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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
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-631
WEBFINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 56-2043000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 East 52nd Street, 21st Floor
New York, New York 10022
(Address and zip code of principal executive offices)
877-431-2942
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS:
COMMON STOCK, $.001 PAR VALUE
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]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
Aggregate market value of Common Stock held by non-affiliates of the
Registrant as of March 23, 2000 was $8,057,900, which value, solely for the
purposes of this calculation, excludes shares held by Registrant's officers,
directors, and their affiliates. Such exclusion should not be deemed a
determination by Registrant that all such individuals are, in fact, affiliates
of the Registrant. The number of shares of Common Stock issued and outstanding
as of March 23, 2000 was 4,349,996.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive proxy statement to be filed pursuant to Regulation 14A in
connection with the 2000 Annual Meeting of Stockholders, Part III.
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I Page No.
Item 1. Business 1
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for Registrant's Common Stock
and Related Security Holder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 9
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 9
PART III
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners
and Management 10
Item 13. Certain Relationships and Related Transactions 10
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Report on Form 8-K 11
Signatures 12
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
PART I
Item 1. BUSINESS
OVERVIEW
WebFinancial Corporation (formerly Rose's Holdings, Inc.) (the "Company")
is a Delaware corporation, incorporated in 1997 to act as a holding company for
Rose's Stores, Inc., an operator of general merchandise discount stores
("Stores") and a wholly owned subsidiary of the Company.
On December 2, 1997, the Company consummated the sale to Variety
Wholesalers, Inc. ("Variety") of all of the outstanding capital stock of Stores
(the "Sale") pursuant to a stock purchase agreement, dated as of October 24,
1997, between the Company and Variety (the "Stock Purchase Agreement"). The
total purchase price for the Sale was $19,200,000, including $1,920,000, which
was placed in escrow. The proceeds of the Sale, net of certain transaction,
closing, and other costs, were $15,331,000 (including the escrow).
On August 31, 1998, the Company, through WebFinancial Holding Corporation
("Holding"), (formerly Rose's International, Inc.) a newly formed, wholly-owned
Delaware subsidiary, acquired 90% of the outstanding common stock of WebBank, a
Utah industrial loan corporation, pursuant to an assignment (the "Assignment")
from Praxis Investment Advisers, LLC, a Nevada limited liability company
("PIA"), of a stock purchase agreement, dated January 20, 1998 (the "Purchase
Agreement"), between PIA and Block Financial Corporation ("Block"), relating to
the purchase by PIA of all of the issued and outstanding shares of common stock
of WebBank. Pursuant to the Assignment, the Company paid Block $4,783,000 for
the shares of WebBank's common stock to be purchased from Block pursuant to the
Purchase Agreement. In addition, the Company paid $288,000 in acquisition costs,
for a total purchase price of $5,071,000.
On August 31, 1998, the Company formed Praxis Investment Advisers, Inc., a
Delaware corporation ("Praxis") that together with Holding and Andrew Winokur,
the holder of the 10% of Praxis not owned by the Company, entered into a
management agreement (the "Management Agreement"). The Management Agreement
provided that Praxis may make recommendations to and consult with the management
and board of directors of WebBank about the deployment of WebBank's capital, the
development of its business lines, its acquisition of assets and its
distributions to its stockholders.
On May 26, 1999, the Company formed WebFinancial Government Lending, Inc.,
a Delaware corporation ("Lending"), as a wholly-owned subsidiary of the Company
to concentrate on holding and servicing U.S. Department of Agriculture ("USDA")
Loans. On August 11, 1999, Web Film Finance, Inc., a Delaware corporation
("Film") was formed as a wholly-owned subsidiary of Lending to finance the
production and distribution of a motion picture. The only motion picture
commitment expired on December 30, 1999, and the Company has subsequently
determined to liquidate Film.
During the first quarter of 2000, management began winding down Praxis with
the intention of liquidating that subsidiary by June 30, 2000. The Company has
received approval of the Department of Financial Institutions of the State of
Utah to cause Lending to become a direct subsidiary of WebBank and that
transaction is expected to be completed in 2000.
The principal executive offices of the Company are located at 150 East 52nd
Street, 21st Floor, New York, New York 10022.
DESCRIPTION OF BUSINESS
The Company through its subsidiaries operates in niche banking markets.
WebBank provides commercial and consumer specialty finance transactions
utilizing U.S. Government credit enhancement. The benefits of WebBank's special
charter allow it to "export" Utah's regulatory environment (interest rates, late
charges, and prepayment fees, etc.) to forty-eight other states. WebBank is a
small, business oriented institution, which is FDIC insured and examined and
regulated by the State of Utah's Department of Financial Institutions. The
business plan of WebBank represents a non-traditional approach to growing within
the context of the regulatory standards of safety and soundness. Prudent
business goals and protection of WebBank's charter are the key elements of the
Company's business strategy for WebBank. Pursuant to this strategy, WebBank has
focused on several lines of business as described below:
PRIVATE LABEL CREDIT CARD processing is a highly competitive product and
service that WebBank is actively pursuing based on its relative small size and
significant staff experience that allows WebBank to offer customized and rapid
service as well as Utah's favorable banking environment. Recently, WebBank began
issuing credit cards for part of the recreation vehicle division of a large
multinational company and expects to expand services to other segments of that
division.
E-COMMERCE CREDIT CARD processing represents a variation on the private
label credit card but is in effect a new business line because it involves the
creation of a "Virtual Credit Card" or an account debiting system peculiar to
the needs of the Internet. WebBank recently announced that it is partnering with
a California based E-commerce company to provide E-tailers with a secure and
proprietary system for their customers to access and safely complete purchases
of large ticket items directly through the popular "drop-ship" method.
USDA BUSINESS AND INDUSTRY LENDING is a commercial loan product 70% to
90% guaranteed by the full faith and credit of the Federal government for up to
$10 million. The loan program administered by the U. S. Department of
Agriculture is to assist businesses located in rural areas (under 50,000
population) to promote industrial modernization and job creation. The Company's
subsidiary, Lending, makes, acquires, sells and services USDA loans and is being
repositioned as a direct subsidiary of WebBank to enhance efficiency and
profitability.
STRUCTURED SETTLEMENT LENDING is a form of lending which is highly
secure and gives customers the opportunity to cash in long-term annuities or
payment streams that are subjects of financial settlements to allow the owners
of such settlements access to the true current value of their award. This
program is expanding and is a fee for service oriented business with the entire
purchased cash stream sold to a third party shortly after the purchase.
PAYDAY ADVANCE processing is aimed at 4 or 5 of the national companies
involved in the payday advance business. WebBank expects to either securitize
and sell or sell outright the receivables generated by this line of business.
Consequently, WebBank expects that it will not retain any residual interest in
its current or future receivables and that this will solely be a fee for service
business.
The Company continues to evaluate its different business lines and consider
various alternatives to maximize the aggregate value of its businesses and
increase stockholder value. Some of these alternatives include selective
acquisitions, divestitures or the discontinuance of an existing business line.
Various alternatives may be implemented from time to time.
COMPETITION
The banking and financial services industry is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The
Company, through its subsidiaries, competes for loans, deposits, and customers
with other commercial banks, savings and loan associations, securities and
brokerage companies, mortgage companies, insurance companies, finance companies,
money market funds, credit unions, and other nonbank financial service
providers. Many of these competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader range
of financial services than the Company. In addition, recent federal legislation
may have the effect of further increasing the pace of consolidation within the
financial services industry.
REGULATION
WebBank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain actions by regulators that, if undertaken, could have a
direct material effect on WebBank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, WebBank
must meet specific capital guidelines that involved quantitative measures of
WebBank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. WebBank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require WebBank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average quarterly assets (as defined).
Management believes, as of December 31, 1999 and 1998 that WebBank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1999 and 1998, the most recent notification from the
FDIC categorized WebBank as "well capitalized" under the regulatory framework.
To be categorized as "well capitalized" WebBank must maintain certain Total and
Tier I capital to risk-weighted assets and Tier I capital to average quarterly
assets ratios. There are no conditions or events since that notification that
management believes have changed WebBank's category. See Footnote 18 to the
Consolidated Financial Statements contained elsewhere in this document.
EMPLOYMENT
Total active employment of the Company at December 31, 1999, totaled 12,
all of whom were salaried employees. The Company believes that its employee
relations are satisfactory.
RISK FACTORS
The following discusses certain factors which may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
INTEREST RATES. The Company's earnings are impacted by changing interest
rates. Changes in interest rates impact the level of loans, deposits and
investments, the credit profile of existing loans, the rates received on loans
and securities and the rates paid on deposits and borrowings. The Company
anticipates that interest rates may continue to increase should the Federal
Reserve Board continue to raise rates. However, significant fluctuations in
interest rates may have an adverse affect on the Company's financial condition
and results of operations.
GOVERNMENT REGULATION AND MONETARY POLICY. The banking industry is
subject to extensive federal and state supervision and regulation. Significant
new laws or changes in existing laws, or repeals of existing laws may cause the
Company's results to differ materially. Further, federal monetary policy,
particularly as implemented through the Federal Reserve System, significantly
affects credit conditions for the Company and a material change in these
conditions could have a material adverse impact on the Company's financial
condition and results of operations.
COMPETITION. The banking and financial services businesses in the
Company's lines of business are highly competitive. The increasingly competitive
environment is a result of changes in regulation, changes in technology and
product delivery systems, and the accelerating pace of consolidation among
financial services providers. The results of the Company may differ if
circumstances affecting the nature or level of competition change.
CREDIT QUALITY. A source of risk arises from the possibility that losses
will be sustained because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans. The Company has adopted
underwriting and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for credit losses, that management
believes are appropriate to minimize this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying the Company's credit
portfolio. These policies and procedures, however, may not prevent unexpected
losses that could have a material adverse effect on the Company's results.
NON-BANKING ACTIVITIES. The Company may expand its operations into new
non-banking activities in 2000. Although the Company has experience in providing
bank-related services, this expertise may not assist us in our expansion into
non-banking activities. As a result, we may be exposed to risks associated with,
among other things, (1) a lack of market and product knowledge or awareness of
other industry related matters and (2) an inability to attract and retain
qualified employees with experience in these non-banking activities.
YEAR 2000 COMPLIANCE. Most of the Company's operations are dependent on
the efficient functioning of the Company's computer systems and software.
Computer system failures or disruption could have a material adverse effect on
the Company's financial condition and results of operations. As of March 23,
2000, WebBank experienced no problems with respect to Year 2000 technology
issues. This does not mean that some problems may not occur in the future.
PROPOSED LEGISLATION. From time to time, various types of federal and
state legislation have been proposed that could result in additional regulation
of, and modifications of restrictions on, the business of the Company. It cannot
be predicted whether any legislation currently being considered will be adopted
or how such legislation or any other legislation that might be enacted in the
future would affect the business of the Company.
OTHER RISKS. From time to time, the Company details other risks with
respect to its business and/or financial results in its filings with the
Commission.
Item 2. PROPERTIES
As of March 31, 1998, the Company entered into a sub-lease for office space
with Gateway Industries, Inc. ("GWAY") for use of such space as a corporate
office on a non-exclusive basis. This lease runs through March 31, 2001, and may
be terminated by either party with 90 days notice. Mr. Lichtenstein, the
Company's President and Chief Executive Officer, is the Chairman of the Board of
Directors and Chief Executive Officer of GWAY. Mr. Lichtenstein is also the sole
managing member of the General Partner of Steel Partners II, L.P. which owns
approximately 48% of the common stock of GWAY. Steel Partners Services, Ltd.
("SPS"), which is owned by an entity controlled by Mr. Lichtenstein, also
subleases part of the office space from GWAY. In 1998, the rent charged to the
Company was approximately $2,700 a month and in 1999, the rent was included in a
management fee charged by SPS to the Company.
As of March 20, 2000, WebBank entered into a lease for 4,630 square feet of
office space in Salt Lake City, Utah with a monthly rent of $8,488.33. The lease
runs through March 19, 2005.
Lending currently leases 500 square feet of office space in St. Helena,
California for $1,200 per month. This lease runs through January 31, 2001.
Item 3. LEGAL PROCEEDINGS
In January 2000, Andrew Winokur, a former executive officer and director of
one of the Company's subsidiaries, Praxis, filed a lawsuit in the Superior Court
of the State of California, County of Napa against the Company, Praxis and
Holdings. The lawsuit alleges that Praxis has breached its employment agreement
with Mr. Winokur. The lawsuit also asserts claims for interference with contract
and unjust enrichment based upon the purported wrongful termination of Mr.
Winokur's employment contract with Praxis. The lawsuit seeks damages of an
unspecified amount and compliance by Praxis with the termination pay out
provisions in Mr. Winokur's employment agreement relating to purchase of Mr.
Winokur's 10% interest in Praxis and WebBank (both 90% owned subsidiaries of the
Company) at their fair market value. The time for the Company to answer and
assert Counterclaims in this matter has not yet expired. The Company and Praxis
deny that Praxis wrongfully terminated Mr. Winokur's employment and intend to
vigorously defend this matter. The Company does not believe that this lawsuit
will have a material adverse impact on its financial condition, results of
operations or liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
WEBFINANCIAL CORPORATION AND SUBSIDIAREIES
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Common Stock was listed on the Nasdaq National Market System until
March 11, 1998, at which time the Common Stock was delisted because the Company
had no commercial operations. From March 11, 1998 until August 22, 1999 the
Common Stock traded on the NASD OTC Bulletin Board (symbol "RSES" which changed
to "WEFN"). Beginning August 22, 1999 the Company's Common Stock was listed on
the NASDAQ Small Cap Market. The Company had 197 holders of record of Common
Stock on March 23, 2000. High and low prices of the Common Stock, as reported on
the NASDAQ OTC Bulletin Board and the NASDAQ Small Cap Market are shown in the
table below. Such prices represent quotations between broker-dealers, do not
include retail mark-ups, mark-downs or commissions, and may not necessarily
reflect prices in actual transactions.
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
High Low High Low
1st Quarter 6.10 4.10 3 1/8 3 7/46
2nd Quarter 45 5 1/16 3 5/8 3 5/8
3rd Quarter 9 5 5/16 4 3/16 4
4th Quarter 8.29 5 1/16 6 5 27/32
The Company paid no dividends on its Common Stock in 1999 or 1998.
The Company intends to retain any future earnings for working capital needs
and to finance potential future acquisitions and presently does not intend to
pay cash dividends on its Common Stock for the foreseeable future.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected financial data of the
Company and should be read in conjunction with the related Consolidated
Financial Statements of the Company and accompanying Notes to Consolidated
Financial Statements included elsewhere herein.
(Amounts in thousands except per share amounts. Not covered by Independent Auditors' Report)
Eleven- Successor Predecessor
Month Restated Restated
Year Period Year Year Thirty-Nine Thirteen
Ended Ended Ended Ended Weeks Ended Weeks Ended
December 31, December 31, January 31, January 25, January 27, April 29,
1999 1998 1998(1) 1997(2) 1996(2) 1995(2)
-------------------------------------------------------------------------------
Net interest income before
provision for loan loss $ 847 676 418 - - -
Other operating income 1,567 - - - - -
Net income (loss) before
minority interest (1,744) (774) (25,538) 380 4,401 70,187
Loss attributable to
minority interests 134 59 - - - -
------- ------- ------- ------- ------- -------
Net income (loss) $ (1,610) (715) (25,538) 380 4,401 70,187
======= ======= ======= ======= ======= =======
Net earnings (loss) per
common basic share (0.37) (0.17) (5.91) .04 .51 3.74
Consolidated Balance December 31, December 31, January 31,
Sheet Data: 1999 1998 1998
---- ---- ----
Cash, cash equivalents
and marketable
investment securities $ 8,124 10,762 15,385
Loans 10,396 1,081 --
Total assets 21,240 15,980 15,408
Deposits 4,889 105 --
Stockholders' equity 13,435 14,687 15,402
- ----------------------------
(1) On December 2, 1997, the Company sold all of the outstanding stock of Stores its sole operating
entity. The operating results of Stores prior to the consummation of the sale are shown as
earnings or loss of discontinued business. The loss resulting from the sale is shown as loss from
disposal of discontinued operation.
(2) On September 5, 1993, Stores filed a voluntary petition for Relief under Chapter 11, Title 11 of
the United States Bankruptcy Court for the Eastern District of North Carolina (the "Bankruptcy
Court"). Stores Modified and Restated First Amended Joint Plan of Reorganization ( the "Plan")
was approved by Order of the Bankruptcy Court on April 24, 1995. On April 28, 1995, the Plan
became effective.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in August 1997 as a holding company. The
former name of the Company, Rose's Holdings, Inc., was changed by a vote of the
stockholders at the annual meeting on June 15, 1999. In December 1997, the
Company divested itself of Stores, then its only operating subsidiary. On August
31, 1998, the Company acquired a 90% interest in WebBank, a Utah industrial loan
corporation, and Praxis. Praxis, based in St. Helena, California, provided
research and development in creating financial products, followed by
implementing practical realization of those products. During May 1999, Lending
was incorporated as a wholly-owned subsidiary of the Company to concentrate on
holding and servicing U.S. Department of Agriculture Loans. On August 11, 1999,
Film was formed as a wholly-owned subsidiary of Lending to finance the
production and distribution of a motion picture. The only motion picture
commitment expired on December 30, 1999, and the Company has subsequently
determined to liquidate Film. All expenses related to Film were either accrued
or paid in 1999.
During the first quarter of 2000 management began winding down Praxis with
the intention of liquidating that subsidiary by June 30, 2000. Management
doesn't anticipate significant expenses related to Praxis during 2000 or
thereafter. The Company has received approval of the Department of Financial
Institutions of the State of Utah to cause Lending to become a direct subsidiary
of WebBank and that transaction is expected to be completed in 2000.
The Company through its subsidiaries operates in niche banking markets.
WebBank provides commercial and consumer specialty finance transactions
utilizing U.S. Government credit enhancement in certain instances. The benefits
of WebBank's special charter allow it to "export" Utah's regulatory environment
(interest rates, late charges, and prepayment fees, etc.) to forty-eight other
states. WebBank is a small, business oriented institution, which is FDIC insured
and examined and regulated by the State of Utah's Department of Financial
Institutions. The business plan of WebBank represents a non-traditional approach
to growing a highly successful profitable institution within the context of the
regulatory standards of safety and soundness. Prudent business goals and
protection of WebBank's charter are the key elements of the Company's business
strategy for WebBank. Pursuant to this strategy, WebBank has focused on several
lines of business as described elsewhere in this document.
In 1998, the Company changed its fiscal year end from January 31 to
December 31, and has presented financial results for the year ended December 31,
1999, the eleven month-period ended December 31, 1998, and the year ended
January 31, 1998.
RESULTS OF OPERATIONS
The year ended December 31, 1999 compared to the eleven-month period ended
December 31, 1998 and the year ended January 31, 1998.
Interest income for Fiscal 1999 increased to $1,022,000 from $676,000 in
eleven month fiscal 1998 and $418,000 for the year ended January 31, 1998. This
increase in the interest income is primarily due to growth in the loan portfolio
at WebBank and Lending. The portfolio grew from $0 at January 31, 1998 to $1.1
million at December 31, 1998 to $10.9 million at December 31, 1999. The majority
of the growth was in the USDA Business & Industry loan portfolio, which
consisted predominantly of the retained, unguaranteed portions of USDA loans.
Interest expense for the year ended December 31, 1999 increased to $179,000
from $0 in the eleven-month period ended December 31, 1998 and the year ended
January 31, 1998. Interest expense increased chiefly due to the growth in the
interest-bearing time certificates of deposit at WebBank. The certificates
principal balance grew from zero at December 31, 1998 to $4.6 million at
December 31, 1999. WebBank's purpose in growing the certificates was to provide
financing for the loan portfolio.
Other operating income increased to $1,571,000 for the year ended December
31, 1999 from zero for the eleven month-period ended December 31, 1998 and the
year ended January 31, 1998. The majority of the increase in other operating
income was from premiums earned on the sale of the guaranteed portion of the
USDA loans and fee income earned on structured settlement lending and payday
advance lending.
Total operating expenses, which consists of expenses for salaries, general
and administrative, professional fees, broker fees, facilities rentals and
amortization, increased to $3,683,000 for the year ended December 31, 1999 from
$1,450,000 for the eleven-month period ended December 31, 1998 and $347,000 for
the year ended January 31, 1998. Total operating expenses increased primarily
due to expanding business activity and continuing search and negotiation for
additional suitable subsidiary associations.
Net loss totaled $1,610,000, or a loss of $0.37 per share of common stock
for the year ended December 31, 1999. Net loss for the eleven-month period ended
December 31, 1998 totaled $715,000, or a loss of $0.17 per share of common
stock. Net loss for the year ended January 31, 1998 totaled $25,538,000, or a
loss of $5.91 per share of common stock. During the year ended January 31, 1998,
the loss was attributable to the disposition of the discontinued business when
the Company was Stores.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $7,266,000 at December 31,
1999. The Company's management believes that the Company's cash and cash
equivalents as well as its anticipated near term cash flows are adequate to meet
its near term liquidity requirements.
With $7,266,000 of cash available the Company is seeking additional
acquisitions and/or merger transactions. No firm commitments have been realized
and no letters of intent have been signed at this time. There can be no
assurance that the Company will be able to locate or purchase a business, or
that such business, if located and purchased, will be profitable. In order to
finance an acquisition, the Company may be required to incur or assume
indebtedness and/or issue securities.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement on Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" in 1998. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. As a result of SFAS No. 137,
SFAS No. 133 will be adopted in 2001. The Company does not believe the adoption
of SFAS No. 133 will have a material effect on the financial position or results
of operations of the Company.
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company will
incorporate the guidance of SAB No. 101 in the first quarter of fiscal 2001.
FORWARD LOOKING STATEMENTS
THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY FORWARD-LOOKING STATEMENTS MADE IN
THIS ANNUAL REPORT ON FORM 10-K AND PRESENTED ELSEWHERE BY MANAGEMENT. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. A NUMBER OF
UNCERTAINTIES EXIST THAT COULD AFFECT THE COMPANY'S FUTURE OPERATING RESULTS,
INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC CONDITIONS, CHANGES IN INTEREST
RATES, THE COMPANY'S ABILITY TO ATTRACT DEPOSITS, AND THE COMPANY'S ABILITY TO
CONTROL COSTS. BECAUSE OF THESE AND OTHER FACTORS, PAST FINANCIAL PERFORMANCE
SHOULD NOT BE CONSIDERED AN INDICATION OF FUTURE PERFORMANCE. THE COMPANY'S
FUTURE OPERATING RESULTS MAY VARY SIGNIFICANTLY. INVESTORS SHOULD NOT USE
HISTORICAL TRENDS TO ANTICIPATE FUTURE RESULTS AND SHOULD BE AWARE THAT THE
TRADING PRICE OF THE COMPANY'S COMMON STOCK MAY BE SUBJECT TO WIDE FLUCTUATIONS
IN RESPONSE TO QUARTERLY VARIATIONS IN OPERATING RESULTS AND OTHER FACTORS,
INCLUDING THOSE DISCUSSED ABOVE.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK AND ASSET LIABILITY MANAGEMENT
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities and other investment
activities. To that end, management actively monitors and manages its interest
rate risk exposure.
In connection with the Company's lending and deposit activities, its
profitability may be affected by fluctuations in interest rates. A sudden and
substantial increase in interest rates may adversely impact the Company's
earnings to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis. The
Company monitors the impact of changes in interest on its net interest income
using several tools. One measure of the Company's exposures to differential
changes in interest rates between assets and liabilities is an interest rate
risk management test. This test measures the impact on net interest income of an
immediate change in interest rates in 100 basis point increments. After a review
of our portfolio, we believe that in the event of a hypothetical ten percent
increase in interest rates, the resulting effect on the Company's net interest
income would not be material.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The Company
relies primarily on its asset-liability structure to control interest rate risk.
In connection with the Company's other investments, our primary objective
is to manage our investment portfolio so as to preserve principal, maintain
proper liquidity to meet operating needs, and maximize yields. The securities
held in our investment portfolio are subject to interest rate risk. We employ
established policies and procedures to manage exposure to fluctuations in
interest rates. We place our investments with high quality issuers and limit the
amount of credit exposure to any one issuer and do not use derivative financial
instruments in our investment portfolio. We maintain an investment portfolio of
various issuers, types, and maturities, which consist mainly of fixed rate
financial instruments. These securities are classified as available-for-sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component in stockholders'
equity. At any time, sharp changes in interest rates can affect the fair value
of the investment portfolio and its interest earnings. Currently, we do not
hedge these interest rate exposures. After a review of our marketable
securities, we believe that in the event of a hypothetical ten percent increase
in interest rates, the resulting fluctuation in the fair market value of our
marketable investment securities would be insignificant to the financial
statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Company's consolidated financial statements contained elsewhere
herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item will be included under the captions
"ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" in the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year covered by this report and
is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this item will be included under the caption
"EXECUTIVE COMPENSATION" in the Company's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year covered by this report and is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included under the captions
"PRINCIPAL STOCKHOLDERS" and "BENEFICIAL OWNERSHIP OF DIRECTORS AND MANAGEMENT"
in the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal year
covered by this report and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is will be included under the caption
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year covered by this report and
is incorporated herein by reference.
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
See index to consolidated financial statements immediately following the
exhibit index.
(b) Reports on Form 8-K filed during the fourth quarter of the period covered
by this report:
(i) none
(c) Exhibits
See exhibit index immediately following the signature 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.
WEBFINANCIAL CORPORATION
By: /s/Warren G. Lichtenstein
-----------------------------
Warren G. Lichtenstein
President, Chief Executive Officer
By: /s/Jack L. Howard
-----------------------------
Jack L. Howard
Vice President and Chief Financial Officer
POWER OF ATTORNEY
WebFinancial Corporation and each of the undersigned do hereby appoint
Warren G. Lichtenstein and Jack L. Howard, and each of them singly, its or his
true and lawful attorney to execute on behalf of WebFinancial Corporation and
the undersigned any and all amendments to this Annual Report on Form 10-K and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission; each of such attorneys
shall have the power to act hereunder with or without the other.
Date: April 12, 2000
Pursuant to the requirements of the Securities and 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 date indicated.
By: /s/Jack L. Howard April 12, 2000
----------------------------------- --------------
Jack L. Howard, Chief Financial Officer and Director Date
(Principal Accounting Officer)
By: /s/Warren G. Lichtenstein April 12, 2000
------------------------------------ --------------
Warren G. Lichtenstein, President, Date
Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/Earle C. May April 12, 2000
------------------------------------- --------------
Earle C. May, Director Date
By: /s/Joseph L. Mullen April 12, 2000
------------------------------------- --------------
Joseph L. Mullen, Director Date
By: /s/James Benenson April 12, 2000
------------------------------------- --------------
James Benenson, Director Date
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
3.1 Company's Certificate of Incorporation, as amended.
3.2 Company's Bylaws.
10.1 Purchase Agreement incorporated by reference to exhibit 1 of the Company's
current report on form 10-Q for the period ended August 1, 1998.
10.2 Subscription and Stockholders Agreement incorporated by reference to
exhibit 2 of the Company's current report on form 10-Q for the period ended
August 1, 1998.
10.3 Assignment, Transfer and Delegation Agreement incorporated by reference to
exhibit 3 of the Company's Current Report on Form 10-Q for the period ended
August 1, 1998.
10.4 Employment Agreement incorporated by reference to exhibit 4 of the
Company's Current Report on Form 10-Q for the period ended August 1, 1998.
10.5 Management Agreement incorporated by reference to exhibit 1 of the
Company's Current Report on Form 10-Q for the period ended August 1, 1998.
27 Financial Data Schedule.
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Report on Financial Statements F-2
Independent Auditors' Report F-3
Consolidated Statements of Financial Condition
as of December 31, 1999 and December 31, 1998 F-4
Consolidated Statements of Operations
for the year ended December 31,1999,
the eleven-month period ended December 31, 1998,
and the year ended January 31, 1998 F-5
Consolidated Statements of Stockholders' Equity
for the year ended December 31, 1999,
the eleven-month period ended December 31, 1998,
and the year ended January 31, 1998 F-7
Consolidated Statements of Cash Flows
for the year ended December 31, 1999,
the eleven-month period ended December 31, 1998,
and the year ended January 31, 1998 F-8
Notes to Consolidated Financial Statements F-11
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
The consolidated financial statements on the following pages have been prepared
by management in conformity with generally accepted accounting principles.
Management is responsible for the reliability and fairness of the financial
statements and other financial information included herein.
To meet its responsibilities with respect to financial information, management
maintains and enforces internal accounting policies, procedures and controls
which are designed to provide reasonable assurance that assets are safeguarded
and that transactions are properly recorded and executed in accordance with
management's authorization. Management believes that the Company's accounting
controls provide reasonable, but not absolute, assurance that errors or
irregularities which could be material to the financial statements are prevented
or would be detected within a timely period by Company personnel in the normal
course of performing their assigned functions. The concept of reasonable
assurance is based on the recognition that the cost of controls should not
exceed the expected benefits.
The responsibility of our independent auditors, KPMG LLP, it to conduct their
audit in accordance with generally accepted auditing standards. In carrying out
this responsibility, they planned and performed their audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether caused by error or fraud.
The Audit Committee of the Board of Directors met twice with management and the
independent auditors to discuss auditing and financial matters and to assure
that each is carrying out its responsibilities. The independent auditors have
full and free access to the Audit Committee and meet with it by telephone, with
and without management being present, to discuss the results of their audit and
their opinions on the quality of financial reporting.
By: /s/Warren G. Lichtenstein/
Warren G. Lichtenstein
President, Chief Executive Officer
and Chief Accounting Officer
By: /s/Jack L. Howard
Jack L. Howard
Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
WebFinancial Corporation
We have audited the accompanying consolidated statements of financial condition
of WebFinancial Corporation and subsidiaries (formerly Rose's Holdings, Inc.) as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1999, the eleven-month period ended December 31, 1998, and the year ended
January 31, 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WebFinancial
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows the year ended December 31, 1999, the
eleven-month period ended December 31, 1998, and the year ended January 31, 1998
in conformity with generally accepted accounting principles.
/s/KPMG LLP
Salt Lake City, Utah
March 24, 2000
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands except share data)
December 31, December 31,
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents ...................................... $ 7,266 8,681
Cash restricted in escrow ...................................... -- 2,018
Investment securities (note 5)
Held-to-maturity (estimated fair value of $37
at December 31, 1999)..................................... 37 --
Available-for-sale ........................................... 858 2,081
Total investment securities ................................ 895 2,081
Loans, net of deferred premium (note 6) ........................ 10,868 1,081
Less allowance for loan loss (note 7) .......................... 472 --
Loans, net ................................................. 10,396 1,081
Accounts receivable ............................................ 14 --
Prepaid expense ................................................ 63 33
Premises and equipment,
net of accumulated depreciation and amortization (note 11) ... 101 116
Accrued interest receivable .................................... 163 41
Goodwill, net of accumulated
amortization of $158 in 1999 and $41 in 1998 ................. 1,616 1,733
Other assets ................................................... 428 196
-------- --------
$ 20,942 15,980
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non interest-bearing demand .................................. $ 250 105
Interest-bearing time certificates of deposit (note 9) ....... 4,639 --
-------- --------
Total deposits ............................................. 4,889 105
Short term borrowing (note 10) ................................. 1,100 --
Accounts payable and accrued liabilities ....................... 953 326
Servicing liability ............................................ 108 --
Income taxes payable to subsidiary's former parent ............. -- 309
-------- --------
Total liabilities before minority interests ................ 7,050 740
Minority interests ......................................... 457 553
Stockholders' Equity:
Preferred stock, 10,000,000 shares authorized, zero issued ... -- --
Common stock, 50,000,000 shares authorized;
$.001 par value, 4,349,996 shares issued and outstanding at
December 31, 1999 and 4,310,192 shares issued
and outstanding at December 31, 1998 ...................... 4 4
Paid-in capital .............................................. 36,578 36,155
Unearned compensation ........................................ (65) --
Accumulated deficit .......................................... (23,082) (21,472)
-------- --------
Total stockholders' equity ................................. 13,435 14,687
-------- --------
Commitments and contingencies (notes 10, 14 and 17)
$ 20,942 15,980
======== ========
See accompanying notes to consolidated financial statements.
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except share data)
Eleven-month
Year ended period ended Year ended
December 31, December 31, January 31,
1999 1998 1998
----------- ----------- ----------
Interest income:
Interest and fees on loans .............. $ 420 30 --
Interest on cash equivalents ............ 476 631 418
Interest on investment securities ....... 130 15 --
------- ------- -------
Total interest income .............. 1,026 676 418
Interest expense:
Interest on deposits .................... 150 -- --
Interest on short-term borrowing ........ 29 -- --
------- ------- -------
Total interest expense ............. 179 -- --
Net interest income before provision
for loan losses ............ 847 676 418
Provision for loan losses (note 7) .......... 475 -- --
------- ------- -------
Net interest income after provision
for loan losses.............. 372 676 418
Other operating income:
Premium earned on sale of loans ......... 913 -- --
Fee income .............................. 442 -- --
Miscellaneous income .................... 212 -- --
------- ------- -------
Total other operating income ........ 1,567 -- --
Operating expenses:
Salaries, wages, and benefits ........... 1,485 428 --
Selling, general and administrative...... 1,265 679 347
Professional and legal fees ............. 617 242 --
Occupancy expense ....................... 199 60 --
Amortization of goodwill ................ 117 41 --
------- ------- -------
Total operating expenses ............ 3,683 1,450 347
Operating income (loss) ............. (1,744) (774) 71
Loss from operation of discontinued business. -- -- (3,163)
Loss from disposal of discontinued business . -- -- (22,446)
------- ------- -------
Loss before minority interest ............... (1,744) (25,538) --
Loss attributable to minority interests ..... 134 59 --
------- ------- -------
Net loss ...................... $(1,610) (715) (25,538)
======= ======= =======
(continued)
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(Amounts in thousands except share data)
Eleven-month
Year ended period ended Year ended
December 31, December 31, January 31,
1999 1998 1998
----------- ----------- -----------
Basic and diluted net loss per common share $ (0.37) (0.17) (5.91)
Weighted average number of common shares
and common share equivalents:
Basic and diluted 4,312,708 4,315,966 4,320,032
See accompanying notes to consolidated financial statements.
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 1999, Eleven-Month Period Ended December 31, 1998
and Year Ended January 31, 1998
(Amounts in thousands except share data)
Total
Common Stock Paid-in Deferred Accumulated stockholders'
Shares Amount capital compensation deficit equity
---------------------------------------------------------------------
Balance at January 25, 1997 4,320,032 $ 35,000 1,159 -- 4,781 40,940
Net loss -- -- -- -- (25,538) (25,538)
--------- --------- --------- --------- --------- ---------
Balance at January 31, 1998 4,320,032 35,000 1,159 -- (20,757) 15,402
Net loss -- -- -- -- (715) (715)
Shares retired (9,840) -- -- -- -- --
Assignment of par value
to common stock -- (34,996) 34,996 -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 4,310,192 4 36,155 -- (21,472) 14,687
Net loss -- -- -- -- (1,610) (1,610)
Shares redeemed and retired (78,829) -- (323) -- -- (323)
Shares issued upon
exercise of options 114,307 -- 417 -- -- 417
Shares issued for
services rendered 4,326 -- 23 -- -- 23
Contribution of capital -- -- 180 -- -- 180
Options granted for
services rendered -- -- 126 (65) -- 61
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1999 4,349,996 $ 4 36,578 (65) (23,082) 13,435
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Eleven-month
Year ended period ended Year ended
December 31, December 31, January 31,
1999 1998 1998
----------- ----------- ----------
Cash flows from operating activities:
Net loss from continuing operations ................... $ (1,610) (715) 71
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Minority interest ................................ (134) (59) --
Depreciation and amortization .................... 65 20 --
Premium earned on sale of loans .................. (913) -- --
Gain on sale of investment securities ............ (76) -- --
Common stock and options granted in lieu of cash.. 84 -- --
Provision for loan losses ........................ 475 -- --
Amortization of loan premiums .................... 28 9 --
Amortization of goodwill ......................... 117 41 --
Amortization of premiums for
available-for-sale securities ................. -- 24 --
Amortization of servicing assets ................. 8 -- --
Amortization of deferred income on USDA loans .... (21) -- --
Net change attributable to discontinued business.. -- -- (45,445)
Change in operating assets and liabilities:
Cash restricted in escrow ..................... 2,018 -- --
Accounts receivable ........................... (14) -- --
Prepaid expense ............................... (30) (33) --
Accrued interest receivable ................... (122) (20) --
Other assets .................................. (118) (145) --
Accounts payable and accrued expenses ......... 627 -- --
Income tax due to former parent ............... (309) -- --
-------- -------- --------
Net cash provided by (used in)
operating activities .................... 75 (566) (45,374)
-------- -------- --------
(continued)
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Eleven-month
Year ended period ended Year ended
December 31, December 31, January 31,
1999 1998 1998
---------- ----------- ----------
Cash flows from investing activities:
Purchase of subsidiary ........................... $ -- (2,946) --
Purchase of investment securities
available-for-sale ............................ -- (1,649) --
Principal payments received on investment
securities available-for-sale ................. 1,042 -- --
Proceeds from sale of
available-for-sale securities ................. 257 -- --
Purchase of investment securities held-to-maturity (48) -- --
Principal payments received on investment
securities held-to-maturity ................... 11 -- --
Loans originated ................................. (32,701) (2,376) --
Proceeds from sale of loans ...................... 23,681 2,157 --
Principal payments received on loans ............. 122 28 --
Purchase of premises and equipment ............... (50) (47) --
Minority interest ................................ -- 612 --
Net change attributable to discontinued business . -- -- 11,127
Funds transferred to escrow ...................... -- (98) --
-------- -------- --------
Net cash provided by (used in)
investing activities .................... $ (7,686) (4,319) 11,127
-------- -------- --------
Cash flows from financing activities:
Net increase in demand deposits .................. $ 145 101 --
Proceeds from issuance of time deposits .......... 7,729 -- --
Payments for maturing time deposits .............. (3,090) -- --
Net increase in short-term borrowings ............ 1,100 -- --
Issuance of common stock for cash ................ 417 -- --
Cash paid to redeem shares ....................... (323) -- --
Minority interest contribution ................... 38 -- --
Contribution of capital .......................... 180 -- --
Net change attributable to discontinued business . -- -- 46,471
-------- -------- --------
Net cash provided by financing activities . 6,196 101 46,471
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .. (1,415) (4,784) 12,224
Cash and cash equivalents at beginning of period ...... 8,681 13,465 1,241
-------- -------- --------
Cash and cash equivalents at end of period ............ $ 7,266 8,681 13,465
======== ======== ========
(continued)
WEBFINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Eleven-month
Year ended period ended Year ended
December 31, December 31, January 31,
1999 1998 1998
----------- ----------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 156 3 --
Supplemental disclosure of additional non-cash
activities:
Retirement of net book value of assets in
reserve for store closings ...................... $ -- -- 30
Capital lease additions ........................... -- -- 887
Conversion of loan receivable to investment
securities available-for-sale ................. -- 216 --
During 1998 the Company acquired 90 percent of the outstanding stock of WebBank
(note 4). The following is a summary of the effect of this transaction in the
Company's consolidated balance sheet:
Assets acquired:
Investment securities available-for-sale .......... $ -- (240) --
Commercial loans .................................. (1,115) -- --
Accrued interest receivable ....................... -- (21) --
Property and equipment ............................ -- (89) --
Other assets ...................................... -- (28) --
Goodwill .......................................... -- (1,774) --
Liabilities assumed:
Demand deposits ................................... -- 4 --
Accounts payable and accrued expenses ............. -- 8 --
Income taxes payable to subsidiary's former parent. -- 309 --
-------- -------- --------
Net cash used ............................... $ -- (2,946) --
======== ======== ========
See accompanying notes to consolidated financial statements.
WEBFINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 1999, Eleven-Month Period Ended December 31, 1998, and
Year Ended January 31, 1998 (All numbers except shares and per share data in
thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--The consolidated financial statements include the financial
statements of WebFinancial Corporation (the "Company") and its subsidiaries:
WebFinancial Holdings Corporation ("Holdings"), WebBank ("WebBank"), Praxis
Investment Advisers, Inc. ("Praxis"), WebFinancial Government Lending, Inc.
("Lending"), and Web Film Financial, Inc. ("Film"), collectively referred to as
the Company. WebBank is a Utah-chartered industrial loan corporation, and is
subject to comprehensive regulation, examination, and supervision by the Federal
Deposit Insurance Corporation ("FDIC"), and the State of Utah Department of
Financial Institutions. WebBank provides commercial and consumer specialty
finance services. Lending is concentrating on U.S. Department of Agriculture
loan originations, sales and servicing. Film was organized to finance the
production and distribution of a motion picture and the Company has subsequently
decided to inactivate Film. All significant intercompany balances have been
eliminated in consolidation.
BASIS OF PRESENTATION--The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash and
noninterest bearing deposits in depository institutions, plus interest-bearing
deposits with banks and investments in cash management funds. For purposes of
the statements of cash flows, the Company considers all highly liquid debt
instruments with maturities of three months or less when purchased to be cash
equivalents. Cash equivalents are stated at cost, which approximates market.
LOSS PER SHARE--Basic loss per common share is calculated by dividing net loss
by the weighted-average number of common shares outstanding for the period.
Diluted net loss per common share reflects the maximum dilutive effect of common
stock issuable upon exercise of stock options and stock warrants.
For the year ended December 31, 1999, the eleven-month period ended December 31,
1998, and the year ended January 31, 1998 potential common shares of 2,584,585,
2,646,191, and 2,191,857, respectively, that could potentially dilute earnings
per share in the future were not included in the computation of diluted loss per
share because to do so would have been anti-dilutive for the periods.
INVESTMENT SECURITIES--The Company classifies its securities as either
available-for-sale securities or held-to-maturity securities. Held-to-maturity
securities are those securities which the Bank has the ability and intent to
hold until maturity. All other securities not included in held-to-maturity are
classified as available-for-sale.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Available-for-sale
securities are recorded at fair value. Unrealized holding gains or losses on
available- for-sale securities are excluded from earnings and reported until
realized in accumulated other comprehensive income (loss) as a separate
component of stockholders' equity until realized. Transfers of securities
between categories are recorded at fair value at the date of transfer.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost for the security. Premiums and
discounts are amortized or accreted over the life of the related security as an
adjustment to the yield using the effective-interest method. Dividend and
interest income is recognized when earned. Realized gains and losses for
securities classified as available-for-sale or held-to-maturity are included in
earnings and are derived using the specific-identification method of determining
the cost of securities sold.
LOANS--Loans are reported at the principal amount outstanding, net of premiums,
discounts, and unearned income. Premiums and discounts are accreted/amortized
over the life of the related loan under the interest method. Unearned income,
which includes deferred fees net of deferred direct incremental loan origination
costs, is amortized to interest income generally over the contractual life of
the loan using an interest method, adjusted for actual prepayment experience.
Interest income is accrued daily as earned.
ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is established through
a provision for loan losses charged to expense. Loan losses are charged against
the allowance when management believes that the collectibility of the loan
principal is unlikely. Recoveries on loans previously charged off are credited
to the allowance.
The allowance is an amount that management believes will be adequate to absorb
possible loan losses based on evaluations of collectibility and prior loss
experience. The evaluation takes into consideration such factors as changes in
the nature and volume of the portfolio, overall portfolio quality, specific
problem loans, and current and anticipated economic conditions that may affect
the borrowers' ability to pay. Management also obtains appraisals where
considered necessary.
IMPAIRED LOANS--Loans are considered impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement, including
scheduled interest payments.
This assessment for impairment occurs when and while such loans are on
nonaccrual. When a loan with unique risk characteristics has been identified as
being impaired, the amount of the impairment will be measured by the Company
using discounted cash flows, except when it is determined that the remaining
source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such cases, the current fair value of the collateral,
reduced by costs to sell, will be used in place of discounted cash flows.
If the measurement of the impaired loan is less than the recorded investment in
the loan, including accrued interest, net deferred loan fees or costs and
unamortized premium or discount, an impairment is recognized by creating or
adjusting an existing allocation of the provision for loan losses.
NONACCRUAL LOANS--Accrual of interest is discontinued on a loan when the loan is
90 days past due or when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful. Interest income on
nonaccrual loans is credited to income only to the extent interest payments are
received. Loans are restored to accrual of interest when delinquent payments are
received in full. Additionally, the Company uses the cost recovery accounting
method to recognize interest income on impaired loans.
PREMISES AND EQUIPMENT--Premises and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation of premises and
equipment is computed by the straight-line method over estimated useful lives
from one to five years. Leasehold improvements are amortized over the terms of
the related leases or the estimated useful lives of the improvements, whichever
is shorter. Useful lives of leasehold improvements are between three and five
years.
INCOME TAXES--Deferred tax assets and deferred tax liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and deferred tax liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and deferred tax liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
LOANS HELD FOR SALE--The Company originates loans to customers under a United
States Department of Agriculture ("USDA") program that generally provides for
USDA guarantees of 70 percent to 90 percent of each loan. The Company plans to
sell the guaranteed portion of each loan to a third party and retain the
unguaranteed portion in its own portfolio. Loans held-for-sale are carried at
the lower of cost or estimated market value in the aggregate. A sale is
recognized when control over the loans sold is surrendered and the proceeds of
the sale are other than beneficial interests in the loans sold. The Company will
allocate basis of the loans sold and the retained portions based upon their
relative fair market values. To the extent the sale of a loan involves the sale
of part of a loan with a disproportionate credit risk, the cost basis of the
loan is allocated based upon the relative fair values of the portion sold and
the portion retained on the date such loan sale was made. Deferred income on
USDA loans arises on the sale of the government guaranteed portion of the loan
and the retention of the unguaranteed portion. Such deferred income is
recognized over the estimated remaining life of the retained portion.
The Company is required to retain a minimum of five percent of each USDA loan
sold and to service the loan for the investor. Based on the specific loan sale
agreement that the Company enters into with the investor, the difference between
the yield on the loan and the yield paid to the buyer is the servicing fee.
Loans serviced for others amounted to $8,289,000 and $-0- at December 31, 1999
and 1998, respectively. These loans are not included in the accompanying
statements of financial condition. Fees earned for servicing loans for others
are reported as income when the related loan payments are collected, less
amortization of the servicing asset. Loan servicing costs are charged to expense
as incurred.
GOODWILL--The acquisition of WebBank was accounted for under purchase accounting
resulting in goodwill of $1,774 which is being amortized using the straight-line
basis over 15 years. Goodwill is reviewed for possible impairment when events or
changed circumstances affect the underlying basis of the asset. Impairment is
measured by comparing the investment to undiscounted operating income.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS--The Company reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets held and used is measured by a comparison of the
carrying amount of the asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of their carrying amount or fair value less cost to
sell.
COMPREHENSIVE LOSS--The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", effective February
1, 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive loss and its components in financial statements. Components of
comprehensive income (loss) include net income (loss), unrealized gains (losses)
on available-for-sale investment securities, foreign currency translation
adjustments, changes in the market value of futures contracts that qualify as a
hedge, and net loss recognized as an additional pension liability not yet
recognized in net periodic pension cost. For the year ended December 31, 1999,
the eleven-month period ended December 31, 1998, and the year ended January 31,
1998 comprehensive loss was equal to the net loss as presented in the
accompanying statements of operations.
STOCK-BASED COMPENSATION--The Company employs the footnote disclosure provisions
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages
entities to adopt a fair-value based method of accounting for stock options or
similar equity based compensation using the intrinsic-value method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25"). The Company has elected to continue to
apply the provisions of APB 25 and provide proforma footnote disclosures
required by SFAS No. 123.
RECLASSIFICATION--Certain amounts as of and for the eleven-month period ended
December 31, 1998 and the year ended January 31, 1998 have been reclassified to
conform with the 1999 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS--The Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" in 1998. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. As a result of SFAS No. 137, SFAS No. 133 will
be adopted in 2001. The Company does not believe the adoption of SFAS No. 133
will have a material effect on the financial position or results of operations
of the Company.
On December 3, 1999 the SEC staff issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company will
incorporate the guidance of SAB No. 101 in the first quarter of fiscal 2001.
OPERATING SEGMENTS--The Company operates in one line of business, commercial and
consumer specialty finance transactions. As such, the Company has only one
reportable operating segment as defined by the SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information."
2. DISCONTINUED OPERATIONS
On August 7, 1997, pursuant to an agreement and plan of merger among Rose's
Stores, Inc. ("Stores") and two newly created, wholly-owned subsidiaries of
Stores, Stores became a wholly-owned subsidiary of the Company. As a result of
such merger, each share of common stock, no par value ("Stores Common Stock"),
of Stores was converted into common stock, no par value ("Common Stock"), of the
Company and each warrant, option, or other right entitling the holder thereof to
purchase or receive shares of Stores Common Stock was converted into a warrant,
option, or other right (as the case may be) entitling the holder thereof to
purchase or receive shares of Common Stock on identical terms. The powers,
rights and other provisions of the Common Stock were identical to the powers,
rights and other provisions of the Stores Common Stock. The transaction was
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests. Certain prior period amounts have been
restated to reflect the effects of discontinued operations.
On December 2, 1997, the Company consummated the sale to Variety Wholesalers,
Inc. ("Variety") of all the outstanding capital stock of Stores pursuant to a
stock purchase agreement, dated as of October 24, 1997, between the Company and
Variety (the "Sale"). The Sale constituted the disposition by the Company of
substantially all of its assets and was approved by the holders of a majority of
the outstanding shares of common stock of the Company at a special meeting of
the stockholders of the Company on December 2, 1997. The total purchase price
for the Sale was $19,200, including $1,920 that was placed in escrow. The
proceeds of the Sale, net of certain transactions, closing, and other costs,
were $15,331. The loss resulting from the Sale was $22,446.
3. CHANGE IN YEAR END
The Company applied to the Internal Revenue Service to change its fiscal year
end to a calendar year end, resulting in an eleven-month reporting period for
1998. The Internal Revenue Service granted approval of the Company's request in
February 1999.
4. ACQUISITION AND FORMATION OF SUBSIDIARIES
On August 31, 1998, Holdings, a newly formed, wholly-owned Delaware subsidiary
of the Company, consummated the acquisition of 90 percent of the outstanding
common stock ("Bank Common Stock") of WebBank, pursuant to an assignment (the
"Assignment") from Praxis Investment Advisers, a Nevada limited liability
company ("PIA"), of a stock purchase agreement, dated January 20, 1998 (the
"Purchase Agreement"), between PIA and Block Financial Corporation ("Block"),
relating to the purchase by PIA of all of the issued and outstanding shares of
Bank Common Stock. Pursuant to the Assignment, the Company paid Block $4,783 for
the shares of Bank Common Stock to be purchased by Block pursuant to the
Purchase Agreement. In addition, the Company paid $288 in acquisition costs, for
a total purchase price of $5,071. The acquisition was accounted for under
purchase accounting, resulting in goodwill of $1,744. On August 31, 1998, Praxis
was formed by a cash contribution from the Company of $428 for a 90 percent
ownership of newly issued stock.
In connection with the purchase of Bank Common Stock, Holdings entered into a
subscription and stockholders agreement, dated as of August 31, 1998 (the
"Stockholders Agreement") with Andrew Winokur ("AW"), the owner of the 10
percent of the outstanding shares of Bank Common Stock not purchased by
Holdings. Pursuant to the Stockholders Agreement, Holdings agreed to purchase 90
percent, and AW agreed to purchase 10 percent, of the common stock ("Praxis
Common Stock") of Praxis. The Stockholders Agreement also provides for certain
restrictions on the disposition by AW of his Bank Common Stock and Praxis Common
Stock and certain rights and obligations of Holdings and the Company to purchase
the shares of Bank Common Stock and Praxis Common Stock owned by AW.
Holdings, AW, and Praxis entered into a management agreement on August 31, 1998
(the "Management Agreement") under which Praxis agreed to provide certain
management services to AW and Holdings in connection with the ownership and
operation of WebBank. During the first quarter of 2000, the Company intends to
liquidate Praxis and, subject to regulatory approval, contribute Lending as a
subsidiary of WebBank.
Praxis and AW had also entered into an employment agreement (the "Employment
Agreement"), providing for the employment of AW by Praxis. Under the Employment
Agreement, AW agreed to serve as president and chief executive officer of Praxis
for a term of five years (which may be extended for one or more years with the
written agreement of the parties). Under the Employment Agreement, AW was
granted the authority to formulate the recommendations to WebBank on behalf of
Praxis pursuant to the Management Agreement. In early January 2000, AW and the
Company terminated their relationship. (See footnote 20.)
5. INVESTMENT SECURITIES
Investment securities as of December 31, 1999, are summarized as follows:
Held-to-maturity
---------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---------- ---------- ---------- ----------
Collateralized MBS $ 37 -- -- 37
========== ========== ========== ==========
Available-for-sale
---------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---------- ---------- ---------- ----------
Collateralized MBS $ 684 -- -- 684
Interest-only strip 174 -- -- 174
---------- ---------- ---------- ----------
$ 858 -- -- 858
========== ========== ========== ==========
Investment securities as of December 31, 1998, are summarized as follows:
Available-for-sale
---------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---------- ---------- ---------- ----------
Collateralized MBS $ 1,649 -- -- 1,649
Interest-only strips 432 -- -- 432
---------- ---------- ---------- ----------
$ 2,081 -- -- 2,081
========== ========== ========== ==========
The amortized cost and estimated market value of investment securities at
December 31, 1999, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
prepay obligations with or without penalties.
Held-to-maturity Available-for-sale
------------------------ -----------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---------- ---------- ---------- ----------
Due beyond five years $ 37 37 858 858
========== ========== ========== ==========
6. LOANS
Loans at December 31, are summarized as follows:
1999 1998
-------- --------
Commercial loans $ 8,785 1,081
Installment loans 982 --
Loans held-for-resale 1,312 --
Deferred income on USDA loans (211) --
-------- --------
$ 10,868 1,081
Loans to eleven customers comprise approximately 93 percent of total loans at
December 31, 1999. The ability of the borrowers to repay their obligations is
dependent upon economic conditions within their respective regions.
7. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is summarized as follows:
1999 1998
-------- --------
Beginning balance $ -- --
Additions:
Provision for loan losses 475 --
Recoveries -- --
Deduction-loan charge-offs (3) --
-------- --------
Ending balance $ 472 --
======== ========
The Company considers the allowance for loan losses adequate to cover losses
inherent in loans and loan commitments at December 31, 1999. However, no
assurance can be given that the Company will not, in any particular period,
sustain loan losses that are sizable in relation to the amount reserved, or that
subsequent evaluations of the loan portfolio, in light of the factors then
prevailing, including economic conditions and the Company's ongoing examination
process and that of its regulators, will not require significant increases in
the allowance for loan losses.
8. RELATED PARTY TRANSACTIONS
As of March 31, 1998, the Company entered into a sub-lease for office space with
Gateway Industries, Inc. ("GWAY") for use of such space as a corporate office on
a non-exclusive basis. This lease runs through March 31, 2001, but may be
terminated by either party with 90 days notice. Warren Lichtenstein, the
Company's President, Chief Executive Officer, and Chief Accounting Officer, is
the Chairman of the Board of Directors of GWAY. Mr. Lichtenstein is also the
sole managing member of the General Partner of Steel Partners II, L.P., which
owns approximately 48% of the common stock of GWAY. Steel Partners Services,
Ltd. ("SPS"), which is owned by an entity controlled by Mr. Lichtenstein, also
subleases part of the office space from GWAY. In 1999, the rent was included in
a $267 management fee charged by SPS to the Company. Such management fee is
included in the Company's selling, general and administrative expense. In 1998,
the rent was approximately $32 and was included in overhead reimbursement to SPS
of $148. In 1997 no rent, overhead, fee, or reimbursement was paid to SPS. As of
December 31, 1999 and 1998 the Company showed, in relation to SPS, prepaid
expense of $40 and $20 and accounts payable of $12 and $11, respectively.
9. TIME CERTIFICATES OF DEPOSIT
Time certificates of deposits as of December 31, are summarized as follows:
Weighted
average
rate 1999
-------- --------
Certificates of deposit
greater than $100,000 5.14% $ 4,609
Other certificates of deposit 4.25 30
-------- --------
5.13% $ 4,639
======== ========
A summary of the maturity of time certificates of deposit as of December 31,
1999 follows:
Within one
year
--------
Greater than $100,000 $ 4,609
Other certificates of deposit 30
--------
$ 4,639
10. SHORT-TERM BORROWINGS
WebBank has an unsecured operating line of credit from a commercial bank due
April 30, 2000, which allows WebBank to borrow up to $3,000. Interest is payable
monthly at the commercial bank's prime rate plus 100 basis points (9.5 percent
at December 31, 1999). The operating line of credit is subject to certain
minimum financial covenants. The average borrowings on the operating line of
credit for the year ended December 31, 1999, were $244, the maximum outstanding
at any month-end during the year ended December 31, 1999 was $2,600, and the
average rate during 1999 was 9.7%.
11. PREMISES AND EQUIPMENT
Premises and equipment at December 31, are summarized as follows:
1999 1998
-------- --------
Leasehold improvements $ 49 43
Furniure and equipment 137 93
-------- --------
186 136
Less accumulated depreciation and
amortization 85 20
-------- --------
$ 101 116
======== ========
12. STOCKHOLDERS' EQUITY
On November 4, 1998, at the annual meeting of stockholders of the Company, the
stockholders approved a one-for- two reverse split of its common stock (the
"Reverse Split"). Pursuant to the Reverse Split, which became effective on
November 20, 1998 (the "Effective Date"), every two shares of common stock held
by stockholders owning of record 500 or more shares of common stock on the
Effective Date were converted into one share of common stock, and all shares
held by stockholders owning of record fewer than 500 shares of common stock on
the Effective Date were converted into the right to receive a cash payment in
the amount of $2.0375 per share. The net effect of the Reverse Split was to
reduce the number of shares of common stock outstanding as of the Effective Date
from 8,620,383 shares to 4,310,192 shares. All references to the number of
common shares and per common share amounts have been restated to reflect the
Reverse Split.
In January of 1999 the Depository Trust Company made a final determination of
78,829 shares to be treated as representing positions of holders of less than
250 shares (on a post-split basis). Accordingly, the Company deposited in an
escrow account with First Union National Bank $323 for the purpose of paying
cash to holders of less than 250 shares and the corresponding shares have been
shown as redeemed and retired.
A member of the Company's board of directors contributed cash of $180 to the
Company in August 1999. No shares were issued as a result of this transaction.
The Company recorded the contribution as an addition to paid-in-capital.
13. STOCK OPTIONS AND WARRANTS
The Company's New Equity Compensation Plan was adopted on February 14, 1995. The
Plan provided for the granting of a maximum of 350,000 shares of stock. The
price of the options granted was not less than 100 percent of the fair market
value of the shares on the date of grant. The options vested immediately with
the Sale of Stores. At that time, all options were canceled 60 days later.
On April 24, 1997, the Company adopted a Long Term Stock Incentive Plan which
provides for the granting to employees and directors of, and consultants to, the
Company certain stock-based incentives and other equity interests in the
Company. A maximum of 250,000 shares were issuable under the Plan. The options
vest according to varied schedules, are exercisable when vested, and expire five
years from the date of issuance.
The Board of Directors of the Company, at its meeting on September 2, 1998,
approved the merger of the New Equity Compensation Plan (which had been adopted
in 1995) into the Long Term Stock Incentive Plan (which had been adopted in
1997) and certain amendments to the Long Term Stock Incentive Plan. At the
annual meeting held November 4, 1998, the shareholders approved the merger and
certain amendments to the new stock option plan (the "Merged Plan".) Approved
were the grants of certain stock-based incentives and other equity interests to
employees, directors, and consultants. A maximum of 1,000,000 shares may be
issued under the Merged Plan. The options are vested according to varied
schedules, exercisable when vested, and expire five years from the date of
issuance.
The following table summarizes stock option activity:
Eleven-month
Year ended period ended Year Ended
December 31, 1999 December 31, 1998 January 31, 1998
-------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of shares exercise of shares exercise of shares exercise
(1,000's) price (1,000's) price (1,000's) price
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding at
beginning of year 504 $ 3.71 49 $ 3.40 159 $ 7.78
Options granted 53 6.25 455 3.75 59 3.41
Options exercised/
expired/canceled (114) 3.65 -- -- (169) 7.46
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding at
end of year 442 4.08 504 3.72 49 3.40
Options exercisable at
end of year 369 $ 4.01 268 $ 3.95 36 $ 4.36
Weighted-average fair
value of options granted
during the year $ 2.71 $ 1.73 $ 1.46
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
Options outstanding Options exercisable
-------------------------------------------------------------------
Number Weighted- Number
outstanding average Weighted- exercisable Weighted-
Range of at remaining average at average
exercise December 31, contractual exercise December 31, exercise
prices 1999 life in years price 1999 price
---------- ----------- ----------- ----------- ----------- ----------
$ 2.875 to 4.313 339 3.5 $ 3.65 283 $ 3.65
4.314 to 6.470 70 3.8 4.81 70 4.81
6.471 to 7.000 33 4.8 6.94 16 6.88
----------- ----------
442 4.08 369 4.01
----------- ----------
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS 123, the Company's net loss and loss per
share would have been changed to the following pro forma amounts:
Eleven-month
Year ended period ended Year Ended
December 31, December 31, January 31,
1999 1998 1998
---------- ---------- ----------
Net loss As reported $ (1,610) $ (715) $ (25,538)
Pro forma (1,654) (1,503) (25,609)
Basic and diluted
loss per share As reported (.37) (.17) (5.91)
Pro forma (.43) (.28) (5.92)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for the year ended December 31, 1999, the eleven-month period ended
December 31, 1998 and the year ended January 31, 1998: risk-free interest rates
of 4.6 percent, 4.7 percent, and 5.4 percent, respectively; expected dividend
yields of 0 percent for all years; expected lives of 5 years for all years; and
expected volatility of 42 percent, 46 percent, and 39 percent, respectively. The
fair value for options granted to nonemployees for services was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions for the year ended December 31, 1999: risk-free interest rate of 5.8
percent, expected dividend yield of 0 percent, expected lives of 5 years, and
expected volatility of 50 percent. No options were granted to nonemployees for
services during the eleven-month period ended December 31, 1998 and the year
ended January 31, 1998. Compensation of $61 was charged to expense as a result
of options issued to nonemployees in 1999.
Warrants were issued to stockholders in 1995 related to the Company's Bankruptcy
filing in 1993. The number of Company warrants exercisable at December 31, 1999
is 4,286. The exercise price is updated annually in April and as of April 1999
is $12.44 per warrant. To acquire one share of Company stock, a warrant holder
must exercise two warrants and pay $24.88. All warrants outstanding expire April
28, 2002.
14. EMPLOYEE BENEFIT PLAN AND INCENTIVE PROGRAM
WebBank has a 401(k) profit sharing plan covering employees who meet age and
service requirements. Plan participants are fully vested after five years of
service. WebBank matches employee contributions up to five percent of covered
compensation at two hundred percent of the employee's contribution.
Contributions to the plan amounted to approximately $60, $8, and $0 for the year
ended December 31, 1999, the eleven-month period ended December 31, 1998, and
the year ended January 31, 1998, respectively.
15. INCOME TAXES
The Company reported no income tax expense or benefit for the year ended
December 31, 1999, the eleven-month period ended December 31, 1998, and the year
ended January 31, 1998. The difference between the expected tax benefit and
actual tax benefit is primarily attributable to the effect of the net operating
losses, offset by an increase in the Company's deferred tax asset valuation
allowance. The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities were as follows:
December 31, December 31,
1999 1998
---------- ----------
Deferred tax assets:
Net operating loss carryforward $ 14,448 12,647
Deferred income 19 19
Accrued bonuses 8 14
Accrued vacation 12 --
Allowance for loan loss 179 --
Premises and equipment 26 --
---------- ----------
Total deferred tax assets 14,692 12,680
Less valuation allowance (14,692) (12,680)
---------- ----------
Net deferred tax assets $ -- --
========== ==========
The net changes in the total valuation allowance for the year ended December 31,
1999, and the eleven-month period ended December 31, 1998, were an increase of
$2,012 and a decrease of $1,063 respectively.
At December 31, 1999, the Company had certain net operating loss carry forwards
of approximately $38,200 which are scheduled to expire from 2003 through 2019.
The Company has treated such net operating losses in accordance with Section
382(l)(5) of the Internal Revenue Code. As a result, there is approximately
$27,000 in net operating losses incurred prior to the Effective Date as well as
$11,200 incurred subsequent to the Effective Date available as carryovers.
All net operating losses may be subject to certain limitations on utilization.
16. DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying value for short-term financial instruments that mature or reprice
frequently at market rates approximates fair value. Such financial instruments
include: cash and cash equivalents, accrued interest receivable, demand
deposits, accounts payable and accrued expenses, time certificates of deposit
and short term borrowing. The difference between the fair market value and the
carrying value for loans and investment securities is not considered significant
to the financial statements.
17. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating leases for office space. The
schedule of future minimum operating lease payments as of December 31, 1999, is
summarized as follows (in thousands):
2000 $ 129
2001 111
2002 102
2003 102
2004 102
Thereafter 21
--------
$ 567
========
The Company's rental expense for the year ended December 31, 1999, the
eleven-month period ended December 31, 1998, and the year ended January 31, 1998
amounted to approximately $199, $60, and $0 respectively.
The Company is a party to financial instruments with off-balance sheet risk. In
the normal course of business, these financial instruments include commitments
to extend credit in the form of loans. At December 31, 1999 and 1998, the
Company's undisbursed commercial loan commitments totaled approximately $21,000
and $4,600 respectively.
WebBank has a Cash Management Account ("CMA") with the Federal Home Loan Bank of
Seattle ("FHLB") at an amount equal to five percent of total assets. CMA
advances must be fully collateralized according to the terms of the Advance,
Security, and Deposit Agreement that the Bank signed with the FHLB. The CMA is
reviewed on an annual basis and market interest rates are set at the time funds
are borrowed. As of December 31, 1999, no borrowings were drawn on this CMA
account.
18. REGULATORY REQUIREMENTS
WebBank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average quarterly assets (as defined).
Management believes, as of December 31, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999 and 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as "well capitalized" under
the regulatory framework. To be categorized as "well capitalized" the Bank must
maintain certain Total and Tier I capital to risk-weighted assets and Tier I
capital to average quarterly assets ratios. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
Capital amounts and ratios are summarized as follows (in thousands):
Well Capitalized Minimum capital
Actual Requirement Requirement
-------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
As of
December 31, 1999:
Total Capital (Tier I +
Tier 2) to risk
weighted assets $ 3,466 54.33% $ 638 10.00% $ 510 8.00%
Tier I Capital to risk
weighted assets 3,384 53.04% 383 6.00% 255 4.00%
Tier I Capital to average
assets (Leverage Ratio) 3,384 33.09% 511 5.00% 409 4.00%
As of
December 31, 1998:
Total Capital (Tier I +
Tier 2) to risk
weighted assets $ 3,455 126.65% $ 272 10.00% $ 218 8.00%
Tier I Capital to risk
weighted assets 3,455 126.65% 164 6.00% 109 4.00%
Tier I Capital to average
assets (Leverage Ratio) 3,455 80.01% 216 5.00% 173 4.00%
19. SERVICING ASSET AND LIABILITIES
In connection with certain businesses in which the Company sells originated or
purchased loans with servicing retained, servicing assets or liabilities are
recorded based on the relative fair value of the servicing rights on the date
the loans are sold. Servicing assets and liabilities are amortized in proportion
to and over the period of estimated net servicing income and expense. At
December 31, 1999 and 1998, servicing assets, which are included in Other
Assets, were $114 and 145, respectively. At December 31, 1999 and 1998,
servicing liabilities, which are netted against loans receivable, were $108 and
$0. Servicing assets are periodically evaluated for impairment based on the fair
value of those assets.
20. SUBSEQUENT EVENTS
In January 2000, a former executive officer and director of the Company's
subsidiary Praxis (the "officer") filed a lawsuit in the Superior Court of the
State of California, County of Napa against the Company, Praxis and Holdings.
The lawsuit alleges that Praxis has breached its employment agreement with the
officer. The lawsuit also asserts claims for interference with contract and
unjust enrichment based upon the purported wrongful termination of the officer's
employment contract with Praxis. The lawsuit seeks damages of an unspecified
amount and compliance by Praxis with the termination pay out provisions in the
officer's employment agreement relating to purchase of the officer's 10%
interest in Praxis and WebBank (both 90% covered subsidiaries of the Company) at
their fair market value. The time for the Company to answer and assert
counterclaims in this matter has not yet expired. The Company and Praxis deny
that Praxis wrongfully terminated the officer's employment and intends to
vigorously defend this matter. The Company does not believe that this lawsuit
will have a material impact on its financial condition, results of operations,
or liquidity.