimum of 20% of the commitment amount in outside
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 4
collateral, and 3) the personal guarantee of Mr. Ashmann to cover 50% of any
deficiency following exhaustion of the collateral. The terms provided for the
payment of interest quarterly and an annual distribution of 50% of BMMC's
profits.
On January 9, 1989, Kayne approved an increase in the line to $10 million
and a reduction in the interest rate from 2.0% over prime to 1.5%. On March 6,
1989, the loan amount was increased to $15 million. On April 5, 1989, the loan
amount was further increased to $20 million. Subsequent increases to $25
million and $30 million were made on May 5, 1989 and September 7, 1989,
respectively, with Kayne's approval and/or direction. It should also be noted
that on at least six different occasions FarWest consented to BMMC's extension
of credit in excess of the lending limit established under the operative
agreements. FarWest did not obtain updated financial information regarding BMMC
during this period. The security obtained by FarWest ranged from second to
sixth deeds of trust, apparently at the discretion of BMMC.
In early 1990 FarWest became aware that certain BMMC loans were in various
stages of default. However, it was not until July of 1990 that FarWest advised
Ashmann that it would discontinue making advances on the line of credit, noting
that the value of pledged collateral did not support the indebtedness and that
not all the pledged collateral had been properly assigned to FarWest as
required. BMMC was unable to make its quarterly interest payment on October 1,
1990. The loan was put on non-accrual status and classified as substandard at
that time. On July 2, 1992, BMMC filed a Chapter 11 bankruptcy petition.
In conducting its underwriting with respect to this loan arrangement,
FarWest received financial statements for entities in which Mr. Ashmann had
interests. There is no evidence that any of the asset values therein were
substantiated, liabilities matched with credit reports and/or tax returns, or
that any cash flow analysis was performed. FarWest did order a Business
Credibility Report on BMMC, which found no information. This should not have
been any surprise since BMMC was a newly formed entity for this venture. There
were no personal financial statements of Mr. Ashmann found in the credit file,
nor was there any documentation of any effort to verify or analyze any financial
information regarding Ashmann. FarWest did not require independent appraisals
of the properties it took as collateral for extensions of the line of credit.
Instead, FarWest accepted so-called internal appraisals from BMMC, apparently
performed by Mr. Ashmann, who himself lacked any appraisal credentials.
Collateral property types included retail and commercial shopping centers,
single family homes, apartments, vacant land and condominiums. Finally, FarWest
did not
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 5
attempt to obtain or approve financial statements from the underlying borrowers
prior to funding on the line. In short, there was no proper evaluation of the
sources of repayment on the line of credit, the borrower, the guarantor or the
collateral. FarWest did not conduct its normal underwriting analysis with
respect to this very risky line of credit. Instead, this loan appears to have
been based solely on the recommendation/direction of Fred Kayne and his
relationship with Warren Ashmann.
A total of $37.75 million was advanced on this line, secured by second,
third, fourth and even fifth or sixth collateral positions on approximately
twenty properties. Approximately $17 million was repaid to FarWest, leaving net
advances of approximately $20.75 million. Following BMMC's bankruptcy, the RTC
has received an additional approximately $.95 million, reducing net advances to
$19.7 million. Unfortunately, due to the amount of deficiencies and
insufficient equity, only four of the collateral properties appear to have any
hope of residual value. The RTC estimates the net realizable value of its
collateral to be $1.67 million. A further reduction for an RTC lien on certain
bank account proceeds results in an estimated principal loss of approximately
$16.8 million. The addition of the RTC's expenses to carry the collateral
properties and lost interest raises the total potential damages to in excess of
$25 million.
B. HERZ DIRECT INVESTMENTS
In April of 1988, FarWest contracted with real estate broker Jack Herz, an
associate of William Belzberg and Keenan Behrle, to acquire certain selected
real estate properties to "flip" for immediate profit. Herz was to locate an
investment opportunity, after which FarWest, through ACFC, would take title to
the property and provide any equity funds necessary to complete the transaction.
Herz, through his company JH Financial, was to provide all management for the
purchased real estate. There was an inherent conflict of interest in that
Keenan Behrle was to receive an additional 5% of the net profit upon sale of the
properties. In addition, First City Industries, a company in the Belzberg
ownership chain, invoiced FarWest and was paid 75% of the cost of Behrle's staff
for their "work" on these investments. The total paid in that regard was
$181,942.32.
All subsequent transactions involved properties that management expected to
resell within a short period of time at a gain; however in no case was a buyer
committed to purchasing the property when FarWest closed escrow on its purchase.
Investments were approved by the Executive Committee but were not run through
the normal channels of supervision and underwriting. Documentation of all
investments was inadequate and there is no indication that management
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 6
conducted a feasibility study, market analysis or an internal asset review.
Appraisals were not ordered prior to or upon acquisition of any of these
investments. It appears that complete reliance was placed upon the
representations of Jack Herz and his relationship with Messrs. Belzberg and
Behrle. Four properties were purchased by FarWest under some portion of this
arrangement. None were profitable, especially given that Herz received a total
of $478,660.00 from FarWest for advances on profits and office expenses.
One of the properties purchased in June of 1989 by FarWest pursuant to this
arrangement was a 3-story, 42,725 square foot office building located at 10350
Santa Monica Boulevard in Los Angeles, California. The purchase price was $10
million. After purchase, it developed that the property had a number of repair
and improvement items necessary to make it marketable. An appraisal in August
of 1990 estimated the value at only between $7.7 million to $8.3 million. The
property was ultimately sold as part of a bulk sale of assets in 1993. The RTC
received cash of approximately $1 million from the sale and the purchaser
assumed the $5.1 million trust deed debt. With the inclusion of carrying costs,
the total loss at this time appears to be $4.15 million.
In November of 1988, FarWest entered into a partnership entitled Panorama
Partners for the purchase of a 149,247 square foot vacant department store
located in Panorama City, Los Angeles County. The purchase price was $9
million, of which FarWest contributed $7 million. Although Mr. Herz was not
involved in this transaction, the concept was the same -- a purchase for
immediate resale, although there was no signed resale contract. The transaction
was located and brought to FarWest by Behrle. FarWest's partners included Mark
Mandelbaum, a Behrle associate. An appraisal was not ordered prior to or upon
purchase, and there was no underwriting of the project. FarWest again relied
upon the recommendation of Mr. Behrle. No buyer has ever entered into a
contract to purchase the property. Problems have developed regarding zoning
entitlements, as well as with asbestos removal. The value of the property is
considered minimal at this time, and the RTC is conservatively estimating a loss
in excess of $4 million.
C. LOANS TO J. L. CONSTRUCTION
Commencing in 1988, FarWest entered into a lender relationship with J.L.
Construction Company, owned by James Franklin. J. L. Construction was
essentially a sole proprietorship, to which FarWest later extended five loans
totalling approximately $48.6 million between March and September of 1989. A
sixth loan of $5.55 million was extended to a straw borrower of Franklin's, Aldo
Baccala, at FarWest's suggestion, in October of 1989 in order to avoid
loan-to-one
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 7
borrower regulations. By this time Mr. Kayne had promoted Frank Henry to
Executive Vice President for screening of the three loan production groups'
proposals, and to act at Kayne's close direction.
Although FarWest followed standard underwriting procedures with respect to
these loans, the executive committee ignored the excessive concentration of
credit to a young developer with a history of aggressive risk-taking and
inability to complete projects within budget. At the same time J.L.
Construction was obtaining more than the maximum credit from FarWest, it was
extending itself further with projects financed by other institutions. FarWest
did not monitor J.L. Construction's change in financial status from the date of
one loan to the next, the progress of projects or the extent of J.L.
Construction's total commitments. If this analysis had been undertaken, a
majority of the loans and subsequent losses would have been avoided since it was
clear that J.L. Construction did not have the experience or personnel to
complete projects located in both Northern and Southern California. While
FarWest was aware of J.L. Construction's equity partner, no effort was made to
ensure that J.L. Construction had money in any of the projects. The anticipated
losses on the J.L. Construction loans include the following: River Run -
$951,008.00; Metro Center II - $3,969,747.00; Dublin Meadows - $5,640,341.00;
and Corona Village (Baccala) - $7,912,414.00.
The Corona Village loan was particularly reckless. On May 15, 1989, J.L.
Construction Company entered into an agreement with Pacific Promenade, Ltd., to
purchase the collateral property. In subsequent conversations with FarWest
Executive officers concerning a loan on the property, James Franklin was
informed by Frank W. Henry that due to the loan-to-one-borrower regulations,
Franklin should get someone else into the deal that FarWest could put on title
and the loan. This turned out to be one of the only loans secured by raw land
made in California by FarWest.
On September 6, 1989, J.L. Construction Company assigned all its interest
in the purchase agreement to the Baccalas. On the same date, the Baccalas
signed a loan application with FarWest. On October 1, 1989, J.L. Construction
and the Baccalas signed an Agreement whereby, among other things, the Baccalas
would acquire the subject property as J.L. Construction Company's assignee; and
that the Baccalas would retain $100,000.00 of the proceeds of a second purchase
loan as consideration for their participation in the acquisition and subsequent
resale to J.L. Construction. There is no evidence that the Baccalas had any
involvement in the loan transaction other than signing the required loan
documents. James Franklin participated in all levels of obtaining the loan,
arranging required
<PAGE>
Martin Washton, Esq.
April 15, 1994
Page 8
documentation and arranging all secondary loans. The Baccalas never invested
any of their own money into this project.
As noted above, the RTC will provide you and your clients access to the
appropriate records in its possession so as to afford you an opportunity to
present a detailed response to the claims. In turn, the RTC desires to review
Westminster's records with respect to the issues indicated above at the earliest
opportunity. We look forward to discussing the mechanics in that regard at your
earliest convenience.
Very truly yours,
/s/ Denis F. Shanagher
Denis F. Shanagher
DFS:ahl
Encls.
cc: Robert W. Helstowski
<PAGE>
[GIBSON, DUNN & CRUTCHER LETTERHEAD]
July 18, 1994
(213) 229-7418 T 87126-00165
Robert W. Helstowski, Esq.
Senior Attorney
Resolution Trust Corporation
4000 MacArthur Boulevard, 5th Floor
Newport Beach, California 92660
Denis F. Shanagher, Esq.
Preuss, Walker & Shanagher
595 Market Street, 16th Floor
San Francisco, California 94105
Re: RTC: FarWest Savings
Your File No. 34253/0447
------------------------
Dear Counsel:
This letter is intended to respond to the "charges" raised in your
letter dated April 15, 1994 (Exhibit 1) concerning FarWest Savings and Loan
("FarWest Savings"), its former parent FarWest Financial Corporation ("FarWest
Financial"), and their affiliates and subsidiaries. For purposes of this
response, we represent Westminster Capital Corporation (formerly FarWest
Financial Corporation) and Messrs. William Belzberg, Keenan Behrle and Fred
Kayne.
As you are aware, we have spent a great deal of time investigating and
evaluating the issues raised in your April 15 letter. We have reviewed more
than 20 binders of indices of FarWest documents, examined the contents of more
than 150 boxes of materials, and copied documents amounting to more than 30
boxes for closer examination. We have also
<PAGE>
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 2
solicited the assistance of former FarWest employees knowledgeable about the
issues you raised.
Our review of these materials leads us to the inevitable conclusion
that you were not able to spend the time examining the pertinent records before
drafting the April 15 letter, and otherwise did not know where to look in the
FarWest records in the RTC's possession. For instance, you state that FarWest
has no records of payment of expenses by FarWest Financial for Century City, no
personal financial statements of Warren Ashmann, little or no documentation
reflecting diligence in the J.H. Financial transactions, and no signed resale
agreements for the Panorama City property, among other examples. These
documents and more were located in your possession.
You contend that FarWest Savings is entitled to tax refunds when it
did not even pay the taxes in the relevant years, that none of the J.H.
Financial transactions were profitable when two of three were very profitable
(and the third would have made $3 million had the RTC accepted an outstanding
offer), and that the Baccala loan was somehow "reckless" although proper
underwriting standards were followed and the loan-to-value ratio was far below
what is considered appropriate even today, post-FIERRA. The entire section of
the RTC letter dealing with "Loans and Investments" is prefaced by the
unsupported allegation that FarWest was in a "deteriorating capital position"
and thus that the subject transactions were inappropriate. In reality, FarWest
was in a secure capital position -- perhaps the healthiest it had ever been --
until it was legislated into a difficult financial position by FIERRA, and all
but one of the loans and investments identified occurred before FIERRA was
passed.
Our clients believe that if the RTC had spent the time to do a
thorough investigation, you would not have asserted the claims raised in your
letter of April 15. We are confident that the claims reserved in our clients'
Tolling Agreements would have been resolved.
At the outset, we observe that the RTC has chosen only a handful of
transactions, which represent less than one percent of the assets of the entire
association -- which exceeded $4 billion. Nor has the RTC given any indication
that it considered the plethora of profitable transactions which made millions
for FarWest Savings, or the fact that FarWest was constantly subject to detailed
oversight by the
<PAGE>
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 3
Office of Thrift Supervision and state regulatory agencies during its
operations.
The RTC also disregards the extensive, banking and business experience
of the Executive Committee members of FarWest Financial, as well as its
diligence. The Executive Committee met roughly forty times per year. It was
comprised of an unusual blend of people who had very strong real estate,
financial, lending, business and management expertise. As Chairman of the
Board, William Belzberg had extensive experience in real estate and lending
ventures and was considered a very knowledgeable investor. Fred Kayne was the
former Senior Managing Partner of the Los Angeles office of Bear Stearns & Co.,
Inc. He held this position for eight years. He was also a founding director
and Chairman of the Investment Committee of First Los Angeles Bank. Charles
Green had been the Chief Financial Officer of FarWest since 1985. Prior to that
time, he was an Executive Vice President of the First Interstate Bank of Denver
for a number of years. He is now Senior Vice President and Chief Credit Officer
of Bank of America in Los Angeles. Keenan Behrle was a senior partner at a
major law firm in Los Angeles who specialized in real estate and corporate law.
He also was a senior real estate executive for First City Industries,
supervising acquisition of land and large development projects, and was an
extremely knowledgeable and respected businessman. David Blackford had
extensive banking experience, and is now the Executive Vice President of the
largest bank in Arizona in charge of lending.
Not only was the Executive Committee extremely experienced, but some
of its members had a substantial investment stake in the success of FarWest.
William Belzberg and his family were major shareholders, owning approximately
50% of its stock. The family had bought these shares in about 1972 and never
sold a share. Similarly, Fred Kayne had bought 40,000 shares of FarWest
Financial at $12 when he joined the Board in 1987 and held the shares until
after he resigned. Both Mr. Belzberg and Mr. Kayne thus had a vested interest
in building the value of the savings and loan over the long term.
While this letter will provide you with a specific response to the RTC's
claims in its April 15 letter, we have not been able to evaluate all pertinent
materials because relevant files have not been located by the RTC. However, we
feel that we have enough information to give a detailed substantive response to
your inquiries, which should be sufficient to put your concerns to rest.
<PAGE>
Robert W. Helstowski, Esq.
Denis P. Shanagher, Esq.
July 18, 1994
Page 4
Note that this letter is not intended to address all pertinent legal
issues. We seek only to address the substantive merit of the claims raised
without any significant treatment of purely legal defenses, which we believe
also would be dispositive. For example, although virtually all (if not all) of
the claims asserted in the letter of April 15 had lapsed for limitation purposes
before the parties entered into the subject tolling agreements, this is not
dealt with in detail in this response -- although it is worth mention in light
of a recent decision. The RTC seized FarWest on or about January 15, 1991, and
the parties entered into their tolling agreement on January 15, 1994 as of
December 15, 1993. By virtue of O'MELVENY & MYERS V. FDIC, 1994 U.S.LEXIS 4446,
62 U.S.L.W. 4487 (June 13, 1994), state statutes of limitations will now likely
apply, as opposed to 12 U.S.C.A. sec. 1821(d)(14), with respect to the pursuit
of state law claims after the takeover. California Code of Civil Procedure
section 339 provides for a two year statute of limitations for all common law
negligence claims of the type you have alleged. In these respects, we further
note that many of the issues you raise, such as the direct investments, are
outside the scope of the tolling agreements. (Of course, any attempt by the RTC
to avoid the mandate of the statute of limitations by labeling the claims as
fraud would be unprofessional and a gross distortion of the true facts, as
demonstrated more fully below.)
An objective examination of the facts does not support the claims
raised in your April 15 letter. As set forth in the detailed response below,
and in the voluminous exhibits referenced herein and attached hereto for your
convenience, in most cases the assertions of fact contained in the letter are
simply not correct. Indeed, it appears that FarWest Savings owes FarWest
Financial substantial sums of money, not the other way around. In other cases,
the analysis and conclusions are inappropriate. Our clients welcome a close
examination of the pertinent records attached hereto and in the possession of
the RTC.
I.
SUBORDINATED DEBT
The RTC contends that FarWest Savings continued to pay interest to
FarWest Financial on subordinated debt through year-end 1989, although it
contends that the debt was retired in early 1989. (Letter dated April 15, 1994
at p. 2 -- Exhibit 1). The RTC contends that the total amount of
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 5
interest overpayment exceeds $1.4 million. (ID.) The RTC simply does not
understand the underlying transaction, as covered by SEC and GAAP requirements
of consolidated accounting which call for the elimination of intercompany
transactions for accounting purposes ONLY.
FarWest Savings was a different legal entity than FarWest Financial.
As the RTC observes by insisting on proper allocation of expenses between the
two companies (SEE next section, INFRA), they were affiliated but independent
entities. The investment by FarWest Financial in the subordinated notes of
FarWest Savings was made under prudent investment guidelines to increase and
maximize FarWest Financial's return on its then available liquid funds.
FarWest Financial made investments in other corporate debt securities during
1988 to 1990 under the same guidelines and intent -- to maximize return.
FarWest Financial purchased $16.25 million of subordinated notes from
FarWest Savings for investment purposes in 1988 and 1989. FarWest Savings paid
interest on these notes to FarWest Financial, just as it did to others who
purchased the notes. Effective at the end of 1989, and not before, FarWest
Financial made a capital contribution to FarWest Savings by legally retiring the
debt. From that time on, no more interest payments were made by FarWest Savings
on the notes.
The contentions of the RTC demonstrate a misunderstanding of
consolidated accounting principles. While purchasing the debt of a subsidiary
company causes certain accounting elimination adjustments to be made in the
consolidation process, the adjustments cannot be interpreted to have effected a
formal legal retirement of the debt. As demonstrated in the monthly financial
statements of FarWest Savings and FarWest Financial, as well as in the quarterly
and annual reports submitted to the SEC and Office of Thrift Supervision
("OTS"), the subordinated notes were surrendered by FarWest Financial to FarWest
Savings on December 31, 1989, and they remained as a legal liability up until
that time. FarWest savings appropriately owed interest on the debt until the
notes were legally surrendered.
As the sole owner of 100% of the capital stock of FarWest Savings and
various other legal entities, FarWest Financial was required under SEC rules and
Generally Accepted Accounting Principles ("GAAP") to issue consolidated
financial
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 6
statements to its shareholders. Consolidated statements were issued each month
internally, and quarterly in accordance with SEC requirements. Consolidation
guidelines called for the elimination of all material intercompany transactions
(profit and loss and balance sheet) that existed between the individual
companies in the consolidated group. As a matter of accounting practice, the
eliminating entries are not "recorded" on the books of any one of the entities
involved in the consolidation.
A constructive elimination of the debt for purposes of consolidated
accounting is not only appropriate, it is required.
The theory behind the preparation of consolidated financial
statements may be stated quite simply: when a parent company
has a controlling interest in a subsidiary, permitting it to
direct the subsidiary's policies and its management -- and
in particular to direct the subsidiary to pay a dividend --
the assets, liabilities, and operations of the two companies
should be presented in one set of consolidated financial
statements as though they had operated as a single company.
This general approach was articulated originally by the
American Institute of Accountants (forerunner of the AICPA)
in 1929, and 30 years later it was formally promulgated in
ARB 51, which with few amendments is still the authority for
today's practice.
(Burton, Palmer & Kay, HANDBOOK OF ACCOUNTING AND AUDITING (1984).
Specifically, the general rules of consolidation discussed in paragraph 6 of
Accounting Research Bulletin No. 51 state, "In the preparation of consolidated
statements, intercompany balances and transactions should be eliminated. This
includes intercompany account balances, securities holdings, sales and
purchases, interest, dividends, etc. . . ." (ARB No. 51 -- Exhibit 2).
There is no doubt that this constructive retirement for purposes of
consolidation applies to bonds as well. "From the point of view of a
consolidated entity, the purchase of an affiliate's bonds by another affiliate
constitutes
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GIBSON, DUNN & CRUTCHER
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 7
constructive retirement of the bonds." (Griffin, Williams & Larson, ADVANCED
ACCOUNTING, p. 288 (3d ed. 1977) (Exhibit 3). Despite this constructive
retirement for purposes of consolidated financial statements, the "ISSUING
CORPORATION IS OBLIGED TO CONTINUE THE PAYMENT OF INTEREST [ON THE BONDS]."
(ID.) (emphasis added).
These were the accounting principles that were relied upon in
preparing the consolidated financial statements. FarWest Financial followed the
provisions of Accounting Research Bulletin No. 51 in that all intercompany items
were eliminated. Of course, while there was an "effective retirement of the
debt" for purposes of consolidation, this is wholly irrelevant for purposes of
determining whether an outstanding debt existed in the first instance between
the parent and the subsidiary.
The decision to legally retire the debt was first discussed as early
as late November 1989. A memorandum from Charles Green to Fred Kayne dated
November 24, 1989 notes that "FWFC holds $16.25 Mil (face value) of FWS $65 Mil
sub debt issue due 1994 . . . . We estimate the interest due FWFC from FWS re
this $16.25 Mil of face value debt at $2.4 Mil annually." (Memorandum from Green
dated 11/24/89 at p. 1 -- Exhibit 4). The memo continues, "FWFC could
contribute this debt down to FWS and create tangible net worth [and] core
capital. . . . In the future, benefits will arise resulting from (a) avoidance
of the $2.4 Mil of annual interest expense and (b) the deduct to RNW in 1991 of
the 1992 $7 Mil sinking fund payment." (ID.)
Once the decision to make the contribution to FarWest Savings was
made, there were minimal changes to the Board Report schedules. This is because
the consolidated statements thereto already reflected the transaction via
elimination and consolidating entries. In the December 1989 Board Book, the
contribution is discussed in the "Financial Highlights," which state, "During
1989, FarWest Financial Corporation (the "Company") purchased $16.25 million of
FarWest Savings (the "Association") subordinated notes which resulted in a
pretax gain on early extinguishment of debt of $3.0 million [because the notes
were purchased $3 million below par value] . . . . Effective December 31, 1989,
the Company made a capital contribution to the Association in the form of the
Association's subordinated notes formerly purchased by the Company. The notes
were effectively retired by the Association." (Exhibit 5).
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GIBSON, DUNN & CRUTCHER
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 8
The whole process is perhaps best reflected in the financial reports
filed with public regulatory agencies. FarWest Financial and FarWest Savings
were required to submit quarterly reports and annual reports to the SEC and OTS,
respectively. As mentioned above, the financial statements that were included
in these periodic filings had to be prepared in accordance with GAAP. This
meant that all statements had to be prepared on a consolidated basis.
Therefore, similar to the consolidating schedules in the Board Reports, at the
consolidated FarWest Savings level the entire amount of the face value of the
subordinated notes ($65 million) would be shown as a liability until such time
that the notes were contributed to FarWest Savings by FarWest Financial in
December 1989. This is reflected by the following:
FarWest Savings' December 31, 1988 10-K, page 37 (Exhibit 6):
Consolidated Statements of Financial Condition for FarWest Savings
properly show the entire $65 million as outstanding.
FarWest Savings' March 31, 1989 10-Q, page 1 (Exhibit 7):
Consolidated Statements of Financial Condition for FarWest Savings
properly show the entire $65 million as outstanding.
FarWest Savings' June 30, 1989 10-Q, page 1 (Exhibit 8):
Consolidated Statements of Financial Condition for FarWest Savings
properly show the entire $65 million as outstanding.
FarWest Savings' September 30, 1989 10-Q, page 1 (Exhibit 9):
Consolidated Statements of Financial Condition for FarWest Savings
properly show the entire $65 million as outstanding.
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 9
FarWest Savings' December 31, 1989 10-K, page 62 (Exhibit 10):
Consolidated Statements of Financial Condition for FarWest Savings
properly showing $48.75 million as outstanding as FarWest Financial
has legally surrendered the $16.25 million face value of notes it
held.
FarWest Savings' December 31, 1989 10-K, pages 83-84 (Exhibit 11):
Note 11 to Consolidated Financial Statements of FarWest Savings
discusses purchases of notes by FarWest Financial and the capital
contribution effective December 31, 1989.
The retirement of the debt would also be evidenced in the OTS monthly
and quarterly Thrift Financial Reports ("TFRs"). The TFRs were comprehensive
reports detailing financial information for FarWest Savings on an
unconsolidated, single entity basis. Throughout the relevant period (June 1988
to December 1989), we have been advised that these reports evidence the
"unretired" nature of the subordinated notes and the fact that the notes were
"eliminated" only in consolidated statements. Upon the legal contribution of
the notes effective December 31, 1989, the TFRs would show a reduction of the
debt to $48.75 million. Copies of the TFRs have not been made available by the
RTC at this time.
II.
TAX REFUNDS
The RTC contends that it is entitled to a $2.2 million refund from the
California Franchise Tax Board received by FarWest Financial in late 1990, and
perhaps two additional refunds, because the tax payments were made by FarWest
Savings or from funds obtained from FarWest Savings. (Letter dated April 15 at
pp. 2-3.)
The RTC's contentions are wrong. From 1987 on, FarWest Financial made
ALL state and federal tax payments for FarWest Savings with its own funds, and
thus any tax refunds appropriately belonged to FarWest Financial. Indeed, given
that FarWest Financial paid millions of dollars of tax
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 10
obligations of FarWest Savings which have not been reimbursed, FarWest Financial
presently is owed said reimbursement by FarWest Savings and fully intends to
pursue a claim in this regard for $4.6 million.
We have conducted an extensive investigation of the RTC's claims by
examining general ledger transactions, account analysis documents, cash account
reconciliations, canceled checks and check copies, tax returns as filed with
taxing authorities, and various other materials. A review of these materials
confirms that the combined federal and state tax payments made by FarWest
Financial during the applicable period were in excess of $17 million. (SEE
Charts entitled Analysis of Tax Liability Accounts -- Exhibits 12 and 13, and
Back-Up Information -- Exhibit 14). It appears that the RTC is somehow unaware
of FarWest Financial's deposit accounts maintained at FarWest Savings which
provided the funds to make these payments. The RTC also appears to be unaware
of the $40 million stock offering proceeds received by FarWest Financial in
April 1986, "deposited" at FarWest Savings and recorded in an intercompany
receivable account, and subsequently used to fund dividend payments, tax
payments, payoffs of "due to" FarWest Savings' accounts, and for investment
purposes.
The refund for $2.2 million received by FarWest Financial on or about
12/31/90 from the California Franchise Tax Board was for tax payments made in
1989. (State Tax Activity -- Exhibit 12). In this respect, FarWest Financial
paid ALL tax payments of FarWest Savings to the California Franchise Tax Board
from 1987 through 1989, and FarWest Savings paid absolutely NO MONEY to the
Franchise Tax Board in these years. (ID.) You will further note that in 1986,
FarWest Savings did pay its own taxes, and appropriately received its own refund
in October 1987 from the California Franchise Tax Board. (ID.) FarWest Financial
received no part of this 1986 refund. (ID.)
The same is true with regard to federal taxes. From 1987 through
1989, FarWest Financial paid all of the federal taxes of FarWest Savings out of
its own funds. (Federal Tax Activity -- Exhibit 13). FarWest Savings paid
absolutely no part of these tax liabilities in those years. (ID.) In 1987,
FarWest Savings did make a payment for 1986 taxes to the IRS, and it also
received the appropriate refund in December 1987. (ID.) FarWest Financial
received no part of this 1986 tax refund. (ID.)
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 11
Indeed, a review of the tax records for FarWest Financial and FarWest
Savings demonstrate exactly the opposite of the RTC's contentions. It is
FarWest Financial that is owed substantial sums of money from FarWest Savings
because FarWest Financial paid all of FarWest Savings' tax liabilities from 1987
through 1989, but has not been reimbursed for these liabilities. Nor has it
been able to recover tax refunds owed because of the RTC's failure to cooperate.
In the years 1986, 1988, 1989, and 1990, FarWest Financial was
generating tax losses on a stand alone basis, principally because of its
overhead payments. (SEE 10-K Reports to the SEC, reflecting losses of $185,000,
$1.6 million, $1 million and $1.7 million in those years respectively. Taxable
losses in those years were also confirmed.) Thus, ALL of the tax liabilities
reflected in the payments to state and federal authorities belonged to FarWest
Savings in those years. In 1987, FarWest Financial had a small amount of
earnings ($394,000), and 83% of the tax liabilities in that year were
attributable to FarWest Savings and 17% was attributable to FarWest Financial.
(Analysis of Income Tax Returns -- Exhibits 15 and 16). The current amount due
to FarWest Financial from FarWest Savings in this respect is over $1.9 million
in state taxes and over $2.7 million in federal taxes, plus interest. (ID.).
Currently, FarWest Financial has federal refund applications pending
for tax year 1988. FarWest Savings has no claim to these refunds, as it did not
pay the 1988 taxes to the IRS. In fact, to the extent FarWest Financial does
not prevail in collecting the full refund from the IRS, a claim for any
remainder can be made against FarWest Savings, since the tax is allocable to
FarWest Savings and was paid by FarWest Financial.
Similarly, FarWest Financial has applied for state refunds for the
years 1987, 1988, and 1989. All of these refunds are due to FarWest Financial,
because it paid all the taxes in those years. Again, FarWest Financial has a
claim against FarWest Savings for the difference between any refunds and any
remaining taxes allocable to FarWest Savings.
In conclusion, the facts are directly opposite to the RTC's claims.
During the indicated period, it was FarWest Financial, not FarWest Savings, that
was making the actual payments of tax. Refunds were, and should be in the
future, given to the entity that wrote the checks and incurred the
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 12
losses. An analysis of the actual tax allocation demonstrates that it is
FarWest Savings which owes FarWest Financial $4.6 million for payment of taxes,
rather than any claim going in the other direction.
III.
ALLOCATION OF OVERHEAD EXPENSES
The RTC contends that all of the expenses for FarWest Financial's
office operations in Century City were paid for by FarWest Savings, "including
rent, utilities, security, office equipment and certain salaries." (Letter dated
April 15 at pp. 2-3.) The RTC alleges that FarWest Savings is owed "in excess of
$1 million" in this respect. (ID.)
Again, the RTC is simply in error. Apparently, the RTC is misinformed
about the methods by which FarWest Financial paid its own operating expenses and
has not followed the intercompany receivable and payable accounts. The fact of
the matter is that FarWest Financial had its own financial resources, including
over $40 million in stock proceeds, and kept its own expenses separate from
those of FarWest Savings.
FarWest Financial paid a significant amount of its expenses using
checks drawn on its operating checking account which was maintained with FarWest
Savings. The account number was 16-135683, and sometime in 1988 or 1989 it was
changed to 01-316892. (Back-Up Information -- Exhibit 14). We have reviewed
check copies of these accounts and found payments made for rent, utilities,
supplies, intercompany liabilities, equipment, and similar expense items. (ID.)
In addition, expense payments made using FarWest Financial checks were recorded
in the books and records under the responsibility code ("RC") number 134. (ID.)
FarWest Financial used its own corporate resources when issuing these checks,
not those of FarWest Savings.
While it is true that some FarWest Financial expenses were actually
paid using checks drawn on FarWest Savings funds, it is also true that
concurrent with issuing a FarWest Savings' check to pay a FarWest Financial
expense, an intercompany accounts receivable (FarWest Savings account #1995-134-
055) and intercompany accounts payable (FarWest Financial account #2995-055-134)
entry would be recorded and to keep the books of the individual companies in
balance to acknowledge the temporary advance of funds as owing between
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 13
the two entities. (ID.) Management attempted to "settle" the intercompany
receivables and payables through the actual writing of checks on a regular
basis. Review of general ledger #2995-0550134 (FarWest Financial Payable to
FarWest Savings) during the 1989-1990 time frame shows the above described
activity. (ID.)
In accounting for these intercompany transactions, it was deemed
convenient to process only one Accounts Payable run using FarWest Savings'
checks, and then concurrently posting the intercompany entries to balance the
books. By paying off the intercompany account due, FarWest Financial paid its
own expenses. Again, FarWest Financial used its available financial resources,
such as its operating checking account and the stock proceeds deposit account,
to regularly retire its obligations to FarWest Savings.
FarWest Financial paid its allocated payroll expenses in this fashion
as well. Such expenses were funded by FarWest Savings as the common company
paymaster. The payroll intercompany accounts, #1997/#2997, operated similarly
to the #1995/#2995 accounts, with FarWest Savings funding FarWest Financial's
payroll expenses and then recording the intercompany due to and due from
entries. (ID.) The liability on FarWest Financial's books was paid off on a
regular basis. Documentation of these payments exists in the general ledger
history statements (microfiche) maintained by the RTC.
In conclusion, the RTC apparently does not understand the manner by
which FarWest Financial paid its own operating expenses. There is no doubt
FarWest Financial paid its own way, contrary to the RTC's contention.
IV.
J.H. FINANCIAL INVESTMENTS
The characterization by the RTC of the investments involving J.H.
Financial Company and Jack Herz are similarly in error. First, the RTC asserts
that "[f]our properties were purchased by FarWest" through some arrangement with
J.H. Financial and Mr. Herz. FarWest only engaged in THREE such transactions,
as follows: 500 S. Sepulveda Boulevard, 19935 Ventura Boulevard and 10350 Santa
Monica Boulevard. Numerous other transactions proposed by J.H. Financial were
rejected because, after review by Keenan Behrle, they were not considered
appropriate.
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GIBSON, DUNN & CRUTCHER
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 14
Second, and perhaps most important, the RTC asserts that "none [of
these transactions] were profitable." This is grossly inaccurate, since two of
the subject transactions generated significant positive cash flow for FarWest,
resulting in profits of about a half million dollars (AFTER taking into
consideration FULL recoupment of all overhead, profits and commissions paid to
J.H. Financial).
In no way can the remaining transaction, the one at Santa Monica
Boulevard, be considered reckless, particularly when it is considered that (1)
there were offers on the property for sums well in excess of FarWest's purchase
price BEFORE the transaction was consummated; (2) subsequent offers and
appraisals were well in excess of the purchase price paid by FarWest; (3)
FarWest had just closed the Sepulveda Boulevard transaction for a substantial
profit, where it paid a higher price in a less favorable location; and (4) the
building across the street on Santa Monica Boulevard sold at about the time of
the transaction for substantial sums (per square foot) in excess of what FarWest
paid for the Century City property.
Furthermore, the properties on Ventura Boulevard and Santa Monica
Boulevard provided substantial additional benefits to FarWest, which benefits
were principal bases for the purchase decisions. FarWest's Valley office was
relocated to the much improved offices at the Ventura Boulevard location and
provided additional needed space. The Santa Monica property also provided much
needed additional space in Century City, and it was considered to be the future
corporate headquarters for FarWest (particularly given that there were no
options for additional space in FarWest's then existing leasehold in Century
City).
The RTC's other allegations concerning a purported conflict of
interest by Mr. Behrle, reimbursement payments to First City, and alleged
failure to recoup payments made to J.H. Financial are also without merit.
500 SEPULVEDA BOULEVARD
The RTC's assertion that this transaction was not profitable is simply
wrong. The transaction speaks for itself. The deal resulted in a,net profit of
over $200,000 to FarWest, AFTER taking into consideration ALL closing, legal
and inspection costs, all overhead advances to J.H. Financial (for a period of
11 months), and J.H. Financial's and Mr.
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Robert W. Helstowski, Esq.
Denis P. Shanagher, Esq.
July 18, 1994
Page 15
Behrle's profit participation in the transaction. (SEE Letter of Lyon to Herz
dated 5/4/89 -- Exhibit 17) (indicating a net profit to ACFC of $203,048.) A
brief summary of the transaction follows.
Initially, in July 1988, J.H. Financial tied up the property with an
offer to purchase for $11.75 million, with the Seller to carry $9.5 million for
five years. (Purchase Contract -- Exhibit 18.) During July and August, J.H.
Financial and Mr. Behrle conducted extensive due diligence on the property,
including a physical inspection, toxic studies, verification of income and
expenses, and market evaluation. (Memorandum from Herz dated 1/5/89 -- Exhibit
19.) Utilizing these studies, J.H. Financial then went back to renegotiate the
deal. ID.
The deal was renegotiated as of August 31, 1988 for a new price of
$11.5 million. (ID.; Amendment to Purchase Contract -- Exhibit 20.) Again, no
final commitments were made. In early October, Mr. Herz met with various
officers of FarWest Savings to discuss in detail the transaction, at which time
it was emphasized that FarWest wanted additional concessions to consummate the
deal, including concessions regarding tenant improvements and leasing
commissions. (Exhibit 19.) When J.H. Financial went back to the Seller to try to
negotiate these points, it was told it "would consider them and get back" to it.
(ID.) J.H. Financial then abruptly received cancellation instructions from the
Seller to the effect that J.H. Financial was not serious about purchasing the
property. (ID.) The Seller indicated that it was putting the property back on
the market. (ID.)
The matter then went briefly to litigation. J.H. Financial filed a
LIS PENDENS to protect FarWest Financial's interest in the property. (ID.) After
numerous meetings and phone conversations, the parties agreed to settle the
matter without further litigation and the Seller agreed to sell the property for
$10.1 million cash. (ID.; Purchase Contract dated 12/21/88 -- Exhibit 21.) This
deal was much stronger than the original one, even foregoing the previous
financing, due to the $1 million reduction or more. (SEE Exhibit 19.) (At the
time, J.H. Financial already had an offer on the property from Municicorp for
$11.1 million.) (ID.) Escrow was to close by March 15, 1989.
Shortly after the new purchase agreement was executed for the
property, a new offer on the property was
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 16
received for a total purchase price of $10.6 million, or $500,000 more than
FarWest Savings was to pay for the property. (Purchase Contract -- Exhibit 22.)
The terms of this sale were approved by Fred Kayne and William Belzberg. The
escrow was altered accordingly so that it became a joint escrow, and the
transaction closed in March of 1989. (Escrow Instructions -- Exhibit 23.)
In connection with the transaction, a short-term loan was made to the
ultimate purchaser of the property in the sum of $8.5 million. (Promissory Note
-- Exhibit 29.) All underwriting requirements were met, and all lending
procedures were followed, in connection with the loan. In this respect, an
independent appraisal of the property was conducted, which included a summary of
sales comparables, lease comparables, and actual lease rates at the location.
(Appraisal dated 2/24/94 -- Exhibit 24.) An in-house appraisal review was also
conducted. (In-House Appraisal dated 3/8/89 -- Exhibit 25.) Intensive
environmental analyses had been conducted previously and were relied upon in
connection with the loan. (Environmental Analyses -- Exhibit 26.) The file on
the loan transaction also contains substantial additional material, comprising
all lease contracts and files for the subject premises, as well as financial and
income statements and tax returns for the prospective buyer. A summary of all
of this information was presented in an extensive "loan brief," which ultimately
was approved by the Executive Committee by March 7, 1989. (Loan Brief dated
2/24/89 -- Exhibit 27; Executive Committee Minutes dated 3/7/89 -- Exhibit 28.)
This loan was paid off in full in June 1990. (Pay-Off Documents --
Exhibit 30.) The calculation of profits to FarWest in connection with this
transaction of over $200,000 do not include the amount of interest and other
payments made by the purchaser in connection with the loan, although these too
should be taken into consideration in evaluating the total profitability of the
transaction.
19935 VENTURA BOULEVARD/WOODLAND HILLS
The RTC's assertion that this transaction was not profitable is also
erroneous. "In September 1990 ACFC sold an office building in Sherman Oaks,
California to the Centaurus Capital Corp. The sale was approved by the OTS and
produced approximately $500,000 in eventual profits." (SEE Memorandum of Lyon
dated 3/6/91 -- Exhibit 31.) (SEE ALSO Memorandum of Lyon dated 9/14/90 --
Exhibit 32 ("[t]here is approximately
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 17
$500,000 of gross profit based on the current contract prices"); Memorandum of
Lyon dated 9/21/90 -- Exhibit 33 ("In a phone conversation with Polly Cortez of
the OTS on September 18, 1990, the approval was given from Ms. Cortez allowing
ACFC to close the transaction as structured")). The actual profit involved in
the transaction was $561,000, AFTER taking into account the profit/commission
paid to J.H. Financial of $114,000. (Exhibit 32 at Chart I.)
The purchase originally came about because FarWest Savings' lease for
its offices in the Valley was to expire in 1988. (Memorandum of Herz dated
8/16/90 -- Exhibit 34.) J.H. Financial contracted to buy a building owned by
Investment Savings & Loan on Ventura Boulevard in February 1988. (ID.) J.H.
Financial called various financial institutions to inquire into their desire to
lease the building, and it had numerous institutions interested, including
FarWest. (ID.) This is probably because the offices not only were in excellent
condition, they had extremely high visibility from both the Ventura Freeway and
Ventura Boulevard. (ID.)
J.H. Financial's and Mr. Herz's first contact with FarWest Savings
concerning the office building -- and indeed his first contact at all with
FarWest -- was with the person in charge of the branch location in Tarzana.
(ID.) Afterwards, Mr. Herz met with representatives of FarWest's Newport Beach
office. (ID.; Letter from Herz dated 3/8/88 -- Exhibit 35.) Mr. Herz also met
with Mr. Belzberg in early March concerning the location. (ID.) Prior to making
these various contacts, nobody from J.H. Financial, including Mr. Herz, had ever
been introduced to Mr. Belzberg or Mr. Behrle, and Mr. Herz certainly was not
their "associate."
J.H. Financial originally proposed leasing the subject property to
FarWest. However, Mr. Belzberg and the members of the Executive Committee
thought it would be best to consider purchasing the location, since FarWest
Savings would be the principal tenant on the property and because it would
guarantee high visibility for the financial institution.
An inspection of the building revealed no significant problems.
(Inspection Report -- Exhibit 36.) Comparables and lease rates were thoroughly
analyzed, and obviously FarWest knew the costs associated with the Tarzana
office. (SEE, E.G., Comparables -- Exhibit 37.) The proposed transaction was
discussed by the Executive Committee on April 26, 1988, and more detailed
discussions occurred
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GIBSON, DUNN & CRUTCHER
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 18
afterwards. (Executive Committee Minutes dated 4/26/88 -- Exhibit 38.)
The purpose of this transaction was not to resell the building for
immediate profit, but to ensure that FarWest Savings had adequate office space
in the Valley, as well as to maximize FarWest's visibility in the Valley. The
deal was consummated in November 1988 with a purchase of both the building and
an adjacent parking lot for $4.275 million. (Escrow Instructions -- Exhibit 39.)
FarWest occupied about two floors of the building, and J.H. Financial also
leased offices in the building.
Obviously, it was in FarWest's interest to continue to monitor to see
if it could sell the building for a profit, as with any real estate investment.
To this end, J.H. Financial continued to solicit and receive offers on the
property. To this end, J.H. Financial received the following offers:
Projects West Corporation, 11/21/89, $3.65 million, building
only. (Exhibit 40.)
Sonne Investments, 11/23/89, $4 million, building only.
(Exhibit 41.)
Westway Properties, 1/11/90, $4.275 million, building only.
(Exhibit 42.)
North American Fund, Inc., 1/31/90, $3.55 million, building
only. (Exhibit 43.)
Thomas D. Long, 3/6/90, $3.75 million, building and
easement. (Exhibit 44.)
Messrs. Sarebanne and Esfantiari, 5/17/90, $4.83 million.
(Exhibit 45.)
There can be no question that FarWest Savings got a good deal on the
property at the time. An independent appraisal of the building conducted in
November 1989 estimated the value of the building and the adjacent parking lot
at $4.5 million in a market that had "softened" considerably from a year
earlier. (Appraisal dated 11/18/89 -- Exhibit 46.) That appraisal indicated that
the value was "composed of $3.0 million for the existing building . . . plus
$1.5 million for the adjacent land. . . ." (ID. at "Overview".) An in-house
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Denis F. Shanagher, Esq.
July 18, 1994
Page 19
appraisal conducted by FarWest at the same time estimated the value of the
building between $2.9 and $3.3 million, with the value of the adjacent land
between $1.2 and $1.5 million, for a total of between $4.1 and $4.8 million --
or a mean value of $4.45 million. (In-House Appraisal dated 11/3/89 -- Exhibit
47.) Another appraisal conducted in September 1990 placed the value of the
building, without the parking lot, at $3.1 million. (Appraisal dated 9/10/90 --
Exhibit 48.) The book value of the building at the time of the purchase was $3.2
million, and the book value of the adjacent parking lot was $1.0 million.
(Exhibit 32 at Chart I.) The offers received and appraisals conducted on the
property, in a market that had weakened considerably, demonstrated the value of
the original transaction.
In June 1990, J.H. Financial received an offer to purchase the
building for $3.8 million, with an option to purchase the adjacent land for
between $1.05 and $1.1 million. (Purchase Offer dated 6/13/90 -- Exhibit 49.)
Because this offer represented a substantial premium to FarWest Savings, and
because FarWest would be able to continue to maintain its offices in the
building under the purchase contract, it agreed to this sale. The preliminary
escrow instructions were signed in July 1990 for a total purchase price, after
some negotiation, of $3.875 million for the building and roughly $1.0 million
for the option to purchase the adjacent land. (Purchase Contract dated 7/16/90
-- Exhibit 50.) The sale was approved by the Board of Directors on September 19,
1990. (Board Resolution dated 9/19/90 -- Exhibit 51.) The transaction closed
soon thereafter. (Escrow Instructions -- Exhibit 52.) This transaction not only
represented more than a half million dollar premium from the original purchase
price, it was far in excess of the values of the building (set forth above)
calculated by recent appraisals.
In early April 1991, the purchaser of the Woodland Hills Building,
Centaurus Capital Corporation, indicated that it was interested in acquiring the
adjacent parking lot by means of its option to purchase, executed in connection
with the original transaction. (Letter from Centaurus dated 4/4/91 -- Exhibit
53.) "The terms of the purchase would essentially be the same as was negotiated
for the purchase of the three story building at 19935 Ventura Boulevard." (ID.)
The proposal was to purchase the parking lot for $1 million with a downpayment
of either 10% or 20% of the purchase price, "to be negotiated." (ID.) The next
day, the RTC acknowledged receipt of the proposal and indicated, "We will
respond to you
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Denis F. Shanagher, Esq.
July 18, 1994
Page 20
as soon as possible." (Letter from Beier dated 4/5/91 -- Exhibit 53.) Rather
then accepting the offer immediately, given that the book value for the parking
lot was $1 million, the RTC spent a month analyzing the transaction. During
this delay, two separate memoranda concluded that the proposal "appears to be
the most advantageous to both FarWest Savings, F.A. and the Resolution Trust
Corporation. (RTC Memorandum dated 5/10/91 at p. 3 -- Exhibit 54; RTC Memorandum
dated 5/24/91 at p. 3 -- Exhibit 55.) The Proposal was "recommended for approval
as presented herein." (ID.) These analyses also correctly stated that "the
likelihood of finding a buyer willing to pay more than the proposed $1,100,000
price is minimum, as this lot has the most value to the owner of the adjacent
building (Centaurus)." (ID.)
Yet, despite these recommendations, the RTC STILL did not accept the
Proposal, and inexplicably did not even respond to Centaurus. A note on one
draft a memorandum dated May 24, 1991, indicates "Get Legal," and thus the
proposal was sent to the RTC's legal department. (RTC Memorandum dated 7/5/91 --
Exhibit 56.) This course of action is particularly baffling given that the legal
department was asked to consider whether the Option Agreement was binding and
whether FarWest could repudiate the Option Agreement!
Yet, the RTC did not stop there. Legal analyses, which was performed
THREE MONTHS after the original offer, concluded that FarWest was under no
obligation to honor the Option Agreement since it appeared from the proposal
that the purchaser wanted to make minor changes to the original transaction,
such as negotiating whether the downpayment would be 10% or 20% (where the
Option Agreement calls for a 20% downpayment). (Exhibit 56.) In a subsequent
legal memorandum, written five weeks later, the RTC's legal department concluded
that "a failure to exercise the option according to its terms results in an
AUTOMATIC termination of the agreement," AND THUS A LETTER WAS DRAFTED AND SENT
BY THE RTC REJECTING THE OFFER TO PURCHASE THE ADJACENT PARKING LOT. (RTC
Memorandum dated 8/19/91 -- Exhibit 57; Letter from Parish dated 8/26/91 --
Exhibit 58.) This letter is dated August 26, 1991. (Exhibit 58.)
It took four and one half months for the RTC to get around to
responding to the subject offer, and then the RTC REJECTED the offer. Any
failure to maximize the return on the property adjacent to the Woodland Hills
building is a direct result of the questionable conduct of the RTC. Appraisals
on
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Denis F. Shanagher, Esq.
July 18, 1994
Page 21
the parking lot conducted a few months after the proposal was received indicated
that the value of the property was between $825,000 and $900,000. (Appraisals --
Exhibits 59 and 60.) Further, even if the RTC had sold the adjacent parking lot
for $500,000, -- $500,000 less than proposed offer -- the total sales price for
both Woodland Hills parcels would have exceeded the original purchase price paid
by FarWest Savings.
10350 SANTA MONICA BOULEVARD/CENTURY CITY
The RTC has alleged that the investment in the Santa Monica Boulevard
office building adjacent to Century City was unsupported and undocumented and
that investment procedures were not followed. (Letter dated April 15, 1994,
p. 5). The RTC has alleged that the investment took place in "complete
reliance" on the representations of Jack Herz and his purported relationship
with Messrs. Belzberg and Behrle. (ID. at p. 6).
Simply put, none of the RTC's assertions are accurate. Before this
investment in the Century City office building was made, two separate
inspections of the building were conducted; lease analyses were performed by
Cushman & Wakefield, Coldwell Banker, Marcus & Millichap, and The Goodglick
Company; a space and area analysis was performed by Space Metrix, Inc.; sales
comparable analyses were performed by Coldwell Banker, Commercial Real Estate
Services, Cushman & Wakefield and independently by J.H. Financial; a West Los
Angeles market analysis was performed by Cushman & Wakefield; sales listings
were analyzed by J.H. Financial; and financing options were evaluated by
Sonnenblick-Goldman Corporation.
As with the property in Woodland Hills, the principal purpose of this
transaction was not to resell the building for immediate profit. The Century
City office of FarWest had simply run out of space, and there were no options in
its existing lease for additional space. A search had been conducted for some
time in the Century City area by members of the Executive Committee and others
to obtain additional space. The Executive Committee not only wanted to obtain
space in the near term, it was interested in the building for purposes of moving
its entire corporate headquarters in Century City. That is why it had such an
extensive space and area analysis done of the entire building.
Of course, should the opportunity present itself to resell the
building at a substantial profit, FarWest would not
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Denis F. Shanagher, Esq.
July 18, 1994
Page 22
look a gift horse in the mouth. It was prudent business practice to investigate
all options, including immediate resale of the building, in connection with this
investment. If the building could be promptly resold at a profit, this would
generate additional income to FarWest. If it could not be resold, then it would
allow FarWest to obtain needed space and would function as its new corporate
headquarters. Since the building was an excellent deal, there was simply no
downside in the transaction. This purchase was considered by the Executive
Committee on a fully informed basis and in a normal fashion for direct
investments.
Indeed, even before the purchase of the property by FarWest Savings
was consummated, J.H. Financial was in serious negotiations with two separate
entities and had received written offers well in excess of FarWest's actual
purchase price. After the sale to FarWest, numerous additional offers were made
on the property well in excess of the purchase price.
In late February 1989, J.H. Financial obtained exclusive rights to
purchase the office building at 10350 Santa Monica Boulevard in the Century City
area. (Memorandum of Herz dated 3/6/89 -- Exhibit 61); Purchase Contract --
Exhibit 95.) The building had approximately 42,700 rentable square feet. (ID.)
J. H. Financial was under contract at $10 million firm with an assumable loan of
approximately $5.1 million at 9.25% interest due in four years. (ID.) "The
property has approximately 42,700 gross rentable with outstanding signage
possibilities. This building sets up ideally for an owner/user." (ID.)
In evaluating the transaction, J.H. Financial compared it to the sale
of the Sepulveda property, which was just a short distance away. In this
respect, Mr. Herz indicated:
I think the building compares favorably with Sepulveda in
economic terms. We paid $10,100,000 for Sepulveda for
approximately 44,500 at $230 a foot versus $234 for 42,700
for this property. Sepulveda has no financing, this one has
an assumable loan lower than current market rate. Location-
wise this one is definitely stronger due to its very close
proximity to Century City and its Santa Monica Boulevard
address. Also, I understand the
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 23
property across the street immediately West sold for $310 a
foot a year ago.
(ID.) (SEE ALSO Memorandum from Herz dated August 16, 1990 -- Exhibit 34) (the
office building at 10350 Santa Monica Boulevard "was very similar to Sepulveda
both in size and our ability to sell the investment to an owner/user. The only
major difference was that 10350 had a better location than 500 South Sepulveda
due to its close proximity to Century City")).
J.H. Financial further indicated that it was in the process of
performing a great deal of work to further evaluate the potential merit of the
transaction. Mr. Herz stated, "I am conducting our due diligence presently
which includes inspections, lease abstracts, etc." (Exhibit 61.) He further
states, "Keenan and myself plan to go in tonight at 6:00 p.m. to see some of the
suites." (ID.)
In a subsequent memorandum dated March 22, 1989, Mr. Herz indicated
that he has "been proceeding ahead with the due-diligence on 10350 Santa Monica
Boulevard." (Memorandum of Herz dated 3/22/89 -- Exhibit 62). Mr. Herz stated
that he was enclosing "a copy of the updated inspection report that comments on
items that have been repaired per the original report's recommendations and
additional items that should be fixed." He also enclosed "a package that Greg
Johnson [of J.H. Financial] has put together which includes a summary of the
property, income and expense analysis and back up assumptions." (ID.) Herz
further indicated that he has researched comparable sales. (ID.)
In his March 22 memorandum, Mr. Herz commented on the results of J.H.
Financial's research, which was made at the request of FarWest. He stated, "I
feel after researching comparable sales and our experience with 500 South
Sepulveda, that we could ask in the $12 million range (approximately $280/square
foot)." (ID.) He indicated that he had already received an offer on the
property. "We have already received an unsolicited written offer from Jan
Development Company/Ed Czuker for $10.5 million which is their starting offer
and they are expecting a counter." (ID.) He further stated that if the building
is not sold immediately, his analysis showed it would still be profitable. "If
we are not able to sell the building within six months from the close of escrow
than we would be looking at a breakeven for 1989 and move into approximately
7.5% cash on cash return in 1990. This would be predicated on putting $200,000
into the building for tenant
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Denis F. Shanagher, Esq.
July 18, 1994
Page 24
improvements and leasing commissions from existing cash flow." (ID.) Finally,
Mr. Herz concluded,
I recommend the purchase of this building because I think
our downside is very minimal based on our cost per foot and
the fact that we are probably buying at replacement cost or
below. Additionally, location being as good as it is and
the lack of 40-50,000 square foot buildings on the Westside
should put us in a strong position to make a substantial
profit.
(ID.)
Before the investment was considered by the Executive Committee of
FarWest Savings, it insisted that J.H. Financial have performed numerous
independent analyses and studies. First, a thorough inspection by construction
Consultants Company was performed indicating a repair cost of only $5,900.
(Inspection Reports -- Exhibit 63.) This same company performed a follow-up
inspection a few weeks later indicating that the building was overall in good
condition. (ID.) (After all, the building was only eight years old.) A prior
inspection by the same company a year earlier came to similar conclusions.
(Inspection Report -- Exhibit 64.) "[T]he improvements are in good condition,
the building is structurally sound, and the construction appears to have been
performed satisfactorily using good quality and appropriate materials." (ID.) In
addition, a space and area analysis for the entire building was conducted by
Space Metrix, Inc. to verify square footage and analyze usable area. (Space and
Area Analyses -- Exhibit 65.) In this respect, Space Metrix notes, "We
physically measured the location of all core walls, columns, window mullion
conditions, corridors, and the tenant dividing walls of each office." (ID.)
Various area rent analyses were then conducted by reputable entities
to determine comparable lease rates, an important element in purchasing an
office building. The analysis performed by Cushman & Wakefield in this respect
is more than 30 pages in length and contains rental rates on 180 different
leases in Century City office buildings. (Lease Analysis -- Exhibit 66.) A
similar analysis performed by Coldwell Banker is 42 legal pages in length and
contains comparable lease rates for almost 400 locations. (Lease Analysis --
Exhibit 67.) A separate analysis performed by
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July 18, 1994
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Marcus & Millichap evaluated lease rates at nine locations on Santa Monica
Boulevard. (Lease Analysis -- Exhibit 68.)
Prior to the purchase of the building, experts also were retained to
analyze comparable sales. Coldwell Banker Commercial Real Estate Services
performed a number of analyses of comparable sales indicating a price per square
foot of between $300 and $440 on comparable property. (Comparable Sales Analysis
-- Exhibit 69.) As part of its engagement, Coldwell Banker analyzed more than 30
separate transactions. A separate comparable sale analysis also indicated sales
rates in excess of $300. (Comparable Sales Analysis -- Exhibit 70.) Cushman &
Wakefield was retained to render a West Los Angeles Market Report analyzing
market activity, lease rates, and other construction projects. (Market Report --
Exhibit 71.) For Century City, this report concluded, "Activity is expected to
increase in Century City as large areas of space become available attracting
large users and satisfying the growth of current tenancy." (ID.)
J.H. Financial also analyzed comparable sales and listings in the
Century City area. (Comparable Sales -- Exhibit 72.) Again, comparables
indicated sales and listing rates of $300 per square foot and above on average.
(ID.) Moreover, as Mr. Herz indicated, the building directly across the street
had sold for over $300 per square foot a short time earlier. (Exhibit 61.)
(Note that FarWest Savings purchased the subject building for $234 a square
foot.)
The appraisal report for 500 Sepulveda Boulevard, as well as the in-
house appraisal analysis of that property, was also relied upon in connection
with the subject transaction. (SEE Exhibits 24 and 25.) In this respect, the
Sepulveda property was located very close and in the same market as the
Century City property. The Sepulveda property was purchased a few months early
for $230 a foot and sold for much more. Clearly, the Sepulveda property was not
in nearly as good a location as the property at Santa Monica Boulevard.
Even before the Executive Committee considered the transaction, and
indeed only shortly after J.H. Financial locked up the property, J.H. Financial
received an offer to purchase for $10.5 million from a respected development
group, Jan Development Company. (Purchase Offer dated 3/20/89 -- Exhibit 73.)
This was the same group that was a serious contender to purchase the building
at Selpuveda Boulevard just a few months before, and J.H. Financial was very
familiar with
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Denis F. Shanagher, Esq.
July 18, 1994
Page 26
them. Similarly, before the transaction closed, J.H. Financial received another
offer to purchase from Wilshire Pacific Properties for $10.25 million, and he
also received an oral offer to purchase from TCW Realty for $11.0 million.
(Purchase Offer dated 3/26/90 -- Exhibit 74; Letter re T&W Realty -- Exhibit
92.) Again, J.H. Financial had just participated in the purchase of the property
at Sepulveda Boulevard for $10.1 million with approximately the same square
footage, and while Sepulveda had no financing, the $10 million transaction in
Century City had an assumable loan lower than the current market rate.
Further, in connection with the transaction, Cushman & Wakefield was
retained to perform a projection investment analysis concerning the subject
property. (Projection Investment Analysis -- Exhibit 75.) After running the
numbers numerous different ways, it was concluded that the rate of return on the
transaction was "120.7% on Cash invested of $4,889,000 based on a proposed
acquisition price of $10 million," assuming that the property was purchased on
June 1, 1989 and was sold on December 31, 1992. (ID.) (Even with an $11 million
purchase price, and assuming the property was not sold for eight years, Cushman
& Wakefield estimated a rate of return of 14.6%. (ID.)) Another analysis was
performed by the Goodglick Company concerning how the purchase of the Santa
Monica Boulevard property compared to the lease of additional space at 1999
Avenue of the Stars. (Purchase-Lease Comparison -- Exhibit 76.) Over a ten year
period, it was estimated that the savings to FarWest realized through the
purchase of the Santa Monica Boulevard property were nearly $4 million. (ID.)
Finally, Sonnenblick-Goldman Corporation was retained to evaluate various
mortgage financing vehicles available in connection with the transaction.
(Letter from Phillips dated 5/30/89 -- Exhibit 70.)
This extensive research occurred before the Executive Committee of
FarWest Savings considered the transaction. The proposed purchase of the Santa
Monica office building received an enormous level of attention and was the
subject of regular discussion. Messrs. Herz and Behrle kept senior officers
and directors informed of the diligence in connection with the subject
transaction. The proposed investment came before the Executive Committee of
FarWest on March 28, 1989, but it had been discussed in detail, and extensive
diligence had been performed, prior to that time. (Executive Committee Minutes
dated 3/28/89 -- Exhibit 78.)
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 27
At the Executive Committee meeting, members took into consideration
not only the studies and analyses performed in connection with the transaction,
they also took into consideration the fact that there were outstanding offers on
the property in excess of the purchase price and that J.H. Financial had been
extremely successful just a short time earlier in making a profit on the
Sepulveda property for FarWest. They took into consideration J.H. Financial's
extensive experience in the commercial real estate community. J.H. Financial
and Mr. Herz had been investing in Southern California real estate for
approximately 20 years, with heavy emphasis over the previous ten years in
office buildings, apartments, and shopping centers. The Executive Committee
members also considered that the purchase allowed the FarWest Savings' office in
Century City to obtain additional needed space in the short term, and would
function as a new corporate headquarters in the long term.
Following the close of the transaction in June, J.H. Financial
actively engaged in marketing the property. Through regular advertising in
major newspapers, as well as through contacts in the brokerage community, J.H.
Financial received an enormous amount of interest in the building. It received
more than 250 inquiries concerning the building, and a separate commercial
brokerage firm received numerous additional inquiries as well. (Lists of
Inquiries -- Exhibits 79 and 80.) A large number of offers were made on the
subject property, two of which proceeded to escrow shortly after the deal was
consummated. These offers are as follows:
Equitec Properties Company, 7/25/89, $10.75 million, cash.
(Exhibit 81.)
Safety Investment, 9/13/89, $11.12 million. (Exhibit 82.)
Sepp Financial, Ltd., 10/4/89, $11.3 million. (Exhibit 83.)
Tower Holdings, Inc., 11/15/89, $11.3 million. (Exhibit 84.)
Projects West Corporation, 11/21/89, $10.5 million. (Exhibit
85.)
City Center Group of Companies, 12/14/89, $10.9 million.
(Exhibit 86.)
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 28
Projects West Corporation, 2/6/90, Escrow agreement executed
for $10.5 million. (Exhibit 87.)
Wilshire Pacific Properties, 4/19/90, $10.25 million,
accepted. (Exhibit 88.)
Wilshire Pacific Properties, 4/23/90, Escrow instructions.
(Exhibit 89.)
Spectrum Partners, 5/18/90, $10.2 million. (Exhibit 90.)
Spectrum Partners, 6/6/90, $10.2 million, accepted. (Exhibit
91.)
Based upon the extensive analysis performed by numerous independent
entities concerning the transaction, the extensive diligence as reflected in the
documentation, and the offers (and acceptances) on the property both before and
after FarWest's purchase, under no circumstances can the subject transaction be
considered reckless. It was entered into only with great care and only after an
enormous amount of work.
Of course, it is wholly inappropriate for the RTC to attempt to make
FarWest's Executive Committee the guarantor of the real estate market in
Southern California. At the time this investment was made, all indicators,
confirmed by independent analyses, were that the transaction was a prudent one.
At the time, no one expected the commercial real estate market in Southern
California to totally collapse.
MR. BEHRLE'S EFFORTS AND COMPENSATION
The RTC also has asserted that Mr. Behrle had a conflict of interest
because he was to receive a small percentage of the net profits for his
extensive work in evaluating the various transactions proposed by J.H.
Financial. First, the RTC fails to note that every member of the Board of
Directors not only was fully informed of Mr. Behrle's potential interest in the
profits of the subject transactions, but they expressly approved this
arrangement. At the Board of Directors' meeting held on February 8, 1989, AND
AFTER MR. BEHRLE WAS ASKED TO LEAVE THE ROOM (AS REFLECTED IN THE MINUTES), the
Board addressed a proposed resolution to grant and approve of Mr. Behrle's
interest. (Board Minutes dated 2/8/89 at pp. 4-5 and Resolution attached thereto
--
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Denis F. Shanagher, Esq.
July 18, 1994
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Exhibit 93). It was noted that Mr. Behrle had and would engage in extensive
"efforts in identifying certain properties which made attractive investments for
the Association," and to this extent was to provide "consulting, analytic,
advisory, managerial and other services ('advisory services') to FarWest
Savings. . . ." (ID. at Resolution.) It was further observed that Mr. Behrle was
"a Director and member of the Executive Committee of the Board of Directors of
FarWest Savings" and that his extensive efforts in attempting to identify
potentially lucrative investments "are not and have not been adequately
compensated." (ID.)
After it was clarified that the interest of Mr. Behrle was in
"realized profit only" -- I.E., only after FarWest Savings made money would Mr.
Behrle be compensated, it was determined by the independent members of the Board
that "the bonus was fair and reasonable under the circumstances." (ID. at
Minutes.) The Board Resolution was "unanimously approved" by all uninterested
directors. (ID.)
There thus can be no dispute that the Board and the Executive
Committee thereof were fully aware and approved of Mr. Behrle's interest in the
subject transactions. They obviously took this into consideration in evaluating
the proposed investments. Again, almost every member of the Board, and
certainly every member of the Executive Committee, was an experienced and
knowledgeable businessperson. Nor can it be said that Mr. Behrle ever voted on
any of the J.H. Financial investments when they came before the Executive
Committee; that was not how the Executive Committee was conducted.
Mr. Behrle's payment for his efforts was to be received IF AND ONLY IF
FarWest Savings made profit. If FarWest Savings did not make money on a
transaction, then Mr. Behrle would receive nothing. Thus, Mr. Behrle's interest
was directly aligned with that of FarWest -- to engage in profitable
transactions. His interest was never in conflict with that of FarWest by
definition.
Mr. Behrle was contacted by J.H. Financial on a constant basis
concerning different proposed transactions, and Mr. Behrle exercised his
business acumen and real estate experience to reject all but a few of these
proposed investments. The remaining transactions made business sense at the
time as set forth above, not only to Mr. Behrle but to
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July 18, 1994
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the other uninterested and experienced members of the Executive Committee who
approved of them.
It should further be noted that Mr. Behrle earned only $14,000 because
of his interest in any of the J.H. Financial transactions. The only transaction
in which he received any profit compensation was the sale of 500 South Sepulveda
Boulevard. He did NOT receive any compensation for the sale of the Woodland
Hills building, although it was even more profitable.
For all of these reasons, Mr. Behrle's small profit participation in
the subject transactions was perfectly appropriate.
FIRST CITY REIMBURSEMENT
In connection with his new responsibilities in attempting to locate
real estate investments for FarWest, Mr. Behrle spent a substantial amount of
time and effort -- approximately 30% of his time -- working for FarWest.
(Memorandum of Lyon to Green dated 3/28/89 -- Exhibit 97). This was 30% of the
time he was not working for his other employers, First City Industries and First
City Development. (Obviously, First City had absolutely no interest in any of
the J.H. Financial investments, and received no benefit from Mr. Behrle's work
on these projects.) Thus, it was perfectly appropriate for 30% of Mr. Behrle's
payroll and other expenses to be allocated to FarWest, which is exactly what
occurred.
Mr. Behrle's work involved not only communicating on a regular basis
with J.H. Financial about potential investments and evaluating them, but also
involved investigating and examining the condition of subject buildings, lease
and lease rates therein, comparable sales rates, comparable lease rates, area
and market conditions, and the identity and background of potential buyers and
their qualifications. Mr. Behrle evaluated numerous transactions proposed by
J.H. Financial. He also spent a considerable time participating in the
negotiation of various transactions, as well as keeping the FarWest officers
and-directors fully informed about the potential investments and their nature.
Since Mr. Behrle was spending at least 30% of his time working for
FarWest in attempting to locate potential real estate investments, and since the
offices of First City
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Denis F. Shanagher, Esq.
July 18, 1994
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and its staff were being utilized in this respect, it was only fair to allocate
expenses accordingly. In this respect, Mr. Behrle did not receive any extra
income; rather, First City was reimbursed for 30% of Mr. Behrle's payroll and
related office expenses since Mr. Behrle and his office were NOT engaged in
First City projects -- Mr. Behrle and his office were working for FarWest
Savings. This overhead allocation is not only wholly appropriate, it is
consistent with the RTC's insistence in an earlier portion of its April 15
letter that a company be reimbursed for all expenses incurred in connection with
the work for another entity. (Letter dated April 15 at p. 3).
It was NOT the case that First City incurred and "was paid 75% of the
cost of Behrle's 'staff' for their 'work' on these investments," as the RTC
asserts. (ID. at p. 5). The RTC has missed the point entirely. Charles Green
asked this very question in a memorandum dated March 13, 1989 -- whether First
City was being reimbursed for 75% of its expenses by FarWest Savings. The RTC
simply ignored the answer, contained in the memorandum from Val Lyon dated
March 28, 1989. (SEE Exhibit 94.) After evaluating the allocation, Mr. Lyon
concluded that "we pay 75% of the 40% allocated away" from First City
Industries. (ID.) In other words, 30% of Mr. Behrle's payroll and related office
expenses were paid by FarWest Savings because this was the amount of time
"dedicated" to the work for FarWest. Mr. Lyon also correctly notes that this
transaction was not an intercompany charge since neither FarWest Financial nor
FarWest Savings is a subsidiary of First City Industries. Hence, this expense
allocation is perfectly fair and appropriate.
RECOUPMENT OF J.H. FINANCIAL'S ADVANCES
All of the advances for profits and office expenses made to J.H.
Financial were fully recouped through profits made in the Sepulveda Boulevard
and Ventura Boulevard transactions. The RTC notes that J.H. Financial received
$478,660 in advances in this respect. The RTC does not observe, however, that
$214,816 of this amount was recouped by FarWest Savings in connection with the
sale of the Sepulveda Boulevard property. (Memorandum of Lyon dated 5/4/89 at
entries for "J.H. Financial Operation Pmts." and "Jack J.H. Financial" --
Exhibit 17). After the recoupment of these advances, the profits made by
FarWest Savings in connection with the transaction where $203,048. (ID. at entry
entitled "ACFC"). In addition, the sale of the Woodland Hills building was made
at a profit of over $500,000 to FarWest Savings,
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 32
thereby resulting in a full recoupment of the additional J.H. Financial balance
with a substantial profit of roughly $250,000 to boot (without taking into
consideration the money earned in leasing the subject building before it was
sold, since it generated income in excess of the debt service). (Exhibits 31-
33.)
It also should be noted that of the monthly overhead allocation made
to J.H. Financial, roughly $4,000 of it was being paid back to FarWest Savings
every month for rent, resulting in an additional recoupment of $40,000 or more.
(SEE, E.G., J.H. Financial Lease Agreement -- Exhibit 96). Further, the monthly
overhead payments advanced to J.H. Financial for its work in attempting to
locate and negotiate real estate investments for FarWest Savings on a full-time
basis were not nearly enough to cover actual overhead costs of J.H. Financial.
J.H. Financial's actual costs were in the neighborhood of $18,000 to $19,000.
In addition to the identification of overhead expenses set forth in J.H.
Financial's agreement with FarWest dated April 1, 1988 (SEE J.H. Financial
Agreement at Chart A -- Exhibit 97), which amount to $13,800, J.H. Financial
paid $2,000 more in rent (note: directly to FarWest Savings), retained an
employee to conduct due diligence at a cost of roughly $2,500 per month, and
paid substantial additional sums per month for advertising expenses. Again,
during this period J.H. Financial and its office were engaged FULL-TIME in
attempting to locate real estate investments for FarWest Savings. (SEE J.H.
Financial Agreement at Paragraph 2.1 -- Exhibit 97) (J.H. Financial shall
furnish to FarWest his "entire and exclusive" efforts).
Although J.H. Financial was working exclusively for FarWest and
thereby incurring substantial overhead expenses, FarWest insisted in negotiating
the J.H. Financial Agreement in such a way as to allow it to recoup these
expenses rather than pay outlays. It further insisted that it recoup these
expenses BEFORE net profits on a transaction were calculated. If J.H. Financial
and its staff became employees of FarWest Savings, the overhead costs incurred
would have been substantially in excess of what was actually paid, to say
nothing of employment benefits.
V.
PANORAMA PARTNERS' INVESTMENT
The RTC's contentions regarding Panorama Partners, contained in one
paragraph on page 6 of its April 15 letter,
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Denis F. Shanagher, Esq.
July 18, 1994
Page 33
similarly misconstrue the actual circumstances. A great deal of careful
consideration was given prior to this investment, and there can be no doubt
that, at the time, the transaction was an extremely favorable one. Contrary to
the RTC's assertion in its April 15 letter, there WAS a signed resale contract
(complete with joint escrow instructions) at the time the purchase of the
property by Panorama Partners was made, which contract provided for payment of
$2.75 million in excess of the purchase price of Panorama Partners. This
investment also was made when the institution was in a very positive financial
position, before FIERRA was passed.
Moreover, contrary to the RTC's assertion that "[n]o buyer has ever
entered into a contract to purchase the property," there were at least four
underlying contracts entered into to purchase the property for millions of
dollars in excess of the $9 million purchase price paid by Panorama Partners in
November of 1988. There were also numerous additional offers to purchase the
property in this respect. Indeed, an appraisal of the property in August of
1990, nearly two years after the original purchase, placed the value of the
property at $10.39 million, or $1.39 million above the original purchase price.
Particularly troublesome is not the decision to enter into the
transaction, but the RTC's decision in February of 1991 to "decline," without
any serious consideration, a $12 million offer to purchase the property by a
respected buyer. This rejection of a serious offer appears to have occurred
notwithstanding a favorable written recommendation of Mr. Mandelbaum.
In connection with the original purchase of the property, a great deal
of research was conducted. First, a thorough written audit of the property was
conducted by ICF Technology Incorporated. (Inspection Report dated 8/10/88 --
Exhibit 98.) The report found no significant problems. Another extensive
written report performed by Diagnostic Engineering Inc. also was evaluated.
(Inspection Report dated 10/29/87 -- Exhibit 99.) While this report concluded
that there was some evidence of asbestos in pipe elbow insulation and various
floor tiles (and not in other building materials), the total cost to address
these items was only $15,580. (ID. at p. 1.) Various members of the Executive
Committee also personally inspected the premises.
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 34
In evaluating the investment, significant research was performed
concerning comparable sales in the area by various of the Panorama Partners. In
this respect, Joseph Haddad, one of the principal partners in the transaction,
was a very experienced real estate syndicator and the owner of real estate
approximating $100 million. His expertise in this respect was well known, and
his analysis of the transaction was thought to be reliable. In addition, Zvi
Ryzman was an experienced and respected investor who also assisted in evaluating
the transaction. Various brokers were consulted to determine market prices.
Various of the Panorama Partners had done very similar deals in the same area,
and their experiences were extremely useful. As significant was the fact that
major real estate syndicators, the other partners, were willing to invest $2
million of their own cash into the investment.
Also taken into consideration were the numerous offers that had been
received by various of the other Panorama Partners for the purchase of the
property as of November 1988, when the investment was considered and finalized
by FarWest. All of these offers were for millions of dollars above the proposed
$9 million purchase price. In this respect, Mr. Mandelbaum had locked up the
property with a purchase agreement in July 1988, and he thus was able to begin
to solicit interest in reselling the property. The following offers on the
property were made to the Panorama Partners before the ultimate purchase for $9
million in November 1988:
Fifty-Fivecal Inc. 8/2/88 $11 million cash
(Exhibit 100)
VISA Development Co. 8/11/88 $11.75 million cash
(Exhibit 101)
B.W. Brody Company 8/19/88 $11 million
(Exhibit 102)
B.W. Brody Company 10/10/88 $11.75 million
(Exhibit 103)
Indeed, two of these offers resulted in signed purchase contracts for the
property. A signed agreement with Fifty-Fivecal Corporation was executed on
April 3, 1988 to purchase the property for $11 million. (Purchase Contract --
Exhibit 104.) Similarly, a signed purchase contract was executed with B.W.
Brody, a major construction firm, on
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Denis F. Shanagher, Esq.
July 18, 1994
Page 35
October 12, 1988 to purchase the property for $11.75 million. (Exhibit 103.)
On October 17, 1988, a purchase agreement with joint escrow
instructions was executed by B.W. Brody Construction Company and Panorama
Partners. (Escrow Instructions -- Exhibit 105.) This resale agreement with
joint escrow instructions was pending at the time that Panorama Partners
purchased the property in November of 1988 (Exhibit 106), and certainly was a
principal inducement to make the investment. Amended escrow instructions were
filed in November of 1988, and on January 12, 1989, a revised purchase agreement
with joint escrow instructions was executed with B.W. Brody Construction for a
sale price of $12.15 million. (Revised Escrow Instructions -- Exhibit 107.)
The BRODY transaction apparently failed because of zoning changes on
the property which occurred AFTER the property was originally purchased by
Panorama Partners. (Letter from Brody dated 2/24/89 -- Exhibit 108.) In this
respect, an Interim Control Ordinance, adopted by the Los Angeles City Council
on December 20, 1988, prohibited the issuance of building permits for the
construction of commercial or industrial structures, or the development of
residential uses, on a tract of land encompassing the subject property for a
period of one year. (Interim Control Ordinance -- Exhibit 109.) The final
ordinance was passed by the Los Angeles City Council on October 4, 1989,
although it was "disapproved by the Director of Planning . . . on behalf of the
City Planning Commission with the recommendation that it NOT be adopted."
(Final Ordinance -- Exhibit 110). Obviously, none of the Panorama Partners have
any control over the vagaries of the Los Angeles City Council.
After the Brody deal fell through, the Panorama Partners continued to
receive numerous substantial offers on the subject property. All of these
offers were for millions of dollars in excess of the $9 million purchase price.
These offers are as follows:
Gross Enterprises 6/2/89 $11 million
(Exhibit 111)
Gross Enterprises 7/17/89 $11.5 million
(Exhibit 112)
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GIBSON, DUNN & CRUTCHER
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 36
Lincoln Property Company 7/27/89 $12.5 million
(Exhibit 113)
Puma Development, Inc. 7/26/89 $10 million
(Exhibit 114)
Gross Enterprises 8/23/89 $12.5 million
(Exhibit 115)
Michael Robbins 1/16/89 $12 million
(Exhibit 116)
Hopkins Development Co. 6/19/90 $11.85 million
(Exhibit 117)
Projects West Corporation 12/12/90 $13 million
(Exhibit 118)
Projects West Corporation 2/4/91 $12 million
(Exhibit 119)
of these offers, two of them were accepted and resulted in signed purchase
agreements. On November 30, 1989, Panorama Partners entered into a purchase
agreement with escrow instructions with Michael Robbins for a purchase price of
$12 million. (Purchase Contract -- Exhibit 120.) On March 27, 1990, Panorama
Partners entered into a purchase agreement with escrow instructions with Gross
Enterprises, Inc. for a purchase price of $12.5 million. (Purchase Contract --
Exhibit 121.) Unfortunately, neither of these purchase contracts came to
fruition for various reasons. They do demonstrate that this certainly could not
be considered a reckless investment.
This is confirmed by a detailed appraisal of the property conducted on
August 6, 1990, at the request of the office of Thrift Supervision. (Appraisal
-- Exhibit 122.) The appraisal analyzed improved sale comparables, land sale
comparables, rental comparables, and cost and income capitalization analyses.
(ID.) The appraisal concluded unequivocally that the value of the property was
$10.39 MILLION at that time, in a real estate market that had softened somewhat
from November of 1989. (ID.) An in-house examination of the appraisal and a
field inspection of the subject property by the Major Loan Appraisal Department
at FarWest care to the written conclusion that the appraisal was
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Denis F. Shanagher, Esq.
July 18, 1994
Page 37
accurate. (In-House Appraisal Review dated 8/17/90 -- Exhibit 123.) "This
appraisal report is in compliance with Association Policy and established
appraisal practice. I have, therefore, APPROVED this report. Development and
support of all appropriate approaches to value are adequate. The associated
value indications are within acceptable ranges." (ID. at p. 1.)
Our clients are particularly concerned that the RTC is attempting lay
blame at their feet when it was the RTC that rejected, apparently without any
substantive analysis, a $12 million offer by a respected buyer to purchase the
property in March 1991. In this respect, Projects West Corporation made a
written offer to purchase the site for $12 million on February 4, 1991. (Exhibit
119.) The offer contained an option to allow Projects West to conduct additional
diligence in connection with the transaction. (ID.) The offer was accompanied by
an extensive resume of Projects West Corporation illustrating their expertise
and experience in acquisition and development projects, and it included a list
of select Projects West developments, numerous properties owned by Projects
West, numerous properties managed by Projects West, an entire developer's team
for the project, and accounting, legal, banking, and construction lending
references. (Projects West Resume -- Exhibit 124.) As an example of the
experience of Projects West, its chairman had over 27 years experience in the
real estate development business, owning, operating, and managing over 7,000
apartments and 2,000,000 square feet of residential/industrial space. (ID.) The
resume also notes, "The list of the over 300 buildings owned and directly
supervised by [the chairman] from 1967 to 1984 is available on request." (ID.)
On February 11, 1991, Mr. Mandelbaum sent the offer letter he received
to FarWest Savings recommending that it be accepted. (Letter of Mandelbaum dated
2/11/91 -- Exhibit 125.) He stated explicitly, "I would recommend signing letter
and we should talk about the offer." (ID.) A handwritten note on the Mandelbaum
letter, apparently written in-house at FarWest savings, states "Let's go over
this." (ID.) However, there is no documentation whatsoever of any substantive
review of the proposal in any of the files produced by the RTC. Nor is there
any indication that anyone at the RTC called to check on any references of
Projects West or called to obtain additional information concerning the
experience of Projects West. No counter-offer was ever made. Rather, on an RTC
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Robert, W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 38
asset review sheet, it is simply noted that the "Disposition of Offer" is
"DECLINED." (RTC Status Sheet -- Exhibit 126.) It is also noted that any
"Counter Offer" is also "DECLINED." (ID.) This is true despite the fact that the
asset review sheet states expressly that the appraised value of the subject
building was $10.39 million on July 1990, and thus that the amount of the
subject offer was almost $2 million more than the appraised value. (ID.)
The only evidence of any communication whatsoever with Projects West
concerning the offer is a communication dated February 15, 1991 which indicates
that "we will initiate analyses to determine whether or not the proposal meets
our requirements." (Letter from Bossio dated 2/15/91 -- Exhibit 127.) It states
further, "In any event, you will be contacted as soon as possible with respect
to the status of your proposal." (ID.) There is no evidence that Projects West
was ever contacted. Rather, in a letter to another potential purchaser, written
two weeks later, who similarly submitted a written offer for the building, the
RTC similarly declines to substantively respond. (Letter from Bossio dated
3/26/91 -- Exhibit 128.) This letter states, "As you are aware, we are
currently under Resolution Trust Corporation ("RTC") Conservatorship. At this
time, it has been determined that it is in everyone's best interest to hold
acceptance, rejection or counter to any and all proposals for the purchase of
this property until all facts are known and current." The letter concludes, "We
understand the problems associated with the delay of this type and appreciate
the inconvenience it may cause you. Hopefully, you will still have interest at
such time as we can properly respond." There is no evidence that the RTC ever
got back to any of these potential purchasers.
The conduct of the RTC in refusing to respond affirmatively to these
offers, although it was in possession of a complete appraisal of the property,
is without justification. Complaints about the "inability of the IPR [the RTC's
management firm] and the RTC to take any concrete steps to sell the property"
continued into 1992. As stated by an interested party, "I am aware of several
offers, but find it incomprehensible why you do not either accept one of the
offers or do something to solicit new offers. The solution is certainly not to
sit on your hands and do nothing." (Letter from Haddad dated 5/27/92 -- Exhibit
129.)
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GIBSON, DUNN & CRUTCHER
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 39
VI.
BACCALAS' LOAN
We have been informed that the RTC does not intend to pursue any
issues in its letter dated April 15, 1994, concerning the J.L. Construction
loans for River Run, Metro Center II and Dublin Meadows. In this respect, in
response to our clients' request to examine the loan files relating to these
transactions, which were not produced by the RTC, we were informed that the RTC
is not making a claim with respect to any of the above-referenced loans made to
J.L. Construction Company. (Letter from Battaglia dated 6/23/94 -- Exhibit 130.)
We were informed that the only loan at issue in the section of the April 15
letter entitled "Loans to J.L. Construction" is a loan to Aldo and Karen
Baccala, and we have confirmed this to you in writing. (ID.) We thus will only
address the Baccalas' loan in this section.
On the face of the loan package, it is simply preposterous for the RTC
to assert that the Baccala loan was somehow reckless. Out of a total purchase
price of $11.27 million, the subject loan on entitled property was $5.55
million, WITH AN EQUITY TO COST RATIO OF 50.75%. (Executive Committee Minutes
dated 9/19/89 -- Exhibit 131; Executive Loan Summary dated 9/8/89 -- Exhibit
132; Recommendations to Executive Committee dated 9/15/89 -- Exhibit 133.) The
loan to value ("LTV") ratio was only 58%, far below what OTS regulations
considered to be a favorable loan even today after FIERRA. (ID.) Today's OTS
regulations provide that a loan to value ratio for entitled land ("Land
Development") of up to 75% is appropriate. (12 CFR Section 563.101 at Appendix
A to subpart D of part 563, entitled "Interagency Guidelines for Real Estate
Lending.") Even if the subject loan were for "raw land" as the RTC mistakenly
asserts, a loan to value ratio of up to 65% is deemed appropriate by the
Office of Thrift Supervision. Obviously, the OTS standards were implemented to
reflect what loans were appropriate, and it is absurd to suggest that a party
can be deemed "reckless" in making a loan which is so clearly within even the
strictest OTS standards imposed under FIERRA.
If that were not enough, the loan per unit on the Baccala loan is
$12,065, OR 69% OF AVERAGE SALE COMPARABLES PER UNIT, which was $17,500 at the
time the loan was made. (Exhibits 131-133.) Further, there can be no question
but that all underwriting standards were followed in connection with the subject
loan, which even the RTC admits. (Letter
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 40
dated April 15 at p. 7.) In this respect, appraisals on the subject property
placed the value at or about the purchase price for the property itself.
Further, FarWest Savings not only had a first trust deed on the property, it
also had a RECOURSE loan against all of the assets of the Baccalas. In this
respect, "The Borrowers were a credit worthy real estate broker and has
experience in land banking for developers." (Exhibit 133.)
The proposed loan was the first item of business at the Executive
Committee meeting of September 19, 1989. (Exhibit 131.) As reflected in the
minutes, the loan was fully evaluated by the experienced members of the
Committee and received approval after discussion. (ID.) The minutes state, "The
strength of the transaction is the low LTV of 58%. Underwriting performed a
limited economic analysis using Borrower's proforma rents and expenses. Based
upon these numbers, an NOI of 10.9% and DSC of 1.04 were calculated." (ID. at
p. 2.)
Further, the Executive Committee had no knowledge whatsoever that J.L.
Construction may somehow be involved in the transaction, or that a previous loan
to J.L. Construction had been rejected. There is nothing in the Executive
Summary prepared by the Major Loans Group that even mentions J.L. Construction
Company (Exhibit 132), and there is nothing in the recommendation from the Major
Loans Group to the Executive Committee that mentions J.L. Construction. (Exhibit
133.) Further, there is nothing in the minutes of the Executive Committee
meeting where the loan was approved which in any way references J.L.
Construction. (Exhibit 131.) To the contrary, the "[e]quity contribution by PMC"
was discussed, and it was noted that there was "[n]o FarWest construction loan
commitment." (ID. at p. 2.) No interest of J.L. Construction was ever recorded
on the property, as is evident by the RTC's title search dated April 15, 1992,
which reflects no such interest. (Title Search -- Exhibit 134.)
It is also simply wrong to suggest that the Baccalas brought nothing
to the transaction. The Baccalas brought $5.72 million in cash, all of which
was subordinate to the interest of FarWest Savings. (Exhibits 131-133.) This
money was provided by S.L.G.H. Investments, Inc., which took a second trust deed
on the property, and apparently by Property Mortgage Company, Inc., which took a
third trust deed in the property. (Exhibit 134.) These investors apparently felt
that there was sufficient equity and promise in the property
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 41
to make substantial investments. That it was their money at risk, instead of
Mr. Baccala's, is immaterial. Again, the entire hard cash investment was
subordinate to FarWest Savings.
After an extensive analysis, which included an evaluation of financial
statements, appraisals, environmental reports, land sales comparables, and an
extensive financial analysis, the Major Loans Division concluded, "The site
enjoys an excellent location within the master planned community of Corona
Hills. Based upon the facts presented above, we feel this is a good transaction
for the Association and recommend approval as presented." (Exhibit 133.)
It has been suggested to the RTC that the $9.5 million appraisal in
connection with the underwriting was somehow concocted to "[cover] the purchase
transaction," and this apparently is a principal basis of a claim of
recklessness by the RTC. (SEE Memorandum from Swartz to Helstowski dated
12/14/93 -- Exhibit 135.) Ms. Swartz concludes, "The appraisals certainly raise
questions in my mind about unsound lending practices in justifying a sales
transaction with an appraisal in the like amount." (ID. at p. 2.) In this
respect, Ms. Swartz suggests that there are questions about the value given an
appraisal from J.L. Construction dated August 16, 1989, "reflecting the land
value 'as is' at $6,875,000." (ID. at p. 1.) "Prudent underwriting should have
dictated meaningful dialogue and requests for the [reconciliation of the] great
variances between the two appraisals."
Not only did the Executive Committee have nothing whatsoever to do
with underwriting in connection with the loan, but Ms. Swartz's analysis, upon
which the RTC apparently bases its conclusion of recklessness, is simply
incorrect. It is true that FarWest Savings conducted an extensive in-house
appraisal review of the subject property in September of 1989 and concluded that
its market value was $9.5 million, or $20,696 per proposed unit. (In-House
Appraisal dated 9/15/89 -- Exhibit 136.) Note that the land area for the
proposed Baccala loan was 21 acres, upon which construction of 460 apartment
dwelling units was to take place. (ID. at V.) Contrary to the contentions of Ms.
Swartz, the independent appraisal conducted two weeks earlier came to a
VIRTUALLY IDENTICAL CONCLUSION considering different comparables. It is true
that this independent appraisal concluded that the property appraised had a land
value of $6.875 million.
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 42
(Appraisal dated 8/16/89 -- Exhibit 137.) However, this appraisal was for a
smaller plot of land, not for the larger tract of land proposed to be purchased
by the Baccalas. This appraisal was for a "land area" of 15.6 acres and for a
development project of only 336 apartment units. (ID. at "Summary Salient Facts
& Conclusions.")
Extrapolating the independent appraisal to the full acreage of the
Baccala loan, the appraised value of the subject property becomes $9.26 million.
Indeed, the independent appraisal indicates that the price per unit is $20,193.
(ID. at p. 32.) Multiply this by the number of units to be constructed in
connection with the Baccala loan, and the appraisal values the subject property
at $9.29 million using this method. Thus, both the in-house appraisal and the
independent appraisal conducted two weeks earlier were virtually identical for
substantive purposes, placing the value of the subject property at more than $9
million, with an equity to cost ratio of approximately 50%.
Indeed, appraisals as late as June 1991 conducted by the RTC indicated
that the subject property had value in excess of the amount of the FarWest loan.
(Appraisal dated 6/19/91 -- Exhibit 138; Appraisal dated 6/28/91 -- Exhibit
139.) At the same time, the appraisal noted that the real estate markets in
Southern California had taken a significant downturn as the region suffered from
the significant recession. "Since acquisition in 1989, the market has taken a
significant down-turn in value trending. This is evidenced by the fact that
there have been little to no apartment land acquisitions that have occurred
since the subject acquisition." (ID. at p. 11.) (SEE ALSO Appraisal dated
December 19, 1992 at p. 36 ("primarily because of the recession and soft housing
market, recent Inland Empire raw high density residential land sales are
scarce")).
It is inappropriate and unfair for the RTC to assert that this or any
other loan was "reckless" because of the unprecedented downturn in the real
estate market in Southern California since 1989, particularly in the commercial
real estate market. The Executive Committee of FarWest Savings can hardly be
considered the guarantors of economic fortune. Should the RTC be considered
reckless in not promptly disposing of this and other property when it took over
FarWest Savings in January 1991, as commercial real estate values continued to
decline even more precipitously than before?
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 43
This was a loan where all OTS guidelines for loan to value ratios were
observed, where the underwriting of the transaction was properly performed,
where two separate appraisals placed the value of the property at 50% above the
subject loan, where there was a substantial hard cash investment of more than $5
million which was subordinate to FarWest's interests, and where FarWest not only
had recourse against the subject collateral but also against the substantial
additional property and assets of the Baccalas. This loan was fully analyzed
and approved by the underwriting department, and the Major Loans Group, and
based on this recommendation it was ultimately approved by the Executive
Committee after discussion.
This loan was not made to J.L. Construction Company. It was made to
the Baccalas who personally guaranteed the loan with their individual assets, as
well as with the property itself. The hard cash of more than $5 million put in
the transaction did not come from J.L. Construction Company, it came from
S.L.G.H. Investments. The Executive Committee which considered the loan
certainly had no knowledge of any past, pending or future involvement by J.L.
Construction Company. Indeed, the first document that appears in the file that
even mentions an Agreement between J.L. Construction and the Baccalas is a
letter from legal counsel dated April 9, 1991, after the RTC took over FarWest
Savings and long after the loan was made. (Letter from Klausner dated 4/9/91 --
Exhibit 140.) Indeed, because there was no reference to this Agreement in any
files of FarWest Savings, the RTC contacted J.L. Construction in July 1991 to
obtain a copy of the Agreement. (Letter from Moss dated 7/18/91 -- Exhibit 141.)
Upon review, it is not surprising that the Agreement was not in FarWest's loan
files. The Agreement was executed AFTER the loan to the Baccalas was made.
(Agreement dated 10/18/91 Exhibit 142.) Moreover, the terms of the Agreement
were contingent on J.L. Construction obtaining a construction loan. (ID. at
Paragraph 5.) FarWest never made any such loan to J.L. Construction. The
purchasers and owners of the property were very clearly the Baccalas.
Nor can the loan conceivably be said to violate the provisions
covering the loan to one borrower limitation. First and foremost, J.L.
Construction was NOT the borrower. The loan was made and secured by the
Baccalas with additional hard cash provided by other investment entities. (Loan
Documents -- Exhibit 143.) Of course, the Baccalas were going to have to secure
the services of a construction company in
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GIBSON, DUNN & CRUTCHER
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 44
order to develop the land -- that does not mean that the loan made by FarWest
Savings is deemed to made to that construction entity. The applicable
regulation defines "one borrower" to mean "[a]ny person or entity that is, or
upon the making of a loan will become, the obligor on a loan. Provided that a
guarantor shall not be included within the meaning of 'obligor' if, in
connection with a loan or other extension of credit, the insured institution has
determined, in good faith, that the primary obligor has qualified for the loan
or extension of credit irrespective of the existence of the guarantor." (12 CFR
Section 563.9-3(a)(1)(a) (1989)). The Baccalas were the sole obligors on the
subject loan. They are the ones that qualified for the loan irrespective of
anyone else.
Second, even if the $5.5 million loan had been to J.L. construction
(which it clearly was not), this would not have violated the loan to one
borrower regulations in effect at the time. It must be remembered that as of
the date of the subject loan, the new loan to one borrower limitations had not
even been proposed, let alone finalized, by the Office of Thrift Supervision.
It was on March 27, 1990, that the OTS published "Interim Final" regulations,
effective immediately, that interpret the loan to one borrower limitations
contained in FIRREA. (55 Fed. Reg. 11294 (March 27, 1990)). The comment period
for these regulations closed on May 29, 1990. The OTS published final
regulations on July 10, 1990. (55 Fed. Reg. 28144.) Indeed, the OTS did not
provide any guidelines concerning interpretation of the loan to one borrower
limitations of FIRREA until it issued Thrift Bulletin 32-2 on December 27, 1989,
two months after the subject loan was made. Further, in Thrift Bulletin 32
issued in September 1989, the Bulletin advised that issues such as "the capital
and other differences" between national banks standards and savings association
standards are unresolved and under review by the OTS. (Thrift Bulletin 32
(September 1989)). The OTS advised savings associations that "no determination
has yet been made" concerning the applicability of the lending limitation
regulations and interpretations of the Office of the Comptroller of the
Currency. Indeed, even as late as March 1990, hearings were held in Congress
concerning the loan to borrower provision because of an apparent regulatory
impasse between the OTS and the OCC on the issue of establishment of a
transition period for implementation of the loan to one borrower provisions.
(House Banking Committee, Subcommittee on General Oversight and Investigations,
on 2/7/90.)
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Denis F. Shanagher, Esq.
July 18, 1994
Page 45
Since the RTC has not produced any files relating to the prior
application by J.L. Construction Company for a loan on the subject property, it
cannot be determined why that particular loan was denied. It is apparent from
an appraisal in the Baccala file that the J.L. Construction application
concerned property different from that in the Baccala application. (Exhibit
137.)
Although no loans to J.L. Construction Company are at issue, it must
be emphasized that "the company had an extremely positive history in the
construction industry, and did not have "a history of aggressive risk-taking" as
the RTC asserts. A Credit Review for J.L. Construction Company dated April 18,
1990, notes that the company has succeeded [as a development company] as
demonstrated by the following: to date, the company has built, sold and paid off
5 apartment projects, totalling 1,030 units for an aggregate sales price of
$80,050,000. The company has sold an additional 750 units, or 4 apartment
project[s], currently in escrow, three of which are substantially complete.
Finally, J.L. Construction has completed another two projects, totalling 514
apartment units, currently in lease-up (at least 74% leased) and being marketed
for sale." (Credit Review dated 4/18/90 at p. 2 -- Exhibit 144.) Further, the
review notes that the balance sheet for J.L. Construction reflected 1989 total
assets of $182,918,000. (ID. at p. 3.) Experience with other lenders and
references indicates that J.L. Construction was well respected at the time. (ID.
at pp. 1-2.) The Credit Review concluded, "Based on J.L. Construction Company's
historically financial performance, FarWest's specific experience and that of
other lenders, J.L. Construction Company builds a quality project quickly,
selects superior sites and is able to sell these projects, some well in advance
of completion, at a significant profit." (ID. at p. 4.) While the construction
company did experience some cost overruns, these overruns "have typically' been
funded by J.L. Construction Company, primarily through cash-flow or equity
partners. In spite of these overruns, the company has shown considerable,
positive net income." (ID.)
VII.
BUTTERFIELD & MASON LINE OF CREDIT
The allegations of the RTC with regard to Butterfield & Mason are
similarly in error. At the outset, it must be noted again that FarWest Savings
was in a secure capital position when the transaction was entered into and
during the time modifications were made. FarWest was not put
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Denis F. Shanagher, Esq.
July 18, 1994
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into a more difficult financial position until it was legislated out of
significant investment markets by FIERRA. Further, as emphasized in more detail
above, the RTC gives no credit to the extensive experience of the members of the
Executive Committee in evaluating and approving the original line of credit. Of
course, the Executive Committee was not involved in the day to day
administration of the line of credit, to the extent the RTC's claims are related
to such conduct.
On July 7, 1988, Warren Ashmann sent a proposal to Fred Kayne at
FarWest Savings and Loan "requesting a line of credit to continue my financing
business." (Proposal dated 7/18/88 -- Exhibit 145.) This proposal arrived at
FarWest in the same manner that numerous other proposals arrived, in the
ordinary course of business. At the time, Fred Kayne knew of Warren Ashmann as
a member of the business community and through charitable affairs. Ashmann was
NOT a personal or social friend of Kayne's.
Initially, Fred Kayne, C.E.O. and a member of the Executive Committee,
met with Ashmann about the proposal, thought it had promise, and referred it to
Charles Green for his review. Mr. Green was then C.F.O., Executive Vice
President and member of the Executive Committee. After meeting with Ashmann,
Charles Green also believed that Ashmann's proposal had merit and presented it
to the full Executive Committee, with Fred Kayne's approval. (All of the
Executive Committee minutes for this period of time are not in the files
produced by the RTC. These minutes reflect a thorough consideration of the
proposed transaction by Executive Committee members.) After presentation to the
Executive Committee, William Belzberg, Chairman of the Board and member of the
Executive Committee, also met with Warren Ashmann to discuss the proposal.
Ultimately, the Executive Committee approved the deal.
Charles Green, CFO, Executive Vice President, and member of the
Executive Committee, was put in charge of negotiating the details of the Ashmann
deal and getting proper attorney review and documentation, and he thus became
the supervising officer. Mr. Green hired the experienced law firm of Manatt,
Phelps to assist him in this respect. The process of arranging the transaction
took over three months of review and negotiation. A deal was signed in November
1988. The documentation for this deal was carefully drafted (comprising about
100 pages with exhibits, including a 29-page agreement
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Denis F. Shanagher, Esq.
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(Exhibit 146), a 21-page guarantee (Exhibit 147), and related documents (Exhibit
148)).
Before the deal was consummated, extensive due diligence on Warren
Ashmann and his business interests was performed. At least two investigation
firms were retained to evaluate Mr. Ashmann and obtain credit and related
information, the respected firm of Murphy and Maconachy, Inc. and Research
Reports, Inc. Both these firms issued favorable reports. (Investigation Reports
-- Exhibits 149 and 150.) Moreover, and contrary to the express representations
in the RTC's April 15 letter, all of Mr. Ashmann's pertinent financial
information was obtained and evaluated, including financial statements and tax
returns for all of his interests. This information is TWO INCHES thick.
(Ashmann Financial Information -- Exhibits 151 to 153.)
Butterfield & Mason was a small privately held mortgage company that
would lend money on first, second, and third trust deeds, often obtaining
multiple collateral for the loan. It would do its own internal appraisals and
evaluations, document the transactions, and fund the deals. The principals had
a successful record of lending in this manner with a history of good quality
borrowers.
The nature of the deal between FarWest Savings and Butterfield & Mason
was as outlined in the Manatt, Phelps agreement of approximately 100 pages,
including exhibits, and can be summarized as follows:
1. Initially, the transaction was to be a $5.0 million revolving
loan. It was documented in the form of a Note and Revolving
Credit Agreement ("RCA") signed by Charles Hall, Sr. Vice
President, and dated as of November 3, 1988 (Exhibit 146);
2. This loan was increased from $5 million to $10 million. It was
documented in the Amended and Restated Revolving Credit Agreement
dated as of November 3, 1988, and signed by Charles Hall, Sr.
vice President (Exhibit 154);
3. Mr. Ashmann and his wife guaranteed 50% of the Repayment
Deficiency as defined in paragraph 6.3 of the guarantee (Exhibits
147 and 154);
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Denis F. Shanagher, Esq.
July 18, 1994
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4. To secure the obligations of the Ashmann guarantee, the Ashmanns
granted a security interest in "eligible collateral" initially
worth $2.0 million, and in the stock of Butterfield & Mason.
(ID.) (There were later modifications which are described below
increasing the "eligible collateral");
5. To further secure the RCA, a first priority security agreement
was also granted in the underlying collateral (IE., the loans
made by Butterfield & Mason) (ID.);
6. FarWest was to receive Prime plus 1.5% plus 50% of the net
profits. (ID.) IN THIS RESPECT, FARWEST RECEIVED A CHECK FOR $1.0
MILLION IN NET PROFIT AFTER THE FIRST YEAR (I.E., IN 12/89)
(Letter from Ashmann dated 12/28/89 -Exhibit 155);
7. It was contemplated at the outset that this deal would evolve and
that it was going to be funded in $5.0 million increments as
approved and recommended by the supervising officers of the
savings and loan and the ACFC subsidiary. A Loan Brief plus
supporting materials was prepared, reviewed and approved by three
individuals prior to the advance of the original $5 million to
Butterfield & Mason. (Loan Brief dated 11/3/88 -- Exhibit 167.)
Charles Hall and Charles Green and/or Fred Kayne reviewed,
and at least two of these three individuals (and often all three)
approved, all modifications to the Revolving Line of Credit,
including all requests and applications for increases in the
line. (Modifications -Exhibits 156 to 166.) All standard internal
procedures of the financial institution were followed and the
applications for additional loans were approved and documented in
accordance with the Board of Directors' guidelines and the
approval process set up by FarWest Savings.
Additional steps were taken to modify the Loan Brief
whenever additional advances or
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July 18, 1994
Page 49
modifications were sought. An analysis was performed, charts of
Eligible Collateral and Eligible Loans were provided, default
rates were discussed, portfolio summaries were performed,
Collateral Valuation worksheets were prepared, status reports
were provided, checks and balances were maintained in place, and
all standard procedures implemented for this type of investment
were followed in connection with these Modifications. It is
interesting to note that in Modification "F" dated April 26,
1990, it states on page 3: "Since inception, there have not been
any losses associated with Butterfield & Mason's direct lending
program." (Exhibit 156.)
Specific procedures were instituted for funding and
servicing the loan, and these procedures were followed. A
summary of these "Butterfield & Mason Loan Documents/Procedures"
is set forth in a memo dated January 24, 1990 from Charles
Hall/Jeneco Johnson to St. John Bannon. (Memorandum from Chic
Hall dated 1/24/90 -- Exhibit 168.) However, the important
attachments to this memorandum were not produced by the RTC.
Indeed, almost ALL of the written documentation which preceded
each increase in the credit line was not produced by the RTC.
5. As each $5.0 million loan increment occurred after the initial
$10 million, it was required that Ashmann's security and
"eligible collateral" was to be increased by a relative
percentage as follows:
a. The loan was increased from $10.0 to $15.0 million on 3/2/89
and Ashmann's security and eligible collateral was increased
from $2.0 to $3.0 million (Exhibits 169 and 170);
b. The loan was increased from $15.0 to $20.0 million on 4/89
and Ashmann's security and eligible collateral was increased
from $3.0 to $4.0 million (Exhibits 171 and 172).;
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Denis F. Shanagher, Esq.
July 18, 1994
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c. The loan was increased from $20.0 to $25.0 million on 6/7/89
and Ashmann's security and eligible collateral was increased
from $4.0 to $5.0 million (Exhibits 173 and 174);
d. At all times, the Ashmanns were responsible for 50% of the
repayment deficiency under Paragraph 6.3 of their guaranty.
(SEE Exhibits 147 and 154).
Charles Green was initially in charge of over-all supervision of the
Butterfield & Mason program as Supervising Officer. Charles Hall, Senior Vice-
President of the Savings and Loan and ACFC and an experienced loan officer,
signed the loan agreement and was put in charge of the day-to-day supervision by
Charles Green. Mr. Hall had two people working for him on the Butterfield &
Mason matter, Jenece Johnson and Janet Hansen, both of whom were also in
constant contact with Butterfield & Mason. This group of three people would
obtain and assemble the necessary written documentation, obtain the necessary
approvals for any increases and forward the package to the Loan Servicing
Department. Only then could Butterfield & Mason obtain an advance.
FarWest Savings administered the Butterfield & Mason program through
its Servicing Department. All payments and receipts of funds, filings and
recordings of all documents, and the handling of all money, collateral,
documents and confirmation with the Butterfield & Mason agreements were handled
by the Servicing Department, just as with any other loan that was outstanding
with FarWest Savings or the ACFC subsidiary. The Loan Servicing Department
would not service a loan or modification unless it assured itself that the
internal funding procedures had been previously followed. The Loan Servicing
Department was a check and balance on the Loan Officers and acted as an
independent department. From time to time, the Loan Servicing Department would
be asked to do an audit.
Charles Green and Charles Hall had extensive lending experience and
the Servicing Department had full knowledge and experience on how to proceed.
Mr. Hall was brought in from Denver, Colorado and relocated to the Century City
office, close to where Butterfield & Mason was located, and a substantial
portion of Mr. Hall's job was to supervise the Butterfield & Mason project.
This loan got a higher degree of
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July 18, 1994
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attention than most other accounts due to Mr. Hall's considerable involvement.
He personally visited many of the underlying properties that constituted the
collateral on this deal. Charles Green met with Butterfield & Mason people and
supervised the program. He also visited some of the properties which
constituted the underlying loan collateral on at least two occasions.
In August 1990, Butterfield & Mason was advised that no more money
could be loaned to it due to FIRREA. Mr. Ashmann became very angry and told
Kayne that FarWest was obligated to continue funding the Butterfield & Mason
program. He also threatened a major lawsuit against FarWest. Ashmann also
stated to Kayne that in his opinion, all of the money outstanding to FarWest
would ultimately be collected if FarWest lived up to its agreement. Ashmann
pointed out that some individual loans would go bad, but that the interest and
income on the others, plus the profit percentages owed to FarWest, would cover
those losses. Ashmann also said that he thought that he had a $9.0 million
reserve with FarWest to help him with the workouts that would be required, and
he insisted that FarWest was obligated to fund these loans and the workouts.
Kayne informed the Executive Committee of Ashmann's threats to sue,
and Ashmann's belief that no money would be lost if the program continued. In
August of 1990, there was IN EXCESS OF $5.5 million of Ashmann's security in
place, plus his guarantee. In October of 1990, Butterfield & Mason defaulted on
its loan and advised FarWest that the reason for the default was that
Butterfield & Mason was using its funds for workouts on its loans, rather than
paying back its obligations to FarWest.
Subsequent to Butterfield & Mason's default in the revolving loan
program in October 1990, there were extensive meetings and communications
between Butterfield & Mason and FarWest work-out officers regarding the
situation. The Butterfield & Mason loan account was placed in the workout
section and a special senior group of officers conduct its review.
On January 8, 1991, Butterfield & Mason submitted a "proposal for
settlement" of the disputes between Butterfield & Mason and Warren and Amy
Ashmann on the one hand, and FarWest Savings, FarWest Financial and ACFC on the
other. This proposal was a detailed, five-page, 14-point
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Denis F. Shanagher, Esq.
July 18, 1994
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proposal, with exhibits. (Memorandum of Whitting dated 1/24/91 at attachment --
Exhibit 175.)
Thereafter, a detailed "Analysis of Proposed Settlement Agreement" was
performed for the RTC by the special FarWest work-out group. (Exhibit 175 at
attachment.) This Analysis provides in brief as follows:
1. In Paragraph 1, the unpaid balance on the line of credit is
stated to be $22,348,336. Paragraph 1 also states: "In any case,
THE FINANCIAL BENEFITS WHICH FARWEST WOULD RECEIVE UNDER THE
TERMS OF THIS SETTLEMENT PROPOSAL MORE THAN MAKE UP FOR THE
ABATED INTEREST" (emphasis added).
2. Paragraph 2, Page 2 of the Analysis, provides that the Exhibit A
loans (of the Butterfield & Mason proposal) represent the best
loans in Butterfield & Mason's portfolio because the borrowers
under the Exhibit A loans are the most financially solid, the
most communicative and have the most equity; each of the Exhibit
A loans has been performing exceptionally well; the Exhibit A
loans will require only minimal management by FarWest; and the
Exhibit A loans have been appraised by FarWest on a continual
basis and FarWest has all the information which it needs to
continue managing them. HENCE, IT IS TO FARWEST'S BENEFIT TO
ACCEPT ASSIGNMENT OF THOSE LOANS AND THE UNDERLYING COLLATERAL IN
EXCHANGE FOR A CORRESPONDING REDUCTION OF THE OUTSTANDING
PRINCIPAL BALANCE OF THE LINE OF CREDIT" (emphasis added). These
Exhibit A loans totaled $9,746,200. Therefore, if they had been
accepted in reduction, as offered, the net balance due on the
note would have been $12,602,136.
3. On Page 3, Paragraphs 4-5, it is stated in the Analysis that:
"The SETTLEMENT PROPOSAL IS EXTREMELY BENEFICIAL TO FARWEST
because FarWest would receive assignment of the best loans of
B&M's portfolio and, WITHOUT ANY COST TO FARWEST (except for the
relatively insubstantial overhead payment and retention sum
referenced in paragraphs 5 and 6 of the
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Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
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settlement proposal), FarWest would also receive the benefit of
B&M's efforts to liquidate the remaining Exhibit D loans. . . .
B&M is in the best position to liquidate the Exhibit D loans
because it is intimately familiar with them and because B&M has
great expertise in managing and liquidating loans" (emphasis
added).
4. Page 4, Paragraph 5 provides, "As owner of the Exhibit A loans,
FarWest can manage and liquidate them as it sees fit, without
having to incur continuing liability for interfering with B&M's
business as it has in the past."
5. Paragraph 7 on Page 5 provides: "FarWest's release of the Exhibit
C collateral would leave FarWest with approximately $3 million in
personal security against an outstanding balance on the Line of
Credit in the sum of $12,499,436, after the Exhibit A loan
assignments are credited. This would leave FarWest with personal
collateral with an aggregate value equal to 24% of the
outstanding balance on the Line of Credit, WHICH WOULD PROVIDE
FARWEST WITH EVEN MORE SECURITY THAN THEY HAD UNDER THE REVOLVING
CREDIT AGREEMENT AND GUARANTEE, where the Ashmanns agreed to put
up personal collateral with a value equal to only 15% of the
outstanding balance. [Paragraph] In addition, the ASHMANNS
OVERCOLLATERALIZED THE LINE OF CREDIT IN THE SUM OF APPROXIMATELY
$1,300,000 in that the Ashmanns pledged collateral worth
approximately $5,800,000, while the revolving credit agreement
required collateral worth only $4,500,000" (emphasis added).
6. On Page 8 of this Analysis, it provides: "THE PROPOSED SETTLEMENT
GIVES FARWEST AN OPPORTUNITY TO RECOUP THE ENTIRE OUTSTANDING
BALANCE OF THE LINE OF CREDIT AND TO RECEIVE ADDITIONAL PROCEEDS
IN THE FORM OF ACCRUED INTEREST, ACCRUED POINTS, AND PROFIT
INTEREST GENERATED BY THE EXHIBIT A AND EXHIBIT D LOANS, WITHOUT
MAKING ANY FURTHER ADVANCES AND WITHOUT INCURRING THE COSTS AND
LIABILITIES ASSOCIATED
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Denis F. Shanagher, Esq.
July 18, 1994
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WITH LITIGATION BETWEEN THE PARTIES. UNDER THE SETTLEMENT
PROPOSAL, FARWEST RECEIVED ESSENTIALLY ALL OF THE "UPSIDE"
RESULTING FROM B&M'S LIQUIDATION OF ITS LOAN PORTFOLIO, AT NO
COST TO FARWEST, EXCEPT THAT FARWEST MUST MAKE MINIMAL
REIMBURSEMENT TO B&M FOR THE OPERATING COST WHICH IT WILL INCUR
IN PERFORMING ITS OBLIGATIONS AS SPECIFIED IN THE SETTLEMENT
PROPOSAL" (emphasis added).
7. On Page 9, the Analysis also states: "FarWest's refusal to
advance further sums under the Line of Credit in August of 1990
has effectively denied B&M the ability to do business.
Thereafter, FarWest did not cooperate with B&M in its efforts to
liquidate its loan portfolio. AS A RESULT, FARWEST HAS PUT B&M
BETWEEN THE PROVERBIAL 'ROCK AND A HARD PLACE' FOR SOME TIME.
The proposed settlement allows FarWest to avoid liability for
such conduct or requiring B&M to liquidate the loan portfolio for
the benefit of FarWest."
In addition to this analysis, also supplied to the RTC was a legal evaluation of
the transaction by the firm of Neumeyer, Landrum & Dillion as well as a detailed
estimate of value of the primary collateral and secondary collateral under the
transaction. (Exhibit 175 at attachment.)
On January 24, 1991, the RTC received a memo entitled, "Outline of
Butterfield & Mason Structures and Problems." It contained a copy of the
Neumeyer, Landrum & Dillion legal evaluation of the transaction, the borrower's
proposal for settlement dated January 8, 1991, and the FarWest Savings'
estimated value of primary collateral and secondary collateral, among numerous
other documents. (Exhibit 175.) It was indicated that the primary collateral
consisted of loans funded through the letter of credit for Butterfield & Mason
in the amount of $22,348,336; that real estate owned by Ashmann or affiliates in
the amount of $5,432,157 was placed as secondary collateral; that there were
personal guarantees of Warren and Amy Ashmann; and that there was a profit
participation in Butterfield & Mason Mortgage Company.
Despite all of this data in the possession of the RTC, THE RTC
INEXPLICABLY REFUSED TO ACCEPT THE BUTTERFIELD & MASON PROPOSAL. This, despite
the fact that the "proposed
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Denis F. Shanagher, Esq.
July 18, 1994
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settlement [gave] FarWest an opportunity to recoup the entire outstanding
balance of the Line of Credit, and to receive additional proceeds in the form of
accrued interest, accrued points and profit interests . . . without making any
further advances and without incurring the costs and liabilities associated with
litigation between the parties." (Exhibit 175 at attachment.) The RTC's refusal
to enter into this settlement cannot be explained or justified.
Between January 24, 1991 and July 1, 1991, the RTC appointed a workout
specialist by the name of Robert D. Saunders to prepare a detailed "CRC Case
Memorandum" of the Butterfield & Mason loan with ACFC. (Case Memorandum dated
5/10/91 -- Exhibit 176.) Notably, Mr. Saunders places primary responsibility for
any deficiencies upon Butterfield & Mason, not FarWest. The Memorandum also
notes that it was a "principal issue" whether FarWest should have advanced MORE
money under the line of credit, not whether existing advances could be
justified. (ID. at p. 5.)
We are advised that Mr. Saunders spent a tremendous amount of time
with Mr. Ashmann at Butterfield & Mason, practically living with him for weeks,
examined the books and records of Butterfield & Mason to his heart's content and
looked into every nook and cranny of the transaction. In a memorandum dated
July 1, 1991 to Mr. Saunders from Jeffrey E. Thomas, attorney, it is stated that
Mr. Saunders had conducted:
An examination of the books and records of BM by an
outside professional accounting firm to confirm the prior
representation of Warren Ashmann with respect to the
business affairs of BM [and]
An asset search of B&M, its related entities and the
Ashmanns to confirm that no other substantial assets exist
which may be used to satisfy or secure the debt to FarWest.
(Memorandum of Thomas dated 7/l/91 -- Exhibit 178.) The Thomas memorandum
concludes that:
Mr. Saunders has advised us that: 1) An accounting firm has
examined the books and records of Butterfield and he is
satisfied that Ashmann did not make any material
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Denis F. Shanagher, Esq.
July 18, 1994
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misrepresentations concerning the affairs of the business;
and, 2) An asset search firm had conducted a search and has
not discovered any undisclosed substantial assets. The
conditions to entering in the agreement appear to have been
met.
(ID. at p. 2.) Based upon the Saunders Case Memorandum and the Thomas
Memorandum, the RTC entered into a Modification and Settlement Agreement dated
July 1, 1991 with the Ashmanns and Butterfield & Mason. (Modification and
Settlement Agreement - Exhibit 177.)
It is thus quite clear that after the RTC conducted its own detailed
investigation, which included an examination of the books and records of
Butterfield & Mason by an outside professional accounting firm and which
confirmed the prior representations of Warren Ashmann with respect to the
business affairs of Butterfield & Mason, the RTC gave the Butterfield & Mason
transaction a clean bill of health. In addition, it formally agreed to retain
Warren Ashmann in the same position as he was in since the beginning of the
FarWest Butterfield & Mason program, subject only to the modifications of the
revolving credit agreement which are set forth in the Modification and
Settlement Agreement of July 1, 1991. This conduct unequivocally confirms the
propriety of the revolving credit agreement transaction between Butterfield &
Mason and FarWest that was instituted as of November 3, 1988. Furthermore, it
is also quite apparent from a review of the above facts that had the RTC
accepted the recommendation of FarWest's work-out officers in mid-January,
1991, FarWest would likely have come out of this entire transaction WITH NO
LOSS, AND POSSIBLY A PROFIT.
Based on the above information, it is difficult to understand how the
RTC could at this time, three years after undertaking a detailed investigation
with outside professionals, make the subject accusations against Messrs.
Belzberg, Kayne and Behrle. There is absolutely no evidence that any of these
individuals were reckless in connection with this transaction.
VIII.
FARWEST FINANCIAL'S CLAIMS
Because of our urgency in reviewing the voluminous materials relevant
to the RTC's claims and in providing this
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July 18, 1994
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response, we have not sought to evaluate all of the claims that FarWest
Financial has against FarWest Savings. However, even a cursory review of
various records we have been provided reveals substantial claims for millions of
dollars by FarWest Financial.
First, as emphasized in Section II above, FarWest Financial paid all
of the tax liabilities of FarWest Savings from 1987 through 1989. FarWest
Financial thus is owed $4.6 million in this respect, plus interest for four
years or more, which may be reduced by subsequent refunds from state and federal
taxing authorities.
Second, over the years 1986 to 1989, FarWest Financial maintained its
general checking and dividend disbursement checking accounts at FarWest Savings.
No interest on these accounts was paid to FarWest Financial, and thus these
accounts were at no interest cost to FarWest Savings. In April 1986, FarWest
Financial completed a secondary offering of common stock which raised
approximately $41 million of new capital for FarWest Financial. Upon receipt of
the net proceeds from the offering, FarWest Financial decided to "deposit" the
funds on account with FarWest Savings. The proceeds check was actually endorsed
by FarWest Financial over to FarWest Savings. Because of certain savings
account system constraints (inability to hold more than $9,999,999.99 in any one
savings/checking account), a decision was made to record the funds in
intercompany receivable and payable accounts maintained on the general ledger
("GL") system. On FarWest Financial's books, available liquid funds always
included the amount it maintained in GL #1995-055-134, Intercompany Accounts
Receivable. Likewise, FarWest savings maintained a liability payable to FarWest
Financial in GL #2995-134-055.
As illustrated in Exhibit 179, FarWest Financial's "deposit" balances
of checking accounts and the GL receivable remained at a significant level for
the entire four-year period. The average monthly balance was $27.3 million.
At no time did FarWest Financial receive any interest on these funds from
FarWest Savings. The bottom section of Exhibit 179 is a calculation of the
approximate interest income that would have accrued to FarWest Financial had the
funds been maintained in an interest bearing account. This income is calculated
using the weighted average cost of all interest bearing liabilities of FarWest
Savings. (Supporting detail for Exhibit 179 is
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Denis F. Shanagher, Esq.
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contained in general ledger accounts maintained by FarWest Savings.)
The economic benefit to FarWest Savings and detriment to FarWest
Financial are quite clear. FarWest Savings had the use of funds for its own
investment purposes at zero cost. FarWest Financial had a significant deposit
of funds that was realizing zero return on investment. The amount of
outstanding interest owed by FarWest Savings to FarWest Financial is NEARLY $7
MILLION, PLUS INTEREST FOR MORE THAN FIVE YEARS.
Third, in 1989 FarWest Financial funded to FarWest Savings
approximately $1.3 million in total bonus accruals, of which only $517,500 was
actually paid out to employees of FarWest Financial. (Memorandum of Lyon dated
8/1/90 -Exhibit 180.) The excess amount funded of $791,300 still remains on the
books of FarWest Savings as an accrued expense and has not been refunded back to
FarWest Financial, as it should have been.
For seven months in 1989, FarWest Financial and subsidiaries recorded
a monthly accrual for discretionary bonuses that were to be paid in January
1990. (ID.) It was an accounting practice to record the total consolidated
accrual into a single general ledger account (#2687-001-094) on the books of
FarWest Savings, even though a portion of accrued expense was on the books of
FarWest Financial. This was accomplished by the posting of intercompany
payables and receivables to keep the individual company's books in balance.
These intercompany payable and receivable accounts were "settled" at least once
a year, and sometimes more often. The payable to FarWest Savings from FarWest
Financial for seven months of bonus accruals, or $1.3 million, was paid by
FarWest Financial through available funds on deposit (off-line account #2022-
134-055) at FarWest Savings. (ID.) Thus, as of December 31, 1989, FarWest
Financial had fully funded $1.3 million to FarWest Savings as its contribution
for projected discretionary bonuses for FarWest Financial employees. These
funds were to be paid out by FarWest Savings as a "common paymaster" for the
FarWest group of companies.
In January 1990, bonus payments were made to employees. Of the $1.3
million contribution made by FarWest Financial, only $517.5 thousand was
actually paid out to employees of FarWest Financial, leaving an amount remaining
on the books of FarWest Savings of $791,262. (ID.) This
<PAGE>
Robert W. Helstowski, Esq.
Denis F. Shanagher, Esq.
July 18, 1994
Page 59
obligation, WITH INTEREST FOR FOUR YEARS, remains due and owing from FarWest
Savings to FarWest Financial.
CONCLUSION
Our clients' extensive investigation of the issues raised by the RTC
in the letter dated April 15 reveals that the RTC's asserted claims wholly lack
merit. In most respects, they are factually inaccurate and result from a
confusion or misunderstanding concerning the operations of FarWest Savings and
FarWest Financial. Other conclusions are simply not supported by the available
records and are otherwise inappropriate. It also appears that the RTC is
attempting to pass the blame, when it is responsible for various losses.
Furthermore, FarWest Financial has substantial claims against FarWest
Savings, as significant sums of money remain due and owing to FarWest Financial.
These sums total more than $12 million.
We are confident that a close examination of the exhibits supplied
with this submission and other documents in the possession of the RTC will
clarify all of the subject matters for you. If the RTC elects to pursue this
matter further, we look forward to meeting with the RTC's authorized officers so
we can present and discuss this submission in accordance with the terms of our
clients' Tolling Agreements.
Very truly yours,
/s/ Martin C. Washton
Martin C. Washton
of Gibson, Dunn & Crutcher
MCW/ljm
<PAGE>
MINUTES OF THE REGULARLY SCHEDULED
BOARD OF DIRECTORS MEETING OF
FARWEST SAVINGS AND LOAN ASSOCIATION
February 8, 1989
The regularly scheduled meeting of the Board of Directors of FarWest
Savings and Loan Association was held at 1800 Avenue of the Stars, Los Angeles,
California on February 8, 1989 pursuant to notice duly given. Present at the
meeting were: William Belzberg, Keenan Behrle, Charles H. Green, Dwight C. Baum,
Monty Hall, Victor H. Indiek, Fred Kayne, Robert Muh, James Nathan, Barbara C.
George. Absent from the meeting was Lester Ziffren. The meeting was called to
order at 10:35 a.m. by the Chairman, William Belzberg. The Chairman requested
that Kurt C. Kemper act as secretary of the meeting and to take the minutes
thereof.
The Chairman noted that the first item on the agenda was a review and
approval of the minutes of the previous meeting. Mr. Kayne stated that the
minutes of the previous meeting contained a reference to the association's
proposed consideration of establishing a general loss reserve with respect to
investment securities in an amount equal to 1.5% of the portfolio. Mr. Kayne
stated that that proposal had been carefully evaluated by the association and
discussed with its independent auditors and that a determination had been made
that the establishment of loss reserves in that amount at this time was not
justified. He added that this proposal would be continuously reviewed and
should change be warranted in the future, it would be implemented. Mr. Muh
indicated that the minutes of the previous meeting discussed a proposed bank
account for FarWest Mortgage Company of Colorado and the question was whether
appropriate controls had been established over that account. Mr. Green stated
that internal audit and others had carefully reviewed the situation and it was
clear that there were satisfactory controls over the account. The Chairman then
enquired whether there was any further discussion of the minutes. There being
none, upon motion made and duly seconded, the minutes of the previous meeting
were approved as supplemented without having been read.
The Chairman noted that the next item to be taken up was a review of
the actions of the Executive Committee of the Board of Directors taken since the
previous meeting. Mr. Belzberg asked if there were any questions. Mr. Muh
enquired whether the association carefully monitored its loan concentrations.
Mr. Indiek responded that loan concentrations were carefully reviewed and that
procedures were in place to avoid excess concentrations. Mr. Belzberg enquired
whether there was any further discussion. There being none, upon motion duly
made and seconded, the actions taken by the Executive Committee since the
previous meeting were unanimously ratified, confirmed and approved.
Mr. Belzberg stated that the next item to be taken up was the review
of major loans in excess of $5 million. Mr. Indiek indicated that he would be
happy to answer any questions raised by the directors with respect to the loans.
Mr. Kayne noted that the bulk of the loans reviewed by the directors were
construction loans since the association was able to acquire such assets on
favorable terms and advantageous rates. In addition, Mr. Kayne noted that the
association had a "proven track record" with respect to construction lending and
was satisfied as to its understanding of the risk profile of such assets. The
Chairman asked if there was any further discussion. There being none, the
Chairman called on Mr. Green to deliver his report with respect to the asset
review process.
<PAGE>
-2-
Mr. Green stated that the asset review process had been very extensive
and had required the participation of many officers and employees. As a result
of the process, the problem assets in the major loan portfolio had been reviewed
and the directors were welcome to look at any of the work of the department. In
addition, all securities with yields of 15% or greater had been reviewed.
Approximately 35% of the securities portfolio had been reviewed. With respect
to the corporate debt portfolio, approximately 25% of that portfolio had been
reviewed. With respect to major loans, approximately $500 million of loans had
been reviewed or 21% of the portfolio. Every asset on the sensitive asset list
had been analyzed. On an aggregate basis, the Asset Review Department had
examined approximately $700 million of assets or roughly 26% of the aggregate
asset portfolio. Each review was approved by three different people. The final
analysis of an asset review was accomplished by Messrs. Indiek, Green and the
Association's Chief Underwriter, Norman MacLeod. Mr. Green added that the asset
review process remains under review in order to make it more efficient. Mr.
Nathan asked how current the file information was. Mr. Green stated that the
objective was to update the file information with respect to the assets on a
quarterly basis. Mr. Nathan asked whether an extensive review was done on each
asset each quarter. Mr. Green stated that if the asset was properly performing
in accordance with current appraisal, net realizable value or other information,
it was not examined further. Mr. Behrle indicated that with respect to the
investment security portfolio, yield was not the only criteria. Mr. Green
agreed and said that yield was a criteria employed to evaluate otherwise
performing assets. Assets which were sensitive for other reasons were evaluated
for those reasons. Mr. Kayne stated that the task accomplished by the Asset
Review Department and the Credit Review Committee had been herculean. In
addition, it was to the credit of management that independent of the asset
review process reserves recommended by management had been within $5 million of
the level ultimately recommended by the Asset Review Committee.
Mr. Hall enquired whether the loss reserves taken with respect to the
investment portfolio reflected management's decision to limit losses. Mr. Kayne
stated that because it was the intent of the company to hold such assets until
maturity. The point of loss reserves with respect to such securities was to
address permanent impairment. Mr. Muh suggested that the results of the
quarterly asset review activity be discussed with the Audit Committee of the
Board of Directors in order that the Board could be kept informed in that
matter.
The Chairman enquired whether there was any further discussion. There
being none, the Chairman then called on Mr. Green to deliver his report with
respect to the Corporate Banking Department. Mr. Green stated that
approximately 22 transactions valued at $225 million had been consummated in
1988. The Department had earned approximately $1.25 million in fee income
during the period and average assets totalled approximately $100 million. Rates
earned with respect to such assets were roughly prime plus 150 basis points or
LIBOR plus 250 basis points. Mr. Kayne stated that the Corporate Banking
Department had established itself as a well run diversified business. In
addition, the analytical and other strengths in that Department had helped
augment the Investment Division since the Corporate Banking area frequently lent
to the same borrowers as the Investment Division did. Mr. Muh asked whether the
indicated pay offs and other details were actually realized by the company. Mr.
Green stated that the directors would be furnished with an updated report to
show the eventual disposition of the assets. Mr. Kayne stated that from a
lender's standpoint, one of the problems faced by the association was that the
association was frequently prepaid
<PAGE>
-3-
because of the strength of the credit. The Chairman then asked if there was any
further discussion. There being none, the Chairman then called on Mr. Green to
deliver his report with respect to the Investment Division. Mr. Green stated
that at December 31, 1988, the Investment Division was responsible for
approximately $646 million of assets with a mark to market loss on the portfolio
equal to approximately $18.4 million. Yields during 1988 had increased to 13.2%
from 11.9% during 1987. Mr. Green added that the Investment Division's assets
had also been reviewed by the asset review team and it was believed that all
potential weaknesses had been identified. Mr. Kayne stated that the Investment
Division was increasing its staff with the addition of several senior analysts
that the association had an ongoing commitment to the business. The Chairman
then asked if there was any further discussion.
There being none, the Chairman called on Mr. Green to deliver his
report with respect to the investment in the AGIO partnership. Mr. Green stated
that during the fall of 1988 the decision had been made to invest approximately
$20 million in a partnership engaged in the securities arbitrage business.
During 1988, FarWest had made approximately $800,000 profit and there was
additional unrealized profit in the portfolio. During January, 1989, it was
expected that an additional $600,000 profit would be realized. Mr. Green drew
the directors, attention to a prior investment in Denver in the Janus
organization which had been successful for the association. Mr. Green added
that every effort had been made to allay any regulatory concerns with respect to
the AGIO investment partnership since our agreement provides for daily review
and supervision of transactions. Mr. Kayne added that the original proposal had
been to employ the principals in the AGIO investment partnership directly but
that these individuals had preferred to work on an independent contractor basis.
In addition, the association was evaluating whether additional funds would be
invested with AGIO. The Chairman then asked if there was any further
discussion. There being none, the Chairman then called on Mr. Kayne to deliver
his report with respect to the 1989 Business Plan.
Mr. Kayne stated that the 1989 Plan had been furnished to the
directors under separate cover for their review. Mr. Kayne stated that the Plan
assumed relatively flat interest rates and that the association's growth during
1989 would be in construction loans and in certain investment securities. Mr.
Kayne added that on a net basis both would be relatively flat during 1989 to
preserve the capital position of the association. The Plan called for
approximately $1.5 billion of new assets with approximately $700 million of
loans sold or securitized during the year. Mr. Kayne then mentioned page 7 of
the materials furnished to the directors concerning the association's cost of
funds. Mr. Indiek stated that the association was in the upper third of its
competition with respect to the rates it paid. Because the association was a
relatively high cost borrower, profitability was affected. Mr. Indiek stated
that a key objective in reducing the association's cost of funds was to sell or
securitize assets to bring liquidity to the association's portfolio. Once
liquidity had been established, interest rates on deposits could possibly be
reduced over time. By obtaining a 20 basis point reduction in the association's
overall cost of funds, the association could earn an additional $10 million at
the margin. Mr. Hall enquired why rates paid by the association were so high.
Mr. Kayne stated that FarWest's competitive position was not strong enough to
allow it to compete against the major banks and S&L's which provide the full
range of services. FarWest's depositors tended to bank at FarWest because of
the rates paid and not because of
<PAGE>
-4-
the full range of financial services offered. Mr. Kayne emphasized that to the
extent that the association's cost of funds could be managed effectively,
profitability would be substantially enhanced. Mr. Belzberg asked when steps
would be taken to reduce interest rates. Mr. Indiek responded that
approximately during the third quarter of 1989 it was expected that substantial
efforts will be made through the retail system to reduce the association's cost
of funds. Mr. Belzberg asked what the prospects for further asset
securitizations were. Mr. Indiek responded that approximately $200 million of
additional assets would be securitized during the next 120 days.
Mr. Kayne then drew the directors' attention to the analysis of
general and administrative expenses contained on page 14 of the materials
furnished to the directors. Mr. Indiek stated that the association expected to
increase its staff by approximately 45 people during 1989. Mr. Belzberg asked
what those people would be doing. Mr. Indiek responded that staff increases
were expected in several different areas and that some new employees were not
increases at all but simply replacements of people who had left. Mr. Indiek
indicated that great care was taken in filling these staffing positions and that
with the completion of the data processing conversion significant overhead costs
could be reduced. At that juncture, Mr. Baum left the meeting because of a
scheduling conflict. The Chairman then enquired whether there was any further
discussion. There being none, the Chairman then called on Mr. Kemper to deliver
his report with respect to criminal referrals.
Mr. Kemper stated that the discussion of criminal referrals had been
supplied to the directors for their review and that he would be happy to answer
any questions. There ensued a general discussion at the conclusion of which the
Chairman asked if there was any further comment. There being none, the Chairman
then called on Mr. Indiek to deliver his commentary with respect to the Asset
Liability Committee.
Mr. Indiek stated that the Asset Liability Committee was comprised of
Mr. Green, Mr. Indiek, and the Association's Chief Financial Officer, Mr. Struck
and various asset deployment personnel. The Committee reviewed credit risk as
well as interest rate risk. A primary objective of the Asset Liability
Committee was to identify acceptable rates of return and was profiled to
establish an overall strategic policy for the association. Mr. Kayne emphasized
that the Asset Liability Committee exercised overall management of the asset and
liability deployment plans of the company. The Chairman then asked if there was
any further discussion. There being none, the Chairman then called on Mr.
Indiek to deliver his report with respect to the impending audit by the FHLB.
Mr. Indiek stated that the Federal Home Loan Bank Board had indicated that they
would commence their audit by the end of February 1989. It was expected that the
examination would focus on specific areas and not become immersed in minutia.
There was no reason to expect any surprises and it was hoped that the asset
review effort would meet with the FHLB's approval. The Chairman asked if there
was any further discussion. There being none, the Chairman called on Mr. Kayne
and Mr. Kemper to deliver their report with respect to regulatory matters.
At that juncture, Mr. Kemper and Mr. Kayne summarized the pending
legislative and regulatory proposals facing FarWest Savings and Loan
Association. Mr. Kayne emphasized that recapitalization of the FSLIC and
stability occasioned thereby would have a very favorable impact on the
industry. Mr. Kayne added that continuing concerns whether the association's
empowerments and authorities would be reduced could substantially affect the
overall value of the franchise of FarWest Savings. At the conclusion of Mr.
Kayne's remarks, there ensued a general discussion. Then Mr. Belzberg asked if
there was any further question or comment. There being none, he noted that the
next item on the agenda was a discussion of the compensation arrangement of Mr.
Behrle. Mr. Belzberg stated
<PAGE>
-5-
that FarWest Savings and Loan Association had agreed to compensate one of its
directors, Mr. Keenan Behrle, for his efforts in identifying certain properties
which made attractive investments for the association. Mr. Behrle is expected
to be compensated at a rate equal to 5% of the net profit of the transactions in
which he is involved. Mr. Belzberg emphasized that while Mr. Behrle had not, in
fact, received any compensation pursuant to the arrangement, it was proposed to
pay Mr. Behrle on that basis. Mr. Muh asked whether the profit distribution was
out of realized or unrealized profit. Mr. Belzberg emphasized that it was out
of realized profit only. Mr. Muh asked whether losses were netted against
gains. Mr. Kayne stated that if a loss were actually incurred, Mr. Behrle would
not be compensated to that extent. He added that the realistic potential for
loss was possibly on a deposit to secure purchase. Mr. Kayne asked Mr. Kemper
to work out the details with Mr. Behrle and Mr. Belzberg. The Chairman then
asked if there was any further discussion. There being none, upon motion made
and duly seconded, the resolution set forth as Exhibit 1 of these minutes was
unanimously approved. Mr. Belzberg asked Mr. Kemper to note in the minutes that
Mr. Behrle had been absent from the room during the discussion and took no part
in it. The Chairman then noted that the next item to be taken up was a
resolution setting the time, date, and place of the Annual Shareholders' Meeting
of FarWest Savings and Loan Association.
Mr. Kemper stated that since FarWest Financial Corporation was the
sole shareholder of FarWest Savings and Loan Association, it was the tradition
to hold the FarWest Savings Annual Meeting immediately after the FarWest
Financial Corporation Annual Meeting. The Chairman then asked if there was any
discussion. There being none, upon motion made and duly seconded, the
resolution set forth as Exhibit 2 of these minutes was unanimously adopted. The
Chairman asked if there was any further business.
Mr. Indiek stated that management was proposing to sell the Via
Valiente branch of FarWest Savings and to sell and to consolidate the West
Hollywood branch of FarWest Savings. Mr. Indiek said that the amount expected
to be received was approximately 3.5% discount of the deposit base. The terms
of the sale were otherwise standard terms in the industry. Mr. Belzberg asked
whether management was taking steps to optimize the association's investment in
these properties. Mr. Indiek stated that he would review the situation and
present any recommendations for the development of branch properties to the
Executive Committee. The Chairman then asked if there was any further
discussion. There being none, upon motion made and duly seconded, the
resolutions set forth as Exhibits 3 and 4 to these minutes were unanimously
adopted.
The Chairman enquired whether there was any other business to be
brought before this meeting. There being none, upon motion made and duly
seconded, the meeting was adjourned at 12:17 p.m.
By: /s/ Kurt C. Kemper
-----------------------------
Kurt C. Kemper, Secretary
Approved: /s/ W. Belzberg
-----------------------------
William Belzberg, Chairman
0045JT
<PAGE>
EXHIBIT I
RESOLUTION ADOPTED BY THE
BOARD OF DIRECTORS OF
FARWEST SAVINGS AND LOAN ASSOCIATION
February 8, 1989
WHEREAS, Keenan Behrle is a Director and a member of the Executive
Committee of the Board of Directors of FarWest Savings and Loan Association; and
WHEREAS, Keenan Behrle has provided consulting, analytic, advisory,
managerial and other services ("advisory services") to FarWest Savings and Loan
Association in connection with identifying certain real estate investments; and
WHEREAS, Keenan Behrle's efforts in that capacity are not and have not
been adequately compensated.
RESOLVED, that FarWest Savings and.Loan Association will pay to Keenan
Behrle a bonus of 5% of the net profit realized from the proceeds of certain
sales and other transactions recognized from the real estate investments with
Jack Herz with respect to which Keenan Behrle provides "advisory services"; and
RESOLVED, that the bonus is fair and reasonable under the
circumstances; and
RESOLVED, the Chairman of the Board of Directors is authorized to make
such adjustments to the bonus arrangement as may be necessary or appropriate
from time to time so long as this Board of Directors is advised of such
adjustments; and
RESOLVED, that any aspect of this arrangement which violates any
applicable law or regulation is specifically null and void.
0149JT
<PAGE>
[PREUSS WALKER & SHANAGHER LETTERHEAD]
September 1, 1994
PRIVILEGED AND CONFIDENTIAL - FRE 408
VIA FACSIMILE AND U.S. MAIL
Martin C. Washton, Esq.
GIBSON, DUNN & CRUTCHER
333 South Grand Avenue
Los Angeles, CA 90071
RE: RTC: FARWEST SAVINGS
OUR FILE NO. 34253\0447
Dear Marty:
The purpose of this letter is to set forth a short reply to certain of the
matters set forth in your letter of July 18, 1994. As you know, we are
scheduled to meet with you on September 14, 1994 to discuss our clients'
respective positions in more detail. Our expectation is that your clients will
be available by telephone and that you will be in a position to discuss a
financial resolution of this matter during that meeting.
After careful consideration of the material set forth in your letter, as
well as the exhibits thereto, the RTC continues to evaluate its claims as having
substantial value. This letter is submitted for the purposes of settlement, and
is considered confidential, privileged and subject to the provisions of Federal
Rules of Evidence Section 408.
In short summary, RTC's claims relating to losses involving the subject
loans and investments undertaken by FarWest prior to its closure, including
loans/investments with Butterfield & Mason ("B&M"), Panorama Partners and Jack
Herz, total in excess of $25,000,000. If RTC succeeds in proving at trial that
even one of these loans/investments was improper, there is significant exposure
to your clients for the losses arising therefrom.
<PAGE>
Martin Washton, Esq.
September 1, 1994
Page 2
Although this issue was argued extensively in your letter, we do not
believe the O'MELVENY decision will either change the law as to mitigation or be
a defense to damages causation in these type of cases, and in any event the
attempt to "quickly flip" the direct investment properties had proven a failure
long before RTC's involvement. Therefore, the main thrust of this short reply
is to address the liability contentions, rather than causation or damage issues
in your July 18 letter, so that our meeting can focus on a pre-filing resolution
of this matter.
LOANS AND INVESTMENTS
A. BUTTERFIELD & MASON
Messrs. Belzberg, Kayne and Behrle assert that due care was exercised in
the creation and administration of the lending relationship between FarWest and
Butterfield & Mason. The evidence demonstrates to the contrary. From the
outset, FarWest was precluded from junior lien lending by the applicable federal
regulations. However, perhaps as a result of the relationship between Fred
Kayne and/or members of his family and Warren Ashmann, FarWest entered into a
line of credit relationship whereby its funds were essentially the sole
capitalization of Mr. Ashmann's business -- junior lien lending. FarWest could
not possibly have properly investigated Mr. Ashmann's capabilities, since he had
absolutely no qualifications as an appraiser and his business acumen was
unproven. Moreover, your letter does not dispute that the due diligence process
of two of FarWest's three loan committees were intentionally bypassed in this
instance.
Butterfield & Mason's payment of $1 million to FarWest for "net profits" at
year-end 1989 was essentially a sham. That payment was simply a return of cash
from FarWest's line of credit, and given as an incentive to convince FarWest to
provide further increases in the line. In reality, FarWest's ability to recoup
its funds was totally dependent on a continual rise in real estate values and
the integrity of the purported assignments to FarWest of the primary and
secondary collateral by Mr. Ashmann. In fact, there was no effort by B&M to
obtain loan repayments from borrowers, and the real estate market could not
possibly grow at the necessary rate to assure payment of second, third and
fourth deeds of trust. Furthermore, FarWest had unfavorable experience with some
of the B&M borrowers, as several of them were in default on its senior liens,
and it was known by Charles Hall and reported directly to Fred Kayne that a
majority of the secondary collateral was not properly assigned to FarWest in the
first instance. Management also repeatedly allowed B&M to avoid adhering to most
of the other terms of its loan documents.
<PAGE>
Martin Washton, Esq.
September 1, 1994
Page 3
In any event, it appears that the RTC was justified in its decisions with
respect to B&M. As a result of the misrepresentations and mismanagement/
misappropriation of collateral by Ashmann, the RTC has been required to and did
obtain an order freezing the assets of Ashmann and B&M on July 21, 1994. This
order and the recent decision relating to mitigation in RTC V. MOSKOWITZ are
attached.
B. INVESTMENTS
The subject transactions are all situations wherein Messrs Belzberg,
Kayne and Behrle used their influence and control to avoid the normal bottom-up
scrutiny of the appropriate FarWest personnel and Committee structure. For
example, in no instance were any of the target transactions submitted to the
review of FarWest Realty Advisors, an affiliate of ACFC, which had been
established in 1988 for that very purpose, Indeed, in a January 17, 1989
memorandum with respect to Panorama Partners, Charles Green inquired as to why
FarWest Realty Advisors was not involved in the transaction. He also asked why
ACFC was a general partner when FarWest Realty Advisors was "forced" to set up
subsidiaries for these type of direct investments.
Corporate assets also appear to have been wasted in connection with the J.R
Financial relationship. Mr. Behrle and First City Properties were reimbursed for
their time in evaluating the J.H. Financial investments when the existing
FarWest Realty Advisors staff could have handled the assignment at no cost to
the institution. If one examines the length of time it took to close the
subject transactions, it was virtually impossible for appropriate due diligence
to occur. How and when was it decided to put ACFC into the transactions, rather
than First City?
It should be noted that in an effort to hide the losses in connection with
the J.H. Financial relationship, FarWest also allocated all of the overhead and
administration costs to the 500 Sepulveda transaction, which was the only
investment to arguably generate any profit.
The July 18 letter argues in connection with the Panorama Partners
transaction that extensive due diligence was conducted prior to the formation of
the partnership and the closing of escrow. It is argued that the zoning issues
did not arise until after the close of escrow. However, contrary to these
assertions, the RTC can demonstrate that Mr. Belzberg and others discussed the
zoning issue with Mr. Mandelbaum prior to consummation of the transaction and
were aware that there would likely be a moratorium on changing the approved use
for the
<PAGE>
Martin Washton, Esq.
September 1, 1994
Page 4
involved building. There is also evidence that Belzberg read and acknowledged a
newspaper article relating to the zoning issue well prior to the closing of the
purchase. Moreover, the RTC can and will demonstrate that Mr. Mandelbaum did
not have the ability or experience to develop the property. Finally, the
assertion that there were agreements to resell the property is illusory, since
the purported agreements had so many contingencies as place in doubt their
validity. In fact, these were merely offers, some from individuals clearly
unable to perform. The Brody agreement, the only one with real potential, did
not formally materialize until many months after the ACFC partnership commitment
and, again, fell through because of the zoning problem.
TAX REFUNDS AND OVERHEAD ALLOCATION
Westminster's position is that since it made the physical payment of the
involved taxes for FarWest during the 1997-1989 period, it is entitled to any
and all refunds flowing therefrom. However, there is competent authority that
it is the subsidiary which generates the refund and provides the initial source
funds to pay the tax that is so entitled. SEE, E.G., BOB RICHARDS CHRYSLER-
PLYMOUTH V. ENGLAND 473 F.2d 262 (9th Cir. 1973). In the present case, the
refunds have been previously generated through lower of cost or market
adjustments/write-offs taken by ACFC, a FarWest subsidiary.
Westminster also asserts that it has a separate claim or right to a set-off
for certain of the tax payments for which it has not been reimbursed. However,
even assuming that such a liability does exist, Westminster will be required to
submit the claim to the FarWest receivership, the time for which may have
already run. In any event, the alleged claim for reimbursement may not be used
as a set-off in any action to be brought by the RTC. SEE, E.G., RTC V. MIDWEST
FEDERAL SAVINGS, 4 F.3d 1990 (9th Cir. 1993).
Moreover, the exhibits supplied by Westminster on the issue, as well as
other documents reviewed by the RTC and its consultants, do not show that
Westminster funds were used to pay the tax liabilities. Instead, they support
the RTC's position that FarWest was the source of the tax funds. For example,
exhibit 13 to your letter of July 18 purports to be an "Analysis of Tax
Liability Account Payments and Refunds." The schedule shows an $800,000 payment
on 3/14/89 to the IRS by Westminster. That amount was posted to a Deferred
Federal Income Tax (FIT) Liability account #2320-000-134 and as a credit in
Westminster's operating cash account #025-000-134. However, five days later,
the amount was reversed and recorded as an intercompany payable to FarWest
<PAGE>
Martin Washton, Esq.
September 1, 1994
Page 5
Savings, as reflected in account #2995-055-134. In short, the payment was
ultimately structured so that the funds came from the savings and loan.
The RTC comes to a similar conclusion when examining the records relating
to the $200,000 payment made 4/17/89. Westminster's check for $200,000, a
$500,000 check to the Franchise Tax Board and others in the series #6312-6324
were combined for a total credit to the operating account of $745,892.40, which
was posted on 4/17/99. On the next day, the same amount was combined with other
amounts and reversed out of Westminster's operating cash account into a
intercompany liability account to FarWest Savings. Again, the net effect was
FarWest's payment of the taxes.
In addition, Exhibit 14 to the July 18 letter demonstrates that the
purported overhead payments by Westminster were ultimately not completed. For
example, between March and the end of June, 1988, Westminster made a number of
payments to satisfy its intercompany receivable to FarWest. However, on July
31, 1988, approximately $6.8 million of those payments were reversed in order to
avoid the $6.3 million overdraft in Westminster's cash account #1025-010-134.
In fact, through accounting entries, Westminster was able to create the
appearance of the pay-off of intercompany receivables and overhead expenses,
when in fact all payments came from FarWest.
Those examples are indicative of the review of this issue by the RTC and
its consultants. In most instances, after sorting through the numerous
accounting antics, the end result is the conclusion that FarWest Savings
provided the cash for the payment of state and federal tax liabilities, and that
it was engaged in the prohibited act of allowing the parent to borrow funds
through the use of intercompany accounts.
As you know, the RTC and your clients entered into an agreement tolling all
applicable status of limitations as of December 15, 1993. The tolling
agreements are scheduled to expire on September 15, 1994. By our calculations,
as of December 15, 1994, there were still 26 days remaining with respect to the
three-year statute of limitations as it applies to this matter. Thus, by our
calculations, upon the expiration of the tolling agreements on September 15, the
RTC will have until October 10, 1994 to file its complaint in this matter under
the three-year statute of limitations. Please advise if the RTC's position in
that regard is incorrect.
In addition, it should be noted that we believe the direct investment
claims to be covered under the terms of the tolling agreements. First, the
general
<PAGE>
Martin Washton, Esq.
September 1, 1994
Page 6
language and intent of the agreements was to cover any and all potential claims
against your clients arising from FarWest. Second, several of the investments
included loans as part of their structure. In any event, FDIC V. MCSWEENEY 976
F.2d 532 (9th Cir. 1992) provides a four-year statute of limitations for actions
alleging breach of fiduciary duty, which claims will be made in connection with
the direct investments in this case.
Two final points - we have only chosen to address the highest dollar loss
claims in a written fashion. Further, we are prepared to demonstrate the
personal attention and involvement of Messrs. Belzberg, Behrle and Kayne in
these transactions in considerably more detail at the appropriate juncture in
our discussions, if necessary.
If you have any questions or comments, please do not hesitate to call or
write.
Very truly yours,
/s/ Denis F. Shanagher
Denis F. Shanagher
DFS:ahl
cc: Robert W. Helstowski
Encls.
<PAGE>
SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement is entered into this ____ day of _________, 1994,
by and between Resolution Trust Corporation (hereinafter the "RTC") in its
corporate capacity and William Belzberg, Fred Kayne, Keenan Behrle (hereinafter
"Directors") and Westminster Capital Corporation (hereinafter "Westminster").
W I T N E S S E T H:
WHEREAS, FarWest Savings & Loan Association (the "Association") was a
savings and loan corporation organized and existing under the laws of the State
of California and having its principal office in Newport Beach, California; and
WHEREAS, on January 11, 1991, the Office of Thrift Supervision ("OTS")
determined that the Association was insolvent and issued an order providing for
the closing of the Association and appointing the RTC as Receiver; and
WHEREAS, the RTC accepted appointment as receiver of the Association as
tendered by OTS, whereupon possession and control of all of the affairs, books,
records, and assets of the Association passed to the RTC, including, but not
limited to, claims and causes of action against the directors, officers and/or
shareholders of the Association; and
WHEREAS, on March 20, 1992, the assets of the Association, including, but
not limited to claims and causes of action against the directors, officers
and/or shareholders of the Association were transferred to the RTC in its
corporate capacity; and
WHEREAS, on December 15, 1993, the Directors, Westminster and FarWest
entered into a Tolling Agreement with respect to certain potential claims and
causes of action, which Tolling Agreement has been extended by the parties
hereto through and including January 1, 1995.
<PAGE>
WHEREAS, on April 15, 1994, the RTC notified the Directors and Westminster
of its claims of breach of fiduciary duty, negligence and breach of contract
arising from certain loans, direct investments and tax refunds which resulted in
damages to FarWest in excess of $20 million ("hereinafter the "Claims"). All of
the Claims related to conduct of the Directors in the course of their official
duties and did not include self-dealing, intentional misconduct or conduct in an
individual or personal capacity. The Directors and Westminster denied and
continue to deny any breach of their fiduciary responsibility, the commission of
any acts of negligence, and/or any breach of contract; and
WHEREAS, all parties to this Settlement Agreement, each denying liability
to the other, and each balancing the risk of the Claims against the chance of
recovery, have agreed and do hereby agree to compromise and settle all of their
claims, causes of action and differences therein on the terms set forth in this
Settlement Agreement;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
promises contained herein and other good and valuable consideration, the parties
hereto agree as follows:
1. PAYMENT OF MONEY. Upon the execution of this Settlement Agreement,
the Directors and Westminster shall pay to the RTC the sum of four million and
no/100 dollars ($4,000,000.00).
2. MUTUAL RELEASE.
a. All parties to this Settlement Agreement and Release do hereby
release and forever discharge all other parties to this Agreement, their heirs,
executors, predecessors, successors and assigns, from any and all claims, cross-
claims, demands, actions or causes of
2
<PAGE>
action, known or unknown, which they may have an/or may hereafter acquire or
which may hereafter accrue, in any way related to the Claims asserted in the
RTC's April 15, 1994 notification, the Directors' service as directors and/or
officers of the Association, and/or Westminster's status as a shareholder of the
Association.
b. All parties to this Settlement Agreement and Release shall bear
their own attorneys' fees and costs incurred in connection with the Claims.
3. WAIVER OF DIVIDENDS. The Directors and Westminster waive any right
they may have to share in any dividends or distributions from the receivership
estate of the Association to which they might otherwise be entitled as a
shareholder or creditor of the Association.
4. RETENTION OF RIGHTS. The RTC shall retain all rights to recover from
any debtor, direct obligor, endorsers or guarantors or person otherwise liable
upon any underlying obligations to the Association, including those debts which
form the basis of the claims and losses asserted by the RTC herein. Nothing in
this Settlement Agreement and Mutual Release shall release any claims the RTC
may have against any other officer or director of FarWest or any claim against
any attorneys, accountants, officials or other professionals who provided
services to FarWest and/or RTC in any capacity. The parties acknowledge and
agree that: (i) RTC cannot and does not purport to have the ability to release
any party hereto and any other person for criminal liability and/or order of
criminal restitution; and (ii) RTC cannot and does not purport to have the
ability to release any party hereto or any other person with respect to any
administrative action which may be brought by any other governmental authority.
3
<PAGE>
5. COOPERATION. The RTC shall cooperate with Westminster in any
application or proceeding to recover tax payments made by Westminster to the
State of California on behalf of Far West Savings. Said cooperation shall be
limited to the execution of an agreement in the form attached hereto as Exhibit
A and the execution of any additional documents reasonably necessary to carry
out the purpose of said agreement.
6. RELEASE OF UNKNOWN CLAIMS. The parties hereby acknowledge that they
may have sustained or acquired, and may sustain or acquire in the future,
claims, demands, damages, losses, accounts, reckonings, debts, liabilities,
indemnities, agreements, obligations, actions, causes of action, settlement
costs, attorney fees, court costs and expenses of a presently unknown and
unforeseen nature which arise from or relate to the Claims, the facts, events,
occurrences, situations and circumstances which gave rise to the Claims, or any
of the actions or inactions of the Directors or Westminster with respect to the
subject matter of the Claims, and they fully, forever and irrevocably release
and discharge one another therefrom. The parties similarly waive any and all
rights and benefits conferred by any statute, regulation, or principle of common
law or civil law of any state or territory of the United States or of any
foreign country which is similar, comparable or equivalent to Section 1542 of
the California Civil Code, which provides as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor."
4
<PAGE>
This Settlement Agreement provides a full, final and complete release by the
parties of the matters described in this Settlement Agreement, regardless of
whether those matters are presently known, unknown, foreseen or unforeseen.
7. NO ADMISSION OF LIABILITY. This Settlement Agreement shall not be
treated or construed as an admission of liability, or a violation of any
applicable law, rule, regulation or order of any kind by any party for any
purpose, including, but not limited to, any purpose related to the Claims.
8. RTC REPRESENTATIONS. The RTC represents and warrants that it has the
sole power to execute and deliver this Settlement Agreement on behalf of the
RTC, and it has secured all necessary authorizations for the execution and
delivery of this Settlement Agreement, including, but not limited to, all
necessary governmental approvals and consents, and that the person executing
this Settlement Agreement on behalf of the RTC has the full and complete power
and authority of the RTC to do so.
9. REPRESENTATIONS AND WARRANTIES. Each party represents and warrants
that he or it has not assigned or released to any other person or entity, either
directly or indirectly, including, without limitation, by subrogation or by
operation of law, any of the items or matters which he or it releases in this
Settlement Agreement.
10. APPLICABLE LAW. To the extent federal law does not control, this
Settlement Agreement shall be governed by and construed in accordance with the
laws of the State of California.
5
<PAGE>
11. NO PURCHASE OF LOANS. This Settlement Agreement shall not be
construed or interpreted as a sale of any loans, claims or related rights to the
Directors or Westminster. The RTC shall have the right to prosecute, settle,
compromise or otherwise deal with any of the assets, claims, or rights sold and
transferred to the RTC as a result of the closure of the Association as it sees
fit.
12. WRITTEN MODIFICATION. Any modification of this Settlement Agreement
and any waiver of any condition existing pursuant to this Settlement Agreement
shall be contained in writing signed by each of the parties and shall be
effective only for the purposes specified in that writing and only upon the
conditions specified in that writing.
13. BINDING EFFECT. This Settlement Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective legal
representatives, successors and assigns.
14. LEGAL PROCEEDINGS. In the event any legal proceeding is instituted in
connection with any controversy arising out of this Settlement Agreement or the
enforcement of any rights hereunder, or this Settlement Agreement is
successfully asserted as a defense in any legal proceeding, the prevailing party
shall be entitled to recover, in addition to costs, such sums as the court may
adjudge reasonable as attorney fees, including attorney fees on any appeal.
15. COUNTERPARTS. This Settlement Agreement may be executed by the
parties hereto in one or more counterparts, each of which shall be considered a
complete original.
6
<PAGE>
16. INTEGRATION. This Settlement Agreement constitutes a final and
complete statement of the agreement between the parties, and fully supersedes
all prior agreements or negotiations, written or oral.
PREUSS WALKER & SHANAGHER RESOLUTION TRUST CORPORATION,
in its Corporate Capacity
By ______________________________ By _________________________________
DENIS F. SHANAGHER Its
Attorneys for RESOLUTION
TRUST CORPORATION
GIBSON, DUNN & CRUTCHER WESTMINSTER CAPITAL
CORPORATION
By ______________________________ By _________________________________
MARTIN C. WASHTON Its
Attorneys for WESTMINSTER
CAPITAL CORPORATION,
WILLIAM BELZBERG,
FRED KAYNE and
KEENAN BEHRLE
____________________________________
WILLIAM BELZBERG
____________________________________
FRED KAYNE
____________________________________
KEENAN BEHRLE
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
FarWest Finanical Insurance Agency
Silver Ridge Apartments G.P., Inc.
Silver Ridge Apartments L.P., Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of the Registrant as of and for the year
ended December 31, 1994 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 845,000
<SECURITIES> 25,402,000
<RECEIVABLES> 973,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,804,000
<DEPRECIATION> 167,000
<TOTAL-ASSETS> 31,427,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 7,815,000
0
0
<OTHER-SE> 13,668,000
<TOTAL-LIABILITY-AND-EQUITY> 31,427,000
<SALES> 0
<TOTAL-REVENUES> 6,706,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 284,000
<INCOME-TAX> 1,778,000
<INCOME-CONTINUING> (1,608,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,608,000)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
