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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-631
WEBFINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 56-2043000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 East 52nd Street, 21st Floor 877-431-2942
New York, New York 10022 (Registrant's telephone number,
(Address and zip code of principal executive offices) including area code)
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 $.001 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K. [ ]
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
Yes [X] No [ ]
Based upon the closing price of the issuer's Common Stock on March
22, 2001, the aggregate market value of the 4,366,866 shares of Common Stock
held by non-affiliates of the issuer was $5,897,508. Solely for the purposes of
this calculation, shares held by directors and officers of the issuer have been
excluded. Such exclusion should not be deemed a determination or an admission by
the issuer that all such individuals are, in fact, affiliates of the issuer.
As of March 22, 2001, 4,366,866 shares of the issuer's Common Stock,
$.001 par value (the "Common Stock") were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
PART I
Page No.
--------
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 4
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 9
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 10
PART III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 13
Item 12. Security Ownership of Certain Beneficial Owners and Management 14
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 17
Signatures 18
PART I
Item 1. Business
Overview
WebFinancial Corporation (formerly Rose's Holdings, Inc.), a
Delaware corporation (the "Company"), was incorporated in 1997 to act as a
holding company for Rose's Stores, Inc., an operator of general merchandise
discount stores ("Stores") and a wholly owned subsidiary of the Company.
On September 5, 1993, Stores filed a voluntary petition for Relief
under Chapter 11, Title 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Eastern District of North Carolina (the
"Bankruptcy Court"). Stores Modified and Restated First Amended Joint Plan of
Reorganization (the "Plan") was approved by Order of the Bankruptcy Court on
April 24, 1995. On April 28, 1995, the Plan became effective.
In August 1997, Stores was reorganized into a holding company
structure and became a wholly owned subsidiary of the Company. On December 2,
1997, the Company consummated the sale of Stores to Variety Wholesalers, Inc.
("Variety") of all of the outstanding capital stock of Stores (the "Sale")
pursuant to a stock purchase agreement, dated as of October 24, 1997, between
the Company and Variety (the "Stock Purchase Agreement"). The total purchase
price for the Sale was $19,200,000. The proceeds of the Sale, net of certain
transaction, closing, and other costs, were $15,331,000.
On August 31, 1998, the Company, through WebFinancial Holdings
Corporation ("Holdings"), a wholly-owned Delaware subsidiary, acquired 90% of
the outstanding common stock of WebBank, a Utah industrial loan corporation,
pursuant to an assignment (the "Assignment") from Praxis Investment Advisers,
LLC, a Nevada limited liability company ("PIA"), of a stock purchase agreement,
dated January 20, 1998 (the "Purchase Agreement"), between PIA and Block
Financial Corporation ("Block"), relating to the purchase by PIA of all of the
issued and outstanding shares of common stock of WebBank. Pursuant to the
Assignment, the Company paid Block $4,783,000 for the shares of WebBank's common
stock to be purchased from Block pursuant to the Purchase Agreement. In
addition, the Company paid $288,000 in acquisition costs, for a total purchase
price of $5,071,000.
On August 31, 1998, the Company formed Praxis Investment Advisers,
Inc., a Delaware corporation ("Praxis"), that together with Holdings and Andrew
Winokur, the holder of the 10% of Praxis not owned by the Company, entered into
a management agreement (the "Management Agreement"). The Management Agreement
provided that Praxis may make recommendations to and consult with the management
and board of directors of WebBank about the deployment of WebBank's capital, the
development of its business lines, its acquisition of assets and its
distributions to its stockholders. During the first quarter of 2000, the Company
significantly reduced the level of operations at Praxis.
On May 26, 1999, the Company formed WebFinancial Government Lending,
Inc., a Delaware corporation ("Lending"), as a wholly owned subsidiary of the
Company to concentrate on holding and servicing U.S. Department of Agriculture
("USDA") Loans.
On August 11, 1999, Web Film Finance, Inc., a Delaware corporation
("Film"), was formed as a wholly owned subsidiary of Lending to finance the
production and distribution of a motion picture. The only motion picture
commitment expired on December 30, 1999, and the Company subsequently determined
to discontinue business operations at this subsidiary.
The principal executive offices of the Company are located at 150
East 52nd Street, 21st Floor, New York, New York 10022.
Description of Business
The Company, through its subsidiaries, operates in niche banking
markets. WebBank provides commercial and consumer specialty finance transactions
utilizing U.S. Government credit enhancement. The benefits of
1
WebBank's special charter allow it to "export" Utah's regulatory environment
(interest rates, late charges, and prepayment fees, etc.) to forty-eight other
states. WebBank is a small, business oriented institution that is FDIC insured
and examined and regulated by the State of Utah Department of Financial
Institutions. The business plan of WebBank represents a non-traditional approach
to growing within the context of the regulatory standards of safety and
soundness. Prudent business goals and protection of WebBank's charter are the
key elements of the Company's business strategy for WebBank. Pursuant to this
strategy, WebBank has focused on several lines of business as described below:
PRIVATE LABEL CREDIT CARD processing is a highly competitive product
and service that WebBank is actively pursuing based on its relative small size
and significant staff experience that allows WebBank to offer customized and
rapid service as well as Utah's favorable banking environment. WebBank is
issuing credit cards for part of the recreation vehicle division of a large
multinational company and expects to expand services to other segments of that
division.
E-COMMERCE CREDIT CARD processing represents a variation on the
private label credit card that management considers to be a new business line
because it involves the creation of a "Virtual Credit Card" or an account
debiting system customized to the needs of the Internet. WebBank recently
announced that it is partnering with a California based e-commerce company to
provide e-tailers with a secure and proprietary system for their customers to
access and safely complete purchases of large ticket items directly through the
popular "drop-ship" method.
USDA BUSINESS AND INDUSTRY (B&I) LENDING is a commercial loan
product 70% to 90% guaranteed by the full faith and credit of the Federal
government. The loan program is administered by the United States Department of
Agriculture to assist businesses located in rural areas (under 50,000
population) to promote industrial modernization and job creation.
STRUCTURED SETTLEMENT LENDING is a form of secured lending that
gives customers the opportunity to cash-in long-term annuities or payment
streams that are subjects of financial settlements to allow the owners of such
settlements access to the current value of their award. This program is a
fee-for-service oriented business in which the entire purchased cash stream is
sold to a third party shortly after the purchase.
PAYDAY ADVANCE processing is a form of lending that provides high
returns to the lender through fees for cashing borrowers' checks. WebBank
provided fee based processing services to three lenders under this program in
2000. However, WebBank expects to exit this line of business by the end of April
2001 due to current regulatory conditions regarding such lending programs.
The Company continues to evaluate its different business lines and
consider various alternatives to maximize the aggregate value of its businesses
and increase stockholder value. Some of these alternatives include insurance
related deposit gathering programs, consumer e-lending programs, and selective
acquisitions, divestitures or the discontinuance of an existing business line.
Various alternatives may be implemented from time to time.
Competition
The banking and financial services industry is highly competitive.
The increasingly competitive environment is primarily attributable to changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The
Company, through its subsidiaries, competes for loans, deposits, and customers
with other commercial banks, savings and loan associations, securities and
brokerage companies, mortgage companies, insurance companies, finance companies,
money market funds, credit unions, and other nonbank financial service
providers. Many of these competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader range
of financial services than the Company. In addition, management believes that
recent federal legislation may have the effect of further increasing the pace of
consolidation within the financial services industry.
2
Regulation
WebBank is regulated by the FDIC and the State of Utah Department of
Financial Institutions. As a result, WebBank is subject to various regulatory
capital requirements administered by federal and state banking agencies. Failure
to meet minimum capital requirements can initiate certain actions by regulators
that, if undertaken, could have a direct material effect on WebBank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, WebBank must meet specific capital guidelines that
involve quantitative measures of WebBank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
WebBank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Management believes that, as of December 31, 2000, WebBank meets and
exceeds all capital adequacy requirements to which it is subject.
Employment
As of March 22, 2001, the Company had 10 employees, all of whom were
full-time employees. The Company believes that its employee relations are
satisfactory.
Item 2. Properties
The Company leases 832 square feet of office space located at 150
East 52nd Street, New York, New York, 10022, from Gateway Industries, Inc.
("GWAY") for use of such space as a corporate office on a non-exclusive basis.
This lease runs through March 31, 2001, and may be terminated by either party
with 90 days notice. Mr. Lichtenstein, the Company's President and Chief
Executive Officer, is the Chairman of the Board of Directors and Chief Executive
Officer of GWAY. Mr. Lichtenstein is also the sole managing member of the
General Partner of Steel Partners II, L.P. that owns approximately 38% of the
common stock of GWAY. Steel Partners Services, Ltd. ("SPS"), which is owned by
an entity controlled by Mr. Lichtenstein, also subleases part of the office
space from GWAY.
On March 20, 2000, WebBank entered into a lease for 4,630 square
feet of headquarters office space in Salt Lake City, Utah. The lease runs
through March 19, 2005.
On August 2, 2000, WebBank entered into a lease for 600 square feet
of office space in Washington, D.C. The lease runs through August 31, 2001. The
space is used by the Chairman of WebBank.
During the year 2000, Lending leased 500 square feet of office space
in St. Helena, California. This lease expired on August 9, 2000.
Item 3. Legal Proceedings
In January 2000, Andrew Winokur, a former executive officer and
director of one of the Company's subsidiaries, Praxis, filed a lawsuit in the
Superior Court of the State of California, County of Napa against the Company,
Praxis and Holdings. The lawsuit alleges that Praxis has breached its employment
agreement with Mr. Winokur. The lawsuit also asserts claims for interference
with contract and unjust enrichment based upon the alleged wrongful termination
of Mr. Winokur's employment contract with Praxis. The lawsuit seeks damages of
an unspecified amount and compliance by Praxis with the termination pay out
provisions in Mr. Winokur's employment agreement relating to purchase of Mr.
Winokur's 10% interest in Praxis and WebBank (both 90% owned subsidiaries of the
Company) at their fair market value. The Company and Praxis deny that Praxis
wrongfully terminated Mr. Winokur's employment and intend to vigorously defend
this matter. At the present time, the parties have agreed to have the matter
submitted to binding arbitration before three retired judges. The Company does
not believe that this lawsuit will have a material adverse impact on its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
3
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock was listed on the Nasdaq National Market
System until March 11, 1998, at which time the Common Stock was delisted because
the Company had no commercial operations. From March 11, 1998 until August 22,
1999, the Common Stock traded on the OTC Bulletin Board, initially under the
symbol "RSES" and then under the symbol "WEFN." As of August 22, 1999, the
Company's Common Stock was listed on the NASDAQ Small Cap Market under the
symbol "WEFN." The table below sets forth the high and low sales prices of the
Common Stock for the periods indicated on such quotation systems and stock
exchanges. All over-the-counter market quotations reflect inter-dealer prices,
without retail mark-ups, markdowns or commissions, and may not necessarily
represent actual transactions. All prices presented have been restated to
reflect a one-for-two reverse stock split effected on November 20, 1998.
Year Ended Year Ended
December 31, 2000 December 31, 1999
High Low High Low
---- --- ---- ---
1st Quarter $ 6.63 $ 5.00 $ 6.10 $ 4.10
2nd Quarter $ 6.13 $ 3.13 $45.00 $ 5.06
3rd Quarter $ 4.06 $ 2.66 $ 9.00 $ 5.31
4th Quarter $ 3.50 $ 2.19 $ 8.29 $ 5.06
As of March 22, 2001, there were 553 record holders of the Company's
Common Stock.
The Company paid no dividends on its Common Stock in 2000 or 1999.
The Company intends to retain any future earnings for working capital needs and
to finance potential future acquisitions and presently does not intend to pay
cash dividends on its Common Stock for the foreseeable future.
4
Item 6. Selected Consolidated Financial Data
The following table summarizes certain selected financial data of
the Company and should be read in conjunction with the related Consolidated
Financial Statements of the Company and accompanying Notes to Consolidated
Financial Statements included elsewhere herein.
(Amounts in thousands except per share amounts. The last two columns not covered
by Independent Auditors' Report)
Year Year Eleven-month Year Year
Consolidated Ended Ended Period Ended Ended Ended
Statements of December December December January January
Operations Data: 31, 2000 31, 1999 31, 1998 31, 1998(1) 25, 1997(1)
-------- -------- -------- ----------- --------
Net interest income
before provision
for loan losses $ 1,339 $ 847 $ 676 $ 418 $ -
Other operating
income $ 3,395 $ 1,567 $ - $ - $ -
Net income (loss)
before minority
interests $ (54) $ (1,774) $ (774) $ (25,538) $ 380
(Income) loss attributable
to minority interests (3) 134 59 - -
-------- --------- ----------- ------------- ---------
Net income (loss) $ (57) $ (1,610) $ (715) $ (25,538) $ 380
======== ========== ============ ============== =========
Basic net earnings (loss)
per common share $ (0.01) $ (0.37) $ (0.17) $ (5.91) $ .04
Consolidated
Balance Sheet December December January
Data: 31, 2000 31, 1999 31,1998
-------- -------- -------
Cash, cash equivalents
and available for sale
investment securities $ 6,625 $ 8,124 $ 10,762
Loans $ 11,054 $ 10,396 $ 1,081
Total assets $ 24,795 $ 20,942 $ 15,980
Deposits $ 10,132 $ 4,889 $ 105
Stockholders' equity $ 13,424 $ 13,435 $ 14,687
- --------
1 Financial condition data for the years ended January 25, 1997 and January
25, 1997 is omitted from the table because of the Company's involvement in
bankruptcy and reorganization, which make that data meaningless for
comparative purposes. The Company completely disposed of its prior retail
business. With the cash remaining after the bankruptcy and reorganization,
the Company entered into the banking business in September 1998 through the
purchase of WebBank.
5
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company was incorporated in August 1997 as a holding company.
The former name of the Company, Rose's Holdings, Inc., was changed by a vote of
the stockholders at the 1999 annual meeting held on June 15, 1999. In December
1997, the Company divested itself of Stores, then its only operating subsidiary.
On August 31, 1998, the Company acquired a 90% interest in WebBank, a Utah
industrial loan corporation, and Praxis. Praxis, formerly based in St. Helena,
California, provided research and development in creating financial products,
followed by implementing practical realization of those products. During May
1999, Lending was incorporated as a wholly owned subsidiary of the Company to
concentrate on holding and servicing U.S. Department of Agriculture Loans. On
August 11, 1999, Film was formed as a wholly owned subsidiary of Lending to
finance the production and distribution of a motion picture.
The only motion picture commitment of Film expired on December 30,
1999, and the Company terminated Film's operations at that time. During the
first quarter of 2000 management began winding down Praxis. On April 30, 2000,
Lending transferred all of its assets, with the exception of a $2 million loan,
to WebBank in exchange for WebBank common stock.
The Company through its subsidiaries operates in niche banking
markets. WebBank provides commercial and consumer specialty finance transactions
utilizing U.S. Government credit enhancement in certain instances. The benefits
of WebBank's special charter allow it to "export" Utah's regulatory environment
(interest rates, late charges, and prepayment fees, etc.) to forty-eight other
states. WebBank is a small, business oriented institution that is FDIC insured
and examined and regulated by the State of Utah Department of Financial
Institutions. The business plan of WebBank represents a non-traditional approach
to growing a highly successful profitable institution within the context of the
regulatory standards of safety and soundness. Prudent business goals and
protection of WebBank's charter are the key elements of the Company's business
strategy for WebBank. Pursuant to this strategy, WebBank has focused on several
lines of business as described elsewhere in this document.
In 1998, the Company changed its fiscal year end from January 31 to
December 31, and has presented financial results for the year ended December 31,
2000, December 31, 1999, and the eleven-month period ended December 31, 1998.
Results of Operations
Year ended December 31, 2000 compared to the year ended December 31, 1999.
The net loss was $(57,000) or $(0.01) per common share for the year
ended December 31, 2000, compared to a net loss of $1,610,000 or $(0.37) per
common share for the year ended December 31, 1999. A comparison of the changes
in major components of net income between the two years is summarized below.
Interest Income. Interest income increased by $1,143,000 or 111%.
This increase was primarily due to a $1,058,000 or 252% increase in interest and
fees on loans. The majority of the increase occurred at WebBank where average
gross loan balances grew from $3,700,000 in 1999 to $10,884,000 in 2000. Most of
this growth was in the commercial (USDA B&I) loan category. Average balances in
consumer loans (payday advance loans) increased from $61,000 in 1999 to
$1,319,000 in 2000. In addition, the prime rate, used as the variable rate index
for most of WebBank's loans, increased steadily from approximately 7.75% in
early 1999 to 9.50% by the middle of 2000 where it remained for the rest of the
year.
Interest Expense. Interest expense increased by $651,000 or 364%
from 1999 to 2000. The majority of the Company's interest expense increase
occurred at WebBank. WebBank relied primarily on time deposits (brokered
certificates of deposit) to fund loan growth during both years. The average
balance of time deposits for 2000 was $3,930,000 in 1999 and $12,368,000 in
2000. The majority of the fixed rate time deposits were issued during late 1999
and early 2000 with maturities that helped to decrease funding costs as general
market interest rates increased. In October 2000, WebBank secured a $2,500,000
Federal Funds Purchased line of credit from a local bank in order to decrease
reliance on brokered certificates of deposit.
6
Provision for Loan Losses. The loans loss provision increased from
$475,000 in 1999 to $917,000 in 2000. Most of the increase was attributable to
the loan balance increase and seasoning of the USDA B&I loan portfolio. WebBank
provided $400,000 at the end of 2000 for a loan to a borrower that unexpectedly
declared bankruptcy in January 2001.
Noninterest Income. Noninterest income increased from $1,567,000 in
1999 to $3,395,000 in 2000, a change of $1,828,000 or 117%. Approximately
$1,038,000 of the difference was due to increases in fee income for various loan
programs such as payday advances, private label credit cards, and structured
settlements. Most of these programs were initiated in late 1999.
Noninterest Expense. Noninterest expense increased from $3,683,000
in 1999 to $3,871,000 in 2000, a change of $188,000 or 5%. The primary reason
why noninterest expense increased only nominally between years was the reduction
in operating activity at Praxis in early 2000. In 1999, Praxis noninterest
expense totaled $1,183,000. In 2000, the amount had decreased to virtually
nothing. Offsetting this decrease, WebBank's noninterest expense increased from
$1,472,000 to $2,766,000, an increase of $1,294,000 or 88%. The increase was
spread over all categories of expense and occurred primarily because WebBank was
still a start-up company in 1999, the first full year of operations.
Income Taxes. No income taxes were expensed in either year because
of the use of net operating loss carryforwards at the consolidated level.
Year ended December 31, 1999 compared to the eleven-month period ended December
31, 1998.
The Company had a net loss of $1,610,000 or $(0.37) per common share
for the year ended December 31, 1999 compared to a net loss of $715,000 or
$(0.17) per common share for the eleven months ended December 31, 1998. A
comparison of the changes in major components of net loss between years is
described below.
Interest Income. Interest income increased by $350,000 or 52%
between years, from $676,000 in 1998 to $1,026,000 in 1999. This increase was
primarily due to a $388,000 increase in interest and fees on loans, which grew
from $30,000 in 1998 to $418,000 in 1999. Both WebBank and Lending were start-up
companies during the two-year time period.
Interest Expense. No interest expense was incurred in the
eleven-month period ended December 31, 1998 compared to $179,000 for the year
ended December 31, 1999. WebBank recorded all of the interest expense in 1999.
Provision for Loan Losses. The loans loss provision increased from
$0 in 1998 to $475,000 in 1999. Most of the increase was attributable to loan
balance increases and seasoning of the USDA B&I loan portfolio at WebBank and
Lending. WebBank expensed $279,000 and Lending expensed $196,000 of the 1999
provision for loan losses.
Noninterest Income. Noninterest income increased from $0 in 1998 to
$1,567,000 in 1999. Approximately $913,000 of the Company's noninterest income
in 1999 was realized from the sale of guaranteed portions of USDA B&I loans at
WebBank and Lending. Most of the Company's current fee based programs began in
late 1999 and had a nominal effect on earnings that year.
Noninterest Expense. Noninterest expense increased from $1,450,000
in 1998 to $3,683,000 in 1999, a change of $2,233,000 or 154%. The primary
reason for this change was an increase of $1,042,000 in noninterest expense at
Praxis between years. In 1999, Praxis noninterest expense totaled $1,183,000. In
1998 the amount was $141,000. Another $939,000 of the increase in noninterest
expense was contributed by WebBank. Both companies were starting up during the
two-year period.
Income Taxes. No income taxes were expensed in either year because
of the use of net operating loss carryforwards at the consolidated level.
7
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $6,162,000 at
December 31, 2000, a decrease of $1,104,000 from the year ended December 31,
1999. The Company's management believes that the Company's cash and cash
equivalents as well as its anticipated near term cash flows are adequate to meet
its near term liquidity requirements.
The Company is continuing to seek additional acquisitions and/or
merger transactions. No firm commitments have been realized and no letters of
intent have been signed at this time. There can be no assurance that the Company
will be able to locate or purchase a business, or that such business, if located
and purchased, will be profitable. In order to finance an acquisition, the
Company may be required to incur or assume indebtedness and/or issue securities.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement on
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities in 1998. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that entities recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. As a result of SFAS No. 137,
SFAS No. 133 has been adopted in 2001. The Company does not believe the adoption
of SFAS No. 133 will have a material effect on the financial position or results
of operations of the Company.
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements. SAB No. 101
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company has incorporated the guidance of SAB No. 101 in the first quarter of
fiscal 2001.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities and revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of SFAS No
125's provisions without reconsideration. It provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. The Company does not believe the adoption of SFAS No. 140 will have
a material effect on the financial position or results of operations of the
Company.
FORWARD-LOOKING STATEMENTS
THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY FORWARD-LOOKING STATEMENTS MADE IN
THIS ANNUAL REPORT ON FORM 10-K AND PRESENTED ELSEWHERE BY MANAGEMENT. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. A NUMBER OF
UNCERTAINTIES EXIST THAT COULD AFFECT THE COMPANY'S FUTURE OPERATING RESULTS,
INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC CONDITIONS, CHANGES IN INTEREST
RATES, THE COMPANY'S ABILITY TO ATTRACT DEPOSITS, AND THE COMPANY'S ABILITY TO
CONTROL COSTS. BECAUSE OF THESE AND OTHER FACTORS, PAST FINANCIAL PERFORMANCE
SHOULD NOT BE CONSIDERED AN INDICATION OF FUTURE PERFORMANCE. THE COMPANY'S
FUTURE OPERATING RESULTS MAY VARY SIGNIFICANTLY. INVESTORS SHOULD NOT USE
HISTORICAL TRENDS TO ANTICIPATE FUTURE RESULTS AND SHOULD BE AWARE THAT THE
8
TRADING PRICE OF THE COMPANY'S COMMON STOCK MAY BE SUBJECT TO WIDE FLUCTUATIONS
IN RESPONSE TO QUARTERLY VARIATIONS IN OPERATING RESULTS AND OTHER FACTORS,
INCLUDING THOSE DISCUSSED BELOW.
Risk Factors
The following paragraphs discuss certain factors that may affect the
Company's financial condition and operations and should be considered in
evaluating the Company.
Interest Rates. The Company's earnings are impacted by changing
interest rates. Changes in interest rates impact the level of loans, deposits
and investments, the credit profile of existing loans, the rates received on
loans and securities and the rates paid on deposits and borrowings. Significant
fluctuations in interest rates may have an adverse affect on the Company's
financial condition and results of operations.
Government Regulation and Monetary Policy. The banking industry is
subject to extensive federal and state supervision and regulation. Significant
new laws or changes in existing laws, or repeals of existing laws may cause the
Company's results to change materially. Further, federal monetary policy,
particularly as implemented through the Federal Reserve System, significantly
affects credit conditions for the Company and a material change in these
conditions could have a material adverse impact on the Company's financial
condition and results of operations.
Competition. The banking and financial services businesses in the
Company's lines of business are highly competitive. The increasingly competitive
environment is a result of changes in regulation, changes in technology and
product delivery systems, and the accelerating pace of consolidation among
financial services providers. The results of the Company may change if
circumstances affecting the nature or level of competition change.
Credit Quality. A source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties may
fail to perform in accordance with the terms of their loans. The Company has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Company's credit portfolio. These policies and procedures, however, may not
prevent unexpected losses that could have a material adverse effect on the
Company's results.
Non-banking Activities. The Company may expand its operations into
new non-banking activities in 2001. Although the Company has experience in
providing bank-related services, this expertise may not assist in expansion into
non-banking activities. As a result, the Company may be exposed to risks
associated with, among other things, (1) a lack of market and product knowledge
or awareness of other industry related matters and (2) an inability to attract
and retain qualified employees with experience in these non-banking activities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK AND ASSET LIABILITY MANAGEMENT
Market risk is the risk of loss from adverse changes in market
prices and rates. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities and other investment
activities. To that end, management actively monitors and manages its interest
rate risk exposure.
In connection with the Company's lending and deposit activities, its
profitability may be affected by fluctuations in interest rates. A sudden and
substantial decrease in interest rates may adversely impact the Company's
earnings to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent, or on the same basis. The
Company monitors the impact of changes in interest on its net interest income
using several tools. One measure of the Company's exposures to differential
changes in interest rates between assets and liabilities is an interest rate
risk management test. This test measures the impact on net interest income of an
immediate change in interest rates in 100 basis point increments. After a review
of the Company's
9
portfolio, we believe that in the event of a hypothetical one percent increase
or decrease in interest rates, the resulting effect on the Company's net
interest income would not be material.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The Company
relies primarily on its asset-liability structure to control interest rate risk.
As an example, during 2000 WebBank relied primarily on fixed rate certificates
of deposit to fund its variable rate loan portfolio. During the period of
moderately rising rates during April 2000, the Bank locked in the funding cost
for periods of three months to one year, creating increased interest margins as
rates increased but creating a risk of decreasing interest margins as rates
began to decline. In order to guard against the impact of future interest rate
decreases, WebBank secured a $2,500,000 Federal Funds Purchased line in October
2000 with a local correspondent bank. This line will decrease reliance on
certificates of deposit for short term funding needs and more closely match the
variable rate structure of the B&I loan portfolio.
In connection with the consolidated Company's other investments, the
primary objective is to manage the investment portfolio to preserve principal,
maintain liquidity to meet operating needs, and maximize yields. The securities
held in our investment portfolio are subject to limited interest rate risk. The
Company employs established policies and procedures to manage exposure to
fluctuations in interest rates. The Company places its investments with high
quality issuers, limits the amount of credit exposure to any one issuer, and
does not use derivative financial instruments in the investment portfolio. The
Company maintains an investment portfolio of various issuers, types, and
maturities, which consist mainly of fixed rate financial instruments. These
securities are primarily classified as available-for-sale and, consequently, are
recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component in stockholders' equity. At any time, sharp
changes in interest rates can affect the fair value of the investment portfolio
and its interest earnings. Currently, the Company does not hedge these interest
rate exposures. After a review of its marketable securities, the Company
believes that in the event of a hypothetical one percent increase or decrease in
interest rates, the resulting fluctuation in the fair market value of its
marketable investment securities would be insignificant to the financial
statements.
Item 8. Financial Statements and Supplementary Data
See the Company's Consolidated Financial Statements beginning on
page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
10
PART III
Item 10. Directors and Executive Officers
Directors
The following sets forth the name, present principal occupation,
employment and material occupations, positions, offices and employments for the
past five years and ages as of March 22, 2001, for the directors of the Company.
Members of the Board of Directors shall be elected at the next annual meeting of
stockholders and until their respective successors shall have been duly elected
and qualified.
DIRECTORS AND EXECUTIVE OFFICERS
NAME AND AGE OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ ----------------------------------
Warren G. Lichtenstein (35) Mr. Lichtenstein has served as a
(term expires 2001) director of the Company since 1996 and
President and Chief Executive Officer
of the Company since December 1997. Mr.
Lichtenstein has served as the Chairman
of the Board, Secretary and the
Managing Member of Steel Partners,
L.L.C. ("Steel LLC"), the general
partner of Steel Partners II, L.P.
("Steel"), since January 1, 1996. Prior
to such time, Mr. Lichtenstein was the
Chairman and a director of Steel
Partners, Ltd., the general partner of
Steel Partners Associates, L.P., which
was the general partner of Steel, from
1993 and prior to January 1, 1996. Mr.
Lichtenstein was the acquisition/risk
arbitrage analyst at Ballantrae
Partners, L.P., a private investment
partnership formed to invest in risk
arbitrage, special situations and
undervalued companies, from 1988 to
1990. Mr. Lichtenstein is a director of
the following publicly held companies:
Tandycrafts, Inc., a manufacturer of
picture frames and framed art; Gateway
Industries, Inc., a provider of
database development and website design
and development services; Puroflow
Incorporated, a designer and
manufacturer of precision filtration
devices; ECC International Corp., a
manufacturer and marketer of
computer-controlled simulators for
training personnel to perform
maintenance and operator procedures on
military weapons; and CPX Corp., a
company with no significant operating
business. He is a former director of
Saratoga Beverage Group, Inc., a
beverage manufacturer and distributor;
Alpha Technologies, Inc., an
electronics component manufacturer;
Tech-Sym Corporation, an electronics
engineering and manufacturing company;
and PLM International, Inc., an
equipment leasing company. Mr.
Lichtenstein also served as Chairman of
the Board of Aydin Corporation, a
provider of products and systems for
the acquisition and distribution of
information over electronic
communications media, from October 5,
1998 until its sale to L-3
Communications Corporation in April
1999.
Jack L. Howard (39) Mr. Howard has served as a director of
(term expires 2001) the Company since 1996 and Vice
President, Secretary, and Treasurer of
the Company since December 1997. Mr.
Howard has been a principal of Mutual
Securities, Inc., a registered
broker-dealer, since prior to 1993. Mr.
Howard has also been the Acting
President and Chief Financial Officer
of Gateway Industries, Inc. since
September 1994. Mr. Howard is a
director of the following publicly held
companies: Gateway
11
Industries, Inc., a provider of
database development and website design
and development services; Pubco
Corporation, a manufacturer and
distributor of printing supplies and
construction equipment; Castelle, a
maker and marketer of application
server devices; and US Diagnostic Inc.,
an operator of outpatient diagnostic
imaging.
James Benenson, Jr. (65) Mr. Benenson has been Chief Executive
(term expires 2001) Officer of Vesper Corporation, an
industrial manufacturing company, since
1979, and of Arrowhead Holdings
Corporation, Vesper's parent, since
1983. Mr. Benenson has been a director
of B.H.I.T, a mortgage investment
company since 2000. Prior to such time,
Mr. Benenson served in various
capacities with F. Eberstadt & Co.,
Walker, Hart & Co. and James Benenson &
Co. Mr. Benenson has served as a
director of the Company since 1999 when
he was appointed by the Company's Board
of Directors to fill the vacancy
created by the resignation of J. David
Rosenberg.
Earle C. May (82) Mr. May has served as a director of the
(term expires 2001) Company since July 1997. Mr. May has
been an executive officer of May
Management, Inc., an investment
management firm, since prior to 1993.
Joseph L. Mullen (53) Mr. Mullen has served as a director of
(term expires 2001) the Company since 1995. Since January
1994, Mr. Mullen has served as Managing
Partner of Li Moran International, a
management consulting company, and has
functioned as a senior officer
overseeing the merchandise and
marketing departments for such
companies as Leewards Creative Crafts
Inc.; Office Depot of Warsaw, Poland;
and Camelot Music. Mr. Mullen is
currently serving as Vice President,
General Merchandising Manager-Hard Line
of Retail Exchange.com, Inc., a
business-to-business Internet company
that operates an online marketplace for
excess consumer goods.
Executive Officers
The following sets forth the name, present principal occupation,
employment and material occupations, positions, offices and employments for the
past five years and ages as of March 22, 2001, for the executive officers of the
Company.
NAME AND AGE OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ ----------------------------------
Glen M. Kassan (57) Mr. Kassan has served as Vice President
and Chief Financial Officer of the
Company since June 2000. He has served
as Vice President of Steel Partners
Services Ltd. since October 1999. From
1997 to 1998, Mr. Kassan was Chairman
and Chief Executive Officer of Long
Term Care Services, Inc., a privately
owned healthcare services company which
he co-founded in 1994, and initially
served as Vice Chairman and Chief
Financial Officer. Mr. Kassan serves on
the Board of Directors of Tandycrafts,
Inc., a manufacturer of picture frames
and framed art, and US Daignostic Inc.,
an operator of outpatient diagnostic
imaging.
James R. Henderson (42) Mr. Henderson has served as Vice
President of Operations of the Company
since September 2000. He has served as
Vice-President of Steel LLC since
August 1999. From 1996 to July 1999,
Mr. Henderson was employed in various
positions with Aydin Corporation, a
defense-electronics manufacturer, which
included a tenure as president and
Chief Operating Officer from October
1998 to June 1999. Prior to his
employment with Aydin Corporation, Mr.
Henderson was employed as an executive
with UNISYS Corporation, an e-business
solutions
12
provider. Mr. Henderson is a director
of ECC International Corp., a
manufacturer and marketer of
computer-controlled simulators for
training personnel to perform
maintenance and operator procedures on
military weapons.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater-than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file. To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company, during its fiscal year ended December 31,
2000 all Section 16(a) filing requirements applicable to its officers, directors
and greater-than 10% beneficial owners were satisfied, with the exception of
Earle May and Glen Kassan whose Forms 5 reporting the acquisition of securities
of the Company were inadvertently filed late.
Item 11. Executive Compensation
Cash and Other Compensation
The following table sets forth all the compensation earned for
services rendered in all capacities, during the fiscal years indicated, by the
Chief Executive Officer of the Company. No other executive officer received
annual compensation in excess of $100,000 during the most recent fiscal year.
Long-Term
Compensation
Name and Awards
Principal Position Year Options/SARs (#)
------------------ ---- ----------------
Warren G. Lichtenstein 2000 0
President and 1999 0
Chief Executive Officer 1998 211,145
Stock Options
The following table shows aggregate option exercise of the Chief
Executive Officer during the year (there were no stock appreciation rights
granted or exercised) and the number and value of options held as of December
31, 2000 by the Chief Executive Officer.
13
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Acquired on Value Options In-the-Money Options at
Name Exercise (#) Realized ($) at Fiscal Year-End(#) Fiscal Year-End ($)(1)
---- ------------ ------------ --------------------- -----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Warren G. Lichtenstein 0 0 227,458 0 $191,602 0
- ------------------------------------------------------------------------------------------------------------------------------
(1) Based on the market value, as reported on the NASDAQ Small Cap of
$2.78 per share of Common Stock at December 31, 2000 and an average
exercise price of $1.94 per share.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is composed of Earle May, Joseph Mullen
and James Benenson. No interlocking relationship exists between any member of
the Company's Compensation Committee and any member of any other company's board
of directors or compensation committee. No interlocking relationship existed
between any member of the Company's Board of Directors and any member of any
other company's board of directors or other compensation committee in 2000.
Director Compensation
Each of the three directors who is not an officer has elected to
receive his retainer fee of $12,000 per year and meeting fee compensation
ranging from $375 to $1,000 per meeting in the form of grants of common stock,
to be paid at the time of the annual meeting. The value of the shares granted is
the fair market value at the time of the grant. Officers who are not directors
do not receive annual or per meeting compensation. Earle May, as chairman of the
audit committee, receives monetary compensation of $2,500 per quarter.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 1, 2001
regarding the beneficial ownership of the Common Stock by each person known by
the Company to own beneficially more than 5% of the Common Stock, by each
director and executive officer, individually, and by all directors and executive
officers as a group.
Amount and
Nature of
Beneficial Percentage
Name and Address Ownership of Class
- ---------------- --------- --------
Warren G. Lichtenstein 1,808,487 (1) 41.41%
150 East 52nd Street
New York, New York 10022
Steel Partners II, L.P. 1,578,529 (2) 36.15%
150 East 52nd Street
New York, New York 10022
14
Jack L. Howard 110,608 (3) 2.53%
182 Farmers Lane
Santa Rosa, CA 95405
Glen M. Kassan 8,333 (4) *
8 Barkley Court
East Brunswick, NJ 08816
James R. Henderson 16,667 (5) *
203 E. Jefferson Street
Falls Church, VA 22046
Earle C. May 383,529 (6) 8.78%
4550 Kruse Way #345
Lake Oswego, Oregon 97035
Joseph L. Mullen 24,646 (7) *
611 Broadway, Suite 801
New York, NY 10012
James Benenson, Jr. 65,427 (8) 1.50%
One Lexington Ave
New York, NY 10010
All directors and executive officers 2,417,697 55.36%
as a group (seven persons)
- ----------------------------
*Less than 1%
(1) Includes: (a) 2,500 shares of Common Stock owned by Mr.
Lichtenstein; (b) 227,458 shares of Common Stock issuable upon
exercise of options owned by Mr. Lichtenstein within sixty days of
March 1, 2001; (c) 1,539,345 shares of Common Stock owned by Steel
Partners II, L.P.; and (d) 39,184 shares of Common Stock issuable
upon the exercise of warrants owned by Steel Partners II, L.P.
within sixty days of March 1, 2000. Mr. Lichtenstein is the sole
managing member of the general partner of Steel Partners II, L.P.
Mr. Lichtenstein disclaims beneficial ownership of the shares of
Common Stock owned by Steel Partners II, L.P, except to the extent
of his pecuniary interest in such shares of Common Stock, which is
less than the amount disclosed.
(2) Represents 1,539,345 shares of Common Stock and 39,184 shares of
Common Stock issuable upon exercise of warrants within sixty days of
March 1, 2001.
(3) Represents 34,900 shares of Common Stock and 75,708 shares of Common
Stock issuable upon exercise of options within sixty days of March
1, 2001.
(4) Represents 8,333 shares of Common Stock issuable upon exercise of
options within sixty days of March 1, 2001.
(5) Represents 16,667 shares of Common Stock issuable upon exercise of
options within sixty days of March 1, 2001.
(6) Includes: (a) 9,618 shares of Common Stock owned by Mr. May; (b)
20,361 shares of Common Stock issuable upon the exercise of options
within sixty days of March 1, 2001 granted to Mr. May; (c) 23,000
shares of Common Stock owned by May Management, Inc.; and (d)
330,550 shares of Common Stock held in customer accounts as to which
May Management, Inc. has
15
shared dispositive power. Mr. May is the Chief Executive Officer and
a principal stockholder of May Management, Inc. and may be deemed to
be the beneficial owner of shares owned by May Management, Inc. or
as to which May Management, Inc. has shared dispositive power.
(7) Represents 4,285 shares of Common Stock and 20,361 shares of Common
Stock issuable upon exercise of options within sixty days of March
1, 2001.
(8) Includes 3,749 shares of Common Stock owned by Mr. Benenson and
61,678 shares of Common Stock owned by Arrowhead Holdings
Corporation, of which Mr. Benenson is the controlling stockholder
and thus deemed the beneficial owner of all such shares of Common
Stock.
--------------------
Item 13. Certain Relationships and Related Transactions
As of March 1, 1998, the Company entered into a sub-lease for office
space with GWAY for use of such space as a corporate office on a non-exclusive
basis. This lease runs through March 31, 2001, but may be terminated by either
party on 90 days notice. Warren Lichtenstein, the Company's President, Chief
Executive Officer, and Chief Accounting Officer, is the Chairman of the Board of
Directors of GWAY. Mr. Lichtenstein is also the Managing Member of the General
Partner of Steel Partners II, L.P. which owns approximately 38% of the common
stock of GWAY. SPS, which is owned by an entity controlled by Mr. Lichtenstein,
also subleases part of the office space from GWAY.
During the years ended December 31, 1999 and 2000, the Company paid
management fees of $267,000 and $310,000, respectively, to SPS for certain
management, consulting and advisory services. The fees also included the
Company's one-third share of rent expense that was paid entirely by SPS during
2000. The Company believes that the cost of obtaining the type and quality of
services rendered by SPS is no less favorable than the cost at which the Company
could obtain from unaffiliated entities.
16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements
See index to consolidated financial statements immediately following
the exhibit index.
(b) Reports on Form 8-K filed during the fourth quarter of the period covered by
this report:
(i) none
(c) Exhibits
See Exhibit Index immediately following the signature page.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 2001 WebFinancial Corporation
By: /s/ Warren G. Lichtenstein
-----------------------------
Warren G. Lichtenstein
President, Chief Executive Officer
By: /s/ Glen M. Kassan
------------------------------
Glen M. Kassan
Vice President and Chief Financial
Officer
POWER OF ATTORNEY
WebFinancial Corporation and each of the undersigned do hereby
appoint Warren G. Lichtenstein and Jack L. Howard, and each of them singly, its
or his true and lawful attorney to execute on behalf of WebFinancial Corporation
and the undersigned any and all amendments to this Annual Report on Form 10-K
and to file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission; each of such attorneys
shall have the power to act hereunder with or without the other.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the date indicated.
Signature Date
- --------- ----
By: /s/ Jack L. Howard March 27, 2001
- ------------------------ --------------
Jack L. Howard, Director Date
By: /s/ Warren G. Lichtenstein March 27, 2001
- ------------------------------------ --------------
Warren G. Lichtenstein, President, Date
Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Earle C. May March 27, 2001
- ------------------------ --------------
Earle C. May, Director Date
By: /s/ Joseph L. Mullen March 27, 2001
- ------------------------------------ --------------
Joseph L. Mullen, Director Date
By: /s/ James Benenson March 27, 2001
- ------------------------------------ --------------
James Benenson, Director Date
18
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation, as amended
- Incorporated by reference to Exhibit I-4 to Registration
Statement on Form 8-A12G filed March 27, 1995.
3.2 By-laws - Incorporated by reference to Exhibit I-5 to
Registration Statement on From 8-A12G filed March 27, 1995.
10.1 Stock Purchase Agreement, dated January 20, 1998, by and
between Praxis Investment Advisors, Inc. and Block Financial
Corporation - Incorporated by reference to Exhibit 1 to
Quarterly Report on Form 10-Q filed September 17, 1998.
10.2 Form of Subscription and Stockholders Agreement, dated August
31, 1998, by and among Andrew Winokur, Rose's International,
Inc., WebBank Corporation, Praxis Investment Advisors, Inc.
and Rose's Holdings, Inc. - Incorporated by reference to
Exhibit 2 to Quarterly Report on Form 10-Q filed September 17,
1998.
10.3 Form of Assignment, Transfer and Delegation Agreement, dated
July 1998, by and among Praxis Investment Advisors, LLC,
Andrew Winokur and Rose's International, Inc. - Incorporated
by reference to Exhibit 3 to Quarterly Report on Form 10-Q
filed September 17, 1998.
10.4 Form of Employment Agreement, dated July 1998, by and among
Praxis Investment Advisors, Inc. and Andrew Winokur -
Incorporated by reference to Exhibit 4 to Quarterly Report on
Form 10-Q filed September 17, 1998.
10.5 Form of Management Agreement, dated 1998, by and among Rose's
International, Inc., Andrew Winokur, and Praxis Investment
Advisors, Inc. - Incorporated by reference to Exhibit 5 to
Quarterly Report on Form 10-Q filed September 17, 1998.
21.1 Subsidiaries of Registrant (WebBank; WebFinancial Government
Lending, Inc.; Praxis Investment Advisors, Inc.; and Web Film
Finance, Inc.)
*23.1 Consent of KPMG LLP.
* Filed herewith.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Report on Financial Statements.................................F-2
Report of Grant Thornton LLP, independent certified public accountants,
on the December 31, 2000 financial statements.......................F-3
Report of KPMG LLP, independent certified public accountants, on the
December 31, 1999 and December 31, 1998 financial statements......F-4
Consolidated Statements of Financial Condition as of December 31, 2000
and December 31, 1999..............................................F-5
Consolidated Statements of Operations for the year ended
December 31, 2000, the year ended December 31,
1999, and the eleven-month period
ended December 31, 1998............................................F-6
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 2000, the year ended December
31, 1999, and the eleven-month
period ended December 31, 1998.....................................F-8
Consolidated Statements of Cash Flows for the year ended
December 31, 2000, the year ended December 31,
1999, and the eleven-month period
ended December 31, 1998............................................F-9
Notes to Consolidated Financial Statements..................................F-12
F-1
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
The consolidated financial statement on the following pages have been prepared
by management in conformity with generally accepted accounting principles.
Management is responsible for the reliability and fairness of the financial
statement and other financial information included herein.
To meet its responsibilities with respect to financial information, management
maintains and enforces internal accounting policies, procedures and controls
which are designed to provide reasonable assurance that assets are safeguarded
and that transactions are properly recorded and executed in accordance with
management's authorization. Management believes that the Company's accounting
controls provide reasonable, but not absolute, assurance that errors or
irregularities which could be material to the financial statements are prevented
or would be detected within a timely period by Company personnel in the normal
course of performing their assigned functions. The concept of reasonable
assurance is based on the recognition that the cost of controls should not
exceed the expected benefits.
The responsibility of our independent auditors, Grant Thornton LLP and KPMG LLP,
is to conduct their audit in accordance with generally accepted auditing
standards. In carrying out this responsibility, they planned and performed their
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether caused by error or fraud.
The Audit Committee of the Board of Directors met twice with management and the
independent auditors to discuss auditing and financial matters and to assure
that each is carrying out its responsibilities. The independent auditors have
full and free access to the Audit Committee and meet with it by telephone, with
and without management being present, to discuss the results of their audit and
their opinions on the quality of financial reporting.
By: /s/ Warren G. Lichtenstein
--------------------------
Warren G. Lichtenstein
President, Chief Executive Officer
and Chief Accounting Officer
By: /s/ Glen M. Kassan
---------------------
Glen M. Kassan
Vice President and Chief Financial Officer
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors
WebFinancial Corporation
We have audited the accompanying consolidated statement of financial condition
of WebFinancial Corporation and subsidiaries as of December 31, 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 2000. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
WebFinancial Corporation and subsidiaries as of December 31, 2000, and the
consolidated results of their operations and their consolidated cash flows for
the year ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/Grant Thornton LLP
Salt Lake City, Utah
February 9, 2001 (except for the second
paragraph of note 19 for which the date
is March 19, 2001)
F-3
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
WebFinancial Corporation:
We have audited the accompanying consolidated statement of financial condition
of WebFinancial Corporation and subsidiaries (formerly Rose's Holdings, Inc.) as
of December 31, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1999 and
the eleven-month period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WebFinancial
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1999 and the eleven-month period ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
- ---------------------
Salt Lake City, Utah
March 24, 2000
F-4
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands except share data)
December 31, December 31,
2000 1999
---- ----
Assets
Cash and due from banks $ 6,086 $ 7,266
Federal funds sold 76 --
Total cash and cash equivalents 6,162 7,266
Investment securities (note 4)
Held-to-maturity (estimated fair value of $32 and $37
at December 31, 2000 and 1999) 32 37
Available-for-sale 463 858
-------- --------
Total investment securities 495 895
Loans, net of deferred income (note 5) 12,131 10,868
Less allowance for loan losses (note 6) 1,077 472
-------- --------
Total loans, net 11,054 10,396
Premises and equipment,
net of accumulated depreciation and amortization (note 10) 110 101
Accrued interest receivable 113 163
Goodwill, net of accumulated
amortization of $276 in 2000 and $158 in 1999 1,498 1,616
Other assets (notes 5 and 18) 5,363 505
-------- --------
$ 24,795 $ 20,942
======== ========
Liabilities and Stockholders' Equity
Deposits:
Non interest-bearing demand $ 250 $ 250
Certificates of deposit (note 8) 9,882 4,639
-------- --------
Total deposits 10,132 4,889
Short term borrowings (note 9) -- 1,100
Other liabilities 779 1,061
-------- --------
Total liabilities before minority interests 10,911 7,050
Minority interests 460 457
Commitments and contingencies (notes 9, 13 and 16)
Stockholders' Equity
Preferred stock, 10,000,000 shares authorized, none issued -- --
Common stock, 50,000,000 shares authorized;
$.001 par value, 4,354,280 shares issued and outstanding at
December 31, 2000 and 4,349,996 shares issued
and outstanding at December 31, 1999 4 4
Paid-in capital 36,559 36,513
Accumulated deficit (23,139) (23,082)
-------- --------
Total stockholders' equity 13,424 13,435
-------- --------
$ 24,795 $ 20,942
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except share data)
Eleven-month
Year ended Year ended period ended
December 31, December 31, December 31,
2000 1999 1998
---- ---- ----
Interest income
Interest and fees on loans $ 1,478 $ 420 $ 30
Interest on cash equivalents 464 476 631
Interest on federal funds sold 5 -- --
Interest on investment securities 222 130 15
------- ------- -------
Total interest income 2,169 1,026 676
Interest expense
Interest on deposits 812 150 --
Interest on short-term borrowings 18 29 --
------- ------- -------
Total interest expense 830 179 --
Net interest income before provision
for loan losses 1,339 847 676
Provision for loan losses (note 6) 917 475 --
------- ------- -------
Net interest income after provision
for loan losses 422 372 676
Noninterest income
Gain on sale of loans 1,061 913 --
Fee income 1,480 442 --
Miscellaneous income 854 212 --
------- ------- -------
Total other operating income 3,395 1,567 --
Noninterest expenses
Salaries, wages, and benefits 1,680 1,485 428
Professional and legal fees 532 617 242
Occupancy expense 191 199 60
Amortization of goodwill 118 117 41
Other general and administrative 1,350 1,265 679
------- ------- -------
Total operating expenses 3,871 3,683 1,450
------- ------- -------
Operating income (loss) (54) (1,744) (774)
Income taxes (note 14) -- -- --
------- ------- -------
Loss before minority interest (54) (1,744) (774)
(Income) loss attributable to minority interests (3) 134 59
------- ------- -------
Net loss $ (57) $(1,610) $ (715)
======= ======= =======
(continued)
F-6
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(Amounts in thousands except share data)
Eleven-month
Year ended Year ended period ended
December 31, December 31, December 31,
2000 1999 1998
---- ---- ----
Basic net income (loss) per common share $ (0.01) $ (0.37) $ (0.17)
Diluted net income (loss) per common share $ (0.01) $ (0.37) $ (0.17)
Weighted average number of common shares:
Basic 4,353,905 4,312,708 4,315,966
Diluted 4,353,905 4,312,708 4,315,966
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 2000, Year Ended December 31, 1999
and Eleven-Month Period Ended December 31, 1998,
(Amounts in thousands except share data)
Common stock Total
------------ Paid-in Accumulated Stockholders'
Shares Amount capital deficit equity
------ ------ ------- ------- ------
Balance at January 31, 1998 4,320,032 $ 35,000 $ 1,159 $ (20,757) $ 15,402
Net loss -- -- -- (715) (715)
Shares retired (9,840) -- -- -- --
Assignment of par value to
common stock -- (34,996) 34,996 -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 4,310,192 4 36,155 (21,472) 14,687
Net loss -- -- -- (1,610) (1,610)
Shares redeemed and
retired (78,829) -- (323) -- (323)
Shares issued upon
exercise of options 114,307 -- 417 -- 417
Shares issued for
services rendered 4,326 -- 23 -- 23
Contribution of
capital -- -- 180 -- 180
Options granted for
services rendered -- -- 61 -- 61
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 4,349,996 4 36,513 (23,082) 13,435
Net loss -- -- -- (57) (57)
Shares issued for
services rendered 4,284 -- 24 -- 24
Contribution of capital -- -- 22 -- 22
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 4,354,280 $ 4 $ 36,559 $ (23,139) $ 13,424
========== ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Eleven-month
Year ended Year ended period ended
December 31, December 31, December 31,
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income (loss) from continuing operations $ (57) $(1,610) $ (715)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Minority interest 3 (134) (59)
Depreciation and amortization 42 65 20
Premium earned on sale of loans (1,061) (913) --
Gain on sale of investment securities -- (76) --
Permanent writedown of investment securities 100 -- --
Common stock and options granted in lieu of cash 24 84 --
Provision for loan losses 917 475 --
Amortization/(accretion) of loan fees, net (97) 7 9
Amortization of goodwill 118 117 41
Amortization of premiums for
available-for-sale securities (163) -- 24
Amortization of servicing assets 35 8 --
Change in operating assets and liabilities:
Cash restricted in escrow -- 2,018 --
Loans held for sale 1,312 -- --
Accounts receivable -- (14) --
Prepaid expense -- (30) (33)
Accrued interest receivable 50 (122) (20)
Other assets (643) (118) (145)
Other liabilities (282) 627 --
Income tax due to former parent -- (309) --
------- ------- -------
Net cash provided by (used in)
operating activities 298 75 (566)
------- ------- -------
(continued)
F-9
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Eleven-month
Year ended Year ended period ended
December 31, December 31, December 31,
2000 1999 1998
---- ---- ----
Cash flows from investing activities:
Purchase of subsidiary -- -- (2,946)
Purchase of investment securities available-for-sale (24,836) -- (1,649)
Principal payments received on investment
securities available-for-sale 25,294 1,042 --
Proceeds from sale of available-for-sale securities -- 257 --
Purchase of investment securities held-to-maturity -- (48) --
Principal payments received on investment
securities held-to-maturity 5 11 --
Loans originated and principal collections, net (5,249) (8,898) (191)
Purchase of loans (730) -- --
Purchase of premises and equipment (51) (50) (47)
Minority interest -- -- 612
Funds transferred to escrow -- -- (98)
-------- -------- --------
Net cash used in
investing activities (5,567) (7,686) (4,319)
-------- -------- --------
Cash flows from financing activities:
Net increase in demand deposits -- 145 101
Net increase in certificates of deposit 5,243 4,639 --
Net increase (decrease) in short-term borrowings (1,100) 1,100 --
Issuance of common stock for cash -- 417 --
Cash paid to redeem shares -- (323) --
Minority interest contribution -- 38 --
Contribution of capital 22 180 --
-------- -------- --------
Net cash provided by financing activities 4,165 6,196 101
-------- -------- --------
Net decrease in cash and cash equivalents (1,104) (1,415) (4,784)
Cash and cash equivalents at beginning of period 7,266 8,681 13,465
-------- -------- --------
Cash and cash equivalents at end of period $ 6,162 $ 7,266 $ 8,681
======== ======== ========
(continued)
F-10
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Eleven-month
Year ended Year ended period ended
December 31, December 31, December 31,
2000 1999 1998
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid for interest $ 731 $ 156 $ 3
Supplemental disclosure of additional non-cash activities:
Conversion of loan receivable to investment
securities available-for-sale $ - $ - $ 216
During 2000 WebBank transferred loans of $4,250 to other assets
to reflect their sale prior to settlement.
During 1998 the Company acquired 90 percent of the outstanding
stock of WebBank (note 3). The following is a summary of the
effect of this transaction in the Company's consolidated
balance sheet: Assets acquired:
Investment securities available-for-sale $ - $ - $ (240)
Commercial loans - - (1,115)
Accrued interest receivable - - (21)
Property and equipment - - (89)
Other assets - - (28)
Goodwill - - (1,774)
Liabilities assumed:
Demand deposits - - 4
Accounts payable and accrued expenses - - 8
Income taxes payable to subsidiary's former parent - - 309
----------- ------ ----------
Net cash used $ - $ - $ (2,946)
=========== ====== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
Year Ended December 31, 2000, Year Ended December 31, 1999
and Eleven-Month Period Ended December 31, 1998
(All numbers except shares and per share data in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--The consolidated financial statements include the financial
statements of WebFinancial Corporation (the "Company") and its subsidiaries:
WebFinancial Holdings Corporation ("Holdings"), WebBank ("WebBank"), Praxis
Investment Advisers, Inc. ("Praxis"), WebFinancial Government Lending, Inc.
("Lending"), and Web Film Financial, Inc. ("Film"), collectively referred to as
the Company. WebBank is a Utah-chartered industrial loan corporation, and is
subject to comprehensive regulation, examination, and supervision by the Federal
Deposit Insurance Corporation ("FDIC"), and the State of Utah Department of
Financial Institutions. WebBank provides commercial and consumer specialty
finance services. Lending was organized to provide U.S. Department of
Agriculture loan originations, sales and servicing. During 2000, most of the
assets of Lending were transferred to WebBank in exchange for WebBank common
stock. Film was organized to finance the production and distribution of a motion
picture and the Company. Both Film and Praxis significantly wound down
operations in 2000. All significant intercompany balances have been eliminated
in consolidation.
Basis of Presentation--The preparation of consolidated financial statements in
conformity with accounting principals generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. A material estimate that is
particularly susceptible to significant change in the near-term relates to the
determination of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowance for loan losses and the
valuation of real estate, management obtains independent appraisals for
significant properties.
Cash and Cash Equivalents--Cash and cash equivalents include cash and
noninterest bearing deposits in depository institutions, plus interest-bearing
deposits with banks and investments in cash management funds. For purposes of
the statements of cash flows, the Company considers all highly liquid debt
instruments with maturities of three months or less when purchased to be cash
equivalents. Cash equivalents are stated at cost, which approximates market.
Income (loss) Per Share--Basic income (loss) per common share is calculated by
dividing net income (loss) by the weighted-average number of common shares
outstanding for the period. Diluted net income (loss) per common share reflects
the maximum dilutive effect of common stock issuable upon exercise of stock
options and stock warrants.
For the year ended December 31, 2000, 42,228 potentially dilutive common shares
were not included in the computation of diluted loss per share because they
would have had an anti-dilutive effect on the 2000 loss per share.
Investment Securities--The Company classifies its securities as either
available-for-sale securities or held-to-maturity securities. Held-to-maturity
securities are those securities that the Bank has the ability and intent to hold
until maturity. All other securities not included in held-to-maturity are
classified as available-for-sale.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Available-for-sale
securities are recorded at fair value. Unrealized holding gains or losses on
available-for-sale securities are excluded from earnings and reported until
realized in accumulated other comprehensive income (loss) as a separate
component of stockholders' equity. A decline in the market value of any
available-for-sale or held-to-maturity security below cost that is deemed other
than temporary is charged to earnings resulting in the establishment of a new
cost for the security. Premiums and discounts are amortized or accreted over the
life of the related security as an adjustment to the yield using the
effective-interest method. Dividend and interest income is recognized when
earned. Realized gains and losses for securities classified as
available-for-sale or held-to-maturity are included in earnings and are derived
using the specific-identification method.
F-12
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
Loans--Loans are reported at the principal amount outstanding, net of premiums,
discounts, and unearned income. Premiums and discounts are accreted/amortized
over the life of the related loan under the interest method. Unearned income,
which includes deferred fees net of deferred direct incremental loan origination
costs, is amortized to interest income over the contractual life of the loan
using an interest method, adjusted for actual prepayment experience. Interest
income is accrued daily as earned.
Allowance for Loan Losses--The allowance for loan losses is established through
a provision for loan losses charged to expense. Loan losses are charged against
the allowance when management believes that the collectibility of the loan
principal is unlikely. Recoveries on loans previously charged off are credited
to the allowance.
The allowance is an amount that management believes will be adequate to absorb
possible loan losses based on evaluations of collectibility and prior loss
experience. The evaluation takes into consideration such factors as changes in
the nature and volume of the portfolio, overall portfolio quality, specific
problem loans, and current and anticipated economic conditions that may affect
the borrowers' ability to pay. Management also obtains appraisals where
considered necessary.
Impaired Loans--Loans are considered impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement, including
scheduled interest payments.
This assessment for impairment occurs when and while such loans are on
nonaccrual. When a loan with unique risk characteristics has been identified as
being impaired, the amount of the impairment will be measured by the Company
using discounted cash flows, except when it is determined that the remaining
source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such cases, the current fair value of the collateral,
reduced by costs to sell, will be used in place of discounted cash flows.
If the measurement of the impaired loan is less than the recorded investment in
the loan, including accrued interest, net deferred loan fees or costs and
unamortized premium or discount, an impairment is recognized by creating or
adjusting an existing allocation of the allowance for loan losses.
Nonaccrual Loans--Accrual of interest is discontinued on a loan when the loan is
90 days past due or when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful. Interest income on
nonaccrual loans is credited to income only to the extent interest payments are
received. Loans are restored to accrual of interest when delinquent payments are
received in full. Additionally, the Company uses the cost recovery accounting
method to recognize interest income on impaired loans.
Premises and Equipment--Premises and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation of premises and
equipment is computed by the straight-line method over estimated useful lives
from one to five years. Leasehold improvements are amortized over the terms of
the related leases or the estimated useful lives of the improvements, whichever
is shorter. Useful lives of leasehold improvements are between three and five
years.
Income Taxes--The Company uses the liability method of accounting for income
taxes. Under the liability method, deferred tax assets and deferred tax
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and deferred tax liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and deferred tax liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Loans Held for Sale--The Company originates loans to customers under a United
States Department of Agriculture ("USDA") program that generally provides for
USDA guarantees of 70 percent to 90 percent of each loan. The Company plans to
sell the guaranteed portion of each loan to a third party and retain the
unguaranteed portion in its own portfolio. Loans held-for-sale are carried at
the lower of cost or estimated market value in the aggregate. A sale is
F-13
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
recognized when control over the loans sold is surrendered and the proceeds of
the sale are other than beneficial interests in the loans sold. The Company
allocates basis of the loans sold, the retained portions, and retained servicing
based upon their relative fair market values. To the extent the sale of a loan
involves the sale of part of a loan with a disproportionate credit risk, the
cost basis of the loan is allocated based upon the relative fair values of the
portion sold and the portion retained on the date such loan sale was made.
Deferred income on USDA loans arises on the sale of the government guaranteed
portion of the loan and the retention of the unguaranteed portion. Such deferred
income is recognized over the estimated remaining life of the retained portion.
The Company is required to retain a minimum of five percent of each USDA loan
sold and to service the loan for the investor. Based on the specific loan sale
agreement that the Company enters into with the investor, the difference between
the yield on the loan and the yield paid to the buyer is the servicing fee.
Loans serviced for others amounted to $54,554,056 and $8,289,000 at December 31,
2000 and 1999, respectively. These loans are not included in the accompanying
statements of financial condition. Fees earned for servicing loans for others
are reported as income when the related loan payments are collected, less
amortization of the servicing asset. Loan servicing costs are charged to expense
as incurred.
Goodwill--The acquisition of WebBank was accounted for under purchase accounting
resulting in goodwill of $1,774 which is being amortized using the straight-line
basis over 15 years. Goodwill is reviewed for possible impairment when events or
changed circumstances affect the underlying basis of the asset. Impairment is
measured by comparing the investment to undiscounted operating income.
Accounting for Impairment of Long-Lived Assets--The Company reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets held and used is measured by a comparison of the
carrying amount of the asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of their carrying amount or fair value less cost to
sell.
Comprehensive Income (Loss)-- Components of comprehensive income (loss) may
include net income (loss), unrealized gains (losses) on available-for-sale
investment securities, foreign currency translation adjustments, changes in the
market value of futures contracts that qualify as a hedge, and net loss
recognized as an additional pension liability not yet recognized in net periodic
pension cost. For the years ended December 31, 2000 and 1999, the comprehensive
income (loss) was $0.
Stock-Based Compensation--The Company employs the footnote disclosure provisions
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 which allows
entities to account for stock options or similar equity based compensation using
the intrinsic-value method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25 Accounting for Stock Issued to Employees ("APB
25"). The Company has elected to continue to apply the provisions of APB 25 and
provide proforma footnote disclosures required by SFAS No. 123.
Reclassification--Certain amounts as of and for the year ended December 31, 1999
and the eleven-month period ended December 31, 1998 have been reclassified to
conform with the 2000 presentation.
Operating Segments--The Company operates in one line of business, commercial and
consumer specialty finance transactions. As such, the Company has only one
reportable operating segment.
New Accounting Pronouncements--The Financial Accounting Standards Board issued
Statement on Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities in 1998. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that entities recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. As a result of SFAS No. 137,
SFAS No. 133 has been adopted in 2001. The Company does not believe the adoption
of SFAS No. 133 will have a material effect on the financial position or results
of operations of the Company.
F-14
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin ("SAB") No.
101, Revenue Recognition in Financial Statements. SAB No. 101 summarizes certain
of the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company has incorporated the
guidance of SAB No. 101 in the first quarter of fiscal 2001.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement replaces
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities and revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but carries over most of SFAS No 125's provisions
without reconsideration. It provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
The Company does not believe the adoption of SFAS No. 140 will have a material
effect on the financial position or results of operations of the Company.
2. CHANGE IN YEAR END
The Company applied to the Internal Revenue Service to change its fiscal year
end to a calendar year end, resulting in an eleven-month reporting period for
1998. The Internal Revenue Service granted approval of the Company's request in
February 1999.
3. ACQUISITION AND FORMATION OF SUBSIDIARIES
On August 31, 1998, Holdings, a newly formed, wholly-owned Delaware subsidiary
of the Company, consummated the acquisition of 90 percent of the outstanding
common stock ("Bank Common Stock") of WebBank, pursuant to an assignment (the
"Assignment") from Praxis Investment Advisers, a Nevada limited liability
company ("PIA"), of a stock purchase agreement, dated January 20, 1998 (the
"Purchase Agreement"), between PIA and Block Financial Corporation ("Block"),
relating to the purchase by PIA of all of the issued and outstanding shares of
Bank Common Stock. Pursuant to the Assignment, the Company paid Block $4,783 for
the shares of Bank Common Stock to be purchased by Block pursuant to the
Purchase Agreement. In addition, the Company paid $288 in acquisition costs, for
a total purchase price of $5,071. The acquisition was accounted for under
purchase accounting, resulting in goodwill of $1,774. On August 31, 1998, Praxis
was formed by a cash contribution from the Company of $428 for a 90 percent
ownership of newly issued stock.
In connection with the purchase of Bank Common Stock, Holdings entered into a
subscription and stockholders agreement, dated as of August 31, 1998 (the
"Stockholders Agreement") with Andrew Winokur ("AW"), the owner of the 10
percent of the outstanding shares of Bank Common Stock not purchased by
Holdings. Pursuant to the Stockholders Agreement, Holdings agreed to purchase 90
percent, and AW agreed to purchase 10 percent, of the common stock ("Praxis
Common Stock") of Praxis. The Stockholders Agreement also provides for certain
restrictions on the disposition by AW of his Bank Common Stock and Praxis Common
Stock and certain rights and obligations of Holdings and the Company to purchase
the shares of Bank Common Stock and Praxis Common Stock owned by AW.
Holdings, AW, and Praxis entered into a management agreement on August 31, 1998
(the "Management Agreement") under which Praxis agreed to provide certain
management services to AW and Holdings in connection with the ownership and
operation of WebBank.
Praxis and AW had also entered into an employment agreement (the "Employment
Agreement"), providing for the employment of AW by Praxis. Under the Employment
Agreement, AW agreed to serve as president and chief executive officer of Praxis
for a term of five years (which may be extended for one or more years with the
written agreement of the parties). Under the Employment Agreement, AW was
granted the authority to formulate the recommendations to WebBank on behalf of
Praxis pursuant to the Management Agreement. During January 2000, AW and the
Company terminated their relationship. (See footnote 16.)
F-15
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
4. INVESTMENT SECURITIES
Investment securities as of December 31, 2000, are summarized as follows:
Held-to-maturity
-----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------- ----------------- ----------------- -----------------
Collateralized MBS $ 32 $ - $ - $ 32
================= ================= ================= =================
Available-for-sale
-----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------- ----------------- ----------------- -----------------
Collateralized MBS $ 447 $ - $ - $ 447
Interest-only strip 16 - - 16
----------------- ----------------- ----------------- -----------------
$ 463 $ - $ - $ 463
================= ================= ================= =================
Investment securities as of December 31, 1999, are summarized as follows:
Held-to-maturity
-----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------- ----------------- ----------------- -----------------
Collateralized MBS $ 37 $ - $ - $ 37
================= ================= ================= =================
Available-for-sale
-----------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------------- ----------------- ----------------- -----------------
Collateralized MBS $ 684 $ - $ - $ 684
Interest-only strip 174 - - 174
----------------- ----------------- ----------------- -----------------
$ 858 $ - $ - $ 858
================= ================= ================= =================
The amortized cost and estimated market value of investment securities at
December 31, 2000, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
prepay obligations with or without penalties.
Held-to-maturity Available-for-sale
---------------------------------------- ----------------------------------------
Estimated fair Estimated fair
Amortized cost value Amortized cost value
----------------- ----------------- ----------------- -----------------
Due beyond five years $ 32 $ 32 $ 463 $ 463
================= ================= ================= =================
F-16
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
5. LOANS
Loans at December 31, 2000 and 1999 are summarized as follows:
2000 1999
-------------- ------------------
Commercial loans $ 11,634 $ 8,785
Installment loans 947 982
Loans held-for-resale - 1,312
Deferred income (450) (211)
-------------- ------------------
$ 12,131 $ 10,868
============== ==================
Loans to thirteen customers comprise approximately 91 percent of total loans at
December 31, 2000. All of the loans in the portfolio are at a variable rate. The
ability of the borrowers to repay their obligations is dependent upon economic
conditions within their respective regions as well as the financial condition of
the borrowers.
6. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is summarized as follows:
2000 1999
----------------- -----------------
Beginning balance $ 472 $ -
Additions:
Provision for loan losses 917 475
Recoveries - -
Deduction-loan charge-offs (312) (3)
----------------- -----------------
Ending balance $ 1,077 $ 472
================ =================
The Company considers the allowance for loan losses adequate to cover losses
inherent in loans and loan commitments at December 31, 2000. However, no
assurance can be given that the Company will not, in any particular period,
sustain loan losses that are sizable in relation to the amount reserved, or that
subsequent evaluations of the loan portfolio, in light of the factors then
prevailing, including economic conditions and the Company's ongoing examination
process and that of its regulators, will not require significant increases in
the allowance for loan losses. (See footnote 19.)
7. RELATED PARTY TRANSACTIONS
As of March 31, 1998, the Company entered into a sub-lease for office space with
Gateway Industries, Inc. ("GWAY") for use of such space as a corporate office on
a non-exclusive basis. This lease runs through March 31, 2001, but may be
terminated by either party with 90 days notice. Warren Lichtenstein, the
Company's President, Chief Executive Officer, and Chief Accounting Officer, is
the Chairman of the Board of Directors of GWAY. Mr. Lichtenstein is also the
sole managing member of the General Partner of Steel Partners II, L.P., which
owns approximately 38% of the common stock of GWAY. Steel Partners Services,
Ltd. ("SPS"), which is owned by an entity controlled by Mr. Lichtenstein, also
subleases part of the office space from GWAY. In 2000 and 1999, the rent was
included in a $310 and $267 management fee, respectively, charged by SPS to the
Company. Such management fee is included in the Company's selling, general and
administrative expense. In 1998, the rent was approximately $32 and was included
in overhead reimbursement to SPS of $148. As of December 31, 2000 and 1999 the
Company showed, in relation to SPS, prepaid expense of $0 and $40 and accounts
payable of $0 and $12, respectively.
F-17
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
8. TIME CERTIFICATES OF DEPOSIT
Time certificates of deposits as of December 31, 2000 are summarized as follows:
Weighted
average
rate 2000
---------------- ------------
Certificates of deposit greater than
$100,000 6.67% $ 8,279
Other certificates of deposit 6.76% 1,603
---------------- ------------
6.69% $ 9,882
================ ============
A summary of the maturity of time certificates of deposit as of December 31,
2000 follows:
Within one year
-----------------
Greater than $100,000 $ 8,279
Other certificates of deposit 1,603
-----------------
$ 9,882
=================
9. SHORT-TERM BORROWINGS
WebBank had an unsecured operating line of credit from a commercial bank that
matured April 30, 2000, which allowed WebBank to borrow up to $3,000. Interest
was payable monthly at the commercial bank's prime rate plus 100 basis points
(9.5 percent at December 31, 1999). The operating line of credit was subject to
certain minimum financial covenants. The average borrowings on the operating
line of credit for the year ended December 31, 1999, were $244, the maximum
outstanding at any month-end during the year ended December 31, 1999 was $2,600,
and the average rate during 1999 was 9.7%. The average borrowings on the
operating line of credit for the year ended December 31, 2000, were $64, the
maximum outstanding at any month-end during the year ended December 31, 2000 was
$775, and the average rate during 2000 was 5.7%. WebBank did not seek to renew
the line of credit when it expired on April 30, 2000.
On October 26, 2000, WebBank was approved for a $2,500 federal funds line of
credit with another commercial bank. The interest rate approximates the federal
funds rate and can be outstanding for no more than 60 days without paying the
line down in full. The line of credit will be used to fund loan originations
prior to sale of the guaranteed portion. The federal funds line of credit was
not utilized in 2000.
10. PREMISES AND EQUIPMENT
Premises and equipment at December 31, are summarized as follows:
2000 1999
---- ----
Leasehold improvements $ 112 $ 49
Furniture and equipment 202 137
------ ------
314 186
Less accumulated depreciation and amortization 204 85
------ ------
$ 110 $ 101
====== ======
F-18
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
11. STOCKHOLDERS' EQUITY
On November 4, 1998, at the annual meeting of stockholders of the Company, the
stockholders approved a one-for-two reverse split of its common stock (the
"Reverse Split"). Pursuant to the Reverse Split, which became effective on
November 20, 1998 (the "Effective Date"), every two shares of common stock held
by stockholders owning of record 500 or more shares of common stock on the
Effective Date were converted into one share of common stock, and all shares
held by stockholders owning of record fewer than 500 shares of common stock on
the Effective Date were converted into the right to receive a cash payment in
the amount of $2.0375 per share. The net effect of the Reverse Split was to
reduce the number of shares of common stock outstanding as of the Effective Date
from 8,620,383 shares to 4,310,192 shares. All references to the number of
common shares and per common share amounts have been restated to reflect the
Reverse Split.
In January of 1999 the Depository Trust Company made a final determination of
78,829 shares to be treated as representing positions of holders of less than
250 shares (on a post-split basis). Accordingly, the Company deposited in an
escrow account with First Union National Bank $323 for the purpose of paying
cash to holders of less than 250 shares and the corresponding shares have been
shown as redeemed and retired.
Members of the Company's board of directors contributed cash of $180 to the
Company in 1999 and $22 in 2000. No shares were issued as a result of these
transactions. The Company recorded the contribution as an addition to
paid-in-capital.
12. STOCK OPTIONS AND WARRANTS
The Company's New Equity Compensation Plan was adopted on February 14, 1995. The
Plan provided for the granting of a maximum of 350,000 shares of stock. The
price of the options granted was not less than 100 percent of the fair market
value of the shares on the date of grant. The options vested immediately with
the Sale of Stores. At that time, all options were canceled 60 days later.
On April 24, 1997, the Company adopted a Long Term Stock Incentive Plan which
provides for the granting to employees and directors of, and consultants to, the
Company certain stock-based incentives and other equity interests in the
Company. A maximum of 250,000 shares was issuable under the Plan. The options
vest according to varied schedules, are exercisable when vested, and expire five
years from the date of issuance.
The Board of Directors of the Company, at its meeting on September 2, 1998,
approved the merger of the New Equity Compensation Plan (which had been adopted
in 1995) into the Long Term Stock Incentive Plan (which had been adopted in
1997) and certain amendments to the Long Term Stock Incentive Plan. At the
annual meeting held November 4, 1998, the shareholders approved the merger and
certain amendments to the new stock option plan (the "Merged Plan".) Approved
were the grants of certain stock-based incentives and other equity interests to
employees, directors, and consultants. A maximum of 1,000,000 shares may be
issued under the Merged Plan. The options are vested according to varied
schedules, exercisable when vested, and expire five years from the date of
issuance.
F-19
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
The following table summarizes stock option activity:
Eleven-month
Year ended Year ended period ended
December 31, 2000 December 31, 1999 December 31, 1998
Weighted- Weighted- Weighted-
Number average Number average Number Average
of shares exercise of shares exercise of shares Exercise
(1,000's) price (1,000's) price (1,000's) Price
----------------------------- ---------------------------------- -----------------------------
Options outstanding at
beginning of year 442 $ 4.08 504 $ 3.72 49 $ 3.40
Options granted 27 $ 3.44 52 $ 6.25 455 $ 3.75
Options cancelled - $ - - $ - - $ -
Options exercised - $ - (114) $ - - $ -
------ ------- -------
Options outstanding at
end of year 469 $ 4.04 442 $ 4.08 504 $ 3.72
Options exercisable at
end of year 441 $ 4.01 369 $ 4.01 268 $ 3.95
Weighted-average fair
value of options granted
during the year $ 3.44 $ 2.71 $ 1.73
The following table summarizes information about fixed stock options outstanding
at December 31, 2000:
Options outstanding Options exercisable
----------------------------------------- -------------------------------
Number Weighted Number
outstanding average Weighted- exercisable Weighted-
Range of at remaining average at average
exercise December 31, contractual exercise December 31, exercise
Prices 2000 life in years price 2000 price
------ ---- ------------- ----- ---- -----
$ 2.875 to 4.313 368 2.6 $ 3.64 348 $ 3.65
$ 4.314 to 6.470 76 2.9 $ 4.99 76 $ 4.99
$ 6.471 to 7.000 25 3.6 $ 7.00 17 $ 7.00
------ -----
469 $ 4.04 441 $ 4.01
===== =====
F-20
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS 123, the Company's net loss and loss per
share would have been changed to the following pro forma amounts:
Eleven-month period
Year ended December Year ended December ended December 31,
31, 2000 31, 1999 1998
---- ---- ----
Net income (loss) As reported $ (57) $ (1,610) $ (715)
Pro forma $ (110) $ (1,861) $ (1,192)
Basic and diluted
net income (loss) per
share As reported $ (0.01) $ (0.37) $ (0.17)
Pro forma $ (0.03) $ (0.43) $ (0.28)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for the years ended December 31, 2000 and 1999, and the eleven
month-period ended December 31, 1998: risk-free interest rates of 6.3 percent,
4.6 percent, and 4.7 percent, respectively; expected dividend yields of 0
percent for all years; expected lives of 5 years for all years; and expected
volatility of 61 percent, 42 percent, and 46 percent, respectively. The fair
value for options granted to nonemployees for services was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions for the year ended December 31, 2000: risk-free interest rate of 6.3
percent, expected dividend yield of 0 percent, expected lives of 5 years, and
expected volatility of 61 percent. No options were granted to nonemployees for
services during the eleven-month period ended December 31, 1998. Compensation of
$61 was charged to expense as a result of options issued to nonemployees in
1999. No options were granted to nonemployees for services during the year ended
December 31, 2000.
Warrants were issued to stockholders in 1995 related to the Company's Bankruptcy
filing in 1993. The number of Company warrants exercisable at December 31, 2000
is 4,286. The exercise price is updated annually in April and as of April 2000
is $13.04 per warrant. To acquire one share of Company stock, a warrant holder
must exercise two warrants and pay $26.08. All warrants outstanding expire April
28, 2002.
13. Employee Benefit Plan and incentive Program
WebBank has a 401(k) profit sharing plan covering employees who meet age and
service requirements. Plan participants are fully vested after five years of
service. WebBank matches employee contributions up to five percent of covered
compensation at two hundred percent of the employee's contribution.
Contributions to the plan amounted to approximately $92, $60, and $8 for the
years ended December 31, 2000 and 1999, and the eleven-month period ended
December 31, 1998.
F-21
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
14. INCOME TAXES
The Company reported no income tax expense or benefit for the year ended
December 31, 2000 and the year ended December 31, 1999. The difference between
the expected tax benefit and actual tax benefit is primarily attributable to the
effect of the net operating losses, offset by an increase in the Company's
deferred tax asset valuation allowance. The tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities were as follows:
December 31, December 31,
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforward $ 14,478 $ 14,448
Deferred income 0 19
Accrued bonuses 0 8
Accrued vacation 12 12
Allowance for loan loss 401 179
Premises and equipment 32 26
--------- ----------
Total deferred tax assets 14,923 14,692
Less valuation allowance (14,923) (14,692)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
The net change in the total valuation allowance for the year ended December 31,
2000 was an increase of $231.
At December 31, 2000, the Company had certain net operating loss carry forwards
of approximately $38,800 that are scheduled to expire from 2009 through 2019.
The Company has treated such net operating losses in accordance with Section
382(l)(5) of the Internal Revenue Code. As a result, there is approximately
$19,000 in net operating losses incurred prior to the Effective Date as well as
$19,800 incurred subsequent to the Effective Date available as carryovers. All
net operating losses may be subject to certain limitations on utilization.
15. DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying value for short-term financial instruments that mature or reprice
frequently at market rates approximates fair value. Such financial instruments
include: cash and cash equivalents, accrued interest receivable, demand
deposits, accounts payable and accrued expenses, time certificates of deposit
and short term borrowing. The difference between the fair market value and the
carrying value for loans and investment securities is not considered significant
to the financial statements.
16. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating leases for office space. The
schedule of future minimum operating lease payments as of December 31, 2000, is
summarized as follows (in thousands):
2001 $ 134
2002 102
2003 102
2004 102
Thereafter 22
---------
$ 462
=========
F-22
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
The Company's rental expense for the year ended December 31, 2000, the year
ended December 31, 1999 and the eleven-month period ended December 31, 1998
amounted to approximately $147, $199, and $60 respectively.
The Company is a party to financial instruments with off-balance sheet risk. In
the normal course of business, these financial instruments include commitments
to extend credit in the form of loans. At December 31, 2000 and 1999, the
Company's undisbursed commercial loan commitments totaled approximately $12,000
and $21,000 respectively. For the same periods, the Company's undisbursed
consumer credit card loan commitments totaled approximately $2,700 and $23,500,
respectively.
WebBank has a Cash Management Account ("CMA") with the Federal Home Loan Bank of
Seattle ("FHLB") at an amount equal to five percent of total assets. CMA
advances must be fully collateralized according to the terms of the Advance,
Security, and Deposit Agreement that the Bank signed with the FHLB. The CMA is
reviewed on an annual basis and market interest rates are set at the time funds
are borrowed. As of December 31, 2000, no borrowings were drawn on this CMA
account.
In January 2000, a former executive officer and director of the Company's
subsidiary Praxis (the "officer") filed a lawsuit in the Superior Court of the
State of California, County of Napa against the Company, Praxis and Holdings.
The lawsuit alleges that Praxis has breached its employment agreement with the
officer. The lawsuit also asserts claims for interference with contract and
unjust enrichment based upon the purported wrongful termination of the officer's
employment contract with Praxis. The lawsuit seeks damages of an unspecified
amount and compliance by Praxis with the termination pay out provisions in the
officer's employment agreement relating to purchase of the officer's 10%
interest in Praxis and WebBank (both 90% covered subsidiaries of the Company) at
their fair market value. The time for the Company to answer and assert
counterclaims in this matter has not yet expired. The Company and Praxis deny
that Praxis wrongfully terminated the officer's employment and intends to
vigorously defend this matter. The Company does not believe that this lawsuit
will have a material impact on its financial condition, results of operations,
or liquidity.
The Company is also a defendant in legal actions arising from normal business
activities. Management believes that the ultimate liability, if any, resulting
from such actions will not materially affect the Company's financial position.
17. REGULATORY REQUIREMENTS
WebBank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average quarterly assets (as defined).
Management believes, as of December 31, 2000, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as "well capitalized" under the
regulatory framework. To be categorized as "well capitalized" the Bank must
maintain certain Total and Tier I capital to risk-weighted assets and Tier I
capital to average quarterly assets ratios. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
F-23
WEBFINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
Capital amounts and ratios are summarized as follows (in thousands):
Well capitalized Minimum capital
Actual requirement requirement
--------------------------- ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ---------- -------- ------- ---------- ----------
As of
December 31, 2000:
Total Capital (Tier 1 +
Tier 2) to risk
weighted assets $ 5,583 36.2% $ 1,541 >10.0% $ 1,233 >8.0%
- -
Tier I Capital to risk
weighted assets $ 5,379 34.9% $ 925 >6.0% $ 617 >4.0%
- -
Tier I Capital to average assets
(Leverage Ratio) $ 5,379 28.3% $ 951 >5.0% $ 761 >4.0%
- -
18. SERVICING ASSETS AND LIABILITIES
In connection with certain businesses in which the Company sells originated or
purchased loans with servicing retained, servicing assets or liabilities are
recorded based on the relative fair value of the servicing rights on the date
the loans are sold. Servicing assets and liabilities are amortized in proportion
to and over the period of estimated net servicing income and expense. At
December 31, 2000 and 1999, net servicing assets, which are included in Other
Assets, were $278 and $6, respectively. Servicing assets are periodically
evaluated for impairment based on the fair value of those assets.
19. SUBSEQUENT EVENTS
During January of 2001 a significant WebBank B&I loan borrower unexpectedly
filed for Chapter 11 bankruptcy. The loan was only one month past due at
December 31, 2000 and had not been considered for nonaccrual status at that
time. The total amount of principal outstanding on the loan at December 31, 2000
was approximately $915. As a result of the bankruptcy, during January 2001,
WebBank provided an additional $400 of allowance for loan losses. This $400 of
additional provision has been recorded in the Company's consolidated financial
statements as of December 31, 2000. The allowance at December 31, 2000, is an
amount that management believes will be adequate to absorb possible loan losses
based on evaluations of collectibility and prior loss experience.
As of March 19, 2001, the borrower backing an interest-only strip owned by
WebBank filed for Chapter 11 bankruptcy. The borrower was two months past due at
December 31, 2000 after making a payment on December 29, 2000. The total amount
of the interest-only strip outstanding at December 31, 2000 was $116. As a
result of the bankruptcy, WebBank permanently wrote down $100 of the balance.
The remaining balance is expected to be recovered in 2001. This $100 writedown
has been recorded in the Company's consolidated financial statements as of
December 31, 2000.
F-24