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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 0-23911
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FOG CUTTER CAPITAL GROUP INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-2081138
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1631 SW COLUMBIA STREET,
PORTLAND, OR 97201
(Address of principal executive offices) (Zip Code)
(503) 721-6500
(Registrant's telephone number, including area code)
WILSHIRE REAL ESTATE INVESTMENT INC.
(Former name)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price as quoted on NASDAQ on
February 28, 2001 was $17,129,514.
As of February 28, 2001, 10,507,313 shares, not including options to
purchase 1,899,500 shares of Fog Cutter Capital Group Inc.'s common stock and
992,687 treasury shares, par value $0.0001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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FOG CUTTER CAPITAL GROUP INC.
FORM 10-K
INDEX
PAGE
----
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 28
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13. Certain Relationships and Related Transactions.............. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 48
2
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE
FILINGS BY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS
(SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL) MAY BE IDENTIFIED BY REFERENCE
TO A FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY,
SUCH AS "MAY," "WILL," "BELIEVE," "EXPECT," "ANTICIPATE," "CONTINUE," OR SIMILAR
TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING
STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
RELATED TO THE ECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH
THE COMPANY OPERATES, THE FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY
OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND
PRICING, THE REAL ESTATE MARKET, FISCAL AND MONETARY POLICIES OF THE U.S.
GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES, ACQUISITIONS AND THE
INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK MANAGEMENT AND ASSET/LIABILITY
MANAGEMENT. EXCEPT AS MAY BE REQUIRED BY LAW, THE COMPANY DOES NOT UNDERTAKE,
AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF
ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS.
PART I
ITEM 1. BUSINESS
GENERAL
Fog Cutter Capital Group Inc. ("FCCG" or the "Company") is a Nasdaq-listed
corporation which focuses on the acquisition of assets where its expertise in
intensive asset management, mortgage and real estate credit analysis and
financial structuring can create value. The Company invests primarily in the
following types of assets:
- mortgage-backed securities,
- mortgage loans,
- real estate,
- real estate corporations, and
- other real estate-related investments.
The Company was originally incorporated as Wilshire Real Estate Investment
Trust Inc. in the State of Maryland on October 24, 1997. However, in order to
benefit from potential tax benefits related to significant net operating loss
carryforwards and to avoid any risk of not qualifying as a real estate
investment trust ("REIT"), the Company, with the approval of its shareholders,
elected in September 1999 not to be taxed as a REIT, and the Company's name was
changed to Wilshire Real
3
Estate Investment Inc. Effective January 25, 2001, the Company changed its name
to Fog Cutter Capital Group Inc. to better reflect the opportunistic nature of
its business and investments.
During the third quarter of 1999, the Company decided to become internally
managed and retained senior executives and other employees to implement this
decision. Prior to this decision and subject to the supervision of the Company's
Board of Directors, the Company's business affairs and day-to-day operations had
been managed by Wilshire Realty Services Corporation ("WRSC"), a wholly-owned
subsidiary of Wilshire Financial Services Group Inc. ("WFSG"), pursuant to a
management agreement (the "Management Agreement"). The decision to become
internally managed and cease to utilize the services of WRSC resulted in
disputes between the Company, on the one hand, and WFSG and certain of its
affiliates, on the other. These disputes were resolved in August 2000.
BACKGROUND
Beginning in August 1998, we were significantly and adversely affected by
the dramatic movement of liquidity towards less-risky assets (e.g., U.S.
Treasury instruments) and away from higher risk assets. In particular, the
markets for certain mortgage-backed securities and pools of mortgage loans
experienced significant declines as Wall Street investment banks marked these
assets down (including illiquid and infrequently traded subordinated
mortgage-backed securities) to their view of the market price and lenders became
unwilling to lend against low-rated or unrated mortgage-backed securities and
many pools of mortgage loans. These factors resulted in a dramatic reduction in
market valuations for our mortgage-backed securities and mortgage loans, as well
as a reduction in the availability of borrowings for those assets, and the
Company was forced to liquidate holdings at reduced prices, resulting in
significant losses in 1998 and 1999.
In response to these adverse market conditions and the resulting effect on
our operations, we focused our efforts during most of 1999 and 2000 on
stabilizing our existing asset and liability structure and we greatly reduced
our acquisition activities. As a result of these efforts, we have significantly
reduced our short-term, mark-to-market-based financing for mortgage-backed
securities. We resumed acquisition activities in the fourth quarter of 2000.
BUSINESS STRATEGY
Our business strategy focuses on opportunistic investing, structuring and
managing real estate-related assets such as mortgage-backed securities,
mezzanine real estate loans and real estate, as well as the acquisition of
companies engaged in investing in such assets. We will concentrate on the
acquisition of assets where our expertise in intensive asset management,
mortgage and real estate credit analysis and financial structuring can create
value. Further, we expect that many of these investments, particularly in
corporate acquisitions, will be acquired in conjunction with partners.
INVESTMENTS
We seek to invest directly or indirectly in real estate-related assets that
provide us with an appropriate risk-adjusted rate of return and the opportunity
for capital gains. We maintain a flexible approach with respect to the nature of
our investments, seeking to take advantage of opportunities as they arise or are
developed.
4
We have set forth below information regarding our principal categories of
investment at December 31, 2000 and 1999.
DECEMBER 31, 2000 DECEMBER 31, 1999
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CARRYING VALUE % CARRYING VALUE %
-------------- -------- -------------- --------
(DOLLARS IN THOUSANDS)
Mortgage-Backed Securities (1).............. $ 74,731 49.7% $104,572 47.8%
Loans: (2)..................................
U.S. Commercial........................... 30,404 20.2 31,014 14.2
International............................. -- -- 620 0.3
-------- ----- -------- -----
Total Loans............................. 30,404 20.2 31,634 14.5
Investment Properties:
U.S. Commercial........................... 4,783 3.2 40,679 18.6
International............................. 19,984 13.3 22,546 10.3
-------- ----- -------- -----
Total Investment Properties............. 24,767 16.5 63,225 28.9
Cash and Cash Equivalents................... 3,394 2.3 5,862 2.7
Other Assets (3)............................ 17,008 11.3 13,373 6.1
-------- ----- -------- -----
Total Assets................................ $150,304 100.0% $218,666 100.0%
======== ===== ======== =====
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(1) At December 31, 2000, our mortgage-backed securities are secured primarily
by residential mortgage loans.
(2) At December 31, 2000, our loans are secured by commercial properties.
(3) At December 31, 2000, other assets consist primarily of $3.6 million of
investment in WFSG common stock, $2.0 million in prepaid service fees to an
affiliate of WFSG, $6.7 million deposit for the acquisition of a U.K.-based
real estate company and $4.7 million of miscellaneous other assets.
The following sections provide additional detail of specific investments as
of December 31, 2000.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are interests in pools of mortgages that have
been securitized and are usually issued in multiple classes ranging from the
most senior to the most subordinate class. We focus on the subordinated classes,
which we believe offer higher risk-adjusted returns. We seek to invest in
subordinated mortgage-backed securities that we believe may appreciate in value
due to the prepayment and default experience of the underlying collateral. At
December 31, 2000, our mortgage-backed securities were principally backed by
pools of residential mortgage loans and were subordinated in right of payment to
more senior interests in those pools. On December 31, 2000, our portfolio of
mortgage-backed securities consisted of 20 classes of mortgage-backed securities
representing interests in 10 securitizations from 5 different issuers.
Subordinated mortgage-backed securities are generally the non-investment-grade
classes of mortgage-backed securities that provide credit enhancement to more
senior classes by having a lower payment priority in the cash flow from the
underlying mortgage loans and absorbing the first losses on the underlying
mortgage loans. In "senior/subordinate" structures, each subordinated class has
a principal face amount equal to the subordination level required for the
classes, if any, which are senior to the respective subordinated class and the
subordination level required at the respective rating (I.E., BBB, BB, B, NR).
Our mortgage-backed securities consist of securities backed by loans that were
originated and are being serviced by unaffiliated, non-governmental third
parties.
5
During the year ended December 31, 2000, we significantly changed the
liability structure of our balance sheet primarily through the following
transactions relating to our mortgage-backed securities portfolio:
- During the quarter ended June 30, 2000, the Company resecuritized
approximately $20.1 million of its mortgage-backed securities portfolio
which resulted in no gain or loss. As part of the resecuritization
transaction, the Company acquired a subordinated interest in the
underlying trust for approximately $6.3 million and eliminated all of the
short-term, mark-to-market debt previously collateralized by these
securities.
- In December 2000, we refinanced the debt on approximately $43.2 million of
our mortgage-backed securities portfolio through a securitized structure.
This transaction was treated as a secured financing transaction rather
than a sale for accounting purposes due to certain call provisions
retained by the Company. As such, our balance sheet continues to reflect
these securities as well as the senior bonds of $34.2 million which
replaced the short-term, mark-to-market debt previously collateralized by
these securities.
At December 31, 2000 and 1999, we valued our securities available for sale
portfolio and gross unrealized gains and losses thereon as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST (1) GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2000
Mortgage-backed securities.................. $ 76,288 $ -- $ 1,557 $ 74,731
DECEMBER 31, 1999
Mortgage-backed securities.................. $127,799 $3,487 $26,714 $104,572
- ------------------------
(1) The amortized cost of our securities is net of the market valuation losses
and impairments discussed in "Results of Operations". The unrealized gains
and losses represent market value declines that, unlike "market value loss
and impairment," the Company believes are temporary.
For financial reporting purposes, we mark our securities portfolio to fair
value at the end of each month based upon broker/dealer valuations (if
available), subject to an internal review process. With respect to many of our
subordinate securities, valuations are typically available from either a single
or a small group of broker/dealers. For those securities that are subject to
repurchase or other financing arrangements with broker/dealers, we employ the
valuation supplied by the financing broker/dealer. For those securities that are
not subject to any repurchase or other financing arrangements, the fair value of
the investment is determined by us at each reporting date by modeling the
anticipated cash flows using certain estimates (e.g. prepayment speeds, default
rates, severity of losses, and discount rate). For example, the fair value of
our investment in the resecuritized mortgage-backed securities is determined by
us at each reporting date as the present value of the anticipated cash flows
from the underlying collateral (primarily "A" quality, jumbo, fixed-rate, 15- to
30-year term loans) using certain assumptions. We are responsible for developing
these assumptions which include: (i) future rate of prepayment; (ii) discount
rate used to calculate present value; and (iii) default rates and loss severity
on loan pools underlying the mortgage-backed securities in the resecuritization.
At December 31, 2000, we used an annual constant prepayment rate of 9%, a
discount rate of 20%, and an annual constant default rate of .22% with a loss
severity of 32% to estimate the fair value of our interest in the
resecuritization. The future cash flows and the discount rate represent our best
estimate; however, there can be no assurance of the accuracy of these estimates.
We review the fair value of our interest in the resecuritization by analyzing
current interest rates, and prepayment, discount rate and loss assumptions in
relation to the actual experience and current rates of prepayment and loss
prevalent in the underlying loan pools.
6
Changes in these factors may lead to significant fluctuations in the fair value
of our investment which may affect earnings, if the fair value decrease is
determined by us to be of other-than-temporary nature.
The difference between our amortized cost of mortgage-backed securities
available for sale and current market values, which was $1.6 million at
December 31, 2000, is included in "Accumulated Other Comprehensive Loss" in
stockholders' equity. This amount, unlike "market valuation losses and
impairments," represent a market value decline that we believe is temporary. If
held to maturity, the anticipated cash flow on these securities based on
estimated interest rates, rate of prepayment and the amount and severity of
defaults would result in our receiving amounts in excess of the current market
value and would allow us to recover our amortized cost plus our original
expected return from the time of acquisition.
Notwithstanding the foregoing, payments on mortgage-backed securities are
subject to a number of market factors which can significantly affect the amount
and rate of payments on mortgage-backed securities, including, without
limitation, defaults on the underlying loans, the level of subordination of the
mortgage-backed securities, changes in interest rates and the rate of
prepayments on the underlying loans. To the extent that these and other factors
change, the anticipated cash flow on our mortgage-backed securities may not be
sufficient to cover our amortized cost or if we sell one of these mortgage-
backed securities at a market price which is below its amortized cost, we will
realize a loss in the amount of that portion of "Accumulated Other Comprehensive
Loss" attributable to such mortgage-backed security.
In calculating the extent to which declines in the value of
available-for-sale securities are other than temporary, we analyze actual
performance of the securities and underlying collateral, including prepayment
and default statistics, as well as the expectation for such performance in the
future. To the extent reasonable expectations for future performance are not
likely to offset declines in current market valuations, a write-down is recorded
in "Market Valuation Losses and Impairments" in the consolidated statement of
operations. Because the variables change over time, there can be no assurance
that current valuations will be reflective of future periods.
The two following tables set forth information, as of December 31, 2000,
regarding our mortgage-backed securities.
The following table sets forth the credit rating designated by the rating
agency for each securitization structure. Classes designated "A" have a superior
claim on payment to those rated "B," which are superior to those rated "C."
Additionally, multiple letters have a superior claim to designations with fewer
letters. Thus, for example, "BBB" is superior to "BB," which in turn is superior
to "B." The lower class designations in any securitization will receive interest
payments subsequent to senior classes and will experience losses prior to any
senior class. The lowest potential class designation is not rated ("NR") which,
if included in a securitization, will generally receive interest last and
experience losses first. Interest-only securities ("IOs") receive the excess
interest remaining after the interest payments have been made on all senior
classes of bonds based on their respective principal balances. There is no
principal associated with IOs and they are considered liquidated when the
particular class they are contractually tied to is paid down to zero. The
mortgage loans underlying the Company's mortgage-backed securities are primarily
residential mortgage loans which generally may be prepaid at any time without
penalty.
7
MORTGAGE-BACKED SECURITIES
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
CLASS
--------------------------------
CLASS BALANCE AT
INITIAL CLASS DECEMBER 31,
ISSUE NAME CLASS RATING(1) ISSUE DATE COLLATERAL TYPE BALANCE 2000
- ----------------------- -------- --------- ---------- --------------- ------------- ----------------
OCWEN 98R1............. B3 BBB 3/27/98 Residential $ 19,789 $ 18,932
BSSPT 2000-3........... B NR 4/30/00 Residential 65,618 61,517
BSMSI 96-6............. B4 BB 12/30/96 Residential 4,824 3,051
BSMSI 96-6............. B3 BBB 12/30/96 Residential 5,427 2,458
WCOST 95-A (3)......... B NR 3/8/95 Consumer 16,638 5,524
WMHT 95-A (3).......... B NR 6/28/95 Manufactured 5,007 4,631
Housing
CITYSCAPE MBS:
CITYH 97-A (4)....... R NR 2/28/97 Residential 79,606 20,060
CITYH 97-B (4)....... R1 NR 4/30/97 Residential 197,548 55,760
CITYH 97-C (4)....... R2 NR 7/30/97 Residential 97,550 14,974
CITYH 97-C (4)....... R1 NR 7/30/97 Residential 102,450 33,618
BSSP 2000-5 MBS:
WIFC 96-3 (3)........ B1 BB 12/1/96 Residential 6,261 5,702
WIFC 96-3 (3)........ B2 B 12/1/96 Residential 4,870 4,440
WIFC 96-3 (3)........ B3 NR 12/1/96 Residential 12,523 8,945
WIFC 97-1-WFC1 (3)... B1 BB 9/25/97 Residential 9,908 8,945
WIFC 97-1-WFC1 (3)... B2 B 9/25/97 Residential 1,835 1,656
WIFC 97-1-WFC1 (3)... B3 NR 9/25/97 Residential 4,404 2,669
WIFC 98-2-WFC2 (3)... B2 B 6/30/98 Residential 3,216 3,116
WIFC 98-2-WFC2 (3)... B1 BB 6/30/98 Residential 20,100 19,464
WIMLT 98-3 (3)....... B1 BB 9/30/98 Residential 1,779 1,779
WIMLT 98-3 (3)....... C NR 9/30/98 Residential 177,730 72,582
-------- --------
Total.............. $837,083 $349,823
======== ========
COMPANY INVESTMENT
----------------------
PERCENTAGE COMPANY'S
ISSUE NAME OF CLASS BASIS(2)
- ----------------------- ---------- ---------
OCWEN 98R1............. 100.00% $ 8,824
BSSPT 2000-3........... 100.00% 6,933
BSMSI 96-6............. 69.47% 2,133
BSMSI 96-6............. 49.76% 2,385
WCOST 95-A (3)......... 50.00% 2,525
WMHT 95-A (3).......... 100.00% 3,621
CITYSCAPE MBS: 7,020
CITYH 97-A (4)....... 100.00%
CITYH 97-B (4)....... 100.00%
CITYH 97-C (4)....... 100.00%
CITYH 97-C (4)....... 100.00%
BSSP 2000-5 MBS: 43,159
WIFC 96-3 (3)........ 100.00%
WIFC 96-3 (3)........ 100.00%
WIFC 96-3 (3)........ 100.00%
WIFC 97-1-WFC1 (3)... 100.00%
WIFC 97-1-WFC1 (3)... 100.00%
WIFC 97-1-WFC1 (3)... 100.00%
WIFC 98-2-WFC2 (3)... 100.00%
WIFC 98-2-WFC2 (3)... 100.00%
WIMLT 98-3 (3)....... 100.00%
WIMLT 98-3 (3)....... 100.00%
-------
Total.............. $76,600
=======
- --------------------------
(1) NR means the security is not rated.
(2) Based on the value reflected in the Company's financial statements as of
December 31, 2000, which is the post-impairment basis (purchase price less
amortization and impairment thereof) of the mortgage-backed securities plus
accrued interest of $0.3 million.
(3) Securities backed by loans that were previously held in the portfolio of
WFSG or its affiliates and for which WFSG or one of its affiliates is
continuing to act as servicer.
(4) Securities backed by loans serviced by an affiliate of WFSG.
8
MORTGAGE-BACKED SECURITIES
DECEMBER 31, 2000
(CONTINUED)
(DOLLARS IN THOUSANDS)
CONSTANT PREPAYMENT RATE FOR
THE INDICATED PERIOD(1) DELINQUENCY(1)(5)
----------------------------------------- ------------------------------
1 3 6 12 30-59 60-89 90+ REAL ESTATE
ISSUE NAME MONTH MONTHS MONTHS MONTHS DAYS DAYS DAYS FORECLOSURE(1) OWNED(1)
- ---------- -------- -------- -------- -------- -------- -------- -------- -------------- -----------
OCWEN 98R1............. 13.1 14.7 14.7 14.5 $ 20,742 $11,999 $35,716 $25,289 $ 14
BSSPT 2000-3........... 8.84 8.49 8.63 8.81 $110,315 $16,012 $12,220 $12,400 $ 3
BSMSI 96-6............. 15.31 12.36 11.9 11.34 $ 3,920 $ 1,244 $ 2,149 $ 1,979 $ 981
BSMSI 96-6............. 15.31 12.36 11.9 11.34 $ 3,920 $ 1,244 $ 2,149 $ 1,979 $ 981
WCOST 95-A (3)......... -0.2 7.9 3.8 4.9 $ 65 $ 54 $ 3,872 N/A $4,917
WMHT 95-A (3).......... 12.9 18 21.2 23.4 $ 182 $ 175 $ 285 N/A N/A
CITYSCAPE MBS:
CITYH 97-A (4)(6).... 29.4 31.4 38.3 35.3 $ 659 $ 799 $ 1,357 $ 1,822 $ 854
CITYH 97-B (4)(6).... 31.6 25.2 26.1 30.4 $ 3,384 $ 1,421 $ 3,757 $ 5,302 $2,238
CITYH 97-C (4)(6).... 40.8 61.6 57 47.8 $ 380 $ 24 N/A $ 2,298 $ 946
CITYH 97-C (4)(6).... 36.2 31.8 28.3 30.1 $ 660 $ 485 $ 343 $ 3,126 $1,885
BSSP 2000-5 MBS:
WIFC 96-3 (3)........ 12.4 21.9 23.1 20.9 $ 3,762 $ 682 $ 4,619 $ 2,767 $1,006
WIFC 96-3 (3)........ 12.4 21.9 23.1 20.9 $ 3,762 $ 682 $ 4,619 $ 2,767 $1,006
WIFC 96-3 (3)........ 12.4 21.9 23.1 20.9 $ 3,762 $ 682 $ 4,619 $ 2,767 $1,006
WIFC 97-1 WFC1 (3)... 7.8 14.8 19.1 17.5 $ 2,463 $ 614 $ 2,120 $ 1,642 $ 208
WIFC 97-1 WFC1 (3)... 7.8 14.8 19.1 17.5 $ 2,463 $ 614 $ 2,120 $ 1,642 $ 208
WIFC 97-1 WFC1 (3)... 7.8 14.8 19.1 17.5 $ 2,463 $ 614 $ 2,120 $ 1,642 $ 208
WIFC 98-2 WFC2 (3)... 26 22.9 20.7 19.5 $ 2,775 $ 1,708 $ 6,038 $ 3,154 $ 236
WIFC 98-2 WFC2 (3)... 26 22.9 20.7 19.5 $ 2,775 $ 1,708 $ 6,038 $ 3,154 $ 236
WIMLT 98-3 (3)....... 12.7 14 17.7 22.6 $ 1,082 $ 550 $ 1,997 $ 498 $ 653
WIMLT 98-3 (3)....... 12.7 14 17.7 22.6 $ 1,082 $ 550 $ 1,997 $ 498 $ 653
BANKRUPTCY CUMULATIVE
ISSUE NAME (1)(2) LOSSES(1)
- ---------- ----------- -----------
OCWEN 98R1............. $25,188 $48,787
BSSPT 2000-3........... $ 2,033 $ 1,742
BSMSI 96-6............. $ 1,778 $ 4,747
BSMSI 96-6............. $ 1,778 $ 4,747
WCOST 95-A (3)......... N/A N/A
WMHT 95-A (3).......... N/A N/A
CITYSCAPE MBS:
CITYH 97-A (4)(6).... $ 2,013 $ 3,607
CITYH 97-B (4)(6).... $ 4,566 $11,413
CITYH 97-C (4)(6).... $ 1,803 $ 1,985
CITYH 97-C (4)(6).... $ 2,494 $ 5,456
BSSP 2000-5 MBS:
WIFC 96-3 (3)........ N/A N/A
WIFC 96-3 (3)........ N/A N/A
WIFC 96-3 (3)........ N/A N/A
WIFC 97-1 WFC1 (3)... N/A N/A
WIFC 97-1 WFC1 (3)... N/A N/A
WIFC 97-1 WFC1 (3)... N/A N/A
WIFC 98-2 WFC2 (3)... N/A N/A
WIFC 98-2 WFC2 (3)... N/A N/A
WIMLT 98-3 (3)....... N/A N/A
WIMLT 98-3 (3)....... N/A N/A
- ----------------------------------
N/A Information is not available.
(1) Data provided by trustees or servicers for the securities or other
third-party sources. Delinquency data does not incorporate payment recency.
For example, if a loan is 90 days delinquent at a point in time, and from
that point on makes each regular monthly payment, that loan would be current
on a recency basis, but not on a contractual delinquency basis. Because of
this, for certain pools, delinquency rates may imply higher expected
defaults than may actually occur.
(2) Based on loans which were in bankruptcy as of December 31, 2000.
(3) Securities backed by loans that were previously held in the portfolio of
WFSG or its affiliates and for which WFSG or one of its affiliates is
continuing to act as servicer.
(4) Securities backed by loans serviced by an affiliate of WFSG.
(5) Delinquency amounts do not include Foreclosure, Real Estate Owned, or
Bankruptcy amounts included elsewhere in this table.
(6) Delinquency amounts include Foreclosure, Real Estate Owned, and Bankruptcy
amounts.
9
LOANS
At December 31, 2000, our U.S. Loans were secured primarily by commercial
properties and were current on their monthly payments.
Set forth below is a brief description of the principal U.S. Commercial
Loans in our loan portfolio at December 31, 2000.
STARRETT-LEHIGH, 601 WEST 26TH STREET. This is a $25 million investment in
mezzanine debt secured by the Starrett-Lehigh building in the Chelsea district
of New York City. The building was acquired in 1996 with $100 million of senior
debt, $52.5 million of subordinated debt and $26 million in reserves for capital
expenditures and interest. The mezzanine loan pays interest at a rate of Libor
plus 4.75%, with principal due on the maturity date in August 2001. The
loan-to-value ratio on an as-is basis ("LTV") at the time of acquisition was
98%; however, since completion of the planned improvements, the current
estimated LTV is approximately 60%. The building is a two million square foot,
nineteen-story warehouse/showroom.
NW CORNELL & MILLER. This was a first lien mortgage loan for the
construction of a private school located in Portland, Oregon. The original
construction loan rolled into a first lien, ten-year, fixed-rate loan at 9%, due
April 1, 2009. The loan currently pays monthly principal and interest and has a
balloon payment of $4.8 million due in 2009. The principal balance of the note
at December 31, 2000 was $5.2 million.
REAL ESTATE
We invest in commercial and multi-family real estate located in the United
States and the United Kingdom. The following table sets forth information
regarding our investments in real estate at December 31, 2000.
WEIGHTED
APPROXIMATE AVERAGE
PERCENTAGE RENT PER
NET LEASED AT SQUARE
DATE YEAR BUILT/ LEASABLE DECEMBER 31, NO. OF ANNUALIZED FOOT NET BOOK
ACQUIRED NAME OF PROPERTY LOCATION RENOVATED SQ.FT. 2000 LEASES RENT(1) OCCUPIED VALUE
- -------- ---------------- --------------- ----------- -------- ------------- ------ ------------- -------- -----------
4/6/98 Eugene Warehouse Eugene, OR Unknown 84,912 37% 1 $ 105,293 3.31 $ 2,389,000
Buena Vista Irwindale, CA N/A 227,863 N/A N/A N/A N/A $ 969,000
11/18/98 Business Park-
Land
4/21/98 Wilsonville-Land Wilsonville, OR N/A 474,804 N/A N/A N/A N/A $ 1,425,000
6/30/98 Warner Estates United Kingdom Various 206,647 99% 72 $2,417,785 11.97 $17,669,000
Crewe United Kingdom Various 35,770 91% 27 $ 275,491 8.49 $ 2,315,000
11/10/00
- ------------------------------
N/A Not applicable
(1) Annualized rent for the current period represents the base fixed rent
scheduled to be paid by the tenants under the terms of the related lease
agreement, which amount generally does not include payments for real estate
taxes, operating expenses, and utility charges. We believe that annualized
rent is helpful to investors as a measure of the revenues we could expect to
receive from our leases. However, we cannot assure you that scheduled lease
revenues will equal the actual lease revenues we received in the past.
10
Set forth below is a brief description of each of the properties set forth
in the above table:
90005 PRAIRIE ROAD ("EUGENE WAREHOUSE"). This building is a warehouse
located on 4.5 acres with access to Interstate Route 5 via Belt Line Road and to
the Eugene-Springfield metropolitan and Gateway areas. The property is served by
an on-site rail spur and the property is within the West Eugene enterprise zone.
This property has one tenant (which is not affiliated with the Company) who
occupies 37% of the building under a short-term lease.
BUENA VISTA BUSINESS PARK, 2400 BLOCK OF BATEMAN AVENUE, IRWINDALE,
CALIFORNIA. This property was acquired on November 18,1998 and consists of
three level, finished industrial zoned lots ranging from 36,068 to 154,943
square feet and totaling 227,863 square feet or 5.2 acres. The parcels are fully
improved with all the major off-sites in place, i.e., paved-streets,
streetlights, curbs, gutters and utilities. Irwindale is located at the center
of the San Gabriel Valley which is located between the inland empire region and
downtown Los Angeles. This site has access to Interstate Route 210 and
Interstate Route 605. The parcels are all under contract for sale in 2001.
WILSONVILLE LAND. This 10.9-acre parcel of undeveloped land is located in
the city of Wilsonville, Oregon. The property is being held for sale.
WARNER ESTATES. At December 31, 2000, we maintained a L12.0 million
($17.7 million) investment in 17 properties in the Midlands and Southeast of
England. There is approximately 207,000 square feet of rentable space in the
portfolio and the properties are substantially all leased to 72 tenants, with
most leases maturing in five to seven years. Leases provide for upward-only
rental increases, which require tenants to pay the higher of their current rent
or the market rates when rates are reviewed. The properties are managed by two
unaffiliated UK property management firms.
CREWE. These two buildings are located in the city of Crewe in the United
Kingdom. The buildings are leased to a mix of retail and office tenants. The
Company holds legal ownership of the property and operates it under a joint
venture arrangement with the former owner.
LEASE EXPIRATIONS. The following table sets forth a summary schedule of the
lease expirations for the commercial properties for leases in place as of
December 31, 2000, assuming that none of the tenants exercise renewal options or
termination rights, if any, at or prior to the scheduled expirations.
PERCENTAGE OF PERCENTAGE
SQUARE AGGREGATE AVERAGE BASE RENT AGGREGATE
NUMBER OF FOOTAGE OF PORTFOLIO ANNUALIZED BASE PER SQUARE FOOT PORTFOLIO
LEASES EXPIRING LEASED RENT OF EXPIRING OF EXPIRING ANNUALIZED
YEAR OF LEASE EXPIRATION (1) EXPIRING LEASES SQUARE FEET LEASES (2) LEASES (3) BASE RENT
- ---------------------------- --------- ---------- ------------- ---------------- ----------------- ----------
2001....................... 39 74,716 27.7% $ 687,842 $ 9.21 24.6%
2002....................... 13 39,115 14.5 400,441 $10.24 14.3
2003....................... 8 8,358 3.1 163,181 $19.52 5.8
2004....................... 9 47,668 17.7 347,869 $ 7.30 12.4
2005....................... 2 435 0.2 22,126 $50.86 0.8
Thereafter................. 29 98,982 36.8 1,177,110 $11.89 42.1
--- ------- ----- ---------- -----
100 269,274 100.0% $2,798,569 $10.39 100.0%
=== ======= ===== ========== =====
- ------------------------
(1) Lease year is on a calendar year basis.
(2) Annualized base rent is calculated based on the amount of scheduled rent in
the expiring year.
(3) Annualized base rent per square foot is calculated using the annualized base
rent divided by a weighted average square footage.
11
MORTGAGE INDEBTEDNESS. Our general strategy is to leverage our investments
by incurring borrowings secured by such investments. Set forth below is
information regarding our mortgage indebtedness relating to our real estate as
of December 31, 2000.
PRINCIPAL MATURITY ANNUAL
PROPERTY AMOUNT INTEREST RATE DATE AMORTIZATION PAYMENTS
- -------- ----------- ------------- -------- ------------ ----------
Eugene Warehouse................... $ 1,058,000 10.63% 1/1/02 30 Years $ 133,080
Warner Estates (1)................. $14,981,000 8.20% 1/25/19 20 Years $1,479,300
Crewe (1).......................... $ 1,493,000 7.56% 11/10/20 20 Years $ 170,200
- ------------------------
(1) U.S. dollar equivalents. The loan is denominated in pounds sterling and
amortizing principal and interest on a quarterly basis with a balloon
payment at maturity.
Many of the mortgage loans obtained by us to finance our real estate
investments do not fully amortize over their terms and instead require
substantial balloon payments on their maturity dates. Because the principal
balance of such mortgage loans does not fully amortize over the term of the
mortgage loan, such mortgage loans may be more difficult for us to repay at
maturity than mortgage loans whose principal balance is fully amortized over the
term of the mortgage loan. Our ability to pay the balloon amount due at maturity
of such mortgage loans will depend on our ability to obtain adequate refinancing
or funds from other sources to repay such mortgage loans.
OTHER INVESTMENTS
The Company also invests in other real estate-related opportunities,
including real estate corporations. In December 2000, the Company (through a 26%
owned Jersey, Channel Islands company known as BEP Acquisitions) announced the
acceptance of a L42 million offer to purchase all of the outstanding capital
stock of Bourne End Properties PLC (Bourne End). Bourne End is a specialist
investor in retail property, currently owning nine town shopping centers located
in England and Scotland. The centers range in size from 80,000 square feet to
340,000 square feet.
BEP Acquisitions was incorporated in Jersey, Channel Islands for the purpose
of making the offer to acquire Bourne End. BEP Acquisitions is a wholly-owned
subsidiary of BEP Property Holdings Limited, which is 26% owned by the Company,
71% owned by Merrill Lynch (Jersey) Holdings Limited (a subsidiary of Merrill
Lynch & Co., Inc.) and 3% owned by Greenbau Estuary Limited. Merrill Lynch
(Jersey) Holdings Limited will also provide mezzanine financing of approximately
L18.5 million. Greenbau Estuary Limited will act as the day-to-day manager of
Bourne End. Nationwide Building Society provided senior financing of
L15.5 million.
In December 2000, the Company deposited its share of the purchase price into
escrow ($6.7 million), which is included in Other Assets on the Company's
Consolidated Statement of Financial Condition as of December 31, 2000. The
acquisition was completed in February 2001.
FUNDING SOURCES
In order to maximize the return on our investments, we generally fund
acquisitions with third-party debt and equity financing so that our invested
capital represents a relatively small percentage of the purchase price. The
principal sources for funding loans and mortgage-backed securities have
historically been repurchase agreements with major investment banks. Repurchase
agreements are secured lending arrangements which involve the borrower selling
an asset to a lender at a fixed price with the borrower having an obligation to
repurchase the asset within a specified period (generally 30 days) at a higher
price reflecting the interest cost of the loan. If the value of the underlying
asset declines as determined by the lender, the lender may request that the
amount of the loan be reduced by cash payments from the borrower or additional
collateral be provided by the borrower (generally known as "collateral calls").
Funding for real property assets generally are longer-term traditional mortgage
financing with
12
banks and other financial institutions. We closely monitor rates and terms of
competing sources of funds on a regular basis and generally utilize the source
which is the most cost effective.
During the year ended December 31, 2000, the Company has significantly
reduced its short-term, mark-to-market-based financing. Such financing has
generally been replaced by two securitized, long-term, non-recourse, and
non-mark-to-market structured transactions. See ITEM 1., BUSINESS, INVESTMENTS,
MORTGAGE-BACKED SECURITIES.
The following table sets forth information relating to our borrowings and
other interest-bearing obligations at December 31, 2000 and 1999.
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Short-term borrowings:
Repurchase agreements..................................... $15,902 $ 86,904
Other..................................................... 2,268 9,911
------- --------
18,170 96,815
Long-term borrowings:
Repurchase agreements..................................... 19,025 18,913
Mortgages secured by real estate.......................... 17,532 45,637
Senior bonds -- mortgage-backed securities................ 34,203 --
------- --------
70,760 64,550
------- --------
$88,930 $161,315
======= ========
The following table sets forth certain information related to the Company's
short-term borrowings. During the reported period, short-term borrowings were
comprised of warehouse lines, repurchase agreements and other short-term
facilities. Averages are determined by utilizing month-end balances.
AT OR FOR THE YEAR
ENDED
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Average amount outstanding during the year.................. $67,399 $155,473
Maximum month-end balance outstanding during the year....... $90,658 $203,742
Weighted average rate:
During the year........................................... 8.7% 8.2%
At end of year............................................ 7.6% 8.9%
ASSET QUALITY
We are exposed to certain credit risks related to the value of the
collateral that secures our loans and the ability of borrowers to repay their
loans. We closely monitor our loans for potential problems on a periodic basis
and report to the Board of Directors at regularly scheduled monthly meetings.
Each loan is reviewed at least once a month and problem loans or properties are
monitored more frequently.
NON-PERFORMING LOANS. It is our policy to establish an allowance for
uncollectible interest on loans that are over 90 days past due or sooner when
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. Upon such a determination, those loans are placed on
nonaccrual status and deemed to be non-performing. When a loan is placed on
nonaccrual status, previously accrued but unpaid interest is reversed by a
charge to interest income.
13
ALLOWANCES FOR LOAN LOSSES. We maintain an allowance for loan losses at a
level believed adequate to absorb estimated losses existing in the loan
portfolios. The allowance is increased by provisions for loan losses charged
against operations, recoveries of previously charged off credits, and
allocations of discounts on purchased loans, and is decreased by charge-offs.
Loans are charged off when they are deemed to be uncollectible. When we increase
the allowance for loan losses related to loans, we record a corresponding
increase to the provision for loan losses in the statement of operations. When
we decrease the allowance for loan losses related to loans, we record a recovery
of loan losses.
During the year ended December 31, 2000, we reviewed the adequacy of loan
loss reserves and recaptured the remaining reserve balance of $0.6 million. At
December 31, 2000, we had $30.4 million of loans that are performing according
to their terms with no required loan loss allowance.
At December 31, 2000 and 1999, we had loans greater than 90 days delinquent
of $0.1 million and $0.5 million, respectively, which were on nonaccrual status.
The amounts at December 31, 2000 were purchased as a non-performing pool of
loans (i.e. over 90 days delinquent).
REGULATORY
The Company currently owns approximately 14.4% of WFSG's common stock on a
non-diluted basis. The Company is continuing to consider what course of action
might best maximize the value of its investment in WFSG. As a result, the
Company may decide to sell some or all of its shares of WFSG or retain its
current ownership position. The Company does not believe at this time that it
would seek to increase its percentage of ownership of WFSG, which would require
specific Office of Thrift Supervision ("OTS") approval.
Any course of conduct (including retention of the Company's current
position) needs to comply with requirements of the OTS, including those relating
to the "control" of savings and loan holding companies such as WFSG. In 1999, as
a result of the Company's material ownership in a savings and loan holding
company (WFSG), the then overlap in certain officers and directors between the
two entities and other related factors, the OTS required the Company to file a
change in control application (Form H(e)-1) with the OTS. The H(e)-1 Application
was filed with the OTS in June 1999.
As a result of discussions with the OTS, the Company decided to withdraw the
Application in November 2000. In lieu of the Application, the Company had filed
a rebuttal of control application ("Rebuttal Application") in January 2001
seeking to rebut "control" of WFSG if the Company later becomes one of the two
largest shareholders in WFSG (the status of being one of the two largest
shareholders of a savings and loan holding company creates a rebuttable
presumption that such a shareholder "controls" that savings and loan holding
company). In the Rebuttal Application, the Company had requested that the OTS
stipulate in advance that, if the Company later becomes one of the two largest
shareholders, such a circumstance would not constitute "control" of WFSG by the
Company, and therefore would not necessitate the Company's sale of a substantial
portion of its WFSG common stock; such a forced divestiture might not be
accomplished advantageously by the Company. After further discussions with the
OTS, the OTS was unwilling at this time to stipulate in advance to the Company's
request and the Company has, without prejudice, withdrawn the Rebuttal
Application. The Company could file the Rebuttal Application again if it does in
fact become one of the two largest shareholders of WFSG.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon, where
the Company leases approximately 12,000 square feet of office space under a
lease expiring in 2003 and subleases approximately 2,000 square feet to an
unrelated third party. The Company also maintains an executive office in New
York and London, England.
14
ITEM 3. LEGAL PROCEEDINGS
The Company, Fog Cap L.P. (a wholly-owned subsidiary of the Company and
formerly known as Wilshire Real Estate Partnership L.P.) and its two top
executives, Messrs. Wiederhorn and Mendelsohn, have been named in a series of
lawsuits relating to the receivership of Capital Consultants, L.L.C. ("CCL").
The cases are TOM HAZZARD, ET AL., V. CCL, ET AL., U.S. District Court of
Oregon, Civil No. CV 00-1338-HU; MARK EIDEM, ET AL., V. TRUSTEES UNITED ASSN.
UNION LOCAL 290, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1446-HA;
NANCY SCHULTZ, ET AL., V. GARY KIRKLAND, ET AL., U.S. District Court of Oregon,
Civil No. CV 00-1377-HA; LARRY MILLER, ET AL., V. LEE CLINTON, ET AL., U.S.
District Court of Oregon, Civil No. CV00-1317-HA; SALVATORE J. CHILIA, ET AL.,
V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1633 JE; and
MADOLE V. CAPITAL CONSULTANTS ET. AL., U.S. District Court of Oregon, Civil No.
CV 00-1600-HU. In the HAZZARD, CHILIA and MADOLE cases, the trustees of several
Taft-Hartley trusts filed suit against CCL and several individuals and
organizations CCL did business with (including the Company and
Messrs. Wiederhorn and Mendelsohn). In the EIDEM, SCHULTZ and MILLERcases, the
trustees who are plaintiffs in HAZZARD, CHILIA and MADOLE are in turn named as
defendants in class action suits filed by beneficiaries of the Taft-Hartley
trusts on which they serve as plaintiff-trustees. In the cases in which the
trustees are defendants, they have filed third-party complaints against several
parties, including the Company and Messrs. Wiederhorn and Mendelsohn. The
complaints and third-party complaints are all virtually identical. They include
claims against the Company, Wiederhorn and Mendelsohn alleging breaches of
fiduciary duties under the Employee Retirement Income Security Act of 1974
("ERISA"); knowing participation in a fiduciary breach under ERISA; knowing
participation in a prohibited transaction under ERISA; knowing transfer of trust
assets under ERISA; negligence; common law claim for breach of fiduciary duty;
tortuous interference with contract; conversion; constructive trust, restitution
and unjust enrichment; fraud; and breach of contract. The suits also allege
claims against Messrs. Wiederhorn and Mendelsohn of tortuous interference with
business relationships between the Taft-Hartley trusts and CCL, as well as
violations of the Racketeering Influenced and Corrupt Organization provisions of
the Organized Crime Control Act of 1970, 18 U.S.C. Section 1961-1965 ("RICO").
The claimants also seek attorneys' fees under their ERISA and RICO claims.
The above suits name multiple defendants in addition to the Company and its
executives. In addition, the claimants have asserted but have not yet filed
claims against a number of additional parties regarding the same alleged losses,
including a number of professional advisors to named defendants. The claimants
have not described with any specificity the proportion or share of losses which
they claim are attributable to the Company or its executives, as compared to the
other parties and other potential defendants. The overall remedies sought
against all defendants include claims for broad relief under the remedial
provisions of ERISA, such as rescission of transactions and the imposition of a
constructive trust over any trust assets which plaintiffs claim were obtained in
violation of ERISA. Certain of the claims against the Company appear to be
covered by releases that were given by CCL to the Company and
Messrs. Wiederhorn and Mendelsohn. The claimants' suits seek to rescind the
transactions in which the releases were granted. The claimants also seek common
law remedies such as damages and punitive damages. However, it appears that
certain of these common law claims may be preempted by ERISA.
Although these cases were filed during the period between October and
December of 2000, they are still in preliminary stages of pleading and
discovery. CCL was placed in receivership by the Department of Labor and the
Securities and Exchange Commission in the cases of SEC V. CAPITAL CONSULTANTS,
L.L.C., et. al., U.S. District Court of Oregon, Case No. 00-1290-KI, and HERMAN
V. CAPITAL CONSULTANTS, L.L.C., et. al., U.S. District Court of Oregon, Case
No. 001291-KI. When the receivership order was entered, the court stayed other
proceedings against CCL for several weeks. Once the stay was partially lifted,
the parties deferred discovery and delayed the filing of any answers or legal
challenges to the sufficiency of the pleadings in order to facilitate a
confidential global mediation
15
process. U.S. Circuit Court Judge Edward Leavy of the Ninth Circuit Court of
Appeals has been selected as the mediator. Under the mediation process, the
parties have only recently begun an early round of document production that has
not yet been completed. No motions challenging the sufficiency of the claimants'
claims have been filed or heard, and the Company and other defendants have not
yet filed their answers or any cross-claims that they may have among themselves.
No discovery depositions have been taken.
Management has directed that these cases be defended against vigorously.
Because the cases are still in early stages of the pleadings and because the
amount of discovery has been limited, a financial loss to the Company, if any,
cannot be reasonably estimated at this time.
The employment agreements between the Company and Messrs. Wiederhorn and
Mendelsohn contain provisions under which they may be entitled to indemnity for
litigation expenses and personal losses that are attributable to actions which
they took on account of their positions as directors or officers of the Company.
Messrs. Wiederhorn and Mendelsohn have notified the Company that they are
reserving their rights to seek such indemnity. At this time, it is not possible
to determine the extent of liability, if any, the Company may face with regard
to such indemnity claims because of the preliminary nature of the underlying
litigation. In addition, certain of the litigation expenses faced by
Messrs. Wiederhorn and Mendelsohn may be subject to reimbursement or payment
from other sources because of employment agreements and indemnity rights they
may have under the articles and bylaws of other defendants named in the
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 12, 2000, at the annual stockholders' meeting, the Company's
stockholders elected five persons to the Board of Directors of the Company,
approved the annual incentive bonuses for the executive officers and ratified
the selection of Ernst & Young LLP as the Company's auditors for the year ending
December 31, 2000.
In connection with the election of directors, the shares of common stock
present in person or by proxy were voted as follows:
FOR WITHHELD
--------- --------
Andrew Wiederhorn........................................ 5,672,351 62,686
Lawrence Mendelsohn...................................... 5,672,485 55,552
David Egelhoff........................................... 5,674,828 50,209
Jordan Schnitzer......................................... 5,693,212 41,825
Patrick Terrell.......................................... 5,696,378 38,659
In connection with the proposal to approve the annual incentive bonuses for
the executive officers: 5,610,287 shares were voted in favor of the proposal,
118,950 shares were voted against the proposal and there were 5,800 abstentions.
In connection with the proposal to approve the ratification of the selection
of Ernst & Young LLP, independent certified public accountants, as the Company's
auditors for the year ending December 31, 2000: 5,718,613 shares were voted in
favor of the proposal, 7,455 shares were voted against the proposal and there
were 9,569 abstentions.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Effective April 6, 1998, our common stock, par value $0.0001 per share (the
"Common Stock") became quoted on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). The Common Stock is traded under the
symbol "FCCG." The approximate number of record holders (not shareholders, as
most shares are held in their brokerage house's name) of our Common Stock at
February 28, 2001 was 14.
The following table sets forth the high and low sales prices for the Common
Stock as quoted on the NASDAQ for the periods indicated.
2000 HIGH LOW
- ------------------------------------------------------------ ----------- -----------
First quarter............................................... $2 9/16 $1 29/32
Second quarter.............................................. $2 13/16 $1 7/8
Third quarter............................................... $2 7/8 $2
Fourth quarter.............................................. $2 13/16 $2 5/32
1999 HIGH LOW
- ------------------------------------------------------------ ----------- -----------
First quarter............................................... $4 $2 29/32
Second quarter.............................................. $4 1/2 $3 5/16
Third quarter............................................... $3 7/8 $2 9/16
Fourth quarter.............................................. $3 1/16 $2 1/8
During the years ended December 31, 2000 and 1999, the Company did not
declare any cash dividends. The Company delayed the payment date of a $0.40 cash
dividend payable on October 27, 1998 to shareholders of record at September 30,
1998. The Company will pay interest, at the rate of 4% per annum, on the amount
due from the previously announced payment date through the date of the actual
payment. During the year ended December 31, 2000, the Company paid one-half of
the cash dividend payable plus interest and intends on paying the remainder
equally on March 28, 2001 and June 28, 2001, subject to the financial condition,
results of operations and capital requirements of the Company as well as other
factors deemed relevant by the Board of Directors.
The Company currently intends to retain its earnings to support its future
growth strategy but may declare and pay new dividends on its common stock in
2001.
On December 15, 1999, the Company declared a distribution of one right (a
"Right") to purchase one-tenth of a share of the Company's Common Stock for each
outstanding share of Common Stock, payable to the stockholders of record on
January 3, 2000. The Board of Directors authorized and directed the issuance of
one Right with respect to each Common Share issued thereafter until the
Distribution Date (as defined in the Rights Agreement) and, in certain
circumstances, with respect to Common Shares issued after the Distribution Date.
The description and terms of the Rights are set forth in a Rights Agreement
between the Company and The Bank of New York, as Rights Agent, dated as of
December 23, 1999. The Rights are not exercisable until the Distribution Date
and will expire at the close of business on December 23, 2009, unless earlier
redeemed by the Company.
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical, financial and operating
data on a consolidated basis at December 31, 2000, 1999 and 1998 and for the
years then ended. The information contained in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our historical consolidated financial statements,
including the notes thereto, included elsewhere in this report.
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998(1)
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Statement of Operations Data:
Net Interest Income:
Loans............................................... $ 3,900 $ 6,740 $ 10,838
Securities.......................................... 10,718 15,342 15,709
Other investments................................... 460 604 1,145
----------- ----------- -----------
Total interest income............................. 15,078 22,686 27,692
Interest expense.................................... 7,704 12,897 13,608
----------- ----------- -----------
Net interest income before loan losses............ 7,374 9,789 14,084
Recovery of (provision for) loan losses............. 555 1,150 (11,842)
----------- ----------- -----------
Net interest income after loan losses............. 7,929 10,939 2,242
Real Estate Operations:
Operating income.................................... 4,870 7,148 4,939
Operating expense................................... (601) (205) (345)
Interest expense.................................... (2,742) (4,546) (2,853)
Gain on sale of real estate......................... 5,404 1,042 --
Provision for losses on real estate................. -- (892) --
Depreciation........................................ (993) (1,102) (963)
----------- ----------- -----------
Total real estate operations...................... 5,938 1,445 778
Other Operating (Loss) Income:
Market valuation losses and impairments............. (22,257) (30,029) (54,822)
Provision for disputes with WFSG.................... (225) (4,077) --
Gain on sale of securities.......................... 5,197 1,326 943
Gain on sale of loans............................... 159 -- 1,320
Other income, net................................... 29 180 23
----------- ----------- -----------
Total other operating loss........................ (17,097) (32,600) (52,536)
Operating Expenses:
Compensation and employee benefits.................. 7,869 1,353 -
Management fees..................................... -- 2,404 3,179
Professional fees................................... 1,973 1,250 1,220
Servicing fees...................................... 154 256 691
Other............................................... 2,316 1,168 1,782
----------- ----------- -----------
Total operating expenses.......................... 12,312 6,431 6,872
----------- ----------- -----------
Net Loss.............................................. $ (15,542) $ (26,647) $ (56,388)
=========== =========== ===========
Per Share Data:
Net Loss............................................ $ (1.48) $ (2.33) $ (4.94)
Dividends declared.................................. $ -- $ -- $ 0.67
Weighted average shares outstanding................. 10,507,313 11,442,921 11,421,933
18
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998(1)
--------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Cash Flow Data:
Net cash (used in) provided by operating activities.... $ (91) $ (17,215) $ 4,484
Net cash provided by (used in) investing activities.... $ 71,072 $ 143,283 $(447,921)
Net cash (used in) provided by financing activities.... $(73,270) $(124,969) $ 448,219
Other Data:
Depreciation........................................... $ 1,144 $ 1,102 $ 963
EBITDA(2).............................................. $ (4,097) $ (8,301) $ (38,964)
Ratio of EBITDA to interest expense.................... (0.39) (0.48) (2.37)
Ratio of earnings to fixed charges..................... (0.65) (1.07) (2.43)
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Total assets................................................ $150,304 $218,666
Cash and cash equivalents................................... $ 3,394 $ 5,862
Securities available for sale, at fair value................ $ 74,731 $104,572
Loans, net.................................................. $ 30,404 $ 31,634
Investments in real estate.................................. $ 24,767 $ 63,225
Investments in WFSG and affiliates, net..................... $ 5,593 $ 9,657
Short-term borrowings....................................... $ 18,170 $ 96,815
Long-term borrowings........................................ $ 70,760 $ 64,550
Total stockholders' equity.................................. $ 55,651 $ 50,872
Ratio of total assets to stockholders' equity............... 2.70 4.30
- ------------------------
(1) We commenced operations on April 6, 1998; therefore, the information
presented only reflects actual operations for the nine-month period ended
December 31, 1998.
(2) EBITDA means net income or (loss) plus interest expense plus taxes and
depreciation plus (or minus) amortization of premiums and discounts, net.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto.
GENERAL
In response to the adverse market conditions that have significantly
impacted our operations since 1998, we have focused our strategy on stabilizing
the balance sheet and managing our exposure to further market fluctuations.
During the year ended December 31, 2000, we restructured the asset and liability
structure of our balance sheet, significantly reduced our exposure to
short-term, mark-to-market-based financing for our mortgage-backed securities
portfolio, disposed of the majority of our U.S. commercial property portfolio
and began arranging and investing in new transactions.
Our results of operations for the year ended December 31, 2000 reflect
further impairment write-downs of mortgage-backed securities of $21.4 million,
the majority of which had been previously deducted from stockholders' equity
through "Accumulated Other Comprehensive Loss." These impairments reduce the
unrealized losses included in stockholders' equity for the mortgage-backed
securities portfolio to $1.6 million at December 31, 2000 from $23.2 million at
December 31, 1999.
19
Despite the continued impact of the marketplace on the Company, we increased
stockholders' equity to $55.7 million at December 31, 2000 from $50.9 million at
December 31, 1999, an increase of $4.8 million or 9.4%. During this same period,
the size of our balance sheet was reduced from $218.7 million to
$150.3 million.
The Company's business strategy now focuses on opportunistic investing,
structuring and managing real estate-related assets such as mortgage-backed
securities, mezzanine real estate loans and real estate, as well as the
acquisition of companies engaged in investing in such assets. We concentrate on
the acquisition of assets where our expertise in intensive asset management,
mortgage and real estate credit analysis and financial structuring can create
value. Further, we expect that many of these investments, particularly in
corporate acquisitions, will be in conjunction with partners.
RESULTS OF OPERATIONS--2000 COMPARED TO 1999
NET LOSS. Our net loss for the year ended December 31, 2000 amounted to
$15.5 million, or $1.48 per share, compared to $26.6 million, or $2.33 per share
for the year ended December 31, 1999. The 2000 net loss is primarily
attributable to $22.3 million of market valuation losses and impairments
compared to $30.0 million of market valuation losses and impairment for 1999.
NET INTEREST INCOME. The following tables set forth information regarding
the total amount of income from interest-earning assets and expenses from
interest-bearing liabilities and the resulting average yields and rates:
FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------
AVERAGE INTEREST
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loan portfolios.......................................... $ 33,204 $ 3,900 11.7%
Mortgage-backed securities available for sale............ 81,159 10,718 13.2
Other investments........................................ 7,402 460 6.2
-------- -------- -------
Total interest-earning assets.......................... $121,765 $ 15,078 12.4%
-------- -------- -------
Interest-Bearing Liabilities:
Short-term and other borrowings.......................... 86,312 (7,704) 8.9
-------- -------- -------
Total interest-bearing liabilities..................... $ 86,312 $ (7,704) 8.9%
-------- -------- -------
Net interest income before provision for loan
losses/spread(1)....................................... $ 7,374 3.5%
======== =======
Net interest margin(2)................................... 6.1%
=======
- ------------------------
(1) Net interest spread represents the unweighted difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
20
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------
AVERAGE INTEREST
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loan portfolios.......................................... $ 68,937 $ 6,740 9.8%
Mortgage-backed securities available for sale............ 122,164 15,342 12.6
Other investments........................................ 13,206 604 4.6
-------- -------- -------
Total interest-earning assets.......................... $204,307 $ 22,686 11.1%
-------- -------- -------
Interest-Bearing Liabilities:
Short-term and other borrowings.......................... 158,376 (12,897) 8.1
-------- -------- -------
Total interest-bearing liabilities..................... $158,376 $(12,897) 8.1%
-------- -------- -------
Net interest income before provision for loan
losses/spread(1)....................................... $ 9,789 3.0%
======== =======
Net interest margin(2)................................... 4.8%
=======
- ------------------------
(1) Net interest spread represents the unweighted difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
For the year ended December 31, 2000, the Company recovered $0.6 million of
the allowance for loan losses compared to a recovery of $1.1 million in 1999.
These amounts are not reflected in the net interest income/spread above.
Prepayments, delinquencies and defaults affect the net spread of the
Company, primarily through their impact on mortgage loans that underlie the
securities in the Company's mortgage-backed securities portfolio. For principal
and interest subordinated mortgage-backed securities, which the Company
generally purchases at a discount to principal amount, increased prepayments
recapture such purchase discount sooner and therefore increase spread. Fewer
prepayments would have the opposite effect, reducing spread. For IOs and
residuals, prepayment increases generally reduce spread since these securities
derive their value from interest payments on loans that are outstanding. IOs
have no principal face amount other than a notional balance and therefore are
quite responsive to changes in prepayment. Residuals have both a principal face
amount and often a credit related IO component. Increased prepayment often
reduces spread except to the extent that such prepayment is related to a
recovery on a defaulted loan. The impact on spread, however, depends upon the
degree to which prepayment is less than or exceeds the Company's assumptions for
prepayment at its time of purchase.
The Company buys mortgage-backed securities based on prepayment, delinquency
and default assumptions. Delinquency itself has little effect on spread from the
Company's mortgage-backed securities portfolio since the loan servicers for each
security generally advance both principal and interest payments and, therefore,
the Company generally receives payments on such loans on a timely basis. More
important is the loss severity on defaulted loans. Generally, the larger the
loss severity is, the greater the reduction in spread will be. However, the
Company's spread is only negatively impacted to the extent the principal face
amount of defaults and the cumulative loss severity exceeds or is expected to
exceed the Company's assumptions at its time of purchase or as subsequently
adjusted through an other than temporary impairment determination.
RECOVERY OF LOAN LOSSES. During the year ended December 31, 2000, we
reviewed the adequacy of loan loss reserves and recaptured the remaining reserve
balance of $0.6 million. At December 31, 2000, we had $30.4 million of loans
that are performing according to their terms with no required loan loss
allowance. During the year ended December 31, 1999, we reversed a provision for
losses of $3.9 million taken in prior periods for a loan held for sale. The loan
was secured by
21
commercial properties in the United Kingdom ("UK") with a carrying value of
approximately $47.9 million. This valuation allowance had been established in
1998 based upon management's estimate at that time of the ultimate
recoverability of the asset. This provision reversal was partially offset by a
provision for losses on loans of $0.1 million. In addition, we recognized a net
write-down of $2.7 million in the carrying value of a $17.0 million note
receivable from WFSG to reflect the estimated value of the common stock of WFSG.
REAL ESTATE OPERATIONS. During the years ended December 31, 2000 and 1999,
real estate operating income was comprised primarily of $4.9 million and
$7.1 million, respectively, in gross rental and other income earned on such
investments. Expenses incurred on such real estate investments for the years
ended December 31, 2000 and 1999 include $2.7 million and $4.5 million,
respectively, of interest expense, $0.6 million and $0.2 million, respectively,
of rental operating expense and $1.0 million and $1.1 million, respectively, of
depreciation expense.
OTHER LOSS. Our other loss was approximately $17.1 million and
$32.6 million for the years ended December 31, 2000 and 1999, respectively. The
components of the Company's net non-interest loss are comprised of the
following:
MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses
and Impairments" as used herein refers to impairment losses recognized primarily
on our mortgage-backed securities and loan portfolios. Total market valuation
losses and impairments for the year ended December 31, 2000 were $22.3 million.
This amount includes $21.4 million of market valuation losses and impairments
related to our portfolio of mortgage-backed securities available for sale and
$0.9 million related to our prepaid service fees from an affiliate of WFSG.
Approximately $20.0 million of these amounts were impaired in the fourth quarter
of 2000 due primarily to the receipt of additional detailed information from the
servicer of the underlying mortgages to certain mortgage-backed securities.
Total market valuation losses and impairments for the year ended
December 31, 1999 were $30.0 million. This amount includes $19.6 million of
market valuation losses and impairments related to our portfolio of
mortgage-backed securities available for sale, $8.7 million related to our
investment in newly-issued WFSG stock, $1.0 million related to fees for advisory
services in connection with our investment in WFSG stock and $0.7 million
related to our holdings of WFSG's 13% Series B Notes prior to their conversion
to newly-issued WFSG stock.
PROVISION FOR DISPUTES WITH WFSG. The Company decided to become internally
managed in the third quarter of 1999 which resulted in disputes between the
Company, on the one hand, and WFSG and certain of its affiliates, on the other.
In connection with these disputes, the Company recorded a reserve for potential
resolution of disputes with WFSG and its affiliates of $4.1 million at
September 30, 1999. Following a partial settlement of disputes with WFSG, the
remaining reserve for potential resolution of disputes with WFSG and its
affiliates was $2.5 million at December 31, 1999. During the year ended
December 31, 2000, the Company settled all remaining disputes with WFSG and its
affiliates which resulted in an additional provision of $0.2 million.
GAIN ON THE SALE OF SECURITIES. During the years ended December 31, 2000
and 1999, we sold mortgage-backed securities to unrelated third parties for
approximately $51.6 million and $46.6 million, respectively, resulting in gains
of approximately $5.2 million and $1.3 million, respectively.
OPERATING EXPENSES. As discussed above, we decided to become internally
managed in the third quarter of 1999. As a result, management fees payable to
our prior manager have ceased and have been replaced with compensation to the
Company's employees. The Company now incurs its own overhead and operating costs
that were previously incurred primarily by the manager. Professional fees during
the year ended December 31, 2000 were higher than 1999 primarily due to the
litigation with WFSG and its affiliates.
22
In the fourth quarter of 2000, the Company established a trust which
purchased 525,000 shares of the Company's common stock from an unrelated
shareholder. The Company's contribution of approximately $1.3 million is
included in compensation expenses. The trust was established for the benefit of
the Company's employees and directors to raise their ownership in the Company,
thereby strengthening the mutuality of interests between them and the Company's
shareholders. While these shares are held in trust, they will be voted ratably
with ballots cast by all other shareholders.
RESULTS OF OPERATIONS--1999 COMPARED TO 1998
NET LOSS. Our net loss for the year ended December 31, 1999 amounted to
$26.6 million, or $2.33 per share, compared to $56.4 million, or $4.94 per
share, for the year ended December 31, 1998. The 1999 net loss is primarily
attributable to $30.0 million of market valuation losses and impairments
compared to $54.8 million of market valuation losses and impairment and
$11.8 million of provision for loan losses for 1998.
NET INTEREST INCOME. The following tables set forth information regarding
the total amount of income from interest-earning assets and expenses from
interest-bearing liabilities and the resultant average yields and rates:
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------
AVERAGE INTEREST
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loan portfolios.......................................... $ 68,937 $ 6,740 9.8%
Mortgage-backed securities available for sale............ 122,164 15,342 12.6
Other investments........................................ 13,206 604 4.6
-------- -------- --------
Total interest-earning assets.......................... $204,307 $ 22,686 11.1%
-------- -------- --------
Interest-Bearing Liabilities:
Short-term and other borrowings.......................... 158,376 (12,897) 8.1
-------- -------- --------
Total interest-bearing liabilities..................... $158,376 $(12,897) 8.1%
-------- -------- --------
Net interest income before provision for loan
losses/spread(1)....................................... $ 9,789 3.0%
======== ========
Net interest margin(2)................................... 4.8%
========
- ------------------------
(1) Net interest spread represents the unweighted difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
23
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------
AVERAGE ANNUALIZED
BALANCE INTEREST INCOME YIELD/RATE (1)
-------- --------------- --------------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Loan portfolios....................................... $121,295 $ 10,838 12.1%
Mortgage-backed securities available for sale......... 195,112 14,674 10.2
Other securities available for sale................... 15,617 1,035 9.0
Other investments..................................... 23,597 1,145 6.5
-------- -------- --------
Total interest-earning assets....................... $355,621 $ 27,692 10.5%
-------- -------- --------
Interest-Bearing Liabilities:
Short-term borrowings 254,945 (13,608) 7.2
-------- -------- --------
Total interest-bearing liabilities.................. $254,945 $(13,608) 7.2%
-------- -------- --------
Net interest income before provision for loan losses/
spread(2)........................................... $ 14,084 3.3%
======== ========
Net interest margin(3)................................ 5.4%
========
- ------------------------
(1) Although the Company was in existence for all of 1998, operations were
commenced on April 6, 1998 at the time of the initial public offering.
Therefore, rates and yields for the year ended December 31, 1998 are
annualized to reflect the Company's period of operations from April 6, 1998
to December 31, 1998.
(2) Net interest spread represents the unweighted difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets and is annualized based on the period of operations
from April 6 to December 31, 1998.
For the year ended December 31, 1999, the Company recovered $1.1 million of
the allowance for loan losses compared to a provision of $11.8 million for 1998.
These amounts are not reflected in the net interest income/spread above.
RECOVERY OF (PROVISION FOR) LOAN LOSSES. During the year ended
December 31, 1999, we reversed a provision for losses of $3.9 million taken in
prior periods for a loan held for sale. The loan was secured by commercial
properties in the UK with a carrying value of approximately $47.9 million. This
valuation allowance had been established in 1998 based upon management's
estimate at that time of the ultimate recoverability of the asset. This
provision reversal was partially offset by a provision for losses on loans of
$0.1 million. In addition, we recognized a net write-down of $2.7 million in the
carrying value of a $17.0 million note receivable from WFSG to reflect the
estimated value of the common stock of WFSG to be received in exchange for a
portion of the note.
Total provision for losses for the year ended December 31, 1998 was
$11.8 million, which included a $5.9 million valuation adjustment of an
unsecured $18.4 million receivable from WFSG and $5.9 million of loan loss
provisions (including the provision for the UK loan noted above).
REAL ESTATE OPERATIONS. During the years ended December 31, 1999 and 1998,
real estate operating income was comprised primarily of $7.1 million and
$4.9 million, respectively, in gross rental and other income earned on such
investments. Such revenue represents income generated from the Company's
investment in various office buildings, retail stores, and other commercial
property located in Oregon, California and the UK. Expenses incurred on such
real estate investments include $4.5 million (1999) and $2.9 million (1998) of
interest expense, $0.2 million (1999) and $0.3 million
24
(1998) of rental operating expense and $1.1 million (1999) and $1.0 million
(1998) of depreciation expense.
OTHER LOSS. Our other loss was approximately $32.6 million and
$52.5 million for the years ended December 31, 1999 and 1998, respectively. The
components of the Company's net non-interest loss is comprised of the following:
MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses
and Impairments" as used herein refers to impairment losses recognized primarily
on our mortgage-backed securities and loan portfolios, as a result of the
international economic and financial turmoil which severely affected the market
for the Company's principal investments beginning in the third quarter of 1998.
Total market valuation losses and impairments for the year ended December 31,
1999 were $30.0 million. This amount includes $19.6 million of market valuation
losses and impairments related to our portfolio of mortgage-backed securities
available for sale, $8.7 million related to our investment in newly-issued WFSG
stock, $1.0 million related to fees for advisory services in connection with our
investment in WFSG stock and $0.7 million related to our holdings of WFSG's 13%
Series B Notes prior to their conversion to newly-issued WFSG stock.
Total market valuation losses and impairments for the year ended
December 31, 1998 were $54.8 million. Of this amount, $49.5 million was
recognized during the third quarter to reflect losses on loans and securities
that were (i) ultimately sold in the fourth quarter to meet collateral calls or
to provide liquidity; or (ii) not sold but were deemed to be other than
temporarily impaired, resulting from faster than expected loan prepayments or
other factors. During the fourth quarter of 1998, an additional $5.3 million of
market valuation losses and impairments was recorded to reflect additional other
than temporary impairment on certain securities and other assets which have not
been sold.
Of the total $54.8 million recognized during 1998, $32.2 million relates to
assets sold during the fourth quarter and $22.4 million relates to assets not
sold. Included in the $22.4 million related to assets not sold is $11.3 million
related to our investment in WFSG's 13% Series B Notes due 2004, which was
converted to newly issued common stock of WFSG following its restructuring. This
loss reflected the write-down of this asset to the estimated value of our
proportionate share of the equity in the restructured WFSG.
PROVISION FOR DISPUTES WITH WFSG. The Company decided to become internally
managed in the third quarter of 1999 which resulted in disputes between the
Company, on the one hand, and WFSG and certain of its affiliates, on the other.
In connection with these disputes, the Company recorded a reserve for potential
resolution of disputes with WFSG and its affiliates of $4.1 million at
September 30, 1999. Following a partial settlement of disputes with WFSG, the
remaining reserve for potential resolution of disputes with WFSG and its
affiliates was $2.5 million at December 31, 1999.
GAIN ON THE SALE OF SECURITIES. During the years ended December 31, 1999
and 1998, we sold mortgage-backed securities to unrelated third parties for
approximately $46.6 million and $133.3 million, respectively, resulting in gains
of approximately $1.3 million and $0.9 million, respectively.
OPERATING EXPENSES. Management fees of $2.4 million and $3.2 million for
the years ended December 31, 1999 and 1998, respectively, were comprised solely
of the 1% (per annum) base management fee paid to WRSC (as provided pursuant to
the Management Agreement between WRSC and the Company). WRSC earned no incentive
fee for these periods.
In addition to the management fee, we incurred loan service fees of
$0.2 million and $0.7 million during the years ended December 31, 1999 and 1998,
respectively, which were paid to WFSG or an affiliate of WFSG. The service fee
structure was dependent on the assets being serviced, but in general, service
fees related to loans purchased at a significant discount were based on a
percentage of cash received and service fees related to other loans were based
on a percentage of unpaid principal balance. We also incurred $0.1 million
(1999) and $0.5 million (1998) of loan related expenses which were reimbursed to
the servicer for actual out of pocket servicing costs. Other expenses were
comprised of professional services, insurance premiums and other sundry
expenses.
25
CHANGES IN FINANCIAL CONDITION
During 2000, total assets decreased to $150.3 million from $218.9 million at
December 31, 1999. This decrease was primarily the result of a net reduction of
$29.8 million of securities available for sale and $38.5 million of investments
in real estate. Total liabilities decreased to $94.7 million during the period,
primarily as a result of a net decrease of $72.4 million in borrowings
associated with sales of mortgage-backed securities, loans and investments in
real estate.
SECURITIES AVAILABLE FOR SALE. At December 31, 2000, securities available
for sale included mortgage-backed securities with an aggregate market value of
$74.7 million, net of realized and unrealized losses, compared to
$104.6 million at December 31, 1999. This decrease of $29.9 million is primarily
due to the sale of $46.4 million of securities, net principal payments received
of $3.2 million partially offset by the purchase of $19.5 million of securities.
In December 2000, we refinanced the debt on approximately $43.2 million of
our mortgage-backed securities portfolio. This transaction was treated as a
secured financing transaction rather than a sale for accounting purposes due to
certain call provisions retained by the Company. As such, our balance sheet
continues to reflect these securities as well as the senior bonds of
$34.2 million which replaced the short-term, mark-to-market debt previously
collateralized by these securities.
We mark our securities portfolio to fair value at the end of each month
based upon broker/dealer valuations (if available), subject to an internal
review process. For those securities that do not have an available market
quotation, we determine the fair value of the securities by modeling the
anticipated cash flows using certain estimates (e.g. prepayment speeds, default
rates, severity of losses, and discount rate). Because our subordinated
securities may not be readily marketable, as trading activity may be infrequent,
the market value is typically available from only a small group of
broker/dealers, and in many cases, only one broker/dealer. As of each reporting
period, we evaluate whether and to what extent any unrealized loss is to be
recognized as other than temporary.
LOAN PORTFOLIO. During the year ended December 31, 2000, we reduced our
loan portfolio to approximately $30.4 million from $31.6 million at
December 31, 1999. We maintain an allowance for loan losses at a level that the
Company considers adequate to provide for probable losses based upon an
evaluation of known and inherent risks. During the year ended December 31, 2000,
we recovered the remaining allowance for loan losses.
INVESTMENTS IN REAL ESTATE. Investments in real estate decreased
approximately $38.5 million during the year ended December 31, 2000. This
decrease was primarily due to sales of five retail buildings and an office
complex/warehouse distribution center, all located in the State of Oregon, with
a carrying value of approximately $27.0 million, and the sale of office
properties located in Portland, Oregon with a carrying value of $7.3 million. In
addition, we recognized approximately $1.0 million of depreciation expense
related to operating properties.
We are currently in the process of marketing certain other commercial
properties for sale as we continue to reduce our level of investment in
commercial real estate income properties to increase liquidity for working
capital and reinvestment opportunities.
OTHER ASSETS. Other assets increased by approximately $8.4 million during
the year ended December 31, 2000. This increase is primarily due to the deposit
of $6.7 million for the purchase of a 26% interest in a UK-based real estate
company. See ITEM 1. BUSINESS. The purchase was completed in the first quarter
of 2001, together with the Company's partners who purchased the remaining 74%
interest.
SHORT-TERM BORROWINGS. Short-term borrowings decreased to approximately
$18.2 million during the year ended December 31, 2000, resulting primarily from
the sale of subordinated mortgage-backed securities and resecuritization of
certain mortgage-backed securities.
26
Interest rates on borrowings under these facilities are generally based on
30-day London Interbank Offer Rate ("LIBOR") rates, plus a spread. Repurchase
agreements are secured lending arrangements which involve the borrower selling
an asset to a lender at a fixed price with the borrower having an obligation to
repurchase the asset within a specified period (generally 30 days) at a higher
price reflecting the interest cost of the loan. If the value of the underlying
asset declines or the lender marks the asset lower, the lender may request that
the amount of the loan be reduced by cash payments from the borrower or
additional collateral be provided by the borrower (generally known as
"collateral calls"). Accordingly, in an environment where lenders consistently
mark down the value of the underlying assets, a borrower can become subject to
significant collateral calls. If the borrower does not have sufficient cash to
meet the collateral call or additional unencumbered assets to pledge, it may be
forced to sell assets to repay the loan. If the Company experiences further
downward marks to market of its assets subject to repurchase agreements, it
could experience cash collateral calls, thereby reducing liquidity, or be forced
to sell further assets, which could result in losses.
LONG-TERM BORROWINGS. At December 31, 2000, we had $70.8 million of
long-term borrowings. Of this amount, $17.5 million financed real estate
investments of $22.4 million, $19.0 million financed a loan with an unpaid
principal balance of $25 million and $34.2 million related to senior bonds
issued as part of the resecuritization discussed above. Other borrowings had a
weighted average interest rate of 9.58%.
STOCKHOLDERS' EQUITY. Stockholders' equity increased to $55.7 million
during the year ended December 31, 2000. The net increase in stockholders'
equity during this period was primarily attributable to a decrease in
accumulated other comprehensive loss of $21.0 million, offset by our net loss of
$15.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, engage in loan acquisition and lending activities, meet collateral
calls and for other general business purposes. The primary sources of funds for
liquidity during the year ended December 31, 2000 consisted of net cash provided
by investing activities, including the cash repayments related to our
mortgage-backed securities portfolio, sales of mortgage-backed securities and
investments in real estate, and resecuritization of our securities portfolio.
Our borrowings and the availability of further borrowings are substantially
affected by, among other things, changes in interest rates, changes in market
spreads whereby the market value of the collateral securing such borrowings may
decline substantially, or decreases in credit quality of underlying assets. In
the event of declines in market value or credit quality, we may be required to
provide additional collateral for, or repay a portion of outstanding balances
of, our short-term borrowing facilities. As of December 31, 2000, we had no
outstanding collateral calls. For additional information with respect to our
monthly mark-to-market of our securities available for sale portfolio, see
"CHANGES IN FINANCIAL CONDITION--SECURITIES AVAILABLE FOR SALE."
Fluctuations in interest rates will continue to impact our net interest
income to the extent our fixed rate assets are funded by variable rate debt or
our variable rate assets reprice on a different schedule or in relation to a
different index than any floating rate debt which in turn could impact potential
returns to shareholders. See "Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK."
At December 31, 2000, we had total consolidated secured indebtedness of
$88.9 million, as well as $5.7 million of other liabilities. The consolidated
secured indebtedness consisted of (i) $34.9 million of repurchase agreements
secured by $15.9 million of mortgage-backed securities and $19.0 million of
loans, (ii) lines of credit aggregating $2.3 million which are secured by loans
and securities and (iii) $51.7 million outstanding of other borrowings maturing
between 2000 and 2020 which are secured
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by real estate and loans. Approximately $37.2 million of this indebtedness had
terms which allowed the lender to request additional collateral if the value of
the underlying collateral declined (including financing facilities for both
mortgage-backed securities and loans). Although the Company believes that the
likelihood of significant declines in asset values has decreased since the third
quarter of 1998, the Company is seeking to maintain a larger cash position and
more unencumbered assets to deal with any future potential collateral calls.
Loans are financed through both short-term and long-term financing
facilities. If the value of the assets securing the loan declines as determined
by the lender, the lender may request that the amount of the loan be reduced by
cash payments form the borrower or additional collateral be provided by the
borrower (generally known as "collateral calls"). Accordingly, in an environment
where lenders consistently mark down the value of the underlying assets, a
borrower can become subject to collateral calls, which can have a significant
impact on liquidity. Similarly, if interest rates increase significantly, the
borrowing cost under the financing facility may also increase while the interest
rate on the assets securing the loan may not increase at the same time or to the
same degree. Real property acquisitions are financed with intermediate or
long-term mortgages with banks and other financial institutions.
We have historically financed acquisitions of mortgage-backed securities
through committed and uncommitted thirty-day repurchase agreements with major
Wall Street investment banks. Repurchase agreements are secured lending
arrangements which involve the borrower selling an asset to a lender at a fixed
price with the borrower having an obligation to repurchase the asset within a
specified period (generally 30 days) at a higher price reflecting the interest
cost of the loan. If the lender marks the asset lower, the lender may request
that the amount of the loan be reduced by cash payments from the borrower or
additional collateral be provided by the borrower (generally known as
"collateral calls"). Mortgage-backed securities which are subject to repurchase
agreements, as well as loans which secure other indebtedness, periodically are
revalued by the lender, and a decline in the value that is recognized by the
lender (whether or not the lender recognizes the full fair value of the
security) may result in the lender requiring us to provide additional collateral
to secure the indebtedness.
If we are unable to fund additional collateral requirements or to repay,
renew or replace maturing indebtedness on terms reasonably satisfactory to us,
we may be required to sell (potentially on short notice) a portion of our
assets, and could incur losses as a result. Furthermore, since from time to time
there is extremely limited liquidity in the market for subordinated and residual
interests in mortgage-related securities, there can be no assurance that we will
be able to dispose of such securities promptly for fair value in such
situations.
Although we are currently operating with negative cash flow (primarily due
to the continued repayment of debt and refinancing of our mortgage-backed
securities portfolio), we believe that our existing sources of funds will be
adequate for purposes of meeting our short-term liquidity needs. There can be no
assurance that this will be the case, however. Material increases in interest
expense from variable-rate funding sources, collateral calls, or material
decreases in monthly cash receipts, generally would negatively impact our
liquidity. On the other hand, material decreases in interest expense from
variable-rate funding sources, in collateral calls or an increase in market
value of our mark-to-market financial assets generally would positively affect
our liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices, and equity prices.
Although the Company's exposure to foreign currency fluctuations has increased
significantly during the year ended December 31, 2000 (approximately 19% of the
Company's equity is invested in the United Kingdom at December 31, 2000), the
primary market risk to which the Company is exposed is interest rate risk, which
is highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international
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economic and political considerations, and other factors beyond the control of
the Company. Changes in the general level of interest rates can affect the
Company's net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with its interest-bearing liabilities, by affecting the spread
between the Company's interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect, among other things, the
ability of the Company to acquire loans, the value of the Company's
mortgage-backed securities and other interest-earning assets, and its ability to
realize gains from the sale of such assets.
It is the objective of the Company to attempt to control risks associated
with interest rate movements. In general, the Company's strategy is to limit our
exposure to earnings variations and variations in the value of assets and
liabilities as interest rates change over time. Our asset and liability
management strategy