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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 0-23911
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FOG CUTTER CAPITAL GROUP INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-2081138
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1631 SW COLUMBIA STREET,
PORTLAND, OR 97201
(Address of principal executive offices) (Zip Code)
(503) 721-6500
(Registrant's telephone number, including area code)
WILSHIRE REAL ESTATE INVESTMENT INC.
(Former name)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
------------------------
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 the 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. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price as quoted on NASDAQ on
February 28, 2001 was $17,129,514.
As of February 28, 2001, 10,507,313 shares, not including options to
purchase 1,899,500 shares of Fog Cutter Capital Group Inc.'s common stock and
992,687 treasury shares, par value $0.0001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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FOG CUTTER CAPITAL GROUP INC.
FORM 10-K
INDEX
PAGE
----
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 28
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13. Certain Relationships and Related Transactions.............. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 48
2
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE
FILINGS BY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS
(SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL) MAY BE IDENTIFIED BY REFERENCE
TO A FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY,
SUCH AS "MAY," "WILL," "BELIEVE," "EXPECT," "ANTICIPATE," "CONTINUE," OR SIMILAR
TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING
STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
RELATED TO THE ECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH
THE COMPANY OPERATES, THE FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY
OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND
PRICING, THE REAL ESTATE MARKET, FISCAL AND MONETARY POLICIES OF THE U.S.
GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES, ACQUISITIONS AND THE
INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK MANAGEMENT AND ASSET/LIABILITY
MANAGEMENT. EXCEPT AS MAY BE REQUIRED BY LAW, THE COMPANY DOES NOT UNDERTAKE,
AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF
ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS.
PART I
ITEM 1. BUSINESS
GENERAL
Fog Cutter Capital Group Inc. ("FCCG" or the "Company") is a Nasdaq-listed
corporation which focuses on the acquisition of assets where its expertise in
intensive asset management, mortgage and real estate credit analysis and
financial structuring can create value. The Company invests primarily in the
following types of assets:
- mortgage-backed securities,
- mortgage loans,
- real estate,
- real estate corporations, and
- other real estate-related investments.
The Company was originally incorporated as Wilshire Real Estate Investment
Trust Inc. in the State of Maryland on October 24, 1997. However, in order to
benefit from potential tax benefits related to significant net operating loss
carryforwards and to avoid any risk of not qualifying as a real estate
investment trust ("REIT"), the Company, with the approval of its shareholders,
elected in September 1999 not to be taxed as a REIT, and the Company's name was
changed to Wilshire Real
3
Estate Investment Inc. Effective January 25, 2001, the Company changed its name
to Fog Cutter Capital Group Inc. to better reflect the opportunistic nature of
its business and investments.
During the third quarter of 1999, the Company decided to become internally
managed and retained senior executives and other employees to implement this
decision. Prior to this decision and subject to the supervision of the Company's
Board of Directors, the Company's business affairs and day-to-day operations had
been managed by Wilshire Realty Services Corporation ("WRSC"), a wholly-owned
subsidiary of Wilshire Financial Services Group Inc. ("WFSG"), pursuant to a
management agreement (the "Management Agreement"). The decision to become
internally managed and cease to utilize the services of WRSC resulted in
disputes between the Company, on the one hand, and WFSG and certain of its
affiliates, on the other. These disputes were resolved in August 2000.
BACKGROUND
Beginning in August 1998, we were significantly and adversely affected by
the dramatic movement of liquidity towards less-risky assets (e.g., U.S.
Treasury instruments) and away from higher risk assets. In particular, the
markets for certain mortgage-backed securities and pools of mortgage loans
experienced significant declines as Wall Street investment banks marked these
assets down (including illiquid and infrequently traded subordinated
mortgage-backed securities) to their view of the market price and lenders became
unwilling to lend against low-rated or unrated mortgage-backed securities and
many pools of mortgage loans. These factors resulted in a dramatic reduction in
market valuations for our mortgage-backed securities and mortgage loans, as well
as a reduction in the availability of borrowings for those assets, and the
Company was forced to liquidate holdings at reduced prices, resulting in
significant losses in 1998 and 1999.
In response to these adverse market conditions and the resulting effect on
our operations, we focused our efforts during most of 1999 and 2000 on
stabilizing our existing asset and liability structure and we greatly reduced
our acquisition activities. As a result of these efforts, we have significantly
reduced our short-term, mark-to-market-based financing for mortgage-backed
securities. We resumed acquisition activities in the fourth quarter of 2000.
BUSINESS STRATEGY
Our business strategy focuses on opportunistic investing, structuring and
managing real estate-related assets such as mortgage-backed securities,
mezzanine real estate loans and real estate, as well as the acquisition of
companies engaged in investing in such assets. We will concentrate on the
acquisition of assets where our expertise in intensive asset management,
mortgage and real estate credit analysis and financial structuring can create
value. Further, we expect that many of these investments, particularly in
corporate acquisitions, will be acquired in conjunction with partners.
INVESTMENTS
We seek to invest directly or indirectly in real estate-related assets that
provide us with an appropriate risk-adjusted rate of return and the opportunity
for capital gains. We maintain a flexible approach with respect to the nature of
our investments, seeking to take advantage of opportunities as they arise or are
developed.
4
We have set forth below information regarding our principal categories of
investment at December 31, 2000 and 1999.
DECEMBER 31, 2000 DECEMBER 31, 1999
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CARRYING VALUE % CARRYING VALUE %
-------------- -------- -------------- --------
(DOLLARS IN THOUSANDS)
Mortgage-Backed Securities (1).............. $ 74,731 49.7% $104,572 47.8%
Loans: (2)..................................
U.S. Commercial........................... 30,404 20.2 31,014 14.2
International............................. -- -- 620 0.3
-------- ----- -------- -----
Total Loans............................. 30,404 20.2 31,634 14.5
Investment Properties:
U.S. Commercial........................... 4,783 3.2 40,679 18.6
International............................. 19,984 13.3 22,546 10.3
-------- ----- -------- -----
Total Investment Properties............. 24,767 16.5 63,225 28.9
Cash and Cash Equivalents................... 3,394 2.3 5,862 2.7
Other Assets (3)............................ 17,008 11.3 13,373 6.1
-------- ----- -------- -----
Total Assets................................ $150,304 100.0% $218,666 100.0%
======== ===== ======== =====
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(1) At December 31, 2000, our mortgage-backed securities are secured primarily
by residential mortgage loans.
(2) At December 31, 2000, our loans are secured by commercial properties.
(3) At December 31, 2000, other assets consist primarily of $3.6 million of
investment in WFSG common stock, $2.0 million in prepaid service fees to an
affiliate of WFSG, $6.7 million deposit for the acquisition of a U.K.-based
real estate company and $4.7 million of miscellaneous other assets.
The following sections provide additional detail of specific investments as
of December 31, 2000.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are interests in pools of mortgages that have
been securitized and are usually issued in multiple classes ranging from the
most senior to the most subordinate class. We focus on the subordinated classes,
which we believe offer higher risk-adjusted returns. We seek to invest in
subordinated mortgage-backed securities that we believe may appreciate in value
due to the prepayment and default experience of the underlying collateral. At
December 31, 2000, our mortgage-backed securities were principally backed by
pools of residential mortgage loans and were subordinated in right of payment to
more senior interests in those pools. On December 31, 2000, our portfolio of
mortgage-backed securities consisted of 20 classes of mortgage-backed securities
representing interests in 10 securitizations from 5 different issuers.
Subordinated mortgage-backed securities are generally the non-investment-grade
classes of mortgage-backed securities that provide credit enhancement to more
senior classes by having a lower payment priority in the cash flow from the
underlying mortgage loans and absorbing the first losses on the underlying
mortgage loans. In "senior/subordinate" structures, each subordinated class has
a principal face amount equal to the subordination level required for the
classes, if any, which are senior to the respective subordinated class and the
subordination level required at the respective rating (I.E., BBB, BB, B, NR).
Our mortgage-backed securities consist of securities backed by loans that were
originated and are being serviced by unaffiliated, non-governmental third
parties.
5
During the year ended December 31, 2000, we significantly changed the
liability structure of our balance sheet primarily through the following
transactions relating to our mortgage-backed securities portfolio:
- During the quarter ended June 30, 2000, the Company resecuritized
approximately $20.1 million of its mortgage-backed securities portfolio
which resulted in no gain or loss. As part of the resecuritization
transaction, the Company acquired a subordinated interest in the
underlying trust for approximately $6.3 million and eliminated all of the
short-term, mark-to-market debt previously collateralized by these
securities.
- In December 2000, we refinanced the debt on approximately $43.2 million of
our mortgage-backed securities portfolio through a securitized structure.
This transaction was treated as a secured financing transaction rather
than a sale for accounting purposes due to certain call provisions
retained by the Company. As such, our balance sheet continues to reflect
these securities as well as the senior bonds of $34.2 million which
replaced the short-term, mark-to-market debt previously collateralized by
these securities.
At December 31, 2000 and 1999, we valued our securities available for sale
portfolio and gross unrealized gains and losses thereon as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST (1) GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2000
Mortgage-backed securities.................. $ 76,288 $ -- $ 1,557 $ 74,731
DECEMBER 31, 1999
Mortgage-backed securities.................. $127,799 $3,487 $26,714 $104,572
- ------------------------
(1) The amortized cost of our securities is net of the market valuation losses
and impairments discussed in "Results of Operations". The unrealized gains
and losses represent market value declines that, unlike "market value loss
and impairment," the Company believes are temporary.
For financial reporting purposes, we mark our securities portfolio to fair
value at the end of each month based upon broker/dealer valuations (if
available), subject to an internal review process. With respect to many of our
subordinate securities, valuations are typically available from either a single
or a small group of broker/dealers. For those securities that are subject to
repurchase or other financing arrangements with broker/dealers, we employ the
valuation supplied by the financing broker/dealer. For those securities that are
not subject to any repurchase or other financing arrangements, the fair value of
the investment is determined by us at each reporting date by modeling the
anticipated cash flows using certain estimates (e.g. prepayment speeds, default
rates, severity of losses, and discount rate). For example, the fair value of
our investment in the resecuritized mortgage-backed securities is determined by
us at each reporting date as the present value of the anticipated cash flows
from the underlying collateral (primarily "A" quality, jumbo, fixed-rate, 15- to
30-year term loans) using certain assumptions. We are responsible for developing
these assumptions which include: (i) future rate of prepayment; (ii) discount
rate used to calculate present value; and (iii) default rates and loss severity
on loan pools underlying the mortgage-backed securities in the resecuritization.
At December 31, 2000, we used an annual constant prepayment rate of 9%, a
discount rate of 20%, and an annual constant default rate of .22% with a loss
severity of 32% to estimate the fair value of our interest in the
resecuritization. The future cash flows and the discount rate represent our best
estimate; however, there can be no assurance of the accuracy of these estimates.
We review the fair value of our interest in the resecuritization by analyzing
current interest rates, and prepayment, discount rate and loss assumptions in
relation to the actual experience and current rates of prepayment and loss
prevalent in the underlying loan pools.
6
Changes in these factors may lead to significant fluctuations in the fair value
of our investment which may affect earnings, if the fair value decrease is
determined by us to be of other-than-temporary nature.
The difference between our amortized cost of mortgage-backed securities
available for sale and current market values, which was $1.6 million at
December 31, 2000, is included in "Accumulated Other Comprehensive Loss" in
stockholders' equity. This amount, unlike "market valuation losses and
impairments," represent a market value decline that we believe is temporary. If
held to maturity, the anticipated cash flow on these securities based on
estimated interest rates, rate of prepayment and the amount and severity of
defaults would result in our receiving amounts in excess of the current market
value and would allow us to recover our amortized cost plus our original
expected return from the time of acquisition.
Notwithstanding the foregoing, payments on mortgage-backed securities are
subject to a number of market factors which can significantly affect the amount
and rate of payments on mortgage-backed securities, including, without
limitation, defaults on the underlying loans, the level of subordination of the
mortgage-backed securities, changes in interest rates and the rate of
prepayments on the underlying loans. To the extent that these and other factors
change, the anticipated cash flow on our mortgage-backed securities may not be
sufficient to cover our amortized cost or if we sell one of these mortgage-
backed securities at a market price which is below its amortized cost, we will
realize a loss in the amount of that portion of "Accumulated Other Comprehensive
Loss" attributable to such mortgage-backed security.
In calculating the extent to which declines in the value of
available-for-sale securities are other than temporary, we analyze actual
performance of the securities and underlying collateral, including prepayment
and default statistics, as well as the expectation for such performance in the
future. To the extent reasonable expectations for future performance are not
likely to offset declines in current market valuations, a write-down is recorded
in "Market Valuation Losses and Impairments" in the consolidated statement of
operations. Because the variables change over time, there can be no assurance
that current valuations will be reflective of future periods.
The two following tables set forth information, as of December 31, 2000,
regarding our mortgage-backed securities.
The following table sets forth the credit rating designated by the rating
agency for each securitization structure. Classes designated "A" have a superior
claim on payment to those rated "B," which are superior to those rated "C."
Additionally, multiple letters have a superior claim to designations with fewer
letters. Thus, for example, "BBB" is superior to "BB," which in turn is superior
to "B." The lower class designations in any securitization will receive interest
payments subsequent to senior classes and will experience losses prior to any
senior class. The lowest potential class designation is not rated ("NR") which,
if included in a securitization, will generally receive interest last and
experience losses first. Interest-only securities ("IOs") receive the excess
interest remaining after the interest payments have been made on all senior
classes of bonds based on their respective principal balances. There is no
principal associated with IOs and they are considered liquidated when the
particular class they are contractually tied to is paid down to zero. The
mortgage loans underlying the Company's mortgage-backed securities are primarily
residential mortgage loans which generally may be prepaid at any time without
penalty.
7
MORTGAGE-BACKED SECURITIES
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
CLASS
--------------------------------
CLASS BALANCE AT
INITIAL CLASS DECEMBER 31,
ISSUE NAME CLASS RATING(1) ISSUE DATE COLLATERAL TYPE BALANCE 2000
- ----------------------- -------- --------- ---------- --------------- ------------- ----------------
OCWEN 98R1............. B3 BBB 3/27/98 Residential $ 19,789 $ 18,932
BSSPT 2000-3........... B NR 4/30/00 Residential 65,618 61,517
BSMSI 96-6............. B4 BB 12/30/96 Residential 4,824 3,051
BSMSI 96-6............. B3 BBB 12/30/96 Residential 5,427 2,458
WCOST 95-A (3)......... B NR 3/8/95 Consumer 16,638 5,524
WMHT 95-A (3).......... B NR 6/28/95 Manufactured 5,007 4,631
Housing
CITYSCAPE MBS:
CITYH 97-A (4)....... R NR 2/28/97 Residential 79,606 20,060
CITYH 97-B (4)....... R1 NR 4/30/97 Residential 197,548 55,760
CITYH 97-C (4)....... R2 NR 7/30/97 Residential 97,550 14,974
CITYH 97-C (4)....... R1 NR 7/30/97 Residential 102,450 33,618
BSSP 2000-5 MBS:
WIFC 96-3 (3)........ B1 BB 12/1/96 Residential 6,261 5,702
WIFC 96-3 (3)........ B2 B 12/1/96 Residential 4,870 4,440
WIFC 96-3 (3)........ B3 NR 12/1/96 Residential 12,523 8,945
WIFC 97-1-WFC1 (3)... B1 BB 9/25/97 Residential 9,908 8,945
WIFC 97-1-WFC1 (3)... B2 B 9/25/97 Residential 1,835 1,656
WIFC 97-1-WFC1 (3)... B3 NR 9/25/97 Residential 4,404 2,669
WIFC 98-2-WFC2 (3)... B2 B 6/30/98 Residential 3,216 3,116
WIFC 98-2-WFC2 (3)... B1 BB 6/30/98 Residential 20,100 19,464
WIMLT 98-3 (3)....... B1 BB 9/30/98 Residential 1,779 1,779
WIMLT 98-3 (3)....... C NR 9/30/98 Residential 177,730 72,582
-------- --------
Total.............. $837,083 $349,823
======== ========
COMPANY INVESTMENT
----------------------
PERCENTAGE COMPANY'S
ISSUE NAME OF CLASS BASIS(2)
- ----------------------- ---------- ---------
OCWEN 98R1............. 100.00% $ 8,824
BSSPT 2000-3........... 100.00% 6,933
BSMSI 96-6............. 69.47% 2,133
BSMSI 96-6............. 49.76% 2,385
WCOST 95-A (3)......... 50.00% 2,525
WMHT 95-A (3).......... 100.00% 3,621
CITYSCAPE MBS: 7,020
CITYH 97-A (4)....... 100.00%
CITYH 97-B (4)....... 100.00%
CITYH 97-C (4)....... 100.00%
CITYH 97-C (4)....... 100.00%
BSSP 2000-5 MBS: 43,159
WIFC 96-3 (3)........ 100.00%
WIFC 96-3 (3)........ 100.00%
WIFC 96-3 (3)........ 100.00%
WIFC 97-1-WFC1 (3)... 100.00%
WIFC 97-1-WFC1 (3)... 100.00%
WIFC 97-1-WFC1 (3)... 100.00%
WIFC 98-2-WFC2 (3)... 100.00%
WIFC 98-2-WFC2 (3)... 100.00%
WIMLT 98-3 (3)....... 100.00%
WIMLT 98-3 (3)....... 100.00%
-------
Total.............. $76,600
=======
- --------------------------
(1) NR means the security is not rated.
(2) Based on the value reflected in the Company's financial statements as of
December 31, 2000, which is the post-impairment basis (purchase price less
amortization and impairment thereof) of the mortgage-backed securities plus
accrued interest of $0.3 million.
(3) Securities backed by loans that were previously held in the portfolio of
WFSG or its affiliates and for which WFSG or one of its affiliates is
continuing to act as servicer.
(4) Securities backed by loans serviced by an affiliate of WFSG.
8
MORTGAGE-BACKED SECURITIES
DECEMBER 31, 2000
(CONTINUED)
(DOLLARS IN THOUSANDS)
CONSTANT PREPAYMENT RATE FOR
THE INDICATED PERIOD(1) DELINQUENCY(1)(5)
----------------------------------------- ------------------------------
1 3 6 12 30-59 60-89 90+ REAL ESTATE
ISSUE NAME MONTH MONTHS MONTHS MONTHS DAYS DAYS DAYS FORECLOSURE(1) OWNED(1)
- ---------- -------- -------- -------- -------- -------- -------- -------- -------------- -----------
OCWEN 98R1............. 13.1 14.7 14.7 14.5 $ 20,742 $11,999 $35,716 $25,289 $ 14
BSSPT 2000-3........... 8.84 8.49 8.63 8.81 $110,315 $16,012 $12,220 $12,400 $ 3
BSMSI 96-6............. 15.31 12.36 11.9 11.34 $ 3,920 $ 1,244 $ 2,149 $ 1,979 $ 981
BSMSI 96-6............. 15.31 12.36 11.9 11.34 $ 3,920 $ 1,244 $ 2,149 $ 1,979 $ 981
WCOST 95-A (3)......... -0.2 7.9 3.8 4.9 $ 65 $ 54 $ 3,872 N/A $4,917
WMHT 95-A (3).......... 12.9 18 21.2 23.4 $ 182 $ 175 $ 285 N/A N/A
CITYSCAPE MBS:
CITYH 97-A (4)(6).... 29.4 31.4 38.3 35.3 $ 659 $ 799 $ 1,357 $ 1,822 $ 854
CITYH 97-B (4)(6).... 31.6 25.2 26.1 30.4 $ 3,384 $ 1,421 $ 3,757 $ 5,302 $2,238
CITYH 97-C (4)(6).... 40.8 61.6 57 47.8 $ 380 $ 24 N/A $ 2,298 $ 946
CITYH 97-C (4)(6).... 36.2 31.8 28.3 30.1 $ 660 $ 485 $ 343 $ 3,126 $1,885
BSSP 2000-5 MBS:
WIFC 96-3 (3)........ 12.4 21.9 23.1 20.9 $ 3,762 $ 682 $ 4,619 $ 2,767 $1,006
WIFC 96-3 (3)........ 12.4 21.9 23.1 20.9 $ 3,762 $ 682 $ 4,619 $ 2,767 $1,006
WIFC 96-3 (3)........ 12.4 21.9 23.1 20.9 $ 3,762 $ 682 $ 4,619 $ 2,767 $1,006
WIFC 97-1 WFC1 (3)... 7.8 14.8 19.1 17.5 $ 2,463 $ 614 $ 2,120 $ 1,642 $ 208
WIFC 97-1 WFC1 (3)... 7.8 14.8 19.1 17.5 $ 2,463 $ 614 $ 2,120 $ 1,642 $ 208
WIFC 97-1 WFC1 (3)... 7.8 14.8 19.1 17.5 $ 2,463 $ 614 $ 2,120 $ 1,642 $ 208
WIFC 98-2 WFC2 (3)... 26 22.9 20.7 19.5 $ 2,775 $ 1,708 $ 6,038 $ 3,154 $ 236
WIFC 98-2 WFC2 (3)... 26 22.9 20.7 19.5 $ 2,775 $ 1,708 $ 6,038 $ 3,154 $ 236
WIMLT 98-3 (3)....... 12.7 14 17.7 22.6 $ 1,082 $ 550 $ 1,997 $ 498 $ 653
WIMLT 98-3 (3)....... 12.7 14 17.7 22.6 $ 1,082 $ 550 $ 1,997 $ 498 $ 653
BANKRUPTCY CUMULATIVE
ISSUE NAME (1)(2) LOSSES(1)
- ---------- ----------- -----------
OCWEN 98R1............. $25,188 $48,787
BSSPT 2000-3........... $ 2,033 $ 1,742
BSMSI 96-6............. $ 1,778 $ 4,747
BSMSI 96-6............. $ 1,778 $ 4,747
WCOST 95-A (3)......... N/A N/A
WMHT 95-A (3).......... N/A N/A
CITYSCAPE MBS:
CITYH 97-A (4)(6).... $ 2,013 $ 3,607
CITYH 97-B (4)(6).... $ 4,566 $11,413
CITYH 97-C (4)(6).... $ 1,803 $ 1,985
CITYH 97-C (4)(6).... $ 2,494 $ 5,456
BSSP 2000-5 MBS:
WIFC 96-3 (3)........ N/A N/A
WIFC 96-3 (3)........ N/A N/A
WIFC 96-3 (3)........ N/A N/A
WIFC 97-1 WFC1 (3)... N/A N/A
WIFC 97-1 WFC1 (3)... N/A N/A
WIFC 97-1 WFC1 (3)... N/A N/A
WIFC 98-2 WFC2 (3)... N/A N/A
WIFC 98-2 WFC2 (3)... N/A N/A
WIMLT 98-3 (3)....... N/A N/A
WIMLT 98-3 (3)....... N/A N/A
- ----------------------------------
N/A Information is not available.
(1) Data provided by trustees or servicers for the securities or other
third-party sources. Delinquency data does not incorporate payment recency.
For example, if a loan is 90 days delinquent at a point in time, and from
that point on makes each regular monthly payment, that loan would be current
on a recency basis, but not on a contractual delinquency basis. Because of
this, for certain pools, delinquency rates may imply higher expected
defaults than may actually occur.
(2) Based on loans which were in bankruptcy as of December 31, 2000.
(3) Securities backed by loans that were previously held in the portfolio of
WFSG or its affiliates and for which WFSG or one of its affiliates is
continuing to act as servicer.
(4) Securities backed by loans serviced by an affiliate of WFSG.
(5) Delinquency amounts do not include Foreclosure, Real Estate Owned, or
Bankruptcy amounts included elsewhere in this table.
(6) Delinquency amounts include Foreclosure, Real Estate Owned, and Bankruptcy
amounts.
9
LOANS
At December 31, 2000, our U.S. Loans were secured primarily by commercial
properties and were current on their monthly payments.
Set forth below is a brief description of the principal U.S. Commercial
Loans in our loan portfolio at December 31, 2000.
STARRETT-LEHIGH, 601 WEST 26TH STREET. This is a $25 million investment in
mezzanine debt secured by the Starrett-Lehigh building in the Chelsea district
of New York City. The building was acquired in 1996 with $100 million of senior
debt, $52.5 million of subordinated debt and $26 million in reserves for capital
expenditures and interest. The mezzanine loan pays interest at a rate of Libor
plus 4.75%, with principal due on the maturity date in August 2001. The
loan-to-value ratio on an as-is basis ("LTV") at the time of acquisition was
98%; however, since completion of the planned improvements, the current
estimated LTV is approximately 60%. The building is a two million square foot,
nineteen-story warehouse/showroom.
NW CORNELL & MILLER. This was a first lien mortgage loan for the
construction of a private school located in Portland, Oregon. The original
construction loan rolled into a first lien, ten-year, fixed-rate loan at 9%, due
April 1, 2009. The loan currently pays monthly principal and interest and has a
balloon payment of $4.8 million due in 2009. The principal balance of the note
at December 31, 2000 was $5.2 million.
REAL ESTATE
We invest in commercial and multi-family real estate located in the United
States and the United Kingdom. The following table sets forth information
regarding our investments in real estate at December 31, 2000.
WEIGHTED
APPROXIMATE AVERAGE
PERCENTAGE RENT PER
NET LEASED AT SQUARE
DATE YEAR BUILT/ LEASABLE DECEMBER 31, NO. OF ANNUALIZED FOOT NET BOOK
ACQUIRED NAME OF PROPERTY LOCATION RENOVATED SQ.FT. 2000 LEASES RENT(1) OCCUPIED VALUE
- -------- ---------------- --------------- ----------- -------- ------------- ------ ------------- -------- -----------
4/6/98 Eugene Warehouse Eugene, OR Unknown 84,912 37% 1 $ 105,293 3.31 $ 2,389,000
Buena Vista Irwindale, CA N/A 227,863 N/A N/A N/A N/A $ 969,000
11/18/98 Business Park-
Land
4/21/98 Wilsonville-Land Wilsonville, OR N/A 474,804 N/A N/A N/A N/A $ 1,425,000
6/30/98 Warner Estates United Kingdom Various 206,647 99% 72 $2,417,785 11.97 $17,669,000
Crewe United Kingdom Various 35,770 91% 27 $ 275,491 8.49 $ 2,315,000
11/10/00
- ------------------------------
N/A Not applicable
(1) Annualized rent for the current period represents the base fixed rent
scheduled to be paid by the tenants under the terms of the related lease
agreement, which amount generally does not include payments for real estate
taxes, operating expenses, and utility charges. We believe that annualized
rent is helpful to investors as a measure of the revenues we could expect to
receive from our leases. However, we cannot assure you that scheduled lease
revenues will equal the actual lease revenues we received in the past.
10
Set forth below is a brief description of each of the properties set forth
in the above table:
90005 PRAIRIE ROAD ("EUGENE WAREHOUSE"). This building is a warehouse
located on 4.5 acres with access to Interstate Route 5 via Belt Line Road and to
the Eugene-Springfield metropolitan and Gateway areas. The property is served by
an on-site rail spur and the property is within the West Eugene enterprise zone.
This property has one tenant (which is not affiliated with the Company) who
occupies 37% of the building under a short-term lease.
BUENA VISTA BUSINESS PARK, 2400 BLOCK OF BATEMAN AVENUE, IRWINDALE,
CALIFORNIA. This property was acquired on November 18,1998 and consists of
three level, finished industrial zoned lots ranging from 36,068 to 154,943
square feet and totaling 227,863 square feet or 5.2 acres. The parcels are fully
improved with all the major off-sites in place, i.e., paved-streets,
streetlights, curbs, gutters and utilities. Irwindale is located at the center
of the San Gabriel Valley which is located between the inland empire region and
downtown Los Angeles. This site has access to Interstate Route 210 and
Interstate Route 605. The parcels are all under contract for sale in 2001.
WILSONVILLE LAND. This 10.9-acre parcel of undeveloped land is located in
the city of Wilsonville, Oregon. The property is being held for sale.
WARNER ESTATES. At December 31, 2000, we maintained a L12.0 million
($17.7 million) investment in 17 properties in the Midlands and Southeast of
England. There is approximately 207,000 square feet of rentable space in the
portfolio and the properties are substantially all leased to 72 tenants, with
most leases maturing in five to seven years. Leases provide for upward-only
rental increases, which require tenants to pay the higher of their current rent
or the market rates when rates are reviewed. The properties are managed by two
unaffiliated UK property management firms.
CREWE. These two buildings are located in the city of Crewe in the United
Kingdom. The buildings are leased to a mix of retail and office tenants. The
Company holds legal ownership of the property and operates it under a joint
venture arrangement with the former owner.
LEASE EXPIRATIONS. The following table sets forth a summary schedule of the
lease expirations for the commercial properties for leases in place as of
December 31, 2000, assuming that none of the tenants exercise renewal options or
termination rights, if any, at or prior to the scheduled expirations.
PERCENTAGE OF PERCENTAGE
SQUARE AGGREGATE AVERAGE BASE RENT AGGREGATE
NUMBER OF FOOTAGE OF PORTFOLIO ANNUALIZED BASE PER SQUARE FOOT PORTFOLIO
LEASES EXPIRING LEASED RENT OF EXPIRING OF EXPIRING ANNUALIZED
YEAR OF LEASE EXPIRATION (1) EXPIRING LEASES SQUARE FEET LEASES (2) LEASES (3) BASE RENT
- ---------------------------- --------- ---------- ------------- ---------------- ----------------- ----------
2001....................... 39 74,716 27.7% $ 687,842 $ 9.21 24.6%
2002....................... 13 39,115 14.5 400,441 $10.24 14.3
2003....................... 8 8,358 3.1 163,181 $19.52 5.8
2004....................... 9 47,668 17.7 347,869 $ 7.30 12.4
2005....................... 2 435 0.2 22,126 $50.86 0.8
Thereafter................. 29 98,982 36.8 1,177,110 $11.89 42.1
--- ------- ----- ---------- -----
100 269,274 100.0% $2,798,569 $10.39 100.0%
=== ======= ===== ========== =====
- ------------------------
(1) Lease year is on a calendar year basis.
(2) Annualized base rent is calculated based on the amount of scheduled rent in
the expiring year.
(3) Annualized base rent per square foot is calculated using the annualized base
rent divided by a weighted average square footage.
11
MORTGAGE INDEBTEDNESS. Our general strategy is to leverage our investments
by incurring borrowings secured by such investments. Set forth below is
information regarding our mortgage indebtedness relating to our real estate as
of December 31, 2000.
PRINCIPAL MATURITY ANNUAL
PROPERTY AMOUNT INTEREST RATE DATE AMORTIZATION PAYMENTS
- -------- ----------- ------------- -------- ------------ ----------
Eugene Warehouse................... $ 1,058,000 10.63% 1/1/02 30 Years $ 133,080
Warner Estates (1)................. $14,981,000 8.20% 1/25/19 20 Years $1,479,300
Crewe (1).......................... $ 1,493,000 7.56% 11/10/20 20 Years $ 170,200
- ------------------------
(1) U.S. dollar equivalents. The loan is denominated in pounds sterling and
amortizing principal and interest on a quarterly basis with a balloon
payment at maturity.
Many of the mortgage loans obtained by us to finance our real estate
investments do not fully amortize over their terms and instead require
substantial balloon payments on their maturity dates. Because the principal
balance of such mortgage loans does not fully amortize over the term of the
mortgage loan, such mortgage loans may be more difficult for us to repay at
maturity than mortgage loans whose principal balance is fully amortized over the
term of the mortgage loan. Our ability to pay the balloon amount due at maturity
of such mortgage loans will depend on our ability to obtain adequate refinancing
or funds from other sources to repay such mortgage loans.
OTHER INVESTMENTS
The Company also invests in other real estate-related opportunities,
including real estate corporations. In December 2000, the Company (through a 26%
owned Jersey, Channel Islands company known as BEP Acquisitions) announced the
acceptance of a L42 million offer to purchase all of the outstanding capital
stock of Bourne End Properties PLC (Bourne End). Bourne End is a specialist
investor in retail property, currently owning nine town shopping centers located
in England and Scotland. The centers range in size from 80,000 square feet to
340,000 square feet.
BEP Acquisitions was incorporated in Jersey, Channel Islands for the purpose
of making the offer to acquire Bourne End. BEP Acquisitions is a wholly-owned
subsidiary of BEP Property Holdings Limited, which is 26% owned by the Company,
71% owned by Merrill Lynch (Jersey) Holdings Limited (a subsidiary of Merrill
Lynch & Co., Inc.) and 3% owned by Greenbau Estuary Limited. Merrill Lynch
(Jersey) Holdings Limited will also provide mezzanine financing of approximately
L18.5 million. Greenbau Estuary Limited will act as the day-to-day manager of
Bourne End. Nationwide Building Society provided senior financing of
L15.5 million.
In December 2000, the Company deposited its share of the purchase price into
escrow ($6.7 million), which is included in Other Assets on the Company's
Consolidated Statement of Financial Condition as of December 31, 2000. The
acquisition was completed in February 2001.
FUNDING SOURCES
In order to maximize the return on our investments, we generally fund
acquisitions with third-party debt and equity financing so that our invested
capital represents a relatively small percentage of the purchase price. The
principal sources for funding loans and mortgage-backed securities have
historically been repurchase agreements with major investment banks. Repurchase
agreements are secured lending arrangements which involve the borrower selling
an asset to a lender at a fixed price with the borrower having an obligation to
repurchase the asset within a specified period (generally 30 days) at a higher
price reflecting the interest cost of the loan. If the value of the underlying
asset declines as determined by the lender, the lender may request that the
amount of the loan be reduced by cash payments from the borrower or additional
collateral be provided by the borrower (generally known as "collateral calls").
Funding for real property assets generally are longer-term traditional mortgage
financing with
12
banks and other financial institutions. We closely monitor rates and terms of
competing sources of funds on a regular basis and generally utilize the source
which is the most cost effective.
During the year ended December 31, 2000, the Company has significantly
reduced its short-term, mark-to-market-based financing. Such financing has
generally been replaced by two securitized, long-term, non-recourse, and
non-mark-to-market structured transactions. See ITEM 1., BUSINESS, INVESTMENTS,
MORTGAGE-BACKED SECURITIES.
The following table sets forth information relating to our borrowings and
other interest-bearing obligations at December 31, 2000 and 1999.
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Short-term borrowings:
Repurchase agreements..................................... $15,902 $ 86,904
Other..................................................... 2,268 9,911
------- --------
18,170 96,815
Long-term borrowings:
Repurchase agreements..................................... 19,025 18,913
Mortgages secured by real estate.......................... 17,532 45,637
Senior bonds -- mortgage-backed securities................ 34,203 --
------- --------
70,760 64,550
------- --------
$88,930 $161,315
======= ========
The following table sets forth certain information related to the Company's
short-term borrowings. During the reported period, short-term borrowings were
comprised of warehouse lines, repurchase agreements and other short-term
facilities. Averages are determined by utilizing month-end balances.
AT OR FOR THE YEAR
ENDED
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Average amount outstanding during the year.................. $67,399 $155,473
Maximum month-end balance outstanding during the year....... $90,658 $203,742
Weighted average rate:
During the year........................................... 8.7% 8.2%
At end of year............................................ 7.6% 8.9%
ASSET QUALITY
We are exposed to certain credit risks related to the value of the
collateral that secures our loans and the ability of borrowers to repay their
loans. We closely monitor our loans for potential problems on a periodic basis
and report to the Board of Directors at regularly scheduled monthly meetings.
Each loan is reviewed at least once a month and problem loans or properties are
monitored more frequently.
NON-PERFORMING LOANS. It is our policy to establish an allowance for
uncollectible interest on loans that are over 90 days past due or sooner when
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. Upon such a determination, those loans are placed on
nonaccrual status and deemed to be non-performing. When a loan is placed on
nonaccrual status, previously accrued but unpaid interest is reversed by a
charge to interest income.
13
ALLOWANCES FOR LOAN LOSSES. We maintain an allowance for loan losses at a
level believed adequate to absorb estimated losses existing in the loan
portfolios. The allowance is increased by provisions for loan losses charged
against operations, recoveries of previously charged off credits, and
allocations of discounts on purchased loans, and is decreased by charge-offs.
Loans are charged off when they are deemed to be uncollectible. When we increase
the allowance for loan losses related to loans, we record a corresponding
increase to the provision for loan losses in the statement of operations. When
we decrease the allowance for loan losses related to loans, we record a recovery
of loan losses.
During the year ended December 31, 2000, we reviewed the adequacy of loan
loss reserves and recaptured the remaining reserve balance of $0.6 million. At
December 31, 2000, we had $30.4 million of loans that are performing according
to their terms with no required loan loss allowance.
At December 31, 2000 and 1999, we had loans greater than 90 days delinquent
of $0.1 million and $0.5 million, respectively, which were on nonaccrual status.
The amounts at December 31, 2000 were purchased as a non-performing pool of
loans (i.e. over 90 days delinquent).
REGULATORY
The Company currently owns approximately 14.4% of WFSG's common stock on a
non-diluted basis. The Company is continuing to consider what course of action
might best maximize the value of its investment in WFSG. As a result, the
Company may decide to sell some or all of its shares of WFSG or retain its
current ownership position. The Company does not believe at this time that it
would seek to increase its percentage of ownership of WFSG, which would require
specific Office of Thrift Supervision ("OTS") approval.
Any course of conduct (including retention of the Company's current
position) needs to comply with requirements of the OTS, including those relating
to the "control" of savings and loan holding companies such as WFSG. In 1999, as
a result of the Company's material ownership in a savings and loan holding
company (WFSG), the then overlap in certain officers and directors between the
two entities and other related factors, the OTS required the Company to file a
change in control application (Form H(e)-1) with the OTS. The H(e)-1 Application
was filed with the OTS in June 1999.
As a result of discussions with the OTS, the Company decided to withdraw the
Application in November 2000. In lieu of the Application, the Company had filed
a rebuttal of control application ("Rebuttal Application") in January 2001
seeking to rebut "control" of WFSG if the Company later becomes one of the two
largest shareholders in WFSG (the status of being one of the two largest
shareholders of a savings and loan holding company creates a rebuttable
presumption that such a shareholder "controls" that savings and loan holding
company). In the Rebuttal Application, the Company had requested that the OTS
stipulate in advance that, if the Company later becomes one of the two largest
shareholders, such a circumstance would not constitute "control" of WFSG by the
Company, and therefore would not necessitate the Company's sale of a substantial
portion of its WFSG common stock; such a forced divestiture might not be
accomplished advantageously by the Company. After further discussions with the
OTS, the OTS was unwilling at this time to stipulate in advance to the Company's
request and the Company has, without prejudice, withdrawn the Rebuttal
Application. The Company could file the Rebuttal Application again if it does in
fact become one of the two largest shareholders of WFSG.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon, where
the Company leases approximately 12,000 square feet of office space under a
lease expiring in 2003 and subleases approximately 2,000 square feet to an
unrelated third party. The Company also maintains an executive office in New
York and London, England.
14
ITEM 3. LEGAL PROCEEDINGS
The Company, Fog Cap L.P. (a wholly-owned subsidiary of the Company and
formerly known as Wilshire Real Estate Partnership L.P.) and its two top
executives, Messrs. Wiederhorn and Mendelsohn, have been named in a series of
lawsuits relating to the receivership of Capital Consultants, L.L.C. ("CCL").
The cases are TOM HAZZARD, ET AL., V. CCL, ET AL., U.S. District Court of
Oregon, Civil No. CV 00-1338-HU; MARK EIDEM, ET AL., V. TRUSTEES UNITED ASSN.
UNION LOCAL 290, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1446-HA;
NANCY SCHULTZ, ET AL., V. GARY KIRKLAND, ET AL., U.S. District Court of Oregon,
Civil No. CV 00-1377-HA; LARRY MILLER, ET AL., V. LEE CLINTON, ET AL., U.S.
District Court of Oregon, Civil No. CV00-1317-HA; SALVATORE J. CHILIA, ET AL.,
V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1633 JE; and
MADOLE V. CAPITAL CONSULTANTS ET. AL., U.S. District Court of Oregon, Civil No.
CV 00-1600-HU. In the HAZZARD, CHILIA and MADOLE cases, the trustees of several
Taft-Hartley trusts filed suit against CCL and several individuals and
organizations CCL did business with (including the Company and
Messrs. Wiederhorn and Mendelsohn). In the EIDEM, SCHULTZ and MILLERcases, the
trustees who are plaintiffs in HAZZARD, CHILIA and MADOLE are in turn named as
defendants in class action suits filed by beneficiaries of the Taft-Hartley
trusts on which they serve as plaintiff-trustees. In the cases in which the
trustees are defendants, they have filed third-party complaints against several
parties, including the Company and Messrs. Wiederhorn and Mendelsohn. The
complaints and third-party complaints are all virtually identical. They include
claims against the Company, Wiederhorn and Mendelsohn alleging breaches of
fiduciary duties under the Employee Retirement Income Security Act of 1974
("ERISA"); knowing participation in a fiduciary breach under ERISA; knowing
participation in a prohibited transaction under ERISA; knowing transfer of trust
assets under ERISA; negligence; common law claim for breach of fiduciary duty;
tortuous interference with contract; conversion; constructive trust, restitution
and unjust enrichment; fraud; and breach of contract. The suits also allege
claims against Messrs. Wiederhorn and Mendelsohn of tortuous interference with
business relationships between the Taft-Hartley trusts and CCL, as well as
violations of the Racketeering Influenced and Corrupt Organization provisions of
the Organized Crime Control Act of 1970, 18 U.S.C. Section 1961-1965 ("RICO").
The claimants also seek attorneys' fees under their ERISA and RICO claims.
The above suits name multiple defendants in addition to the Company and its
executives. In addition, the claimants have asserted but have not yet filed
claims against a number of additional parties regarding the same alleged losses,
including a number of professional advisors to named defendants. The claimants
have not described with any specificity the proportion or share of losses which
they claim are attributable to the Company or its executives, as compared to the
other parties and other potential defendants. The overall remedies sought
against all defendants include claims for broad relief under the remedial
provisions of ERISA, such as rescission of transactions and the imposition of a
constructive trust over any trust assets which plaintiffs claim were obtained in
violation of ERISA. Certain of the claims against the Company appear to be
covered by releases that were given by CCL to the Company and
Messrs. Wiederhorn and Mendelsohn. The claimants' suits seek to rescind the
transactions in which the releases were granted. The claimants also seek common
law remedies such as damages and punitive damages. However, it appears that
certain of these common law claims may be preempted by ERISA.
Although these cases were filed during the period between October and
December of 2000, they are still in preliminary stages of pleading and
discovery. CCL was placed in receivership by the Department of Labor and the
Securities and Exchange Commission in the cases of SEC V. CAPITAL CONSULTANTS,
L.L.C., et. al., U.S. District Court of Oregon, Case No. 00-1290-KI, and HERMAN
V. CAPITAL CONSULTANTS, L.L.C., et. al., U.S. District Court of Oregon, Case
No. 001291-KI. When the receivership order was entered, the court stayed other
proceedings against CCL for several weeks. Once the stay was partially lifted,
the parties deferred discovery and delayed the filing of any answers or legal
challenges to the sufficiency of the pleadings in order to facilitate a
confidential global mediation
15
process. U.S. Circuit Court Judge Edward Leavy of the Ninth Circuit Court of
Appeals has been selected as the mediator. Under the mediation process, the
parties have only recently begun an early round of document production that has
not yet been completed. No motions challenging the sufficiency of the claimants'
claims have been filed or heard, and the Company and other defendants have not
yet filed their answers or any cross-claims that they may have among themselves.
No discovery depositions have been taken.
Management has directed that these cases be defended against vigorously.
Because the cases are still in early stages of the pleadings and because the
amount of discovery has been limited, a financial loss to the Company, if any,
cannot be reasonably estimated at this time.
The employment agreements between the Company and Messrs. Wiederhorn and
Mendelsohn contain provisions under which they may be entitled to indemnity for
litigation expenses and personal losses that are attributable to actions which
they took on account of their positions as directors or officers of the Company.
Messrs. Wiederhorn and Mendelsohn have notified the Company that they are
reserving their rights to seek such indemnity. At this time, it is not possible
to determine the extent of liability, if any, the Company may face with regard
to such indemnity claims because of the preliminary nature of the underlying
litigation. In addition, certain of the litigation expenses faced by
Messrs. Wiederhorn and Mendelsohn may be subject to reimbursement or payment
from other sources because of employment agreements and indemnity rights they
may have under the articles and bylaws of other defendants named in the
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 12, 2000, at the annual stockholders' meeting, the Company's
stockholders elected five persons to the Board of Directors of the Company,
approved the annual incentive bonuses for the executive officers and ratified
the selection of Ernst & Young LLP as the Company's auditors for the year ending
December 31, 2000.
In connection with the election of directors, the shares of common stock
present in person or by proxy were voted as follows:
FOR WITHHELD
--------- --------
Andrew Wiederhorn........................................ 5,672,351 62,686
Lawrence Mendelsohn...................................... 5,672,485 55,552
David Egelhoff........................................... 5,674,828 50,209
Jordan Schnitzer......................................... 5,693,212 41,825
Patrick Terrell.......................................... 5,696,378 38,659
In connection with the proposal to approve the annual incentive bonuses for
the executive officers: 5,610,287 shares were voted in favor of the proposal,
118,950 shares were voted against the proposal and there were 5,800 abstentions.
In connection with the proposal to approve the ratification of the selection
of Ernst & Young LLP, independent certified public accountants, as the Company's
auditors for the year ending December 31, 2000: 5,718,613 shares were voted in
favor of the proposal, 7,455 shares were voted against the proposal and there
were 9,569 abstentions.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Effective April 6, 1998, our common stock, par value $0.0001 per share (the
"Common Stock") became quoted on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). The Common Stock is traded under the
symbol "FCCG." The approximate number of record holders (not shareholders, as
most shares are held in their brokerage house's name) of our Common Stock at
February 28, 2001 was 14.
The following table sets forth the high and low sales prices for the Common
Stock as quoted on the NASDAQ for the periods indicated.
2000 HIGH LOW
- ------------------------------------------------------------ ----------- -----------
First quarter............................................... $2 9/16 $1 29/32
Second quarter.............................................. $2 13/16 $1 7/8
Third quarter............................................... $2 7/8 $2
Fourth quarter.............................................. $2 13/16 $2 5/32
1999 HIGH LOW
- ------------------------------------------------------------ ----------- -----------
First quarter............................................... $4 $2 29/32
Second quarter.............................................. $4 1/2 $3 5/16
Third quarter............................................... $3 7/8 $2 9/16
Fourth quarter.............................................. $3 1/16 $2 1/8
During the years ended December 31, 2000 and 1999, the Company did not
declare any cash dividends. The Company delayed the payment date of a $0.40 cash
dividend payable on October 27, 1998 to shareholders of record at September 30,
1998. The Company will pay interest, at the rate of 4% per annum, on the amount
due from the previously announced payment date through the date of the actual
payment. During the year ended December 31, 2000, the Company paid one-half of
the cash dividend payable plus interest and intends on paying the remainder
equally on March 28, 2001 and June 28, 2001, subject to the financial condition,
results of operations and capital requirements of the Company as well as other
factors deemed relevant by the Board of Directors.
The Company currently intends to retain its earnings to support its future
growth strategy but may declare and pay new dividends on its common stock in
2001.
On December 15, 1999, the Company declared a distribution of one right (a
"Right") to purchase one-tenth of a share of the Company's Common Stock for each
outstanding share of Common Stock, payable to the stockholders of record on
January 3, 2000. The Board of Directors authorized and directed the issuance of
one Right with respect to each Common Share issued thereafter until the
Distribution Date (as defined in the Rights Agreement) and, in certain
circumstances, with respect to Common Shares issued after the Distribution Date.
The description and terms of the Rights are set forth in a Rights Agreement
between the Company and The Bank of New York, as Rights Agent, dated as of
December 23, 1999. The Rights are not exercisable until the Distribution Date
and will expire at the close of business on December 23, 2009, unless earlier
redeemed by the Company.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical, financial and operating
data on a consolidated basis at December 31, 2000, 1999 and 1998 and for the
years then ended. The information contained in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our historical consolidated financial statements,
including the notes thereto, included elsewhere in this report.
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998(1)
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Statement of Operations Data:
Net Interest Income:
Loans............................................... $ 3,900 $ 6,740 $ 10,838
Securities.......................................... 10,718 15,342 15,709
Other investments................................... 460 604 1,145
----------- ----------- -----------
Total interest income............................. 15,078 22,686 27,692
Interest expense.................................... 7,704 12,897 13,608
----------- ----------- -----------
Net interest income before loan losses............ 7,374 9,789 14,084
Recovery of (provision for) loan losses............. 555 1,150 (11,842)
----------- ----------- -----------
Net interest income after loan losses............. 7,929 10,939 2,242
Real Estate Operations:
Operating income.................................... 4,870 7,148 4,939
Operating expense................................... (601) (205) (345)
Interest expense.................................... (2,742) (4,546) (2,853)
Gain on sale of real estate......................... 5,404 1,042 --
Provision for losses on real estate................. -- (892) --
Depreciation........................................ (993) (1,102) (963)
----------- ----------- -----------
Total real estate operations...................... 5,938 1,445 778
Other Operating (Loss) Income:
Market valuation losses and impairments............. (22,257) (30,029) (54,822)
Provision for disputes with WFSG.................... (225) (4,077) --
Gain on sale of securities.......................... 5,197 1,326 943
Gain on sale of loans............................... 159 -- 1,320
Other income, net................................... 29 180 23
----------- ----------- -----------
Total other operating loss........................ (17,097) (32,600) (52,536)
Operating Expenses:
Compensation and employee benefits.................. 7,869 1,353 -
Management fees..................................... -- 2,404 3,179
Professional fees................................... 1,973 1,250 1,220
Servicing fees...................................... 154 256 691
Other............................................... 2,316 1,168 1,782
----------- ----------- -----------
Total operating expenses.......................... 12,312 6,431 6,872
----------- ----------- -----------
Net Loss.............................................. $ (15,542) $ (26,647) $ (56,388)
=========== =========== ===========
Per Share Data:
Net Loss............................................ $ (1.48) $ (2.33) $ (4.94)
Dividends declared.................................. $ -- $ -- $ 0.67
Weighted average shares outstanding................. 10,507,313 11,442,921 11,421,933
18
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998(1)
--------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Cash Flow Data:
Net cash (used in) provided by operating activities.... $ (91) $ (17,215) $ 4,484
Net cash provided by (used in) investing activities.... $ 71,072 $ 143,283 $(447,921)
Net cash (used in) provided by financing activities.... $(73,270) $(124,969) $ 448,219
Other Data:
Depreciation........................................... $ 1,144 $ 1,102 $ 963
EBITDA(2).............................................. $ (4,097) $ (8,301) $ (38,964)
Ratio of EBITDA to interest expense.................... (0.39) (0.48) (2.37)
Ratio of earnings to fixed charges..................... (0.65) (1.07) (2.43)
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Total assets................................................ $150,304 $218,666
Cash and cash equivalents................................... $ 3,394 $ 5,862
Securities available for sale, at fair value................ $ 74,731 $104,572
Loans, net.................................................. $ 30,404 $ 31,634
Investments in real estate.................................. $ 24,767 $ 63,225
Investments in WFSG and affiliates, net..................... $ 5,593 $ 9,657
Short-term borrowings....................................... $ 18,170 $ 96,815
Long-term borrowings........................................ $ 70,760 $ 64,550
Total stockholders' equity.................................. $ 55,651 $ 50,872
Ratio of total assets to stockholders' equity............... 2.70 4.30
- ------------------------
(1) We commenced operations on April 6, 1998; therefore, the information
presented only reflects actual operations for the nine-month period ended
December 31, 1998.
(2) EBITDA means net income or (loss) plus interest expense plus taxes and
depreciation plus (or minus) amortization of premiums and discounts, net.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto.
GENERAL
In response to the adverse market conditions that have significantly
impacted our operations since 1998, we have focused our strategy on stabilizing
the balance sheet and managing our exposure to further market fluctuations.
During the year ended December 31, 2000, we restructured the asset and liability
structure of our balance sheet, significantly reduced our exposure to
short-term, mark-to-market-based financing for our mortgage-backed securities
portfolio, disposed of the majority of our U.S. commercial property portfolio
and began arranging and investing in new transactions.
Our results of operations for the year ended December 31, 2000 reflect
further impairment write-downs of mortgage-backed securities of $21.4 million,
the majority of which had been previously deducted from stockholders' equity
through "Accumulated Other Comprehensive Loss." These impairments reduce the
unrealized losses included in stockholders' equity for the mortgage-backed
securities portfolio to $1.6 million at December 31, 2000 from $23.2 million at
December 31, 1999.
19
Despite the continued impact of the marketplace on the Company, we increased
stockholders' equity to $55.7 million at December 31, 2000 from $50.9 million at
December 31, 1999, an increase of $4.8 million or 9.4%. During this same period,
the size of our balance sheet was reduced from $218.7 million to
$150.3 million.
The Company's business strategy now focuses on opportunistic investing,
structuring and managing real estate-related assets such as mortgage-backed
securities, mezzanine real estate loans and real estate, as well as the
acquisition of companies engaged in investing in such assets. We concentrate on
the acquisition of assets where our expertise in intensive asset management,
mortgage and real estate credit analysis and financial structuring can create
value. Further, we expect that many of these investments, particularly in
corporate acquisitions, will be in conjunction with partners.
RESULTS OF OPERATIONS--2000 COMPARED TO 1999
NET LOSS. Our net loss for the year ended December 31, 2000 amounted to
$15.5 million, or $1.48 per share, compared to $26.6 million, or $2.33 per share
for the year ended December 31, 1999. The 2000 net loss is primarily
attributable to $22.3 million of market valuation losses and impairments
compared to $30.0 million of market valuation losses and impairment for 1999.
NET INTEREST INCOME. The following tables set forth information regarding
the total amount of income from interest-earning assets and expenses from
interest-bearing liabilities and the resulting average yields and rates:
FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------
AVERAGE INTEREST
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loan portfolios.......................................... $ 33,204 $ 3,900 11.7%
Mortgage-backed securities available for sale............ 81,159 10,718 13.2
Other investments........................................ 7,402 460 6.2
-------- -------- -------
Total interest-earning assets.......................... $121,765 $ 15,078 12.4%
-------- -------- -------
Interest-Bearing Liabilities:
Short-term and other borrowings.......................... 86,312 (7,704) 8.9
-------- -------- -------
Total interest-bearing liabilities..................... $ 86,312 $ (7,704) 8.9%
-------- -------- -------
Net interest income before provision for loan
losses/spread(1)....................................... $ 7,374 3.5%
======== =======
Net interest margin(2)................................... 6.1%
=======
- ------------------------
(1) Net interest spread represents the unweighted difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
20
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------
AVERAGE INTEREST
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loan portfolios.......................................... $ 68,937 $ 6,740 9.8%
Mortgage-backed securities available for sale............ 122,164 15,342 12.6
Other investments........................................ 13,206 604 4.6
-------- -------- -------
Total interest-earning assets.......................... $204,307 $ 22,686 11.1%
-------- -------- -------
Interest-Bearing Liabilities:
Short-term and other borrowings.......................... 158,376 (12,897) 8.1
-------- -------- -------
Total interest-bearing liabilities..................... $158,376 $(12,897) 8.1%
-------- -------- -------
Net interest income before provision for loan
losses/spread(1)....................................... $ 9,789 3.0%
======== =======
Net interest margin(2)................................... 4.8%
=======
- ------------------------
(1) Net interest spread represents the unweighted difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
For the year ended December 31, 2000, the Company recovered $0.6 million of
the allowance for loan losses compared to a recovery of $1.1 million in 1999.
These amounts are not reflected in the net interest income/spread above.
Prepayments, delinquencies and defaults affect the net spread of the
Company, primarily through their impact on mortgage loans that underlie the
securities in the Company's mortgage-backed securities portfolio. For principal
and interest subordinated mortgage-backed securities, which the Company
generally purchases at a discount to principal amount, increased prepayments
recapture such purchase discount sooner and therefore increase spread. Fewer
prepayments would have the opposite effect, reducing spread. For IOs and
residuals, prepayment increases generally reduce spread since these securities
derive their value from interest payments on loans that are outstanding. IOs
have no principal face amount other than a notional balance and therefore are
quite responsive to changes in prepayment. Residuals have both a principal face
amount and often a credit related IO component. Increased prepayment often
reduces spread except to the extent that such prepayment is related to a
recovery on a defaulted loan. The impact on spread, however, depends upon the
degree to which prepayment is less than or exceeds the Company's assumptions for
prepayment at its time of purchase.
The Company buys mortgage-backed securities based on prepayment, delinquency
and default assumptions. Delinquency itself has little effect on spread from the
Company's mortgage-backed securities portfolio since the loan servicers for each
security generally advance both principal and interest payments and, therefore,
the Company generally receives payments on such loans on a timely basis. More
important is the loss severity on defaulted loans. Generally, the larger the
loss severity is, the greater the reduction in spread will be. However, the
Company's spread is only negatively impacted to the extent the principal face
amount of defaults and the cumulative loss severity exceeds or is expected to
exceed the Company's assumptions at its time of purchase or as subsequently
adjusted through an other than temporary impairment determination.
RECOVERY OF LOAN LOSSES. During the year ended December 31, 2000, we
reviewed the adequacy of loan loss reserves and recaptured the remaining reserve
balance of $0.6 million. At December 31, 2000, we had $30.4 million of loans
that are performing according to their terms with no required loan loss
allowance. During the year ended December 31, 1999, we reversed a provision for
losses of $3.9 million taken in prior periods for a loan held for sale. The loan
was secured by
21
commercial properties in the United Kingdom ("UK") with a carrying value of
approximately $47.9 million. This valuation allowance had been established in
1998 based upon management's estimate at that time of the ultimate
recoverability of the asset. This provision reversal was partially offset by a
provision for losses on loans of $0.1 million. In addition, we recognized a net
write-down of $2.7 million in the carrying value of a $17.0 million note
receivable from WFSG to reflect the estimated value of the common stock of WFSG.
REAL ESTATE OPERATIONS. During the years ended December 31, 2000 and 1999,
real estate operating income was comprised primarily of $4.9 million and
$7.1 million, respectively, in gross rental and other income earned on such
investments. Expenses incurred on such real estate investments for the years
ended December 31, 2000 and 1999 include $2.7 million and $4.5 million,
respectively, of interest expense, $0.6 million and $0.2 million, respectively,
of rental operating expense and $1.0 million and $1.1 million, respectively, of
depreciation expense.
OTHER LOSS. Our other loss was approximately $17.1 million and
$32.6 million for the years ended December 31, 2000 and 1999, respectively. The
components of the Company's net non-interest loss are comprised of the
following:
MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses
and Impairments" as used herein refers to impairment losses recognized primarily
on our mortgage-backed securities and loan portfolios. Total market valuation
losses and impairments for the year ended December 31, 2000 were $22.3 million.
This amount includes $21.4 million of market valuation losses and impairments
related to our portfolio of mortgage-backed securities available for sale and
$0.9 million related to our prepaid service fees from an affiliate of WFSG.
Approximately $20.0 million of these amounts were impaired in the fourth quarter
of 2000 due primarily to the receipt of additional detailed information from the
servicer of the underlying mortgages to certain mortgage-backed securities.
Total market valuation losses and impairments for the year ended
December 31, 1999 were $30.0 million. This amount includes $19.6 million of
market valuation losses and impairments related to our portfolio of
mortgage-backed securities available for sale, $8.7 million related to our
investment in newly-issued WFSG stock, $1.0 million related to fees for advisory
services in connection with our investment in WFSG stock and $0.7 million
related to our holdings of WFSG's 13% Series B Notes prior to their conversion
to newly-issued WFSG stock.
PROVISION FOR DISPUTES WITH WFSG. The Company decided to become internally
managed in the third quarter of 1999 which resulted in disputes between the
Company, on the one hand, and WFSG and certain of its affiliates, on the other.
In connection with these disputes, the Company recorded a reserve for potential
resolution of disputes with WFSG and its affiliates of $4.1 million at
September 30, 1999. Following a partial settlement of disputes with WFSG, the
remaining reserve for potential resolution of disputes with WFSG and its
affiliates was $2.5 million at December 31, 1999. During the year ended
December 31, 2000, the Company settled all remaining disputes with WFSG and its
affiliates which resulted in an additional provision of $0.2 million.
GAIN ON THE SALE OF SECURITIES. During the years ended December 31, 2000
and 1999, we sold mortgage-backed securities to unrelated third parties for
approximately $51.6 million and $46.6 million, respectively, resulting in gains
of approximately $5.2 million and $1.3 million, respectively.
OPERATING EXPENSES. As discussed above, we decided to become internally
managed in the third quarter of 1999. As a result, management fees payable to
our prior manager have ceased and have been replaced with compensation to the
Company's employees. The Company now incurs its own overhead and operating costs
that were previously incurred primarily by the manager. Professional fees during
the year ended December 31, 2000 were higher than 1999 primarily due to the
litigation with WFSG and its affiliates.
22
In the fourth quarter of 2000, the Company established a trust which
purchased 525,000 shares of the Company's common stock from an unrelated
shareholder. The Company's contribution of approximately $1.3 million is
included in compensation expenses. The trust was established for the benefit of
the Company's employees and directors to raise their ownership in the Company,
thereby strengthening the mutuality of interests between them and the Company's
shareholders. While these shares are held in trust, they will be voted ratably
with ballots cast by all other shareholders.
RESULTS OF OPERATIONS--1999 COMPARED TO 1998
NET LOSS. Our net loss for the year ended December 31, 1999 amounted to
$26.6 million, or $2.33 per share, compared to $56.4 million, or $4.94 per
share, for the year ended December 31, 1998. The 1999 net loss is primarily
attributable to $30.0 million of market valuation losses and impairments
compared to $54.8 million of market valuation losses and impairment and
$11.8 million of provision for loan losses for 1998.
NET INTEREST INCOME. The following tables set forth information regarding
the total amount of income from interest-earning assets and expenses from
interest-bearing liabilities and the resultant average yields and rates:
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------
AVERAGE INTEREST
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loan portfolios.......................................... $ 68,937 $ 6,740 9.8%
Mortgage-backed securities available for sale............ 122,164 15,342 12.6
Other investments........................................ 13,206 604 4.6
-------- -------- --------
Total interest-earning assets.......................... $204,307 $ 22,686 11.1%
-------- -------- --------
Interest-Bearing Liabilities:
Short-term and other borrowings.......................... 158,376 (12,897) 8.1
-------- -------- --------
Total interest-bearing liabilities..................... $158,376 $(12,897) 8.1%
-------- -------- --------
Net interest income before provision for loan
losses/spread(1)....................................... $ 9,789 3.0%
======== ========
Net interest margin(2)................................... 4.8%
========
- ------------------------
(1) Net interest spread represents the unweighted difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
23
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------
AVERAGE ANNUALIZED
BALANCE INTEREST INCOME YIELD/RATE (1)
-------- --------------- --------------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loan portfolios....................................... $121,295 $ 10,838 12.1%
Mortgage-backed securities available for sale......... 195,112 14,674 10.2
Other securities available for sale................... 15,617 1,035 9.0
Other investments..................................... 23,597 1,145 6.5
-------- -------- --------
Total interest-earning assets....................... $355,621 $ 27,692 10.5%
-------- -------- --------
Interest-Bearing Liabilities:
Short-term borrowings 254,945 (13,608) 7.2
-------- -------- --------
Total interest-bearing liabilities.................. $254,945 $(13,608) 7.2%
-------- -------- --------
Net interest income before provision for loan losses/
spread(2)........................................... $ 14,084 3.3%
======== ========
Net interest margin(3)................................ 5.4%
========
- ------------------------
(1) Although the Company was in existence for all of 1998, operations were
commenced on April 6, 1998 at the time of the initial public offering.
Therefore, rates and yields for the year ended December 31, 1998 are
annualized to reflect the Company's period of operations from April 6, 1998
to December 31, 1998.
(2) Net interest spread represents the unweighted difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets and is annualized based on the period of operations
from April 6 to December 31, 1998.
For the year ended December 31, 1999, the Company recovered $1.1 million of
the allowance for loan losses compared to a provision of $11.8 million for 1998.
These amounts are not reflected in the net interest income/spread above.
RECOVERY OF (PROVISION FOR) LOAN LOSSES. During the year ended
December 31, 1999, we reversed a provision for losses of $3.9 million taken in
prior periods for a loan held for sale. The loan was secured by commercial
properties in the UK with a carrying value of approximately $47.9 million. This
valuation allowance had been established in 1998 based upon management's
estimate at that time of the ultimate recoverability of the asset. This
provision reversal was partially offset by a provision for losses on loans of
$0.1 million. In addition, we recognized a net write-down of $2.7 million in the
carrying value of a $17.0 million note receivable from WFSG to reflect the
estimated value of the common stock of WFSG to be received in exchange for a
portion of the note.
Total provision for losses for the year ended December 31, 1998 was
$11.8 million, which included a $5.9 million valuation adjustment of an
unsecured $18.4 million receivable from WFSG and $5.9 million of loan loss
provisions (including the provision for the UK loan noted above).
REAL ESTATE OPERATIONS. During the years ended December 31, 1999 and 1998,
real estate operating income was comprised primarily of $7.1 million and
$4.9 million, respectively, in gross rental and other income earned on such
investments. Such revenue represents income generated from the Company's
investment in various office buildings, retail stores, and other commercial
property located in Oregon, California and the UK. Expenses incurred on such
real estate investments include $4.5 million (1999) and $2.9 million (1998) of
interest expense, $0.2 million (1999) and $0.3 million
24
(1998) of rental operating expense and $1.1 million (1999) and $1.0 million
(1998) of depreciation expense.
OTHER LOSS. Our other loss was approximately $32.6 million and
$52.5 million for the years ended December 31, 1999 and 1998, respectively. The
components of the Company's net non-interest loss is comprised of the following:
MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses
and Impairments" as used herein refers to impairment losses recognized primarily
on our mortgage-backed securities and loan portfolios, as a result of the
international economic and financial turmoil which severely affected the market
for the Company's principal investments beginning in the third quarter of 1998.
Total market valuation losses and impairments for the year ended December 31,
1999 were $30.0 million. This amount includes $19.6 million of market valuation
losses and impairments related to our portfolio of mortgage-backed securities
available for sale, $8.7 million related to our investment in newly-issued WFSG
stock, $1.0 million related to fees for advisory services in connection with our
investment in WFSG stock and $0.7 million related to our holdings of WFSG's 13%
Series B Notes prior to their conversion to newly-issued WFSG stock.
Total market valuation losses and impairments for the year ended
December 31, 1998 were $54.8 million. Of this amount, $49.5 million was
recognized during the third quarter to reflect losses on loans and securities
that were (i) ultimately sold in the fourth quarter to meet collateral calls or
to provide liquidity; or (ii) not sold but were deemed to be other than
temporarily impaired, resulting from faster than expected loan prepayments or
other factors. During the fourth quarter of 1998, an additional $5.3 million of
market valuation losses and impairments was recorded to reflect additional other
than temporary impairment on certain securities and other assets which have not
been sold.
Of the total $54.8 million recognized during 1998, $32.2 million relates to
assets sold during the fourth quarter and $22.4 million relates to assets not
sold. Included in the $22.4 million related to assets not sold is $11.3 million
related to our investment in WFSG's 13% Series B Notes due 2004, which was
converted to newly issued common stock of WFSG following its restructuring. This
loss reflected the write-down of this asset to the estimated value of our
proportionate share of the equity in the restructured WFSG.
PROVISION FOR DISPUTES WITH WFSG. The Company decided to become internally
managed in the third quarter of 1999 which resulted in disputes between the
Company, on the one hand, and WFSG and certain of its affiliates, on the other.
In connection with these disputes, the Company recorded a reserve for potential
resolution of disputes with WFSG and its affiliates of $4.1 million at
September 30, 1999. Following a partial settlement of disputes with WFSG, the
remaining reserve for potential resolution of disputes with WFSG and its
affiliates was $2.5 million at December 31, 1999.
GAIN ON THE SALE OF SECURITIES. During the years ended December 31, 1999
and 1998, we sold mortgage-backed securities to unrelated third parties for
approximately $46.6 million and $133.3 million, respectively, resulting in gains
of approximately $1.3 million and $0.9 million, respectively.
OPERATING EXPENSES. Management fees of $2.4 million and $3.2 million for
the years ended December 31, 1999 and 1998, respectively, were comprised solely
of the 1% (per annum) base management fee paid to WRSC (as provided pursuant to
the Management Agreement between WRSC and the Company). WRSC earned no incentive
fee for these periods.
In addition to the management fee, we incurred loan service fees of
$0.2 million and $0.7 million during the years ended December 31, 1999 and 1998,
respectively, which were paid to WFSG or an affiliate of WFSG. The service fee
structure was dependent on the assets being serviced, but in general, service
fees related to loans purchased at a significant discount were based on a
percentage of cash received and service fees related to other loans were based
on a percentage of unpaid principal balance. We also incurred $0.1 million
(1999) and $0.5 million (1998) of loan related expenses which were reimbursed to
the servicer for actual out of pocket servicing costs. Other expenses were
comprised of professional services, insurance premiums and other sundry
expenses.
25
CHANGES IN FINANCIAL CONDITION
During 2000, total assets decreased to $150.3 million from $218.9 million at
December 31, 1999. This decrease was primarily the result of a net reduction of
$29.8 million of securities available for sale and $38.5 million of investments
in real estate. Total liabilities decreased to $94.7 million during the period,
primarily as a result of a net decrease of $72.4 million in borrowings
associated with sales of mortgage-backed securities, loans and investments in
real estate.
SECURITIES AVAILABLE FOR SALE. At December 31, 2000, securities available
for sale included mortgage-backed securities with an aggregate market value of
$74.7 million, net of realized and unrealized losses, compared to
$104.6 million at December 31, 1999. This decrease of $29.9 million is primarily
due to the sale of $46.4 million of securities, net principal payments received
of $3.2 million partially offset by the purchase of $19.5 million of securities.
In December 2000, we refinanced the debt on approximately $43.2 million of
our mortgage-backed securities portfolio. This transaction was treated as a
secured financing transaction rather than a sale for accounting purposes due to
certain call provisions retained by the Company. As such, our balance sheet
continues to reflect these securities as well as the senior bonds of
$34.2 million which replaced the short-term, mark-to-market debt previously
collateralized by these securities.
We mark our securities portfolio to fair value at the end of each month
based upon broker/dealer valuations (if available), subject to an internal
review process. For those securities that do not have an available market
quotation, we determine the fair value of the securities by modeling the
anticipated cash flows using certain estimates (e.g. prepayment speeds, default
rates, severity of losses, and discount rate). Because our subordinated
securities may not be readily marketable, as trading activity may be infrequent,
the market value is typically available from only a small group of
broker/dealers, and in many cases, only one broker/dealer. As of each reporting
period, we evaluate whether and to what extent any unrealized loss is to be
recognized as other than temporary.
LOAN PORTFOLIO. During the year ended December 31, 2000, we reduced our
loan portfolio to approximately $30.4 million from $31.6 million at
December 31, 1999. We maintain an allowance for loan losses at a level that the
Company considers adequate to provide for probable losses based upon an
evaluation of known and inherent risks. During the year ended December 31, 2000,
we recovered the remaining allowance for loan losses.
INVESTMENTS IN REAL ESTATE. Investments in real estate decreased
approximately $38.5 million during the year ended December 31, 2000. This
decrease was primarily due to sales of five retail buildings and an office
complex/warehouse distribution center, all located in the State of Oregon, with
a carrying value of approximately $27.0 million, and the sale of office
properties located in Portland, Oregon with a carrying value of $7.3 million. In
addition, we recognized approximately $1.0 million of depreciation expense
related to operating properties.
We are currently in the process of marketing certain other commercial
properties for sale as we continue to reduce our level of investment in
commercial real estate income properties to increase liquidity for working
capital and reinvestment opportunities.
OTHER ASSETS. Other assets increased by approximately $8.4 million during
the year ended December 31, 2000. This increase is primarily due to the deposit
of $6.7 million for the purchase of a 26% interest in a UK-based real estate
company. See ITEM 1. BUSINESS. The purchase was completed in the first quarter
of 2001, together with the Company's partners who purchased the remaining 74%
interest.
SHORT-TERM BORROWINGS. Short-term borrowings decreased to approximately
$18.2 million during the year ended December 31, 2000, resulting primarily from
the sale of subordinated mortgage-backed securities and resecuritization of
certain mortgage-backed securities.
26
Interest rates on borrowings under these facilities are generally based on
30-day London Interbank Offer Rate ("LIBOR") rates, plus a spread. Repurchase
agreements are secured lending arrangements which involve the borrower selling
an asset to a lender at a fixed price with the borrower having an obligation to
repurchase the asset within a specified period (generally 30 days) at a higher
price reflecting the interest cost of the loan. If the value of the underlying
asset declines or the lender marks the asset lower, the lender may request that
the amount of the loan be reduced by cash payments from the borrower or
additional collateral be provided by the borrower (generally known as
"collateral calls"). Accordingly, in an environment where lenders consistently
mark down the value of the underlying assets, a borrower can become subject to
significant collateral calls. If the borrower does not have sufficient cash to
meet the collateral call or additional unencumbered assets to pledge, it may be
forced to sell assets to repay the loan. If the Company experiences further
downward marks to market of its assets subject to repurchase agreements, it
could experience cash collateral calls, thereby reducing liquidity, or be forced
to sell further assets, which could result in losses.
LONG-TERM BORROWINGS. At December 31, 2000, we had $70.8 million of
long-term borrowings. Of this amount, $17.5 million financed real estate
investments of $22.4 million, $19.0 million financed a loan with an unpaid
principal balance of $25 million and $34.2 million related to senior bonds
issued as part of the resecuritization discussed above. Other borrowings had a
weighted average interest rate of 9.58%.
STOCKHOLDERS' EQUITY. Stockholders' equity increased to $55.7 million
during the year ended December 31, 2000. The net increase in stockholders'
equity during this period was primarily attributable to a decrease in
accumulated other comprehensive loss of $21.0 million, offset by our net loss of
$15.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, engage in loan acquisition and lending activities, meet collateral
calls and for other general business purposes. The primary sources of funds for
liquidity during the year ended December 31, 2000 consisted of net cash provided
by investing activities, including the cash repayments related to our
mortgage-backed securities portfolio, sales of mortgage-backed securities and
investments in real estate, and resecuritization of our securities portfolio.
Our borrowings and the availability of further borrowings are substantially
affected by, among other things, changes in interest rates, changes in market
spreads whereby the market value of the collateral securing such borrowings may
decline substantially, or decreases in credit quality of underlying assets. In
the event of declines in market value or credit quality, we may be required to
provide additional collateral for, or repay a portion of outstanding balances
of, our short-term borrowing facilities. As of December 31, 2000, we had no
outstanding collateral calls. For additional information with respect to our
monthly mark-to-market of our securities available for sale portfolio, see
"CHANGES IN FINANCIAL CONDITION--SECURITIES AVAILABLE FOR SALE."
Fluctuations in interest rates will continue to impact our net interest
income to the extent our fixed rate assets are funded by variable rate debt or
our variable rate assets reprice on a different schedule or in relation to a
different index than any floating rate debt which in turn could impact potential
returns to shareholders. See "Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK."
At December 31, 2000, we had total consolidated secured indebtedness of
$88.9 million, as well as $5.7 million of other liabilities. The consolidated
secured indebtedness consisted of (i) $34.9 million of repurchase agreements
secured by $15.9 million of mortgage-backed securities and $19.0 million of
loans, (ii) lines of credit aggregating $2.3 million which are secured by loans
and securities and (iii) $51.7 million outstanding of other borrowings maturing
between 2000 and 2020 which are secured
27
by real estate and loans. Approximately $37.2 million of this indebtedness had
terms which allowed the lender to request additional collateral if the value of
the underlying collateral declined (including financing facilities for both
mortgage-backed securities and loans). Although the Company believes that the
likelihood of significant declines in asset values has decreased since the third
quarter of 1998, the Company is seeking to maintain a larger cash position and
more unencumbered assets to deal with any future potential collateral calls.
Loans are financed through both short-term and long-term financing
facilities. If the value of the assets securing the loan declines as determined
by the lender, the lender may request that the amount of the loan be reduced by
cash payments form the borrower or additional collateral be provided by the
borrower (generally known as "collateral calls"). Accordingly, in an environment
where lenders consistently mark down the value of the underlying assets, a
borrower can become subject to collateral calls, which can have a significant
impact on liquidity. Similarly, if interest rates increase significantly, the
borrowing cost under the financing facility may also increase while the interest
rate on the assets securing the loan may not increase at the same time or to the
same degree. Real property acquisitions are financed with intermediate or
long-term mortgages with banks and other financial institutions.
We have historically financed acquisitions of mortgage-backed securities
through committed and uncommitted thirty-day repurchase agreements with major
Wall Street investment banks. Repurchase agreements are secured lending
arrangements which involve the borrower selling an asset to a lender at a fixed
price with the borrower having an obligation to repurchase the asset within a
specified period (generally 30 days) at a higher price reflecting the interest
cost of the loan. If the lender marks the asset lower, the lender may request
that the amount of the loan be reduced by cash payments from the borrower or
additional collateral be provided by the borrower (generally known as
"collateral calls"). Mortgage-backed securities which are subject to repurchase
agreements, as well as loans which secure other indebtedness, periodically are
revalued by the lender, and a decline in the value that is recognized by the
lender (whether or not the lender recognizes the full fair value of the
security) may result in the lender requiring us to provide additional collateral
to secure the indebtedness.
If we are unable to fund additional collateral requirements or to repay,
renew or replace maturing indebtedness on terms reasonably satisfactory to us,
we may be required to sell (potentially on short notice) a portion of our
assets, and could incur losses as a result. Furthermore, since from time to time
there is extremely limited liquidity in the market for subordinated and residual
interests in mortgage-related securities, there can be no assurance that we will
be able to dispose of such securities promptly for fair value in such
situations.
Although we are currently operating with negative cash flow (primarily due
to the continued repayment of debt and refinancing of our mortgage-backed
securities portfolio), we believe that our existing sources of funds will be
adequate for purposes of meeting our short-term liquidity needs. There can be no
assurance that this will be the case, however. Material increases in interest
expense from variable-rate funding sources, collateral calls, or material
decreases in monthly cash receipts, generally would negatively impact our
liquidity. On the other hand, material decreases in interest expense from
variable-rate funding sources, in collateral calls or an increase in market
value of our mark-to-market financial assets generally would positively affect
our liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices, and equity prices.
Although the Company's exposure to foreign currency fluctuations has increased
significantly during the year ended December 31, 2000 (approximately 19% of the
Company's equity is invested in the United Kingdom at December 31, 2000), the
primary market risk to which the Company is exposed is interest rate risk, which
is highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international
28
economic and political considerations, and other factors beyond the control of
the Company. Changes in the general level of interest rates can affect the
Company's net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with its interest-bearing liabilities, by affecting the spread
between the Company's interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect, among other things, the
ability of the Company to acquire loans, the value of the Company's
mortgage-backed securities and other interest-earning assets, and its ability to
realize gains from the sale of such assets.
It is the objective of the Company to attempt to control risks associated
with interest rate movements. In general, the Company's strategy is to limit our
exposure to earnings variations and variations in the value of assets and
liabilities as interest rates change over time. Our asset and liability
management strategy is formulated and monitored regularly to review, among other
things, the sensitivity of our assets and liabilities to interest rate changes,
the book and market values of assets and liabilities, unrealized gains and
losses, including those attributable to hedging transactions, purchase and
securitization activity, and maturities of investments and borrowings.
The following tables quantify the potential changes in net interest income
and net portfolio value as of December 31, 2000 should interest rates go up or
down (shocked) by 100 to 400 basis points, assuming the yield curves of the rate
shocks will be parallel to each other and instantaneous. Net portfolio value is
calculated as the sum of the value of off-balance sheet instruments and the
present value of cash in-flows generated from interest-earning assets net of
cash out-flows in respect of interest-bearing liabilities. The cash flows
associated with the loan portfolios and securities available for sale are
calculated based on prepayment and default rates that vary by asset but not by
changes in interest rates. Projected losses, as well as prepayments, are
generated based upon the actual experience with the subject pool, as well as
similar, more seasoned pools. To the extent available, loan characteristics such
as loan-to-value ratio, interest rate, credit history and product types are used
to produce the projected loss and prepayment assumptions that are included in
the cash flow projections of the securities. The following tables apply the U.S.
Treasury yield curve generally for assets and LIBOR for repurchase agreement
liabilities and assume a uniform change in both rates. The tables assume that
changes in interest rates occur instantaneously. The tables also reflect that
the Company has a significant exposure
29
to LIBOR rates since its short-term repurchase agreement borrowings are
generally based on LIBOR rates. Actual results could differ significantly from
those estimated in the tables.
PROJECTED PERCENT CHANGE IN
- -----------------------------------------------------------------------
CHANGE IN INTEREST RATES(1) NET INTEREST INCOME NET PORTFOLIO VALUE
- --------------------------- ------------------- -------------------
-400 Basis Points 31.2% 19.3%
-300 Basis Points 23.4% 13.8%
-200 Basis Points 15.6% 8.8%
-100 Basis Points 7.8% 4.2%
0 Basis Points 0.0% 0.0%
100 Basis Points -7.8% -3.9%
200 Basis Points -15.6% -7.5%
300 Basis Points -23.4% -10.9%
400 Basis Points -31.2% -14.0%
- ------------------------
(1) Assumes that uniform changes occur instantaneously in both the yield on
10-year U.S. Treasury notes and the interest rate applicable to U.S. dollar
deposits in the London interbank market.
CHANGE IN MONTHLY CHANGE IN
CHANGE IN INTEREST RATES(1) NET INTEREST INCOME NET PORTFOLIO BALANCE
- --------------------------- ------------------- ---------------------
-400 Basis Points $ 156,698 $10,726,274
-300 Basis Points $ 117,523 $ 7,680,969
-200 Basis Points $ 78,349 $ 4,899,161
-100 Basis Points $ 39,174 $ 2,348,058
0 Basis Points -- --
100 Basis Points $ (39,174) $(2,168,467)
200 Basis Points $ (78,349) $(4,177,335)
300 Basis Points $(117,523) $(6,043,734)
400 Basis Points $(156,698) $(7,782,412)
- ------------------------
(1) Assumes that uniform changes occur instantaneously in both the yield on
10-year U.S. Treasury notes and the interest rate applicable to U.S. dollar
deposits in the London interbank market.
30
The following table sets forth information as to the type of funding used to
finance the Company's assets as of December 31, 2000. As indicated in the table,
a large percentage of the Company's fixed-rate assets are financed by
floating-rate liabilities and the Company's variable-rate assets are generally
funded by variable-rate liabilities which use the same index.
ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
INTEREST-BEARING ASSETS BASIS AMOUNT COUPON TYPE LIABILITY TYPE
- -------------------------------------------------- ------------ ----------- --------- --------
Fixed-Rate Assets, Financed Floating.............. $ 60,876 Fixed $52,373 LIBOR
Fixed-Rate Assets, No Financing................... 19,259 Fixed -- None
Floating-Rate Assets, Financed Floating........... 25,000 LIBOR 19,025 LIBOR
-------- -------
Subtotal........................................ 105,135 71,398
OTHER ASSETS
- --------------------------------------------------
Investments in Real Estate........................ 24,767 N/A 17,532 Fixed
Cash and Cash Equivalents......................... 3,394 N/A -- None
Investments in WFSG and affiliates, net........... 5,593 N/A -- None
Other............................................. 11,415 N/A -- None
-------- -------
Subtotal........................................ 45,169 17,532
LIABILITY ONLY
- --------------------------------------------------
Dividends......................................... -- 1,718 Fixed
Accounts Payable and Accrued Liabilities.......... -- 4,005 None
-------- -------
Subtotal........................................ -- 5,723
-------- -------
Total......................................... $150,304 $94,653
======== =======
Asset and liability management involves managing the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. Asset and
liability management can utilize a wide variety of off-balance sheet financial
techniques to assist it in the management of interest rate risk. For example, in
hedging the interest rate and exchange rate exposure of a foreign currency
denominated asset or liability, we may enter into hedge transactions to counter
movements in the different currencies as well as interest rates in those
currencies. These hedges may be in the form of currency and interest rate swaps,
options, and forwards, or combinations thereof. No such techniques were in use
as of December 31, 2000.
Methods for evaluating interest rate risk include an analysis of the
Company's interest rate sensitivity "gap," which is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities. A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Since different
types of assets and liabilities with the same or similar maturities may react
differently to changes in overall market rates or conditions, changes in
interest rates may affect net interest income positively or negatively even if
an institution were perfectly matched in each maturity category.
31
The following table sets forth the estimated contractual maturity or
repricing of the Company's interest-earning assets and interest-bearing
liabilities at December 31, 2000.
AS OF DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
WITHIN 4 TO 12 ONE YEAR TO MORE THAN
3 MONTHS MONTHS 3 YEARS 3 YEARS TOTAL
-------- -------- ----------- --------- --------
INTEREST-SENSITIVE ASSETS(1)
Cash and cash equivalents................. $ 3,394 $ -- $ -- $ -- $ 3,394
Securities available for sale............. -- -- -- 74,731 74,731
Loans(2).................................. 25,135 405 924 3,940 30,404
------- ------ ------ ------- --------
Total rate-sensitive assets............. $28,529 $ 405 $ 924 $78,671 $108,529
======= ====== ====== ======= ========
INTEREST-SENSITIVE LIABILITIES
Short-term borrowings..................... $18,170 $ -- $ -- $ -- $ 18,170
Long-term borrowings...................... -- -- 1,058 69,702 70,760
Dividends payable......................... 859 858 -- -- 1,717
------- ------ ------ ------- --------
Total rate-sensitive liabilities........ $19,029 $ 858 $1,058 $69,702 $ 90,647
======= ====== ====== ======= ========
Interest rate sensitivity gap............... $ 9,500 $ (453) $ (134) $ 8,969
Cumulative interest rate sensitivity gap.... $ 9,500 $9,047 $8,913 $17,882
Cumulative interest rate sensitivity gap as
a percentage of total rate-sensitive
assets.................................... 9% 8% 8% 16%
- ------------------------
(1) Real estate property holdings are not considered interest rate sensitive.
(2) Amortizing fixed rate loans are assumed to prepay at a Constant Prepayment
Rate ("CPR") of 10%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 12, 1999, the Board of Directors of the Company appointed the
firm of Ernst & Young LLP to replace Arthur Andersen LLP as the principal
accountant to audit the Company's financial statements. Arthur Andersen LLP was
replaced due to a potential conflict of interest with the services it performed
for WFSG and its affiliates.
In the third quarter of 1999, the Company decided to become internally
managed. Prior to this decision, the Company's business and investment affairs
had been managed by WRSC pursuant to a management agreement and the Company had
received managerial and administrative services from WRSC thereunder.
The report of Arthur Andersen LLP on the financial statements of the Company
for the 1998 year (the Company was formed on October 24, 1997, commenced
operations on April 6, 1998 and was audited for the one year ended December 31,
1998) did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope or accounting principles,
except that, in its report dated March 19, 1999, Arthur Andersen LLP included a
matter-of-emphasis paragraph stating "As discussed in Note 1, Wilshire Realty
Services Corporation, a wholly owned
32
subsidiary of Wilshire Financial Services Group Inc. ("WFSG"), is the manager of
the Company. Furthermore, Wilshire Credit Corporation ("WCC"), an affiliate of
WFSG, provides loan servicing and real property management services to the
Company. On March 3, 1999, WFSG filed a voluntary prepackaged petition for
relief under Chapter 11 of the U.S. Bankruptcy Code. The WFSG plan of
reorganization includes the transfer of servicing operations conducted by WCC to
a newly formed subsidiary of WFSG. As discussed in Note 2, the Company has also
entered into several transactions with these affiliated entities." However, the
report of Arthur Andersen LLP for 1998, dated March 19, 1999 and included in
this Form 10-K, does not include the matter-of-emphasis paragraph. During the
period from the Company's inception, October 24, 1997, through November 12, 1999
there were no disagreements with Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Arthur
Andersen LLP, would have caused it to make reference to the subject matter of
the disagreement in connection with its report on the financial statements of
the Company.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information about our executive officers and
directors as of February 28, 2001. The business address of each executive
officer and director is the address of the Company, 1631 SW Columbia Street,
Portland, OR 97201, and each executive officer and director is a United States
citizen.
ANDREW A. WIEDERHORN, age 35, has been the Chairman of the Board of
Directors and Chief Executive Officer of the Company since its formation.
Mr. Wiederhorn also serves as Treasurer and Secretary. Until August 1999,
Mr. Wiederhorn was also the Chairman of the Board of Directors, Chief Executive
Officer, Secretary, Treasurer and a director for both WFSG and WRSC. In 1987,
Mr. Wiederhorn founded Wilshire Credit Corporation ("WCC") and served as the
Chief Executive Officer of WCC and certain of its affiliates until August 1999.
Mr. Wiederhorn received his B.S. degree in Business Administration from the
University of Southern California.
LAWRENCE A. MENDELSOHN, age 39, has been a director and the President of the
Company since its formation. Until August 1999, Mr. Mendelsohn was also the
President of WFSG and WCC. From January 1992 until February 1993,
Mr. Mendelsohn was Vice President, Principal and Head of Capital Markets for
Emerging Markets at Bankers Trust New York Corporation/BT Securities
Corporation. From August 1987 until January 1992, Mr. Mendelsohn was the Vice
President, Senior Options Principal and Head of Proprietary Trading for
Equities, Equity Options and Distressed Debt at J.P. Morgan and Co./J.P. Morgan
Securities. Mr. Mendelsohn received an A.B. degree in Economics from the
University of Chicago, an M.A. degree in International Politics from the
University of Texas, an M.S. degree in Business Research from the University of
Southern California and a Ph.D./ABD in Finance from the University of Southern
California.
DAVID C. EGELHOFF, age 52, has been a director of the Company since its
formation. Mr. Egelhoff has been President of Macadam Forbes, Inc., a commercial
real estate brokerage company headquartered in Portland, Oregon since 1981.
Mr. Egelhoff is a licensed real estate broker who has extensive brokerage
experience. He is a member of the Oregon and National Board of Realtors and the
Builders and Owners Management Association. Mr. Egelhoff received a degree in
Finance and Marketing from the University of Wisconsin-Madison in 1971.
JORDAN D. SCHNITZER, age 49, has been a director since March 27, 1998.
Mr. Schnitzer has been President of Jordan Schnitzer Properties, an owner and
developer of commercial and residential properties in Oregon, Washington and
California, since 1976. Mr. Schnitzer is also President of Harsch Investment
Properties, LLC, which owns and operates a portfolio of properties in seven
western U.S. states. Mr. Schnitzer received his undergraduate degree in
Literature from the University of Oregon in 1973 and his J.D. from the
Northwestern School of Law of Lewis and Clark College in 1976.
PATRICK TERRELL, age 46, became a director of the Company on December 28,
1998. Mr. Terrell has been the principal owner of Terrell & Associate
Investments, private investment company, since 1992. Mr. Terrell founded Leading
Technology Company in 1986 and worked as the Chief Executive Officer until he
sold the company in 1992. Mr. Terrell was also founder and Chief Executive
Officer of Byte Shops Computer Stores, which he founded in 1976 and sold to
Pacific Telesis in 1985. Mr. Terrell currently serves on the boards of R.S.
Medical, United Soil Recycling, Microware, Inc., Electrical Distributing Inc.,
and Lakeside Associates. Mr. Terrell attended Oregon State University prior to
forming Byte Shops Computer Stores in 1976.
CHRIS TASSOS, age 43, has been Executive Vice President and Chief Financial
Officer of the Company since its formation. Until October 1999, Mr. Tassos was
Executive Vice President and Chief Financial Officer of WFSG and Executive Vice
President of WCC. From August 1995 until June 1997, he was Senior Vice President
of WCC. From March 1992 until February 1995, he was the Chief
34
Financial Officer and/or Senior Vice President of Finance of Long Beach Mortgage
Company (formerly Long Beach Bank). From July 1979 until April 1984 and
May 1985 until September 1990, Mr. Tassos was an auditor for Deloitte & Touche
LLP. Mr. Tassos received a B.A. degree from California State University,
Fullerton.
ROBERT G. ROSEN, age 34, is Executive Vice President of the Company. From
November 1997 until October 1999, Mr. Rosen was Senior Vice President, Asset
Securitization and Capital Markets for WFSG. Mr. Rosen was the Vice President of
Securitization at BTM Capital Corp., a wholly-owned subsidiary of the Bank of
Tokyo-Mitsubishi, Ltd. from March 1997 until October 1997. From January 1995
until March 1997, Mr. Rosen was a Director of Black Diamond Advisors, Inc., a
firm specializing in securitization and capital markets needs of finance
companies. From January 1994 to January 1995, Mr. Rosen was with Kidder Peabody
and Co. in the Asset-Backed Securitization Group.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires a company's
directors and executive officers, and beneficial owners of more than 10% of the
common stock of such company, to file with the Securities and Exchange
Commission initial reports of ownership and periodic reports of changes in
ownership of the company's securities. Based solely on a review of Forms 3, 4
and 5 and amendments thereto furnished to us for the year ended December 31,
2000, the Company's directors, officers, or beneficial owners of more than 10%
of the Company's Common Stock timely furnished reports on Forms 3, 4 or 5,
except Donald Berchtold, who filed a Form 4 for December late, Robert Rosen, who
filed a Form 4 for September late, Patrick Terrell, who filed a Form 4 for
August late, and Jordan Schnitzer, who filed a Form 4 for January late.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
During the nine months ended September 30, 2000, each non-employee director
was paid an annual director's fee equal to $12,000, with no additional fee paid
for the first four meetings of the Board of Directors. Each non-employee
director received a fee of $1,000 for each additional meeting of the Board of
Directors or committee thereof attended in person by such non-employee director,
which is not a regularly scheduled quarterly meeting. For meetings attended
telephonically, each of the non-employee directors received a fee of $100 per
hour. The Board of Directors approved a new compensation arrangement for
non-employee directors. Effective October 1, 2000, each non-employee director
will be paid an annual director's fee equal to $50,000. Each non-employee
director will also receive an annual fee equal to $25,000 for each committee
upon which such non-employee director serves.
All non-employee directors are reimbursed for their costs and expenses in
attending all meetings of the Board of Directors. In addition, on the last day
of each calendar quarter through September 30, 2000, each non-employee director
receives a non-statutory stock option for 1,500 shares of Common Stock at an
exercise price equal to 110% of the fair market value of the Common Stock on
that day. Such grants vest one-third on each of the first three anniversaries of
the grant date and expire on the tenth anniversary of the grant date. Effective
October 1, 2000, the directors no longer receive these quarterly grants.
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid or accrued by the
Company for services rendered during the last two fiscal years to the Chief
Executive Officer of the Company, and to each of the four other most highly
compensated executive officers of the Company whose total cash
35
compensation for the year ended December 31, 2000 exceeded $100,000 (the "Named
Executive Officers").
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------
---------------------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS/SARS(#)
- ----------------------------------------------- -------- --------- ----------- ---------------------
Andrew A. Wiederhorn........................... 2000 $393,750 $345,921 --
Chairman, Chief Executive Officer, 1999 $ 84,091 -- 630,000
Secretary and Treasurer
Lawrence A. Mendelsohn......................... 2000 $321,875 $208,845 --
President 1999 $ 77,083 -- 350,000
Robert G. Rosen................................ 2000 $254,808 $841,250 --
Executive Vice President, Capital 1999 $ 46,627 $310,909 210,000
Markets
Chris Tassos................................... 2000 $250,000 $162,500 --
Executive Vice President and 1999 $ 46,627 $ 92,424 120,000
Chief Financial Officer
Matthew Green.................................. 2000 $167,900 $ 50,000 --
Vice President 1999 $ 27,983 -- 10,000
- ------------------------
(1) Bonuses for 1999 are shown net of a $555,000 reimbursement from WFSG to the
Company under a settlement agreement.
During the year ended December 31, 1998 and until their employment with the
Company, the executive officers of the Company did not receive any compensation
from the Company for their services. To the extent such officers were also
officers of WFSG, they were compensated by WFSG for their services. WFSG is the
parent company of WRSC, which received certain fees from the Company for
management services it provided the Company under a management agreement.
Following the Company's decision to become internally managed, the Company
entered into the employment agreements with its executive officers described
above. SEE ITEM 1.--BUSINESS.
EMPLOYMENT AND OTHER ARRANGEMENTS
The Company has entered into employment agreements with Andrew A. Wiederhorn
(as Chief Executive Officer), Lawrence A. Mendelsohn (as President), Robert G.
Rosen (as Executive Vice President) and Chris Tassos (as Chief Financial
Officer) (each an "Executive" and collectively, the "Executives").
The employment agreements with Messrs. Wiederhorn, Mendelsohn and Rosen were
amended and restated effective October 1, 2000. Each such employment agreement
provides for an initial three-year term commencing October 1, 2000 which is
automatically renewable for successive two-year terms unless either party gives
written notice to the other at least 90 days prior to the expiration of the then
employment term.
The employment agreement with Mr. Tassos provides for an initial three-year
term commencing October 1, 1999 which is automatically renewable for successive
two-year terms unless either party gives written notice to the other at least
90 days prior to the expiration of the then employment term.
The employment agreements provide for an annual base salary of $750,000 for
Mr. Wiederhorn, $500,000 for Mr. Mendelsohn, and $250,000 for Mr. Rosen and
Mr. Tassos (which may be increased, but not decreased, by the Compensation
Committee of the Board of Directors) and an annual bonus for each.
36
For each 12-month period commencing October 1, 2000, Mr. Wiederhorn and
Mr. Mendelsohn are entitled to share in a bonus pool based upon the Company
achieving certain performance goals. Mr. Wiederhorn will be entitled to receive
an annual bonus equal to 45% of the bonus pool and Mr. Mendelsohn will be
entitled to receive an annual bonus equal to 30% of the bonus pool. If the
Company's return on equity (as defined in the employment agreements) determined
on a post bonus basis is 15% or more, Mr. Wiederhorn and Mr. Mendelsohn will be
entitled to share in a bonus pool equal to 25% of the Company's after-tax income
(prior to subtracting the amount of the bonuses paid by the Company). If the
Company's return on equity (as defined in the employment agreements) determined
on a post bonus basis is 10% or greater but less than 15%, Mr. Wiederhorn and
Mr. Mendelsohn will be entitled to share in a bonus pool equal to 20% of the
Company's after-tax income (prior to subtracting the amount of the bonuses paid
by the Company). If the Company's return on equity (as defined in the employment
agreements) determined on a post bonus basis is between 5% or greater but less
than 10%, Mr. Wiederhorn and Mr. Mendelsohn will be entitled to share in a bonus
pool equal 10% of the Company's after-tax income (prior to subtracting the
amount of the bonuses paid by the Company). If the return on equity (as defined
in the employment agreements) determined on a post bonus basis is less than 5%,
Mr. Wiederhorn and Mr. Mendelsohn will not be entitled to a bonus.
For the period commencing October 9, 1999 and ending on November 30, 2000,
Mr. Rosen was entitled to receive a bonus in the amount of $368,004. The bonus
was paid to Mr. Rosen in January 2001 based upon the Company materially
achieving a majority of the following goals during the bonus period:
(i) reduction or elimination of the liability risk associated with short-term,
mark-to-market financing for those applicable assets, (ii) sale, upgrade of the
ratings or improvement in the marketability of some or all of the Company's
mortgage-backed securities, (iii) focus on and/or implementation of a successful
resolution strategy for the Cityscape mortgage-backed securities position,
(iv) completion and closure of the "P.O." deal, subject to acceptable structure,
(v) exploration and provision of advice to the Company on the process of
launching a collateralized bond obligation or other form of long-term financing
or take-out strategy for the mortgage-backed securities portfolio and
(vi) demonstration of the ability to functionally work 50% of the time away from
the Portland office (as a result of being in the New York office or traveling on
behalf of the Company). In addition, for each 12-month period commencing
October 1, 2000, Mr. Rosen is entitled to an annual bonus of $850,000, of which
$725,000 will be a minimum guaranteed bonus payable on a quarterly basis and the
remainder will be an incentive bonus. An incentive bonus of $62,500 will be
earned by Mr. Rosen, if one of the following two performance goals is obtained:
(1) sale of the Company's GI Joes commercial real estate retail and warehouse
portfolio; or (2) sale of the Company's Irwindale land investment by
September 3, 2001. An incentive bonus of $62,500 will be earned by Mr. Rosen, if
two of the following four performance goals are obtained: (1) an annual increase
in the Company's book value from September 3, 2001; (2) the Company's income,
excluding charges from the impairment of mortgage-backed securities, divided by
its net shareholders' equity, exceeds the 10 year U.S. Treasury note yield as
measured using the rate in effect on the first business day of each period
beginning October 1; (3) the Company's Funds From Operations, including capital
gains and losses, but excluding charges from the impairment of mortgage backed
securities, exceeds $5 million; or (4) a recovery of more than $2,000,000 in the
Company's unrealized loss allowance for its existing mortgage-backed securities
portfolio of WFSG and subsidiary or affiliate issued deals from October 1, 2000
to September 30, 2001.
For each 12-month period commencing September 30, 1999, Mr. Tassos is
entitled to receive an annual bonus based upon the Company achieving certain
performance goals. If the Company's return on equity (as defined in the
employment agreement) determined on a post bonus basis is 5% or greater but less
than 10%, Mr. Tassos will be entitled to receive an annual bonus pool equal to
$162,500. If the Company's return on equity (as defined in the employment
agreement) determined on a post bonus basis is 10% or greater but less than 15%,
Mr. Tassos will be entitled to receive a bonus equal to $212,500. If the
Company's return on equity (as defined in the employment agreement)
37
determined on a post bonus basis is 15% or greater, Mr. Tassos will be entitled
to receive a bonus equal to $312,500. If the return on equity (as defined in the
employment agreement) determined on a post bonus basis is less than 5%,
Mr. Tassos will not be entitled to a bonus, unless the Compensation Committee
awards Mr. Tassos a discretionary bonus.
The employment agreements also provide that a portion of the annual bonus
may be advanced to the Executive on a quarterly basis; provided, however, that
advances shall be repaid in the event the relevant quarterly performance goals
are not obtained.
The employment agreements also provide that the Executives may participate
in the Company's Stock Plan.
The employment agreements also provide that during the Employment Term and
thereafter, the Company will indemnify the Executives to the fullest extent
permitted by law, in connection with any claim against the Executive as a result
of the Executive serving as an officer or director of the Company or in any
capacity at the request of the Company in or with regard to any other entity,
employee benefit plan or enterprise. Following the Executives' termination of
employment, the Company will continue to cover the Executives even if the
Executives have ceased to serve in such capacity.
The Executive may terminate his employment agreement at any time for Good
Reason or with or without Good Reason during the Change in Control Protection
Period (if a Change in Control occurs) (capitalized terms as defined in the
agreement). If Mr. Wiederhorn or Mr. Mendelsohn terminates his employment
agreement at any time for Good Reason or with or without Good Reason during the
Change in Control Protection Period (if a Change in Control occurs), or if
Mr. Wiederhorn or Mr. Mendelsohn is terminated by the Company without Cause or
the employment agreement is not renewed in accordance with the employment
agreement, the Executive will be entitled to receive (i) any unreimbursed
business expenses, (ii) any base salary, bonus, vacation pay or other deferred
compensation accrued or earned but not yet paid at the date of termination,
(iii) the estimated annual bonus payable to the Executive pro rated through the
end of the month in which the Executive is terminated, and (iv) one year's base
salary in effect on the date of termination. If Mr. Rosen terminates his
employment agreement at any time for Good Reason or with or without Good Reason
during the Change in Control Protection Period (if a Change in Control occurs),
or if Mr. Rosen is terminated by the Company without Cause or the employment
agreement is not renewed in accordance with the employment agreement, Mr. Rosen
will be entitled to receive (i) any unreimbursed business expenses and (ii) any
base salary, bonus, vacation pay or other deferred compensation accrued or
earned but not yet paid at the date of termination, and after Mr. Rosen signs a
release of claims he will be entitled to receive (i) one year's base salary in
effect on the date of termination and (ii) an amount equal to one full year's
bonus (regardless of whether performance goals were attained). If Mr. Tassos
terminates his employment agreement at any time for Good Reason or with or
without Good Reason during the Change in Control Protection Period (if a Change
in Control occurs), or if Mr. Tassos is terminated by the Company without Cause
or the employment agreement is not renewed in accordance with the employment
agreement, Mr. Tassos will be entitled to receive (i) the estimated annual bonus
payable to the Executive for the annual period, pro rated through the end of the
month in which the Executive is terminated, (ii) any unreimbursed business
expenses and (iii) any base salary, bonus, vacation pay or other deferred
compensation accrued or earned but not yet paid as of the date of termination.
The Executive will also be entitled (in the case of Mr. Rosen, after signing a
release of claims) to (i) accelerated full vesting under all outstanding
equity-based and long-term incentive plans with options remaining outstanding as
provided under the applicable stock option plan and a pro rata payment under any
long term incentive plans based on actual coverage under such plans payment
being made at the time payments would normally be made under such plans;
(ii) any other amounts or benefits due Executive under the then applicable
employee benefit plans of the Company (in accordance with such plan, policy or
practice); (iii) one year of additional service and compensation
38
credit (at his then compensation level) for pension purposes under any defined
benefit type qualified or nonqualified pension plan or arrangement of the
Company, measured from the date of termination of employment and not credited to
the extent that Executive is otherwise entitled to such credit during such one
year period, which payments shall be made through and in accordance with the
terms of the nonqualified defined benefit pension arrangement if any then
exists, or, if not, in an actuarially equivalent lump sum (using the actuarial
factors then applying in the Company's defined benefit plan covering Executive);
(iv) one year of the maximum Company contribution (assuming Executive deferred
the maximum amount and continued to earn his then current salary) measured from
the date of termination under any type of qualified or nonqualified 401(k) plan
(payable at the end of each such year); and (v) continued medical coverage for
the Executive, his spouse and dependents for one year.
If termination is the result of Executive's death, the Company will pay to
the Executive's spouse (or his estate), an amount equal to (i) any earned but
not yet paid compensation, (ii) a pro-rated bonus plus, in the case of
Mr. Rosen an additional six months of bonus, (iii) accelerated full vesting
under all outstanding equity--based and long term incentive plans with options
remaining outstanding as provided under the applicable stock option plan and a
pro rata payment under any long term incentive plans based on actual coverage
under such plans at the time payments normally would be made under such plans,
(iv) any other amounts or benefits due under then applicable employee benefit
plans of the Company (in accordance with such plan, policy or practice),
(v) payment on a monthly basis of six months of base salary to Executive's
spouse or dependents and (vi) continued medical coverage for the Executive's
spouse and dependents for up to one year. In addition, the Executive will
receive accelerated full vesting under all outstanding equity-based and
long-term incentive plans.
If Executive's employment is terminated by reason of disability, the
Executive will be entitled to receive payments and benefits to which his
representatives would be entitled in the event of his termination by reason of
death, provided that the payment of base salary will be reduced by any long-term
disability payments under any policy maintained by the Company.
If the Executive is terminated by the Company with Cause or the Executive
terminates his employment without Good Reason outside of the Change in Control
Protection Period, the Executive will be entitled to receive only his base
salary through the date of termination, the estimated annual bonus pro-rated
through the last day of the month in which the Executive is terminated, and any
unreimbursed business expenses.
The employment agreements also provide for the Company to make a recourse
loan to each Executive up to $50,000 annually for the purchase of the Company's
stock by such Executive up to a maximum of $250,000 (other than in the case of
Mr. Rosen for whom there is no maximum). The loans bear interest at the prime
rate. Interest is not paid in cash but payable in kind on an annual basis (i.e.,
compounded annually). Upon termination, the loan becomes due and payable six
months after the date of termination. At December 31, 2000, the Company had
outstanding loans of $1,026,000 to the Executives.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of the Company (the
"Committee") administers the executive compensation programs of the Company.
From January 1, 2000 through September 19, 2000, the members of the Committee
were Andrew A. Wiederhorn, Lawrence A. Mendelsohn, David C. Egelhoff and Patrick
Terrell. Effective September 20, 2000, the Board of Directors appointed David C.
Egelhoff, Patrick Terrell and Jordan D. Schnitzer, all of whom are independent
directors as the members of the Committee. All actions of the Committee
pertaining to executive compensation are submitted to the Board of Directors for
approval.
The Company's executive compensation program is designed to attract, retain,
and motivate high caliber executives and to focus the interests of the
executives on objectives that enhance stockholder
39
value. These goals are attained by emphasizing "pay for performance" by having a
portion of the executive's compensation dependent upon business results and by
providing equity interests in the Company. The principal elements of the
Company's executive compensation program are base salary, bonus, and stock
options. In addition, the Company recognizes individual contributions as well as
overall business results, using a discretionary bonus program.
BASE SALARY. Base salaries for the Company's executives are intended to
reflect the scope of each executives' responsibilities, the success of the
Company, and contributions of each executive to that success. Executive salaries
are adjusted gradually over time and only as necessary to meet this objective.
Increases in base salary may be moderated by other considerations, such as
geographic or market data, industry trends or internal fairness within the
Company.
The base salaries for Andrew A. Wiederhorn, Lawrence A. Mendelsohn, Robert
G. Rosen and Chris Tassos for 2000 are set forth in their respective employment
agreements.
BONUSES. The Company paid annual bonuses in 2000. The Committee determined
the amount of the annual discretionary and other bonuses paid by the Company.
STOCK OPTION PLAN. At its initial public offering in April 1998, the
Company adopted the Stock Plan. The purpose of the Stock Plan is to enable the
Company to attract, retain and motivate key employees and directors by providing
them with equity participation in the Company. Accordingly, the Stock Plan
permits the Company to grant stock options, restricted stock and stock
appreciation rights (collectively "Awards") to employees, directors,
consultants, and vendors of the Company and subsidiaries of the Company. The
Board of Directors has delegated administration of the Stock Plan to the
Committee.
Under the Stock Plan, the Committee may grant stock options with an exercise
price not less than the fair market value of the shares covered by the option on
the date the option is granted. The Committee may also grant Awards of
restricted shares of Common Stock. Each restricted stock Award would specify the
number of shares of Common Stock to be issued to the recipient, the date of
issuance, any consideration for such shares and the restrictions imposed on the
shares (including the conditions of release or lapse of such restrictions). The
Committee may also grant Awards of stock appreciation rights. A stock
appreciation right entitles the holder to receive from the Company, in cash or
Common Stock, at the time of exercise, the excess of the fair market value at
the date of exercise of a share of Common Stock over a specified price fixed by
the Committee in the Award, multiplied by the number of shares as to which the
right is being exercised. The specified price fixed by the Committee will not be
less than the fair market value of shares of Common Stock at the date the stock
appreciation right was granted.
In 2000, no options were issued to executive officers and employees.
RESTRICTED STOCK TRUST. In the fourth quarter of 2000, the Company
established a trust which purchased 525,000 shares of the Company's common stock
from an unrelated shareholder. The Company's contribution to the trust of
approximately $1.3 million is included in the Company's compensation expenses.
The trust was established for the benefit of the Company's employees and
directors to raise their ownership in the Company, thereby strengthening the
mutuality of interests between them and the Company's shareholders. While these
shares are held in trust, they will be voted ratably with ballots cast by all
other shareholders.
Lawrence Mendelsohn, Andrew Wiederhorn, and David Egelhoff are the trustees
for the trust. Pursuant to the terms of the trust, the trustees will, from time
to time, allocate the Contributed Shares to the Company's employees. An employee
shall not have any rights with respect to any Contributed Shares allocated to
him unless and until the employee completes five years of continuous service
with the Company, commencing with the date the employee is first allocated such
shares. Upon the
40
employee's completion of the vesting period, the trustees shall promptly
distribute to such employee the shares allocated to such employee; provided,
however, that the trustees may, in lieu of distributing the shares, make a cash
payment to the employee equal to the fair market value of the shares allocated
to such employee as of the date immediately prior to the date of distribution or
distribute any combination of cash or shares, as determined by the trustees, in
their sole discretion.
As of February 28, 2001, the trustees had not allocated any shares to the
Company's employees or directors.
POLICY OF DEDUCTIBILITY OF COMPENSATION. Section 162(m) of the Internal
Revenue Code limits the Company's tax deduction to $1 million for compensation
paid to the Named Executive Officers, unless certain requirements are met. One
of these requirements is that compensation over $1 million must be performance
based. The Committee intends to continue to use performance-based compensation
in the future, which should minimize the effect of this deduction limitation.
However, the Committee strongly believes that its primary responsibility is to
provide a compensation program that will attract, retain and reward the
executive talent necessary to maximize the return to stockholders, and that the
loss of a tax deduction may be necessary in some circumstances. Base salary does
not qualify as performance-based compensation under IRS regulations.
CEO COMPENSATION AND PRESIDENT COMPENSATION. Andrew A. Wiederhorn was
appointed the Company's Chief Executive Officer and Lawrence A. Mendelsohn was
appointed its President at its formation. The base salary for each of these
officers for 2000 was determined by the Committee and is set forth in their
employment agreements.
COMPENSATION COMMITTEE
David C. Egelhoff
Patrick Terrell
Jordan Schnitzer
41
PERFORMANCE GRAPH
The Performance Graph shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act or under the Exchange Act, except to
the extent the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under the Securities Act or the Exchange
Act.
The following Performance Graph covers the period beginning April 6, 1998
when our Common Stock was first traded on the NASDAQ Stock Market through
December 31, 2000. The graph compares the shareholder return on the Company's
Common Stock to the Standard & Poor's 500 Stock Index ("S&P 500") and a peer
group of companies ("PGI").
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
APR 6 1998 DEC 31 1998 DEC 31 1999 DEC 31 2000
FCCG $100 $18.56 $12.88 $14.39
PGI $100 $42.01 $27.99 $31.41
S&P 500 $100 $109.62 $131.02 $117.74
MEASUREMENT PERIOD(1)(2)
-----------------------------------------------------
APRIL 6, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
-------- ------------ ------------ ------------
Company........................................ $100.00 $ 18.56 $ 12.88 $ 14.39
PGI(3)......................................... $100.00 $ 42.01 $ 27.99 $ 31.41
S&P 500........................................ $100.00 $109.62 $131.02 $117.74
- ------------------------
(1) Assumes all distributions to stockholders are reinvested on the payment
dates.
(2) Assumes $100 invested on April 6, 1998 in our Common Stock, the S&P 500
Index and the PGI.
(3) The companies included in the PGI are Anthracite Capital, Amresco Capital
Trust Inc., Resource America Inc., Dynex Capital Inc., Hanover Capital
Mortgage Holdings, Novastar Financial Inc. and Capital Trust.
42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows as of February 28, 2001 the beneficial ownership
of common stock with respect to (i) each person who was known by the Company to
own beneficially more than 5% of the outstanding shares of the Company's common
stock, (ii) each director and nominee for director, (iii) each executive officer
named below, and (iv) directors and executive officers as a group.
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) CLASS
- ------------------------------------------------------------ ------------------------ ----------
Andrew A. Wiederhorn........................................ 979,137(3) 9.2
Lawrence A. Mendelsohn...................................... 612,760(4) 5.8
Donald Berchtold............................................ 11,114(5) *
Matthew Green............................................... 2,500(6) *
Robert L. Moir.............................................. 5,000(7) *
Robert G. Rosen............................................. 367,167(8) 3.5
Robert A. Sprouse III....................................... 2,500(6) *
R. Scott Stevenson.......................................... 2,600(6) *
Chris Tassos................................................ 47,943(9) *
David C. Egelhoff........................................... 60,800(10) *
Jordan D. Schnitzer......................................... 563,500(10) 5.3
Patrick Terrell............................................. 490,700(11) 4.6
Clarence B. Coleman and Joan F. Coleman..................... 637,189(12) 6.1
All executive officers and directors as a group (12
persons).................................................. 3,145,721(13) 28.6
- ------------------------------
(1) The address for each stockholder is c/o Fog Cutter Capital Group Inc., 1631
SW Columbia Street, Portland, OR 97201.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of Common Stock subject to
options or warrants exercisable within 60 days of February 28, 2001 are
deemed outstanding for computing the percentage beneficially owned by the
person or group holding such options or warrants, but are not deemed
outstanding for computing the percentage of any other person. Except as
noted, each shareholder has sole voting power and sole investment power with
respect to all shares beneficial owned by such shareholder.
(3) Includes 603,001 shares of Common Stock held by Mr. Wiederhorn's spouse,
38,636 shares of Common Stock held by Mr. Wiederhorn's minor children, and
100,000 shares of Common Stock held by a partnership controlled by
Mr. Wiederhorn's spouse. Also includes 157,500 shares of Common Stock
issuable upon the exercise of outstanding options.
(4) Includes 17,150 shares of Common Stock held by Mr. Mendelsohn's spouse and
403,102 shares of Common Stock held by two limited liability companies
controlled by Mr. Mendelsohn's spouse and 80,000 shares of Common Stock held
by a limited partnership controlled by Mr. Mendelsohn and his spouse. Also
includes 87,500 shares of Common Stock issuable upon exercise of outstanding
options.
(5) Includes 152 shares of Common Stock held by Mr. Berchtold's spouse, 1,374
shares of Common Stock held in trust for Mr. Berchtold's minor child, and
3,758 shares of Common Stock held by Mr. Berchtold's minor child. Also
includes 2,500 shares issuable upon the exercise of outstanding options.
(6) Includes 2,500 shares of Common Stock issuable upon the exercise of
outstanding options.
(7) Includes 5,000 shares of Common Stock issuable upon the exercise of
outstanding options.
(8) Includes 59,167 shares of Common Stock issuable upon the exercise of
outstanding options.
(9) Includes 38,333 shares of Common Stock issuable upon the exercise of
outstanding options.
(10) Includes 48,500 shares of Common Stock issuable upon the exercise of
outstanding options.
(11) Includes 46,500 shares of Common Stock issuable on the exercise of
outstanding options and 194,200 shares held by Mr. Terrell's spouse.
(12) Based upon information obtained from a Schedule 13D filed with the
Securities and Exchange Commission on or about August 26, 1999.
(13) Includes 501,000 shares of Common Stock issuable upon the exercise of
outstanding options.
* Less than one percent.
43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
WFSG AND ITS AFFILIATES
BACKGROUND
Prior to September 1999, the Company and WFSG had the same senior management
team (though the Company had a different stockholder base and the majority of
its directors were independent), and the Company's business affairs and
day-to-day operations were managed by WRSC, pursuant to a management agreement
("Management Agreement"). After September 1999, the Company's independent
directors decided that the Company should be internally managed and the Company
and WFSG ceased to have the same senior executives and no longer had any common
directors. Accordingly, the Company no longer views WFSG and its subsidiaries as
affiliated parties.
RELATIONSHIPS PRIOR TO SEPTEMBER 1999
Prior to September 1999, we had a number of contractual relationships with
WFSG and its affiliates. The Company had entered into loan servicing agreements
with WCC, an affiliate of WFSG, and Wilshire Servicing Company U.K. Limited, a
wholly-owned subsidiary of WFSG (collectively, the "Servicers"). Under these
servicing agreements, the Servicers provided loan and real property management
services to us, including billing, portfolio administration and collection
services. In return, we agreed to pay each of the Servicers a fee at market
rates for servicing our investments and to reimburse them for certain
out-of-pocket costs. During 1999, servicing fees and reimbursement for expenses
totaled $256,000 and $49,000, respectively, and management fees under the
Management Agreement totaled $2,404,000. We prepaid $3.2 million of future
service fees as part of the WFSG and WCC restructuring described below, although
WFSG had disputed this amount in the past (as well as servicing eligibility for
application of the credit), suggesting that the original amount was
$2.3 million.
CONFLICTS RELATING TO WFSG'S RESTRUCTURING
A conflict of interest also arose out of our status as a creditor of WFSG in
connection with its debt restructuring. In addition to holding certain of WFSG's
publicly traded notes, we had an outstanding receivable of approximately
$17.0 million from WFSG, which bore interest at 13% per annum. WFSG incurred
significant losses as a result of adverse market conditions in 1998 and on
March 3, 1999 filed a prepackaged plan of reorganization (the "Restructuring
Plan") with the U.S. Bankruptcy Court for the District of Delaware as part of a
voluntary bankruptcy filing under Chapter 11 of the U.S. Bankruptcy Code. Prior
to the solicitation of WFSG's Restructuring Plan, the unofficial noteholders
committee of WFSG (which did not include the Company) negotiated a compromise
and settlement of the Company's claim against WFSG in respect of the
$17.0 million receivable. The Company's independent directors represented it in
connection with the compromise and settlement negotiations. Under this
compromise and settlement, if the Company funded the full amount of the
debtor-in-possession facility described below, the Company would have received a
new note for the full amount of the receivable bearing interest at 6% per annum,
payable monthly in arrears and treated the same as the other holders of WFSG's
13% Series B Notes. The business decision to provide the debtor-in-possession
facility was based on the independent directors' desire to obtain the best
possible treatment for the Company's holdings of WFSG's 13% Series B Notes and
the account receivable due from WFSG and the fact that the debtor-in-possession
facility had priority as a matter of law and was fully secured by the stock of
WFSG's banking subsidiary, First Bank of Beverly Hills, F.S.B. Without funding
of the debtor-in-possession facility, it is unlikely that the Company would have
received as favorable treatment for its investments. The new note bore interest
at 6%, and therefore, the carrying value of the receivable was reduced by
$5.9 million at December 31, 1998 to reflect the reduction in interest rate.
44
The court approved the Restructuring Plan on April 12, 1999 and, on
June 10, 1999; WFSG emerged from bankruptcy pursuant to the Restructuring Plan.
As part of the Restructuring Plan, during the quarter ended March 31, 1999, the
Company agreed to provide WFSG with debtor-in-possession financing pursuant to
which the Company agreed to lend up to $10.0 million (the "DIP Facility"). The
DIP Facility bore interest at a rate of 12% per annum and was secured by the
stock of First Bank of Beverly Hills, FSB. The DIP Facility would have matured
on February 29, 2004 and repayment was required through fully amortizing
principal and interest payments commencing on February 29, 2000. Prior to
February 29, 2000, only interest payments were required. The Company loaned
$5.0 million under the DIP Facility on March 3, 1999 and did not provide WFSG
with the remaining balance. Accordingly, under the agreement negotiated by the
Company's non-employee directors with WFSG and its creditors, 50%, or
approximately $8.5 million, of WFSG's obligation was treated PARI PASSU with the
claims of WFSG's noteholders and converted, together with approximately
$21.4 million (in principal plus accrued but unpaid interest) of WFSG's 13%
Series B Notes, to 2,874,791 shares of newly issued common stock of WFSG on
June 10, 1999, the effective date of the Restructuring Plan. Additionally, on
the effective date of the Restructuring Plan, the Company acquired approximately
$8.5 million in principal amount of WFSG's 6% Convertible PIK Notes due 2006
(the "PIK Notes") in exchange for the remaining 50% of the $17.0 million
intercompany receivable owed by WFSG to the Company.
In connection with the restructuring of WCC's debt, we paid $15 million to
WCC in January 1999, consisting of a payment of amounts owed by the Company to
WCC of $11.8 million and the prepayment of $3.2 million of future service fees
for a release of a $35 million guarantee by the Company of WCC's indebtedness
and of any and all claims against us by the guaranteed party. At that time, we
had approximately $3.2 million of prepaid future service fees with WCC. However,
this figure (as well as servicing eligibility for application of the credit) had
been disputed by WFSG in the past, which claimed that the amount owed to WCC was
approximately $900,000 higher thereby reducing the amount of the prepayment
credit to $2.3 million.
RELATIONS FOLLOWING SEPTEMBER 1999
The decision to become internally managed and cease to utilize the services
of WFSG and its affiliates resulted in disputes between the Company and WFSG,
which included disputes over the termination of the Management Agreement, the
applicability of a facilities sharing agreement and other matters. On
August 20, 1999, the Company filed a lawsuit (the "Lawsuit") against WFSG in the
Circuit Court of the State of Oregon for Multnomah County and on August 23,
1999, the Company filed an amended complaint in the lawsuit adding as additional
defendants WRSC, WCC, a 50.01% subsidiary of WFSG, and Wilshire Management
Leasing Corporation ("WML"), a wholly-owned subsidiary of WFSG alleging:
(1) WFSG's termination of Messrs. Wiederhorn and Mendelsohn made WFSG and WRSC
unable and/or unwilling to provide management to the Company as required under
the Management Agreement; (2) the inability of WFSG and WRSC to manage the
Company's business affairs triggered application of a facilities sharing
agreement dated February 19, 1999 among the Company, WFSG, WRSC, WCC, and WML
(the "Facilities Sharing Agreement"); and (3) WFSG's refusal to allow
Messrs. Wiederhorn and Mendelsohn access to WFSG's facilities, personnel, and
equipment for the Company's business violated the terms of the Facilities
Sharing Agreement.
On September 22, 1999, WFSG and WRSC filed papers in the above litigation
alleging various affirmative defenses and counterclaims, including allegations
that the Facilities Sharing Agreement was not in effect and was not enforceable,
and that the Company breached the Management Agreement, obligating the Company
to pay a termination fee.
The Company entered into a partial settlement agreement dated as of
December 10, 1999 with WFSG, pursuant to which the Company repurchased 992,687
shares of its common stock (the "Shares"), representing approximately 8.7% of
shares outstanding, in a non-cash transaction from
45
WFSG. The Shares, as well as 1,112,500 of options and cumulative dividends
payable on the Shares, were received in exchange for a reduction in value of the
PIK Notes owed by WFSG to the Company. The Shares and options represented WFSG's
entire ownership interest in the Company.
In October 1999, the Company also purchased from WFSG approximately
$20.9 million of mortgage-backed securities as part of these settlement
discussions.
On February 18, 2000, after the Company received permission from the court
to do so, the Company filed a Second Amended Complaint which added claims
against WFSG and its affiliated companies as follows: claims for declaratory
relief that WFSG is entitled to no termination fee under the Management
Agreement; seeking an accounting from WCC regarding the use of funds from
lockbox accounts used to service assets which the Company owns or in which the
Company has a beneficial interest; declaring the Company's entitlement to use
prepaid service fees for the servicing of assets serviced under pooling and
servicing agreements; and declaring WFSG to be in default of its
Debtor-in-Possession ("DIP") loan agreement with the Company and declaring that
the balance of $5.0 million is immediately due and payable. On March 2, 2000,
WFSG filed an answer disputing each of the counterclaims added by the Second
Amended Complaint, and realleging the counterclaims included in WFSG's original
answer and counterclaim.
In March 2000, we terminated the servicing relationship in the United
Kingdom with the European Servicer and transferred this servicing to an
unaffiliated third party. We also terminated all loan and real property
servicing in the United States with WCC, reserving our rights to do so with
respect to certain mortgage-backed securities.
In July 2000, the court granted summary judgment to Andrew A. Wiederhorn and
Lawrence A. Mendelsohn with respect to certain claims that had been made by WFSG
against Messrs. Wiederhorn and Mendelsohn.
On August 28, 2000, the Company announced that the Company, on behalf of
itself and all of its subsidiaries and affiliates, Andrew A. Wiederhorn and
Lawrence A. Mendelsohn entered into settlement agreements, dated as of
August 17, 2000, with WFSG, on behalf of all of its subsidiaries and affiliates
other than First Bank of Beverly Hills, F.S.B., pursuant to which all disputes
among the parties have been settled, including those related to WFSG's
termination of Andrew A. Wiederhorn and Lawrence A. Mendelsohn (the
"Settlement"). The settlement agreements contain provisions, which provide that,
except as required for compliance with laws or government requests, the terms of
the Settlement shall remain confidential.
As part of the Settlement, the Company and WFSG agreed to dismiss with
prejudice, and without costs or attorney fees to any party, their claims,
including counterclaims, in the Lawsuit and WFSG agreed that the termination of
Messrs. Wiederhorn and Mendelsohn was without cause.
LOANS TO OFFICERS
The employment agreements with Messrs. Wiederhorn, Mendelsohn, Rosen, and
Tassos provide for the Company to make a recourse loans to each executive up to
$50,000 annually for the purchase of the Company's stock by such executive up to
a maximum of $250,000 (other than in the case of Mr. Rosen for whom there is no
maximum). The loans bear interest at the prime rate. Interest is not paid in
cash but payable in kind on an annual basis (i.e., compounded annually). Upon
termination of any such executive, the executive's loans will become due and
payable six months after the date of termination. At December 31, 2000, the
Company had outstanding loans to Messrs. Wiederhorn, Mendelsohn, and Rosen of
approximately $104,000, $53,000, and $869,000, respectively.
46
FOG CUTTER LONG-TERM VESTING TRUST
In the fourth quarter of 2000, the Company established a trust which
purchased 525,000 shares of the Company's common stock from an unrelated
shareholder. The Company's contribution to the trust of approximately
$1.3 million is included in the Company's compensation expenses. The trust was
established for the benefit of the Company's employees and directors to raise
their ownership in the Company, thereby strengthening the mutuality of interests
between them and the Company's shareholders. While these shares are held in
trust, they will be voted ratably with ballots cast by all other shareholders.
Andrew Wiederhorn, Lawrence Mendelsohn and David Egelhoff are the trustees
for the trust. Pursuant to the terms of the trust, the trustees will, from time
to time, allocate the shares to the Company's employees. An employee shall not
have any rights with respect to any shares allocated to him unless and until the
employee completes five years of continuous service with the Company, commencing
with the date the employee is first allocated such shares. Upon the employee's
completion of the vesting period, the trustees shall promptly distribute to such
employee the shares allocated to such employee; provided, however, that the
trustees may, in lieu of distributing the shares, make a cash payment to the
employee equal to the fair market value of the shares allocated to such employee
as of the date immediately prior to the date of distribution or distribute any
combination of cash or shares, as determined by the trustees, in their sole
discretion.
As of February 28, 2001, the trustees had not allocated any shares to the
Company's employees or directors.
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements
Consolidated Statements of Financial Condition at December 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December 31, 2000,
1999
and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000,
1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000,
1999
and 1998
All financial statement schedules of the Company are omitted because they
are not required
or are not applicable.
(b) Reports on Form 8-K filed during the fourth quarter of the period covered by
this report:
Current Report on Form 8-K filed October 25, 2000 announcing the sale of
five retail buildings and an office complex/warehouse/distribution center,
totaling 444,864 square feet, to Madrona Park II, LLC, an unaffiliated third
party. Pro forma financial information giving effect to sale was filed as an
exhibit to the Current Report on Form 8-K.
(c) Exhibits
See Exhibit Index immediately following the signature pages.
48
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Auditors--Ernst & Young LLP........... F-2
Report of Independent Public Accountants--Arthur Andersen
LLP....................................................... F-3
Consolidated Financial Statements:
Consolidated Statements of Financial Condition at December
31, 2000 and 1999......................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 2000,
1999 and 1998............................................. F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000,
1999 and 1998............................................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2000,
1999 and 1998............................................. F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
REPORT OF INDEPENDENT AUDITORS--ERNST & YOUNG LLP
To the Board of Directors and Stockholders of Fog Cutter Capital Group Inc.:
We have audited the accompanying consolidated statements of financial
condition of Fog Cutter Capital Group Inc. and Subsidiaries (the "Company") as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. 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 auditing standards generally
accepted in the United States. 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 consolidated financial position of
Fog Cutter Capital Group Inc. and Subsidiaries as of December 31, 2000 and 1999,
and the consolidated results of their operations and their consolidated cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Los Angeles, California
February 8, 2001
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Fog Cutter Capital Group Inc.:
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of Fog Cutter Capital Group Inc.
and Subsidiaries (the "Company") for the year ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated statements of operations, changes in
stockholders' equity and cash flows referred to above presents fairly, in all
material respects, the consolidated results of operations, changes in
stockholders' equity and cash flows of Fog Cutter Capital Group Inc. and
Subsidiaries for the year ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States.
/S/ ARTHUR ANDERSEN LLP
Los Angeles, California
March 19, 1999
F-3
FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Cash and cash equivalents................................... $ 3,394 $ 5,862
Securities available for sale, at fair value................ 74,731 104,572
Loans, net.................................................. 30,404 31,634
Investments in real estate held for sale.................... 24,767 63,225
Investments in WFSG and affiliates, net..................... 5,593 9,657
Accrued interest receivable................................. 522 1,246
Other assets................................................ 10,893 2,470
-------- --------
Total assets................................................ $150,304 $218,666
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowings..................................... $ 18,170 $ 96,815
Long-term borrowings...................................... 70,760 64,550
Accounts payable and accrued liabilities.................. 4,006 2,339
Dividends payable......................................... 1,717 4,090
-------- --------
Total liabilities..................................... 94,653 167,794
-------- --------
Commitments and contingencies (Note 11)
Stockholders' Equity:
Preferred stock, $.0001 par value; 25,000,000 shares
authorized; no shares issued and outstanding............ -- --
Common stock, $.0001 par value; 200,000,000 shares
authorized; 11,500,000
shares issued; and 10,507,313 shares outstanding........ 166,981 166,981
Treasury stock; 992,687 common shares, at cost............ (2,171) (2,171)
Accumulated deficit....................................... (106,077) (90,717)
Recourse loans to officers to acquire stock............... (1,026) (198)
Accumulated other comprehensive loss...................... (2,056) (23,023)
-------- --------
Total stockholders' equity............................ 55,651 50,872
-------- --------
Total liabilities and stockholders' equity.................. $150,304 $218,666
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Net Interest Income:
Loans............................................... $ 3,900 $ 6,740 $ 10,838
Securities.......................................... 10,718 15,342 15,709
Other investments................................... 460 604 1,145
----------- ----------- -----------
Total interest income............................. 15,078 22,686 27,692
Interest expense.................................... 7,704 12,897 13,608
----------- ----------- -----------
Net interest income before loan losses............ 7,374 9,789 14,084
Recovery of (provision for) loan losses............. 555 1,150 (11,842)
----------- ----------- -----------
Net interest income after loan losses............. 7,929 10,939 2,242
Real Estate Operations:
Operating income.................................... 4,870 7,148 4,939
Operating expense................................... (601) (205) (345)
Interest expense.................................... (2,742) (4,546) (2,853)
Gain on sale of real estate......................... 5,404 1,042 --
Provision for losses on real estate................. -- (892) --
Depreciation........................................ (993) (1,102) (963)
----------- ----------- -----------
Total real estate operations...................... 5,938 1,445 778
Other Operating (Loss) Income:
Market valuation losses and impairments............. (22,257) (30,029) (54,822)
Provision for disputes with WFSG.................... (225) (4,077) --
Gain on sale of securities.......................... 5,197 1,326 943
Gain on sale of loans............................... 159 -- 1,320
Other income, net................................... 29 180 23
----------- ----------- -----------
Total other operating loss........................ (17,097) (32,600) (52,536)
Operating Expenses:
Compensation and employee benefits.................. 7,869 1,353 --
Management fees..................................... -- 2,404 3,179
Professional fees................................... 1,973 1,250 1,220
Servicing fees...................................... 154 256 691
Other............................................... 2,316 1,168 1,782
----------- ----------- -----------
Total operating expenses.......................... 12,312 6,431 6,872
----------- ----------- -----------
NET LOSS.............................................. $ (15,542) $ (26,647) $ (56,388)
=========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE.................. $ (1.48) $ (2.33) $ (4.94)
WEIGHTED AVERAGE SHARES OUTSTANDING................... 10,507,313 11,442,921 11,421,933
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
RECOURSE
LOANS TO ACCUMULATED
COMMON STOCK TREASURY STOCK OFFICERS TO OTHER
--------------------- ------------------- ACCUMULATED ACQUIRE COMPREHENSIVE
SHARES(1) AMOUNT SHARES AMOUNT DEFICIT STOCK LOSS TOTAL
---------- -------- -------- -------- ----------- ----------- ------------- --------
Initial capital.............. -- $ 2 -- $ -- $ -- $ -- $ -- $ 2
Issuance of common stock..... 11,500,000 166,979 -- -- -- -- -- 166,979
Comprehensive loss:
Net loss................... -- -- -- -- (56,388) -- -- (56,388)
Other comprehensive loss:
Foreign currency
translation............ -- -- -- -- -- -- (7) (7)
Unrealized holding losses
on securities available
for sale............... -- -- -- -- -- -- (67,817) (67,817)
Reclassification
adjustment for losses
on securities included
in net loss............ -- -- -- -- -- -- 37,379 37,379
--------
Total comprehensive loss..... (86,833)
Dividends declared........... -- -- -- -- (7,705) -- -- (7,705)
---------- -------- ------- ------- --------- ------- -------- --------
Balance at December 31,
1998....................... 11,500,000 166,981 -- -- (64,093) -- (30,445) 72,443
Comprehensive loss:
Net loss................... -- -- -- -- (26,647) -- -- (26,647)
Other comprehensive loss:
Foreign currency
translation............ -- -- -- -- -- -- (148) (148)
Unrealized holding losses
on securities available
for sale............... -- -- -- -- -- -- (12,015) (12,015)
Reclassification
adjustment for losses
on securities included
in net loss............ -- -- -- -- -- -- 19,585 19,585
--------
Total comprehensive loss..... (19,225)
Treasury stock acquired...... (992,687) -- 992,687 (2,171) -- -- -- (2,171)
Recourse loans to officers to
acquire stock.............. -- -- -- -- -- (198) -- (198)
Discount on dividend
purchase................... -- -- -- -- 23 -- -- 23
---------- -------- ------- ------- --------- ------- -------- --------
Balance at December 31,
1999....................... 10,507,313 166,981 992,687 (2,171) (90,717) (198) (23,023) 50,872
Comprehensive income:
Net loss................... -- -- -- -- (15,542) -- -- (15,542)
Other comprehensive income:
Foreign currency
translation............ -- -- -- -- -- -- (345) (345)
Unrealized holding losses
on securities available
for sale............... -- -- -- -- -- -- (3,880) (3,880)
Reclassification
adjustment for losses
on securities included
in net loss............ -- -- -- -- -- -- 25,192 25,192
--------
Total comprehensive income... 5,425
Recourse loans to officers to
acquire stock.............. -- -- -- -- -- (828) -- (828)
Discount on dividend
purchase................... -- -- -- -- 182 -- -- 182
---------- -------- ------- ------- --------- ------- -------- --------
Balance at December 31,
2000....................... 10,507,313 $166,981 992,687 $(2,171) $(106,077) $(1,026) $ (2,056) $ 55,651
========== ======== ======= ======= ========= ======= ======== ========
- ------------------------------
(1) Issued and outstanding.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(15,542) $(26,647) $(56,388)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation............................................ 1,144 1,102 963
Amortization of premiums and accretion of discounts,
net..................................................... (145) (377) (1,322)
(Recovery of) provision for loan losses................. (555) (1,150) 11,842
Provision for losses on real estate..................... -- 892 --
Market valuation losses and impairments................. 22,257 30,029 54,822
(Gain) loss on foreign currency translation............. (29) 24 --
Gain on sale of securities.............................. (5,197) (1,326) (943)
Gain on sale of loans................................... (159) -- (1,320)
Gain on sale of real estate............................. (5,404) (1,042) --
Change in:
Investments in WFSG and affiliates, net............... 2,764 (15,034) (6,591)
Accrued interest receivable........................... 724 792 (1,939)
Other assets.......................................... (1,653) (559) (2,673)
Accounts payable and accrued liabilities.............. 1,704 (3,919) 8,033
-------- -------- --------
Net cash (used in) provided by operating
activities........................................... (91) (17,215) 4,484
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale................. (19,481) (30,420) (365,919)
Repayments of securities available for sale............... 3,244 19,588 5,517
Proceeds from sale of securities available for sale....... 51,627 46,585 133,327
Purchase of loans......................................... (361) (663) (672,919)
Principal repayments on loans............................. 2,042 39,802 21,907
Proceeds from sale of real estate......................... 43,448 20,131 --
Proceeds from sale of loans............................... 359 48,366 515,386
Investments in real estate................................ (2,215) (223) (85,648)
Deposits in escrow........................................ (6,719) -- --
Other..................................................... (872) 117 428
-------- -------- --------
Net cash provided by (used in) investing
activities........................................... 71,072 143,283 (447,921)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings....................... 11,068 22,301 529,851
Repayments on short-term borrowings....................... (89,713) (132,162) (306,085)
Proceeds from securitized mortgage obligations............ -- -- 372,318
Repayment of securitized mortgage obligations............. -- -- (372,318)
Proceeds from long-term borrowings........................ 36,356 -- 60,940
Repayments on long-term borrowings........................ (28,787) (14,622) (363)
Dividend payments on common stock......................... (2,209) (486) (3,105)
Proceeds from issuance of common stock.................... -- -- 166,981
Other..................................................... 15 -- --
-------- -------- --------
Net cash (used in) provided by financing
activities........................................... (73,270) (124,969) 448,219
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (179) (19) --
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (2,468) 1,080 4,782
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 5,862 4,782 --
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 3,394 $ 5,862 $ 4,782
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 11,393 $ 19,589 $ 12,655
Cash paid for taxes....................................... $ -- $ -- $ --
NONCASH FINANCING AND INVESTING ACTIVITIES:
Investment in WFSG........................................ $ -- $ 3,104 $ --
Purchase of treasury stock and securities available for
sale...................................................... $ -- $ (4,591) $ --
Common stock dividend declared but not paid............... $ -- $ -- $ 4,600
Additions to investment in real estate acquired in
settlement of loans....................................... $ -- $ -- $ 348
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND AS NOTED)
NOTE 1--ORGANIZATION AND RELATIONSHIPS
The Company was originally incorporated as Wilshire Real Estate Investment
Trust Inc. in the State of Maryland on October 24, 1997. The Company was
initially formed with a capital investment of $2 thousand. On April 6, 1998, the
Company was capitalized with the sale of 11,500,000 shares of common stock, par
value $.0001 per share, at a price of $16.00 per share (the "Offering"). Total
net proceeds of the Offering after underwriting and offering expenses were
$167.0 million. In September 1999, in order to benefit from significant net
operating loss carryforwards and to avoid any risk of not qualifying as a real
estate investment trust ("REIT"), the Company, with the approval of its
shareholders, elected not to be taxed as a REIT, and the Company's name was
changed to Wilshire Real Estate Investment Inc. Effective January 25, 2001, the
Company changed its name to Fog Cutter Capital Group Inc. to better reflect the
opportunistic nature of its business and investments.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--The operations of the Company consist primarily of the
acquisition of pools of performing, sub-performing and non-performing
residential and commercial mortgage loans, as well as commercial real estate and
mortgage-backed securities. The Company's primary sources of revenue are from
loans, mortgage-backed securities and real estate.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Fog Cutter Capital Group Inc. and its
subsidiaries, including Fog Cap L.P. (formerly Wilshire Real Estate Partnership
L.P.), WREP 1998-1 LLC, Fog Cutter Securities Corporation (formerly WREI
Securities Corporation), Fog Cutter Servicing Inc. (formerly WREI
Mortgage Inc.) and WREP Islands Limited. Intercompany accounts have been
eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS--The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
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. Significant
estimates include valuation allowances for loans and real estate owned, the
determination of fair values of certain financial instruments for which there is
no active market, the allocation of basis between assets sold and retained, the
evaluation of other than temporary market value declines, and the selection of
yields utilized to recognize interest income on certain mortgage-backed
securities. Estimates and assumptions also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS--For purposes of reporting the consolidated
financial condition and cash flows, cash and cash equivalents include
non-restricted cash and due from banks, repurchase agreements and securities
with original maturities of 90 days or less.
SECURITIES AVAILABLE FOR SALE--Securities available for sale include
mortgage-backed securities and other securities that are designated as assets
available for sale because the Company does not intend to hold them to maturity.
Securities available for sale are carried at estimated fair values with the net
unrealized gains or losses reported in accumulated other comprehensive loss,
which is included as a separate component in stockholders' equity. The Company
records its securities portfolio at estimated fair value at the end of each
month based upon available broker/dealer valuations (if available), subject to
an internal review process. For those securities that do not have an available
market quotation, the Company determines the fair value of the securities by
modeling the anticipated cash flows using certain assumptions (e.g. prepayment
speeds, default rates, severity of losses, and discount rate). As of
F-8
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
each reporting period, the Company evaluates whether and to what extent any
decline in the estimated fair values is to be recognized in earnings as other
than temporary. Other than temporary declines in the carrying value of
securities, if any, are charged to earnings and the basis of each security is
adjusted, accordingly. At disposition, the realized net gain or loss is included
in earnings on a specific identification basis. The amortization of premiums and
accretion of discounts are computed using the interest method after considering
actual and estimated prepayment rates, if applicable. Actual prepayment
experience and the yields are reviewed at least quarterly. The Company considers
securities available for sale to be impaired if the Company is unable to
demonstrate the ability to hold such asset until a temporary decline in the
market value reverses or the aggregate anticipated cash flows on such asset
discounted to present value are not expected to exceed the Company's amortized
basis in such asset. The Company currently believes that it has a reasonable
expectation to recover its amortized basis in securities available for sale
based on its post-impairment basis in these securities.
LOANS--The Company acquires loan portfolios for prices generally at par or
at a premium or discount to the principal face amount (i.e., unpaid principal
balance plus accrued interest) and re-performing and sub-performing loan
portfolios for prices generally at or below their principal amount. Unaccreted
discounts or premiums represent the portion of the difference between the
purchase price and the principal face amount on specific loans that is available
for accretion to the income statement. The allowance for loan losses includes
valuation allowances for estimated losses against the principal face amount that
are established at acquisition and for subsequent valuation adjustments that are
provided for through current period earnings and are based on discounted future
cash flows or the fair value of the underlying real estate collateral for
collateral dependent loans. If total cash received on a pool of loans exceeds
original estimates, excess specific valuation allowances are recorded as
additional discount accretion on the cost-recovery method. The allocated
specific valuation allowances are included in the allowance for loan losses.
Where appropriate, discounts are accreted into interest income on a cash basis.
Interest income is recognized on an accrual basis. Deferred fees and costs
and premiums are recognized in interest income over the life of the loan using a
method that approximates the interest method. Certain loans are designated as
held for sale and are presented at the lower of cost or fair value. If fair
value is less than cost, a valuation allowance is recorded through a charge to
earnings to reduce the carrying value to fair value.
The Company evaluates loans for impairment. Commercial and multi-family real
estate loans are considered to be impaired, for financial reporting purposes,
when it is probable that the Company will be unable to collect all principal or
interest due, according to the contractual terms of the loan agreement. Specific
valuation allowances are established either at acquisition or through provisions
for loan losses, as described above, for impaired loans based on the fair value
of the underlying collateral.
All specific valuation allowances established for pools of loans are
recorded in the allowance for loan losses. The allowance for each pool is
decreased by the amount of loans charged off and is increased by the provision
for estimated losses on loans and recoveries of previously charged-off loans.
The allowance for each pool is maintained at a level believed adequate by
management to absorb probable losses. Management's determination of the adequacy
of the allowance is based on an evaluation of the portfolio, previous loan loss
experience, current economic conditions, volume, growth and composition of the
portfolio and other relevant factors. Actual losses may differ from management's
estimates.
It is the Company's policy to establish an allowance for uncollectible
interest on performing loans that are past due more than 90 days or sooner when,
in the judgment of management, the probability of collection of interest is
deemed to be insufficient to warrant further accrual. Upon such a determination,
those loans are placed on nonaccrual status and deemed to be non-performing.
When a
F-9
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
loan is placed on nonaccrual status, previously accrued but unpaid interest is
reversed by a charge to interest income.
INVESTMENTS IN REAL ESTATE--Real estate purchased directly is originally
recorded at the purchase price. Real estate acquired in settlement of loans is
originally recorded at fair value less estimated costs to sell. Any excess of
net loan cost basis over the fair value less estimated selling costs of real
estate acquired through foreclosure is charged to the allowance for loan losses.
Any subsequent operating expenses or income, reductions in estimated fair
values, as well as gains or losses on disposition of such properties, are
recorded in current operations. Depreciation on investments in real estate is
computed using the straight-line method over the estimated useful lives of the
assets as follows.
Buildings and improvements............... 35 years
Tenant improvements...................... Lesser of lease term or useful life
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized and amortized over their
expected useful lives. Fees and costs incurred in the successful negotiation of
leases are deferred and amortized on a straight-line basis over the terms of the
respective leases. Rental revenue is reported on a straight-line basis over the
terms of the respective leases.
INCOME TAXES--The Company files its income tax returns with the relevant tax
authorities in the United States on a consolidated basis. Deferred tax assets
and 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. Deferred tax assets and
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 liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided when it is not probable that
some portion or all of the deferred tax assets will be realized.
NET LOSS PER SHARE--Basic EPS excludes dilution and is computed by dividing
the net loss available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company.
During the years ended December 31, 2000, 1999 and 1998, however, the
Company experienced a net loss, which resulted in common stock equivalents
having an anti-dilutive effect on earnings per share. Weighted average shares
outstanding are therefore equivalent for basic and diluted net loss per share.
RECLASSIFICATION--Certain items in the consolidated financial statements for
1999 and 1998 were reclassified to conform to the 2000 presentation.
NOTE 3--RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, AN AMENDMENT OF FASB
STATEMENT NO. 133 ("FAS 138") which amends certain provisions of Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("FAS 133"). These statements establish accounting and
financial reporting for derivative instruments and hedging activities and will
require the Company to recognize and report all derivative instruments at their
fair value in the Company's consolidated statement of financial position with
changes in fair value recorded generally in operations. These statements become
effective for the
F-10
NOTE 3--RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
Company on January 1, 2001. The Company believes that the effect, if any, that
FAS 133 and FAS 138 will have on the Company's operations and financial position
will not be material upon adoption.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENT OF LIABILITIES ("FAS 140"). FAS 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Other provisions of the statement are effective
for fiscal years ended after December 15, 2000 and include additional disclosure
requirements and changes related to the recognition and reclassification of
collateral. We do not expect FAS 140 will have a material effect on our earnings
and financial position. FAS 140 disclosures are included in Note 4.
NOTE 4--SECURITIES AVAILABLE FOR SALE
At December 31, 2000 and 1999, securities available for sale were as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST(1) GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
DECEMBER 31, 2000
Mortgage-backed securities.......... $ 76,288 $ -- $ 1,557 $ 74,731
DECEMBER 31, 1999
Mortgage-backed securities.......... $127,799 $3,487 $26,714 $104,572
- ------------------------
(1) The amortized cost of the securities reflects impairment adjustments deemed
to be other than temporary. The total amount of impairment write-downs of
$21.4 million and $19.6 million has been included in market valuation losses
and impairments in the accompanying consolidated statements of operations
for the years ended December 31, 2000 and 1999, respectively.
The Company expects to receive payments on securities over periods that are
considerably shorter than the contractual maturities of the securities, which
range from 6 to 30 years due to prepayments. At December 31, 2000, the net
unrealized loss on available-for-sale mortgage-backed securities totaled
approximately $1.6 million. In the opinion of management, these losses represent
temporary declines in the fair values of such securities. These unrealized gains
and losses are reflected in "Accumulated other comprehensive loss" in
stockholders' equity. Should management's estimates of the temporary nature of
these market value declines change in the future to other than temporary, such
changes would be reflected as losses in the Company's consolidated statement of
operations.
At December 31, 2000, approximately $55.6 million of securities available
for sale were pledged to secure borrowings (see Note 7).
During the quarter ended June 30, 2000, the Company resecuritized
approximately $20.1 million of its mortgage-backed securities portfolio which
resulted in no gain or loss. The cash proceeds to the Company from the
resecuritization were approximately $20.1 million and no other cash flows
occurred between the Company and the trust through December 31, 2000. As part of
the resecuritization transaction, the Company acquired a subordinated interest
in the underlying trust for approximately $6.3 million. The fair value of the
Company's investment in the resecuritized mortgage-backed securities is
determined at each reporting date as the present value of the anticipated cash
flows from the underlying collateral (primarily "A" quality, jumbo, fixed-rate,
15- to 30-year term loans) using certain assumptions. These assumptions include:
(i) future rate of prepayment; (ii) discount rate used to calculate present
value; and (iii) default rates and loss severity on loan pools underlying the
mortgage-backed securities in the resecuritization. At the time of the
resecuritization, the key economic assumptions to determine the fair value of
the retained subordinated interests were an annual
F-11
NOTE 4--SECURITIES AVAILABLE FOR SALE (CONTINUED)
prepayment speed of 12%, an annual default rate of 0.20%, a loss severity of 32%
and a discount rate of 20%. At December 31, 2000, key economic assumptions and
the sensitivity of the current fair value of the subordinated interest to
immediate 10% and 20% adverse changes in assumed economics were as follows:
FAIR VALUE OF THE SUBORDINATED INTEREST............. $6,933
PREPAYMENT SPEED (ANNUAL RATE)...................... 9%
Fair value after 10% adverse change................. $6,635
Fair value after 20% adverse change................. $6,345
DEFAULT RATE (ANNUAL RATE).......................... 0.22%
Fair value after 10% adverse change................. $6,254
Fair value after 20% adverse change................. $5,659
LOSS SEVERITY....................................... 32%
Fair value after 10% adverse change................. $6,248
Fair value after 20% adverse change................. $5,646
DISCOUNT RATE (ANNUAL RATE)......................... 20%
Fair value after 10% adverse change................. $6,418
Fair value after 20% adverse change................. $5,903
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10 percent variation in assumptions generally
cannot be extrapolated because the relationship of the change in assumption to
the change in fair value may not be linear. Also, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated
without changing any other assumption: in reality, changes in one factor may
result in changes in another (for example, increases in market interest rates
may result in lower prepayments and increase credit losses), which might magnify
or counteract the sensitivities.
The outstanding balance (unpaid principal balance) of the underlying
residential mortgage loans totaled $13.9 billion at December 31, 2000.
Mortgage-backed securities sold and the underlying residential mortgage loans
are serviced by entities unrelated to the Company. At December 31, 2000,
underlying loans of $12.2 million were delinquent on their payments by greater
than 90 days. Cumulative losses on the underlying loans were $1.7 million
through December 31, 2000.
NOTE 5--LOANS
The Company's loans are comprised of the following loan categories at
December 31, 2000 and 1999:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Unpaid principal balance of real estate loans:
Commercial.............................................. $30,231 $34,624
Over four residential units............................. - 349
------- -------
Total loans secured by real estate...................... 30,231 34,973
Other loans............................................... 173 --
Less:
Allowance for loan losses............................... -- 2,980
Discount on purchased loans and deferred fees........... -- 359
------- -------
$30,404 $31,634
======= =======
F-12
NOTE 5--LOANS (CONTINUED)
As of December 31, 2000 and 1999, the unpaid principal balances of loans
with adjustable rates of interest were $25.0 million and $26.1 million,
respectively, and loans with fixed rates of interest were $5.4 million and
$8.8 million, respectively, before allowances and discounts. Adjustable-rate
loans are generally indexed to LIBOR and are subject to limitations on the
timing and extent of adjustment. Most loans adjust within one month of changes
in the index.
At December 31, 2000 and 1999, substantially all loans were pledged to
secure borrowings. At December 31, 2000, the Company had no impaired loans.
Activity in the allowance for loan losses is summarized as follows:
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
Balance, beginning of period............................... $2,980 $11,108
Charge-offs................................................ (2,457) (7,364)
Recovery of loan losses.................................... (555) (1,150)
Other...................................................... 32 386
------ -------
Balance, end of period..................................... $ -- $ 2,980
====== =======
NOTE 6--INVESTMENTS IN REAL ESTATE
At December 31, 2000 and 1999, the Company's investments in real estate were
comprised of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Commercial and multi-family real estate:
Building and improvements................................. $23,521 $60,071
Undeveloped land.......................................... 2,391 4,633
Less: Accumulated depreciation............................ (1,145) (1,848)
------- -------
24,767 62,856
Other real estate owned, net.............................. -- 369
------- -------
$24,767 $63,225
======= =======
At December 31, 2000 approximately $20.0 million or 80.7% of the investments
in commercial and multi-family real estate were located in the United Kingdom
and the remainder of commercial or multi-family properties were located in the
United States.
Effective October 1, 1999, the Company holds its investments in real estate
as held for sale at lower of cost, less accumulated depreciation, or market
value, not to exceed the net realizable value of the properties on an individual
basis.
F-13
NOTE 7--SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 2000 and 1999 include repurchase
agreements, line of credit borrowings and other short-term borrowings. Proceeds
from the various credit facilities are used primarily for the acquisition of
mortgage-backed securities and loan pools. Following is information about
short-term borrowings:
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Average amount outstanding during the year.................. $67,399 $155,473
Maximum month-end balance outstanding during the year....... $90,658 $203,742
Weighted average rate:
During the year........................................... 8.7% 8.2%
At end of year............................................ 7.6% 8.9%
In certain instances, lenders on mortgage-backed securities have withheld
principal and/or interest payments on such assets in order to reduce
outstanding, unpaid collateral calls. At December 31, 2000 and 1999, there were
no outstanding unpaid collateral calls.
NOTE 8--LONG-TERM BORROWINGS
At December 31, 2000, the Company had $70.8 million of long-term borrowings
with a weighted average interest rate of 9.10%. Investments in real estate with
a carrying amount of $22.4 million and a loan with an unpaid principal balance
of $25 million were pledged as collateral against these borrowings. Maturities
of these borrowings range from 2002 to 2020.
At December 31, 2000, the contractual repayment terms of long-term
borrowings and estimated repayment of the senior bonds issued in conjunction
with a resecuritization for each of next five years and the total thereafter is
as follows:
YEAR AMOUNT
- ------------------------------------------------------------ --------
2001........................................................ $ 5,455
2002........................................................ 8,706
2003........................................................ 9,370
2004........................................................ 8,671
2005........................................................ 3,592
Thereafter.................................................. 34,966
-------
$70,760
=======
The Company is subject to various covenants in the agreements evidencing its
indebtedness. At December 31, 2000, management believes the Company was in
compliance with all obligations under the agreements evidencing its
indebtedness, as defined in the applicable agreements.
NOTE 9--DIVIDENDS PAYABLE
During the years ended December 31, 2000 and 1999, the Company did not
declare any cash dividends. The Company delayed the payment date of a $0.40 cash
dividend payable on October 27, 1998 to shareholders of record at September 30,
1998. The Company will pay interest, at the rate of 4% per annum, on the amount
due from the previously announced payment date through the date of the actual
payment. During the year ended December 31, 2000, the Company paid one-half of
the cash dividend payable plus interest and intends on paying the remainder
equally on March 28, 2001 and
F-14
NOTE 9--DIVIDENDS PAYABLE (CONTINUED)
June 28, 2001, subject to the financial condition, results of operations and
capital requirements of the Company as well as other factors deemed relevant by
the Board of Directors.
In 2000, the Company purchased the dividend rights to approximately
$0.7 million at a 25% discount. In 1999, the Company purchased the dividend
rights to approximately $0.1 million at a 20% discount from a shareholder and
$0.4 million from WFSG.
NOTE 10--INCOME TAXES
The Company originally was formed with a view of qualifying as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
However, to qualify as a REIT, the Company must first make an affirmative
election to be taxed as a REIT when the Company files its federal income tax
return.
Due to the significant potential tax benefits from net operating loss
carryforwards of the Company and risks of not qualifying as a REIT, the Company
reevaluated its original plan to elect to be taxed as a REIT. On September 10,
1999, the Company's shareholders voted not to elect REIT status and, as a
result, the Company will be subject to corporate taxation.
As of December 31, 2000, the Company had, for U.S. Federal tax purposes, a
net operating loss carryforward of approximately $90 million, which begins to
expire in 2018. U.S. tax regulations impose limitations on the use of loss
carryforwards following certain changes in ownership. If such a change were to
occur with respect to the Company, the limitation could significantly reduce the
amount of benefits that would be available to offset future taxable income each
year, starting with the year of ownership change. To reduce the potential impact
of such ownership changes, the Company established a Shareholder Rights Plan
dated as of December 23, 1999 and effective January 3, 2000. The Company has not
recorded any tax assets for the future benefits of the net operating loss
carryforwards.
A reconciliation, stated as a percentage of pretax loss, of the U.S. federal
statutory rate to the effective tax rate on the loss from continuing operations
is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
U.S. federal statutory rate............................... (35.0)% (35.0)% (34.0)%
State taxes, net of federal benefit....................... (6.9) (6.9) (6.9)
Valuation allowance....................................... 41.9 41.9 40.6
Other..................................................... -- -- 0.3
----- ----- -----
Effective tax rate........................................ --% --% --%
===== ===== =====
F-15
NOTE 10--INCOME TAXES (CONTINUED)
The tax effects of temporary differences and carryforwards resulting in
deferred income taxes are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Deferred Tax Assets:
Loss carryforwards........................................ $ 36,397 $ 26,175
Unrealized holding losses on available for sale
securities................................................ 636 8,774
Tax mark to market adjustment............................. 3,412 2,302
Other..................................................... 202 4,975
-------- --------
Subtotal................................................ 40,647 42,226
Valuation allowance......................................... (40,647) (42,226)
-------- --------
Net deferred tax asset...................................... $ -- $ --
======== ========
Given the lack of sufficient earnings history, the Company does not believe
the recognition of a deferred tax asset is appropriate at this time.
NOTE 11--COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK
The Company and two of its senior officers have been named, among other
defendants, in a series of lawsuits related to the receivership of an
unaffiliated investment company. In their claims, multiple plaintiffs allege
several theories of liability, including knowing participation in fiduciary
breach and prohibited transactions under the Employee Retirement Income Security
Act of 1974. The plaintiffs have not described with any specificity the
proportion or share of losses and related amounts which they claim are
attributable to the Company or its executives. These lawsuits are still in the
early stage of pleadings and limited discovery, and the likely outcome of these
actions, or the amount of loss to the Company, if any, cannot be reasonably
determined at this time. The Company and its executives have directed that these
cases be defended against vigorously. Under their employment arrangements with
the Company, the Company's senior officers may be entitled to indemnification by
the Company. Due to the preliminary nature of the underlying litigation, the
Company has not determined whether such indemnification will be granted, and
accordingly, the Company does not believe it is possible to estimate the extent
of liability, if any, related to such indemnification.
The Company is involved in various other legal proceedings occurring in the
ordinary course of business which the Company believes will not have a material
adverse effect on the consolidated financial condition or operations of the
Company.
The Company may utilize a wide variety of off-balance sheet financial
techniques to assist them in the management of interest rate risk. In hedging
the interest rate and/or exchange rate exposure of a foreign currency
denominated asset or liability, the Company may enter into hedge transactions to
counter movements in the different currencies, as well as interest rates in
those currencies. These hedges may be in the form of currency and interest rate
swaps, options, and forwards, or combinations thereof. At December 31, 2000 and
1999, the Company had no outstanding off-balance-sheet instruments.
NOTE 12--RELATIONSHIP WITH WFSG AND ITS AFFILIATES
Prior to September 1999, the Company and WFSG had the same senior management
team, though the Company had a different stockholder base and the majority of
its directors were independent, and the Company's business affairs and
day-to-day operations were managed by Wilshire Realty Services
F-16
NOTE 12--RELATIONSHIP WITH WFSG AND ITS AFFILIATES (CONTINUED)
Corporation ("WRSC"), a wholly-owned subsidiary of WFSG, pursuant to a
management agreement ("Management Agreement"). After September 1999, the
Company's independent directors decided that the Company should be internally
managed and the Company and WFSG ceased to have the same senior executives and
no longer had any common directors. Accordingly, the Company no longer views
WFSG and its subsidiaries as affiliated parties.
The Company's decision to become internally managed in the third quarter of
1999 resulted in disputes between the Company, on the one hand, and WFSG and
certain of its affiliates on the other. In connection with these disputes, the
Company recorded a reserve for potential resolution of disputes with WFSG and
its affiliates of $4.1 million in 1999. Following a partial settlement of
disputes with WFSG, the remaining reserve for potential resolution of disputes
with WFSG and its affiliates was $2.5 million at December 31, 1999. During the
year ended December 31, 2000, the Company settled all remaining disputes with
WFSG and its affiliates which resulted in an additional provision of
$0.2 million.
The Company continues to maintain certain business relationships with WFSG
and its affiliates which include the following:
- The Company owns approximately 14.4% of WFSG's outstanding common stock.
- An affiliate of WFSG services loans underlying certain mortgage-backed
securities owned by the Company.
- The Company has a prepaid servicing fee credit with an affiliate of WFSG
to be utilized by servicing loans for the Company (exclusive of
mortgage-backed securities).
The following table sets forth the Company's balances with WFSG and its
affiliates as of December 31, 2000 and 1999.
DECEMBER 31,
-----------------------
2000 1999
-------- --------
Investments in WFSG and Affiliates, net:
WFSG Common Stock......................................... $3,593(1) $ 3,953
Prepaid Service Fees...................................... 2,000 2,974
Debtor-in-Possession Facility............................. -- 5,000(2)
Other Notes Receivable.................................... -- 275
Reserve for Disputes...................................... -- (2,545)
------ -------
$5,593 $ 9,657
====== =======
Borrowings.................................................. $ -- $ 2,569(3)
====== =======
- ------------------------
(1) Based on $1.25 per share. WFSG's common stock currently trades on the OTC
Bulletin Board and the closing price as of December 31, 2000 was $1.25 per
share.
(2) This Facility was paid off in 2000.
(3) Investments in real estate were pledged against these loans. The Company
repaid these loans in 2000.
F-17
NOTE 12--RELATIONSHIP WITH WFSG AND ITS AFFILIATES (CONTINUED)
The effect of the various transactions between the Company and WFSG and its
affiliates are summarized below for the years ended December 31:
2000 1999
-------- --------
Interest income(1).......................................... $ 387 $ 1,887
Interest expense............................................ -- --
----- --------
387 1,887
Provision for loan losses................................... -- 2,699
----- --------
387 (812)
Real estate operations, net(2).............................. -- 46
Other operating income:
Market valuation losses and impairments................... -- (10,443)
Provision for disputes with WFSG.......................... (225) (4,077)
----- --------
162 (15,286)
Operating expenses.......................................... (87) (2,260)
----- --------
$ 75 $(17,546)
===== ========
- ------------------------
(1) Does not include interest income on MBS securities resulting from
securitizations by WFSG or its affiliates.
(2) Does not include rental income paid by third parties on properties partially
financed by WFSG or its affiliates.
NOTE 13--STOCK OPTIONS AND RIGHTS
The Company adopted a non-qualified stock option plan ("the Option Plan")
which provides for options to purchase shares of the Company's common stock. The
maximum number of shares of common stock that may be issued pursuant to options
granted under the Option Plan is 3,500,000 shares.
In 1998, the Company granted options to WRSC and its independent directors
under the Option Plan, representing the right to acquire 1,150,000 shares of
common stock. Of these initial grants, 1,135,000 were granted to WRSC and 5,000
were granted to each of the Company's three independent directors. The initial
grants of options under the Option Plan to WRSC vest at a rate of 25% per year
for each of the first four anniversaries following the closing of the Initial
Public Offering ("Offering"), and expire on the tenth anniversary of the
Offering. The initial grants to the Independent Directors vest immediately and
expire ten years from the date of grant. In the future, newly elected directors
will receive 5,000 options on the day they join the Board at an exercise price
equivalent to the closing price on that day. In addition, on the last day of
each calendar quarter through September 30, 2000, each Independent Director
received, on the last day of each quarter, an automatic non-statutory option
grant to purchase 1,500 shares of common stock at 110% of the fair market value
on that day. Automatic grants will vest one third on each of the first three
anniversaries of the grant date and expire on the tenth anniversary of the grant
date.
In conjunction with a partial settlement agreement with WFSG and certain of
its affiliates in 1999, the Company received 1,112,500 of the options issued to
WRSC at the initial public offering, which were subsequently cancelled.
F-18
NOTE 13--STOCK OPTIONS AND RIGHTS (CONTINUED)
A summary of the Company's stock options as of and for the year ended
December 31, 2000 is presented below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at beginning of year........................... 2,096,000 $4.75
Granted.................................................... 13,500 $2.61
Cancelled/forfeited........................................ (210,000) $4.53
---------
Outstanding at end of year................................. 1,899,500 $4.76
=========
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE
- -------------------------------------------- --------- ----------------- ----------------
$2.20-4.26.................................. 41,000 8.00-9.75 $ 3.10
$4.53....................................... 1,820,000 8.75 $ 4.53
$11.28-18.63................................ 38,500 7.25-7.75 $17.37
A summary of the Company's stock options as of and for the period ended
December 31, 1999 is presented below:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
Outstanding at beginning of year.......................... 1,165,500 $15.89
Granted................................................... 2,048,000 $ 4.52
Cancelled/forfeited....................................... (1,117,500) $16.00
----------
Outstanding at end of year................................ 2,096,000 $ 4.75
==========
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE
- -------------------------------------------- --------- ----------------- ----------------
$2.34....................................... 4,500 10.00 $ 2.48
$2.81-4.26.................................. 18,500 9.00-9.50 $ 3.57
$3.30-4.53.................................. 2,034,500 9.75 $ 4.53
$11.28-18.63................................ 38,500 8.25-8.75 $17.37
The Company applies Accounting Principles Board Opinion No. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES," and related Interpretations in accounting for
the Option Plan. Accordingly, no compensation expense has been recognized in the
Consolidated Statements of Operations for grants under the Option Plan. Had
compensation expense for the Company's Option Plan been determined based on the
fair value at the grant date consistent with the methods of SFAS No. 123
"Accounting for Stock Based Compensation", the Company's net loss and loss per
share for the year ended
F-19
NOTE 13--STOCK OPTIONS AND RIGHTS (CONTINUED)
December 31, 2000, 1999 and 1998 would have been increased to the pro forma
amounts indicated below:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net loss:
As reported.......................................... $(15,542) $(26,647) $(56,388)
Pro forma............................................ $(15,820) $(27,083) $(58,265)
Net loss per common and common share equivalent:
Basic loss per share:
As reported........................................ $ (1.48) $ (2.33) $ (4.94)
Pro forma.......................................... $ (1.51) $ (2.37) $ (5.10)
Diluted loss per share:
As reported........................................ $ (1.48) $ (2.33) $ (4.94)
Pro forma.......................................... $ (1.51) $ (2.37) $ (5.10)
There were no options granted with exercise prices below the market value of
the stock at the grant date. The weighted average fair value of options granted
during 2000, 1999 and 1998 was $0.40, $0.45 and $3.80, respectively, for options
with exercise prices exceeding the market price of the stock at the grant date.
Fair values were estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions used: 1% dividend yield, expected
volatility of 25%, risk-free interest rate of 5.0% and expected lives of three
to five years.
On December 15, 1999, the Company declared a distribution of one right (a
"Right") to purchase one one-tenth of a share of the Company's Common Stock for
each outstanding share of Common Stock, payable to the stockholders of record on
January 3, 2000. The Board of Directors authorized and directed the issuance of
one Right with respect to each Common Share issued thereafter until the
Distribution Date (as defined in the Rights Agreement) and, in certain
circumstances, with respect to Common Shares issued after the Distribution Date.
The description and terms of the Rights are set forth in a Rights Agreement
between the Company and The Bank of New York, as Rights Agent, dated as of
December 23, 1999. The Rights are not exercisable until the Distribution Date
and will expire at the close of business on December 23, 2009, unless earlier
redeemed by the Company.
NOTE 14--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange.
F-20
NOTE 14--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ---------- -------- ----------
Assets:
Cash and cash equivalents..................... $ 3,394 $ 3,394 $ 5,862 $ 5,862
Mortgage-backed securities available for
sale.......................................... $74,731 $74,731 $104,572 $104,572
Loans......................................... $30,404 $29,998 $ 31,634 $ 31,727
Liabilities:
Short-term borrowings......................... $18,170 $18,170 $ 96,815 $ 96,815
Long-term borrowings.......................... $70,760 $70,881 $ 64,412 $ 64,412
The methods and assumptions used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value are
explained below:
CASH AND CASH EQUIVALENTS--The carrying amounts approximate fair values due
to the short-term nature of these instruments.
MORTGAGE-BACKED SECURITIES--The fair values of securities are based upon
broker dealer quotes (if available), subject to the Company's internal review
process. For those securities that do not have available broker/dealer quotes,
the fair value of the investment is determined by modeling the anticipated cash
flows using certain assumptions (e.g. prepayment speeds, default rates, severity
of losses, and discount rate).
LOANS--Loans are segregated by type, such as fixed- and adjustable-rate
interest terms. The fair values of fixed-rate mortgage loans are based on
discounted cash flows utilizing applicable risk-adjusted spreads relative to the
current pricing of similar fixed-rate loans as well as anticipated prepayment
schedules. The fair values of adjustable-rate mortgage loans are based on
discounted cash flows utilizing discount rates that approximate the pricing of
available mortgage-backed securities having similar rate and repricing
characteristics, as well as anticipated prepayment schedules. No value
adjustments have been made for changes in credit within the loan portfolio. It
is management's opinion that the allowance for estimated loan losses pertaining
to loans results in a fair value adjustment of the credit risk of such loans.
SHORT-TERM BORROWINGS--The carrying amounts of short-term borrowings
approximate fair value due to the short-term nature of these instruments.
LONG-TERM BORROWINGS--The fair value of other borrowings is estimated based
on current market rates for similar borrowings with similar characteristics.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2000 and 1999, respectively. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
F-21
NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2000 2000 2000 2000
------------ ------------- -------- ---------
Interest income................................... $ 3,257 $3,682 $3,619 $4,520
Interest expense.................................. (1,784) (1,916) (1,708) (2,296)
Recovery of loan losses........................... -- -- 555 --
-------- ------ ------ ------
Net interest income after recovery of loan
losses.......................................... 1,473 1,766 2,466 2,224
Real estate operations, net....................... 3,303 1,222 388 1,025
Other operating (loss) income..................... (20,131) (622) 2,139 1,517
Other operating expenses.......................... (5,510) (2,096) (2,580) (2,126)
-------- ------ ------ ------
(Loss) income before income taxes................. (20,865) 270 2,413 2,640
Income tax (benefit) provision.................... -- (125) 25 100
-------- ------ ------ ------
Net (loss) income................................. $(20,865) $ 395 $2,388 $2,540
======== ====== ====== ======
(Loss) earnings per share:
Basic........................................... $ (1.99) $ 0.04 $ 0.23 $ 0.24
Diluted......................................... $ (1.99) $ 0.04 $ 0.23 $ 0.24
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
------------ ------------- -------- ---------
Interest income................................. $4,517 $ 4,805 $ 6,280 $7,084
Interest expense................................ (3,056) (2,803) (3,345) (3,693)
Recovery of loan losses......................... -- -- -- 1,150
------ ------- -------- ------
Net interest income after recovery of loan
losses........................................ 1,461 2,002 2,935 4,541
Real estate operations, net..................... 1,000 597 (91) (61)
Other operating income (loss)................... 490 (10,096) (21,761) (1,233)
Other operating expenses........................ (2,017) (1,675) (1,259) (1,480)
------ ------- -------- ------
Income (loss) before income taxes............... 934 (9,172) (20,176) 1,767
Income tax (benefit) provision.................. (200) 200 -- --
------ ------- -------- ------
Net income (loss)............................... $1,134 $(9,372) $(20,176) $1,767
====== ======= ======== ======
Earnings (loss) per share:
Basic......................................... $ 0.10 $ (0.82) $ (1.75) $ 0.15
Diluted....................................... $ 0.10 $ (0.82) $ (1.75) $ 0.15
F-22
NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
QUARTER ENDED
---------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30,
1998 1998 1998
------------ ------------- --------
Interest income............................................ $ 10,957 $ 11,645 $ 5,090
Interest expense........................................... (6,095) (6,012) (1,501)
Provision for loan losses.................................. (8,842) (3,000) -
-------- -------- -------
Net interest (loss) income after provision for loan
losses................................................... (3,980) 2,633 3,589
Real estate operations, net................................ (13) 428 363
Other operating loss....................................... (3,950) (48,586) --
Other operating expenses................................... (2,607) (3,355) (910)
-------- -------- -------
(Loss) income before income taxes.......................... (10,550) (48,880) 3,042
Income tax provision....................................... -- -- --
-------- -------- -------
Net (loss) income.......................................... $(10,550) $(48,880) $ 3,042
======== ======== =======
(Loss) earnings per share:
Basic.................................................... $ (0.92) $ (4.25) $ 0.27
Diluted.................................................. $ (0.92) $ (4.25) $ 0.27
NOTE 16--PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Cash........................................................ $ 2 $ 4
Intercompany receivable, net................................ 9,819 12,821
Investments in subsidiaries................................. 47,722 42,372
------- -------
Total assets................................................ $57,543 $55,197
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities...................... $ 175 $ 235
Dividend payable............................................ 1,717 4,090
------- -------
Total liabilities........................................... 1,892 4,325
Contributed and retained equity............................. 55,651 50,872
------- -------
Total liabilities and equity................................ $57,543 $55,197
======= =======
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Total revenues.............................................. $ -- $ -- $ --
Total expenses.............................................. 302 412 48
-------- -------- --------
Loss before equity in losses of subsidiaries and income tax
provision................................................. (302) (412) (48)
Equity in losses of subsidiaries............................ (15,240) (26,235) (56,340)
Income tax provision........................................ -- -- --
-------- -------- --------
Net loss.................................................... $(15,542) $(26,647) $(56,388)
======== ======== ========
F-23
NOTE 16--PARENT COMPANY INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................. $(15,542) $(26,647) $ (56,388)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Equity in loss of subsidiaries.......................... 15,240 26,235 56,340
Change in:
Accounts payable and other liabilities................ (60) (271) 506
-------- -------- ---------
Net cash (used in) provided by operating activities... (362) (683) 458
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in intercompany receivable......................... 3,002 1,170 19,639
Net investment in subsidiaries............................ (451) -- (183,970)
-------- -------- ---------
Net cash provided by (used in) investing activities... 2,551 1,170 (164,331)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend payments on common stock......................... (2,191) (486) (3,105)
Issuance of capital stock................................. -- -- 166,981
-------- -------- ---------
Net cash (used in) provided by financing activities... (2,191) (486) 163,876
-------- -------- ---------
NET INCREASE IN CASH........................................ (2) 1 3
CASH:
Beginning of year......................................... 4 3 --
-------- -------- ---------
End of year............................................... $ 2 $ 4 $ 3
======== ======== =========
NONCASH FINANCING ACTIVITIES:
Common stock dividend declared but not paid............... $ -- $ -- $ 4,600
Purchase of treasury stock................................ $ -- $ (2,171) $ --
NOTE 17--SUBSEQUENT EVENTS
In December 2000, the Company (through a 26% owned Jersey, Channel Islands
company known as BEP Acquisitions) announced the acceptance of a L42 million
offer to purchase all of the outstanding capital stock of Bourne End Properties
PLC (Bourne End). Bourne End is a specialist investor in retail property,
currently owning nine town shopping centers located in England and Scotland. The
centers range in size from 80,000 square feet to 340,000 square feet
BEP Acquisitions was incorporated in Jersey, Channel Islands for the purpose
of making the offer to acquire Bourne End. BEP Acquisitions is a wholly-owned
subsidiary of BEP Property Holdings Limited, which is 26% owned by the Company,
71% owned by Merrill Lynch (Jersey) Holdings Limited (a subsidiary of Merrill
Lynch & Co., Inc.) and 3% owned by Greenbau Estuary Limited. Merrill Lynch
(Jersey) Holdings Limited will also provide mezzanine financing of approximately
L18.5 million. Greenbau Estuary Limited will act as the day-to-day manager of
Bourne End.
In December 2000, the Company deposited its share of the purchase price into
escrow ($6.7 million), which is included in Other Assets on the Company's
Statement of Financial Condition as of December 31, 2000. The acquisition was
completed in February 2001.
F-24
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 on March 13, 2001 by the undersigned, thereunto duly authorized.
FOG CUTTER CAPITAL GROUP INC.
By: /s/ LAWRENCE A. MENDELSOHN
-----------------------------------------
Lawrence A. Mendelsohn
PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 13, 2001 by the following persons on
behalf of the Registrant and in the capacities indicated.
NAME TITLE
---- -----
/s/ ANDREW A. WIEDERHORN Chairman of the Board,
------------------------------------------- Chief Executive Officer,
Andrew A. Wiederhorn Secretary and Treasurer
/s/ LAWRENCE A. MENDELSOHN
------------------------------------------- President
Lawrence A. Mendelsohn
/s/ CHRIS TASSOS Executive Vice President
------------------------------------------- and Chief Financial
Chris Tassos Officer
/s/ DAVID C. EGELHOFF
------------------------------------------- Director
David C. Egelhoff
/s/ JORDAN D. SCHNITZER
------------------------------------------- Director
Jordan D. Schnitzer
/s/ PATRICK TERRELL
------------------------------------------- Director
Patrick Terrell
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
*10.10 Employment Agreement dated September 4, 1999, and amended
and restated October 1, 2000, between the Company and
Wilshire Real Estate Partnership L.P. and Andrew A.
Wiederhorn
*10.11 Employment Agreement dated September 4, 1999, and amended
and restated October 1, 2000, between the Company and
Wilshire Real Estate Partnership L.P. and Lawrence A.
Mendelsohn
*10.12 Employment Agreement dated October 9, 1999, amended as of
May 19, 2000 and again as of July 27, 2000, and
subsequently amended and restated as of October 1, 2000,
between the Company and Wilshire Real Estate Partnership
L.P. and Robert G. Rosen
*11 Computation of Loss Per Common Share
*21.1 Subsidiaries
99.1 Settlement Agreement, dated as of December 10, 1999, among
the Company, on behalf of itself and all of its
subsidiaries and affiliates, Andrew A. Wiederhorn,
Lawrence A. Mendelsohn, Wilshire Financial Services
Group Inc., on behalf of itself and all of its
subsidiaries and affiliates other than First Bank of
Beverly Hills, F.S.B. (Incorporated by reference to the
Company's Current Report on Form 8-K filed December 17,
1999.)
- ------------------------
* Filed herewith.