-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TT9JVXqEQItUQm2Et4YmWAyZbq80Rpd8BQVu9xGf1sUsuPyuMcGl9MHE/Y6ekKgY uDo2aH1fV3DVZMLrHi0EtA== 0000912057-01-503949.txt : 20010319 0000912057-01-503949.hdr.sgml : 20010319 ACCESSION NUMBER: 0000912057-01-503949 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOG CUTTER CAPITAL GROUP INC CENTRAL INDEX KEY: 0001048566 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 522081138 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23911 FILM NUMBER: 1569852 BUSINESS ADDRESS: STREET 1: 1631 SW COLUMBIA STREET CITY: PORTLAND STATE: OR ZIP: 97201 BUSINESS PHONE: 5037216500 MAIL ADDRESS: STREET 1: 1310 S W 17TH ST CITY: PORTLAND STATE: OR ZIP: 97201 FORMER COMPANY: FORMER CONFORMED NAME: WILSHIRE REAL ESTATE INVESTMENT TRUST INC DATE OF NAME CHANGE: 19971027 10-K 1 a2040821z10-k.txt 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE 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 ------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 ------------------------- ------------------------- 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% ======== ===== ======== =====
- ------------------------ (1) At December 31, 2000, our mortgage-backed securities are secured primarily by residential mortgage loans. (2) At December 31, 2000, our loans are secured by commercial properties. (3) At December 31, 2000, other assets consist primarily of $3.6 million of investment in WFSG common stock, $2.0 million in prepaid service fees to an affiliate of WFSG, $6.7 million deposit for the acquisition of a U.K.-based real estate company and $4.7 million of miscellaneous other assets. The following sections provide additional detail of specific investments as of December 31, 2000. MORTGAGE-BACKED SECURITIES Mortgage-backed securities are interests in pools of mortgages that have been securitized and are usually issued in multiple classes ranging from the most senior to the most subordinate class. We focus on the subordinated classes, which we believe offer higher risk-adjusted returns. We seek to invest in subordinated mortgage-backed securities that we believe may appreciate in value due to the prepayment and default experience of the underlying collateral. At December 31, 2000, our mortgage-backed securities were principally backed by pools of residential mortgage loans and were subordinated in right of payment to more senior interests in those pools. On December 31, 2000, our portfolio of mortgage-backed securities consisted of 20 classes of mortgage-backed securities representing interests in 10 securitizations from 5 different issuers. Subordinated mortgage-backed securities are generally the non-investment-grade classes of mortgage-backed securities that provide credit enhancement to more senior classes by having a lower payment priority in the cash flow from the underlying mortgage loans and absorbing the first losses on the underlying mortgage loans. In "senior/subordinate" structures, each subordinated class has a principal face amount equal to the subordination level required for the classes, if any, which are senior to the respective subordinated class and the subordination level required at the respective rating (I.E., BBB, BB, B, NR). Our mortgage-backed securities consist of securities backed by loans that were originated and are being serviced by unaffiliated, non-governmental third parties. 5 During the year ended December 31, 2000, we significantly changed the liability structure of our balance sheet primarily through the following transactions relating to our mortgage-backed securities portfolio: - During the quarter ended June 30, 2000, the Company resecuritized approximately $20.1 million of its mortgage-backed securities portfolio which resulted in no gain or loss. As part of the resecuritization transaction, the Company acquired a subordinated interest in the underlying trust for approximately $6.3 million and eliminated all of the short-term, mark-to-market debt previously collateralized by these securities. - In December 2000, we refinanced the debt on approximately $43.2 million of our mortgage-backed securities portfolio through a securitized structure. This transaction was treated as a secured financing transaction rather than a sale for accounting purposes due to certain call provisions retained by the Company. As such, our balance sheet continues to reflect these securities as well as the senior bonds of $34.2 million which replaced the short-term, mark-to-market debt previously collateralized by these securities. At December 31, 2000 and 1999, we valued our securities available for sale portfolio and gross unrealized gains and losses thereon as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST (1) GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) DECEMBER 31, 2000 Mortgage-backed securities.................. $ 76,288 $ -- $ 1,557 $ 74,731 DECEMBER 31, 1999 Mortgage-backed securities.................. $127,799 $3,487 $26,714 $104,572
- ------------------------ (1) The amortized cost of our securities is net of the market valuation losses and impairments discussed in "Results of Operations". The unrealized gains and losses represent market value declines that, unlike "market value loss and impairment," the Company believes are temporary. For financial reporting purposes, we mark our securities portfolio to fair value at the end of each month based upon broker/dealer valuations (if available), subject to an internal review process. With respect to many of our subordinate securities, valuations are typically available from either a single or a small group of broker/dealers. For those securities that are subject to repurchase or other financing arrangements with broker/dealers, we employ the valuation supplied by the financing broker/dealer. For those securities that are not subject to any repurchase or other financing arrangements, the fair value of the investment is determined by us at each reporting date by modeling the anticipated cash flows using certain estimates (e.g. prepayment speeds, default rates, severity of losses, and discount rate). For example, the fair value of our investment in the resecuritized mortgage-backed securities is determined by us at each reporting date as the present value of the anticipated cash flows from the underlying collateral (primarily "A" quality, jumbo, fixed-rate, 15- to 30-year term loans) using certain assumptions. We are responsible for developing these assumptions which include: (i) future rate of prepayment; (ii) discount rate used to calculate present value; and (iii) default rates and loss severity on loan pools underlying the mortgage-backed securities in the resecuritization. At December 31, 2000, we used an annual constant prepayment rate of 9%, a discount rate of 20%, and an annual constant default rate of .22% with a loss severity of 32% to estimate the fair value of our interest in the resecuritization. The future cash flows and the discount rate represent our best estimate; however, there can be no assurance of the accuracy of these estimates. We review the fair value of our interest in the resecuritization by analyzing current interest rates, and prepayment, discount rate and loss assumptions in relation to the actual experience and current rates of prepayment and loss prevalent in the underlying loan pools. 6 Changes in these factors may lead to significant fluctuations in the fair value of our investment which may affect earnings, if the fair value decrease is determined by us to be of other-than-temporary nature. The difference between our amortized cost of mortgage-backed securities available for sale and current market values, which was $1.6 million at December 31, 2000, is included in "Accumulated Other Comprehensive Loss" in stockholders' equity. This amount, unlike "market valuation losses and impairments," represent a market value decline that we believe is temporary. If held to maturity, the anticipated cash flow on these securities based on estimated interest rates, rate of prepayment and the amount and severity of defaults would result in our receiving amounts in excess of the current market value and would allow us to recover our amortized cost plus our original expected return from the time of acquisition. Notwithstanding the foregoing, payments on mortgage-backed securities are subject to a number of market factors which can significantly affect the amount and rate of payments on mortgage-backed securities, including, without limitation, defaults on the underlying loans, the level of subordination of the mortgage-backed securities, changes in interest rates and the rate of prepayments on the underlying loans. To the extent that these and other factors change, the anticipated cash flow on our mortgage-backed securities may not be sufficient to cover our amortized cost or if we sell one of these mortgage- backed securities at a market price which is below its amortized cost, we will realize a loss in the amount of that portion of "Accumulated Other Comprehensive Loss" attributable to such mortgage-backed security. In calculating the extent to which declines in the value of available-for-sale securities are other than temporary, we analyze actual performance of the securities and underlying collateral, including prepayment and default statistics, as well as the expectation for such performance in the future. To the extent reasonable expectations for future performance are not likely to offset declines in current market valuations, a write-down is recorded in "Market Valuation Losses and Impairments" in the consolidated statement of operations. Because the variables change over time, there can be no assurance that current valuations will be reflective of future periods. The two following tables set forth information, as of December 31, 2000, regarding our mortgage-backed securities. The following table sets forth the credit rating designated by the rating agency for each securitization structure. Classes designated "A" have a superior claim on payment to those rated "B," which are superior to those rated "C." Additionally, multiple letters have a superior claim to designations with fewer letters. Thus, for example, "BBB" is superior to "BB," which in turn is superior to "B." The lower class designations in any securitization will receive interest payments subsequent to senior classes and will experience losses prior to any senior class. The lowest potential class designation is not rated ("NR") which, if included in a securitization, will generally receive interest last and experience losses first. Interest-only securities ("IOs") receive the excess interest remaining after the interest payments have been made on all senior classes of bonds based on their respective principal balances. There is no principal associated with IOs and they are considered liquidated when the particular class they are contractually tied to is paid down to zero. The mortgage loans underlying the Company's mortgage-backed securities are primarily residential mortgage loans which generally may be prepaid at any time without penalty. 7 MORTGAGE-BACKED SECURITIES DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)
CLASS -------------------------------- CLASS BALANCE AT INITIAL CLASS DECEMBER 31, ISSUE NAME CLASS RATING(1) ISSUE DATE COLLATERAL TYPE BALANCE 2000 - ----------------------- -------- --------- ---------- --------------- ------------- ---------------- OCWEN 98R1............. B3 BBB 3/27/98 Residential $ 19,789 $ 18,932 BSSPT 2000-3........... B NR 4/30/00 Residential 65,618 61,517 BSMSI 96-6............. B4 BB 12/30/96 Residential 4,824 3,051 BSMSI 96-6............. B3 BBB 12/30/96 Residential 5,427 2,458 WCOST 95-A (3)......... B NR 3/8/95 Consumer 16,638 5,524 WMHT 95-A (3).......... B NR 6/28/95 Manufactured 5,007 4,631 Housing CITYSCAPE MBS: CITYH 97-A (4)....... R NR 2/28/97 Residential 79,606 20,060 CITYH 97-B (4)....... R1 NR 4/30/97 Residential 197,548 55,760 CITYH 97-C (4)....... R2 NR 7/30/97 Residential 97,550 14,974 CITYH 97-C (4)....... R1 NR 7/30/97 Residential 102,450 33,618 BSSP 2000-5 MBS: WIFC 96-3 (3)........ B1 BB 12/1/96 Residential 6,261 5,702 WIFC 96-3 (3)........ B2 B 12/1/96 Residential 4,870 4,440 WIFC 96-3 (3)........ B3 NR 12/1/96 Residential 12,523 8,945 WIFC 97-1-WFC1 (3)... B1 BB 9/25/97 Residential 9,908 8,945 WIFC 97-1-WFC1 (3)... B2 B 9/25/97 Residential 1,835 1,656 WIFC 97-1-WFC1 (3)... B3 NR 9/25/97 Residential 4,404 2,669 WIFC 98-2-WFC2 (3)... B2 B 6/30/98 Residential 3,216 3,116 WIFC 98-2-WFC2 (3)... B1 BB 6/30/98 Residential 20,100 19,464 WIMLT 98-3 (3)....... B1 BB 9/30/98 Residential 1,779 1,779 WIMLT 98-3 (3)....... C NR 9/30/98 Residential 177,730 72,582 -------- -------- Total.............. $837,083 $349,823 ======== ======== COMPANY INVESTMENT ---------------------- PERCENTAGE COMPANY'S ISSUE NAME OF CLASS BASIS(2) - ----------------------- ---------- --------- OCWEN 98R1............. 100.00% $ 8,824 BSSPT 2000-3........... 100.00% 6,933 BSMSI 96-6............. 69.47% 2,133 BSMSI 96-6............. 49.76% 2,385 WCOST 95-A (3)......... 50.00% 2,525 WMHT 95-A (3).......... 100.00% 3,621 CITYSCAPE MBS: 7,020 CITYH 97-A (4)....... 100.00% CITYH 97-B (4)....... 100.00% CITYH 97-C (4)....... 100.00% CITYH 97-C (4)....... 100.00% BSSP 2000-5 MBS: 43,159 WIFC 96-3 (3)........ 100.00% WIFC 96-3 (3)........ 100.00% WIFC 96-3 (3)........ 100.00% WIFC 97-1-WFC1 (3)... 100.00% WIFC 97-1-WFC1 (3)... 100.00% WIFC 97-1-WFC1 (3)... 100.00% WIFC 98-2-WFC2 (3)... 100.00% WIFC 98-2-WFC2 (3)... 100.00% WIMLT 98-3 (3)....... 100.00% WIMLT 98-3 (3)....... 100.00% ------- Total.............. $76,600 =======
- -------------------------- (1) NR means the security is not rated. (2) Based on the value reflected in the Company's financial statements as of December 31, 2000, which is the post-impairment basis (purchase price less amortization and impairment thereof) of the mortgage-backed securities plus accrued interest of $0.3 million. (3) Securities backed by loans that were previously held in the portfolio of WFSG or its affiliates and for which WFSG or one of its affiliates is continuing to act as servicer. (4) Securities backed by loans serviced by an affiliate of WFSG. 8 MORTGAGE-BACKED SECURITIES DECEMBER 31, 2000 (CONTINUED) (DOLLARS IN THOUSANDS)
CONSTANT PREPAYMENT RATE FOR THE INDICATED PERIOD(1) DELINQUENCY(1)(5) ----------------------------------------- ------------------------------ 1 3 6 12 30-59 60-89 90+ REAL ESTATE ISSUE NAME MONTH MONTHS MONTHS MONTHS DAYS DAYS DAYS FORECLOSURE(1) OWNED(1) - ---------- -------- -------- -------- -------- -------- -------- -------- -------------- ----------- OCWEN 98R1............. 13.1 14.7 14.7 14.5 $ 20,742 $11,999 $35,716 $25,289 $ 14 BSSPT 2000-3........... 8.84 8.49 8.63 8.81 $110,315 $16,012 $12,220 $12,400 $ 3 BSMSI 96-6............. 15.31 12.36 11.9 11.34 $ 3,920 $ 1,244 $ 2,149 $ 1,979 $ 981 BSMSI 96-6............. 15.31 12.36 11.9 11.34 $ 3,920 $ 1,244 $ 2,149 $ 1,979 $ 981 WCOST 95-A (3)......... -0.2 7.9 3.8 4.9 $ 65 $ 54 $ 3,872 N/A $4,917 WMHT 95-A (3).......... 12.9 18 21.2 23.4 $ 182 $ 175 $ 285 N/A N/A CITYSCAPE MBS: CITYH 97-A (4)(6).... 29.4 31.4 38.3 35.3 $ 659 $ 799 $ 1,357 $ 1,822 $ 854 CITYH 97-B (4)(6).... 31.6 25.2 26.1 30.4 $ 3,384 $ 1,421 $ 3,757 $ 5,302 $2,238 CITYH 97-C (4)(6).... 40.8 61.6 57 47.8 $ 380 $ 24 N/A $ 2,298 $ 946 CITYH 97-C (4)(6).... 36.2 31.8 28.3 30.1 $ 660 $ 485 $ 343 $ 3,126 $1,885 BSSP 2000-5 MBS: WIFC 96-3 (3)........ 12.4 21.9 23.1 20.9 $ 3,762 $ 682 $ 4,619 $ 2,767 $1,006 WIFC 96-3 (3)........ 12.4 21.9 23.1 20.9 $ 3,762 $ 682 $ 4,619 $ 2,767 $1,006 WIFC 96-3 (3)........ 12.4 21.9 23.1 20.9 $ 3,762 $ 682 $ 4,619 $ 2,767 $1,006 WIFC 97-1 WFC1 (3)... 7.8 14.8 19.1 17.5 $ 2,463 $ 614 $ 2,120 $ 1,642 $ 208 WIFC 97-1 WFC1 (3)... 7.8 14.8 19.1 17.5 $ 2,463 $ 614 $ 2,120 $ 1,642 $ 208 WIFC 97-1 WFC1 (3)... 7.8 14.8 19.1 17.5 $ 2,463 $ 614 $ 2,120 $ 1,642 $ 208 WIFC 98-2 WFC2 (3)... 26 22.9 20.7 19.5 $ 2,775 $ 1,708 $ 6,038 $ 3,154 $ 236 WIFC 98-2 WFC2 (3)... 26 22.9 20.7 19.5 $ 2,775 $ 1,708 $ 6,038 $ 3,154 $ 236 WIMLT 98-3 (3)....... 12.7 14 17.7 22.6 $ 1,082 $ 550 $ 1,997 $ 498 $ 653 WIMLT 98-3 (3)....... 12.7 14 17.7 22.6 $ 1,082 $ 550 $ 1,997 $ 498 $ 653 BANKRUPTCY CUMULATIVE ISSUE NAME (1)(2) LOSSES(1) - ---------- ----------- ----------- OCWEN 98R1............. $25,188 $48,787 BSSPT 2000-3........... $ 2,033 $ 1,742 BSMSI 96-6............. $ 1,778 $ 4,747 BSMSI 96-6............. $ 1,778 $ 4,747 WCOST 95-A (3)......... N/A N/A WMHT 95-A (3).......... N/A N/A CITYSCAPE MBS: CITYH 97-A (4)(6).... $ 2,013 $ 3,607 CITYH 97-B (4)(6).... $ 4,566 $11,413 CITYH 97-C (4)(6).... $ 1,803 $ 1,985 CITYH 97-C (4)(6).... $ 2,494 $ 5,456 BSSP 2000-5 MBS: WIFC 96-3 (3)........ N/A N/A WIFC 96-3 (3)........ N/A N/A WIFC 96-3 (3)........ N/A N/A WIFC 97-1 WFC1 (3)... N/A N/A WIFC 97-1 WFC1 (3)... N/A N/A WIFC 97-1 WFC1 (3)... N/A N/A WIFC 98-2 WFC2 (3)... N/A N/A WIFC 98-2 WFC2 (3)... N/A N/A WIMLT 98-3 (3)....... N/A N/A WIMLT 98-3 (3)....... N/A N/A
- ---------------------------------- N/A Information is not available. (1) Data provided by trustees or servicers for the securities or other third-party sources. Delinquency data does not incorporate payment recency. For example, if a loan is 90 days delinquent at a point in time, and from that point on makes each regular monthly payment, that loan would be current on a recency basis, but not on a contractual delinquency basis. Because of this, for certain pools, delinquency rates may imply higher expected defaults than may actually occur. (2) Based on loans which were in bankruptcy as of December 31, 2000. (3) Securities backed by loans that were previously held in the portfolio of WFSG or its affiliates and for which WFSG or one of its affiliates is continuing to act as servicer. (4) Securities backed by loans serviced by an affiliate of WFSG. (5) Delinquency amounts do not include Foreclosure, Real Estate Owned, or Bankruptcy amounts included elsewhere in this table. (6) Delinquency amounts include Foreclosure, Real Estate Owned, and Bankruptcy amounts. 9 LOANS At December 31, 2000, our U.S. Loans were secured primarily by commercial properties and were current on their monthly payments. Set forth below is a brief description of the principal U.S. Commercial Loans in our loan portfolio at December 31, 2000. STARRETT-LEHIGH, 601 WEST 26TH STREET. This is a $25 million investment in mezzanine debt secured by the Starrett-Lehigh building in the Chelsea district of New York City. The building was acquired in 1996 with $100 million of senior debt, $52.5 million of subordinated debt and $26 million in reserves for capital expenditures and interest. The mezzanine loan pays interest at a rate of Libor plus 4.75%, with principal due on the maturity date in August 2001. The loan-to-value ratio on an as-is basis ("LTV") at the time of acquisition was 98%; however, since completion of the planned improvements, the current estimated LTV is approximately 60%. The building is a two million square foot, nineteen-story warehouse/showroom. NW CORNELL & MILLER. This was a first lien mortgage loan for the construction of a private school located in Portland, Oregon. The original construction loan rolled into a first lien, ten-year, fixed-rate loan at 9%, due April 1, 2009. The loan currently pays monthly principal and interest and has a balloon payment of $4.8 million due in 2009. The principal balance of the note at December 31, 2000 was $5.2 million. REAL ESTATE We invest in commercial and multi-family real estate located in the United States and the United Kingdom. The following table sets forth information regarding our investments in real estate at December 31, 2000.
WEIGHTED APPROXIMATE AVERAGE PERCENTAGE RENT PER NET LEASED AT SQUARE DATE YEAR BUILT/ LEASABLE DECEMBER 31, NO. OF ANNUALIZED FOOT NET BOOK ACQUIRED NAME OF PROPERTY LOCATION RENOVATED SQ.FT. 2000 LEASES RENT(1) OCCUPIED VALUE - -------- ---------------- --------------- ----------- -------- ------------- ------ ------------- -------- ----------- 4/6/98 Eugene Warehouse Eugene, OR Unknown 84,912 37% 1 $ 105,293 3.31 $ 2,389,000 Buena Vista Irwindale, CA N/A 227,863 N/A N/A N/A N/A $ 969,000 11/18/98 Business Park- Land 4/21/98 Wilsonville-Land Wilsonville, OR N/A 474,804 N/A N/A N/A N/A $ 1,425,000 6/30/98 Warner Estates United Kingdom Various 206,647 99% 72 $2,417,785 11.97 $17,669,000 Crewe United Kingdom Various 35,770 91% 27 $ 275,491 8.49 $ 2,315,000 11/10/00
- ------------------------------ N/A Not applicable (1) Annualized rent for the current period represents the base fixed rent scheduled to be paid by the tenants under the terms of the related lease agreement, which amount generally does not include payments for real estate taxes, operating expenses, and utility charges. We believe that annualized rent is helpful to investors as a measure of the revenues we could expect to receive from our leases. However, we cannot assure you that scheduled lease revenues will equal the actual lease revenues we received in the past. 10 Set forth below is a brief description of each of the properties set forth in the above table: 90005 PRAIRIE ROAD ("EUGENE WAREHOUSE"). This building is a warehouse located on 4.5 acres with access to Interstate Route 5 via Belt Line Road and to the Eugene-Springfield metropolitan and Gateway areas. The property is served by an on-site rail spur and the property is within the West Eugene enterprise zone. This property has one tenant (which is not affiliated with the Company) who occupies 37% of the building under a short-term lease. BUENA VISTA BUSINESS PARK, 2400 BLOCK OF BATEMAN AVENUE, IRWINDALE, CALIFORNIA. This property was acquired on November 18,1998 and consists of three level, finished industrial zoned lots ranging from 36,068 to 154,943 square feet and totaling 227,863 square feet or 5.2 acres. The parcels are fully improved with all the major off-sites in place, i.e., paved-streets, streetlights, curbs, gutters and utilities. Irwindale is located at the center of the San Gabriel Valley which is located between the inland empire region and downtown Los Angeles. This site has access to Interstate Route 210 and Interstate Route 605. The parcels are all under contract for sale in 2001. WILSONVILLE LAND. This 10.9-acre parcel of undeveloped land is located in the city of Wilsonville, Oregon. The property is being held for sale. WARNER ESTATES. At December 31, 2000, we maintained a L12.0 million ($17.7 million) investment in 17 properties in the Midlands and Southeast of England. There is approximately 207,000 square feet of rentable space in the portfolio and the properties are substantially all leased to 72 tenants, with most leases maturing in five to seven years. Leases provide for upward-only rental increases, which require tenants to pay the higher of their current rent or the market rates when rates are reviewed. The properties are managed by two unaffiliated UK property management firms. CREWE. These two buildings are located in the city of Crewe in the United Kingdom. The buildings are leased to a mix of retail and office tenants. The Company holds legal ownership of the property and operates it under a joint venture arrangement with the former owner. LEASE EXPIRATIONS. The following table sets forth a summary schedule of the lease expirations for the commercial properties for leases in place as of December 31, 2000, assuming that none of the tenants exercise renewal options or termination rights, if any, at or prior to the scheduled expirations.
PERCENTAGE OF PERCENTAGE SQUARE AGGREGATE AVERAGE BASE RENT AGGREGATE NUMBER OF FOOTAGE OF PORTFOLIO ANNUALIZED BASE PER SQUARE FOOT PORTFOLIO LEASES EXPIRING LEASED RENT OF EXPIRING OF EXPIRING ANNUALIZED YEAR OF LEASE EXPIRATION (1) EXPIRING LEASES SQUARE FEET LEASES (2) LEASES (3) BASE RENT - ---------------------------- --------- ---------- ------------- ---------------- ----------------- ---------- 2001....................... 39 74,716 27.7% $ 687,842 $ 9.21 24.6% 2002....................... 13 39,115 14.5 400,441 $10.24 14.3 2003....................... 8 8,358 3.1 163,181 $19.52 5.8 2004....................... 9 47,668 17.7 347,869 $ 7.30 12.4 2005....................... 2 435 0.2 22,126 $50.86 0.8 Thereafter................. 29 98,982 36.8 1,177,110 $11.89 42.1 --- ------- ----- ---------- ----- 100 269,274 100.0% $2,798,569 $10.39 100.0% === ======= ===== ========== =====
- ------------------------ (1) Lease year is on a calendar year basis. (2) Annualized base rent is calculated based on the amount of scheduled rent in the expiring year. (3) Annualized base rent per square foot is calculated using the annualized base rent divided by a weighted average square footage. 11 MORTGAGE INDEBTEDNESS. Our general strategy is to leverage our investments by incurring borrowings secured by such investments. Set forth below is information regarding our mortgage indebtedness relating to our real estate as of December 31, 2000.
PRINCIPAL MATURITY ANNUAL PROPERTY AMOUNT INTEREST RATE DATE AMORTIZATION PAYMENTS - -------- ----------- ------------- -------- ------------ ---------- Eugene Warehouse................... $ 1,058,000 10.63% 1/1/02 30 Years $ 133,080 Warner Estates (1)................. $14,981,000 8.20% 1/25/19 20 Years $1,479,300 Crewe (1).......................... $ 1,493,000 7.56% 11/10/20 20 Years $ 170,200
- ------------------------ (1) U.S. dollar equivalents. The loan is denominated in pounds sterling and amortizing principal and interest on a quarterly basis with a balloon payment at maturity. Many of the mortgage loans obtained by us to finance our real estate investments do not fully amortize over their terms and instead require substantial balloon payments on their maturity dates. Because the principal balance of such mortgage loans does not fully amortize over the term of the mortgage loan, such mortgage loans may be more difficult for us to repay at maturity than mortgage loans whose principal balance is fully amortized over the term of the mortgage loan. Our ability to pay the balloon amount due at maturity of such mortgage loans will depend on our ability to obtain adequate refinancing or funds from other sources to repay such mortgage loans. OTHER INVESTMENTS The Company also invests in other real estate-related opportunities, including real estate corporations. In December 2000, the Company (through a 26% owned Jersey, Channel Islands company known as BEP Acquisitions) announced the acceptance of a L42 million offer to purchase all of the outstanding capital stock of Bourne End Properties PLC (Bourne End). Bourne End is a specialist investor in retail property, currently owning nine town shopping centers located in England and Scotland. The centers range in size from 80,000 square feet to 340,000 square feet. BEP Acquisitions was incorporated in Jersey, Channel Islands for the purpose of making the offer to acquire Bourne End. BEP Acquisitions is a wholly-owned subsidiary of BEP Property Holdings Limited, which is 26% owned by the Company, 71% owned by Merrill Lynch (Jersey) Holdings Limited (a subsidiary of Merrill Lynch & Co., Inc.) and 3% owned by Greenbau Estuary Limited. Merrill Lynch (Jersey) Holdings Limited will also provide mezzanine financing of approximately L18.5 million. Greenbau Estuary Limited will act as the day-to-day manager of Bourne End. Nationwide Building Society provided senior financing of L15.5 million. In December 2000, the Company deposited its share of the purchase price into escrow ($6.7 million), which is included in Other Assets on the Company's Consolidated Statement of Financial Condition as of December 31, 2000. The acquisition was completed in February 2001. FUNDING SOURCES In order to maximize the return on our investments, we generally fund acquisitions with third-party debt and equity financing so that our invested capital represents a relatively small percentage of the purchase price. The principal sources for funding loans and mortgage-backed securities have historically been repurchase agreements with major investment banks. Repurchase agreements are secured lending arrangements which involve the borrower selling an asset to a lender at a fixed price with the borrower having an obligation to repurchase the asset within a specified period (generally 30 days) at a higher price reflecting the interest cost of the loan. If the value of the underlying asset declines as determined by the lender, the lender may request that the amount of the loan be reduced by cash payments from the borrower or additional collateral be provided by the borrower (generally known as "collateral calls"). Funding for real property assets generally are longer-term traditional mortgage financing with 12 banks and other financial institutions. We closely monitor rates and terms of competing sources of funds on a regular basis and generally utilize the source which is the most cost effective. During the year ended December 31, 2000, the Company has significantly reduced its short-term, mark-to-market-based financing. Such financing has generally been replaced by two securitized, long-term, non-recourse, and non-mark-to-market structured transactions. See ITEM 1., BUSINESS, INVESTMENTS, MORTGAGE-BACKED SECURITIES. The following table sets forth information relating to our borrowings and other interest-bearing obligations at December 31, 2000 and 1999.
DECEMBER 31, ----------------------- 2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) Short-term borrowings: Repurchase agreements..................................... $15,902 $ 86,904 Other..................................................... 2,268 9,911 ------- -------- 18,170 96,815 Long-term borrowings: Repurchase agreements..................................... 19,025 18,913 Mortgages secured by real estate.......................... 17,532 45,637 Senior bonds -- mortgage-backed securities................ 34,203 -- ------- -------- 70,760 64,550 ------- -------- $88,930 $161,315 ======= ========
The following table sets forth certain information related to the Company's short-term borrowings. During the reported period, short-term borrowings were comprised of warehouse lines, repurchase agreements and other short-term facilities. Averages are determined by utilizing month-end balances.
AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------- 2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) Average amount outstanding during the year.................. $67,399 $155,473 Maximum month-end balance outstanding during the year....... $90,658 $203,742 Weighted average rate: During the year........................................... 8.7% 8.2% At end of year............................................ 7.6% 8.9%
ASSET QUALITY We are exposed to certain credit risks related to the value of the collateral that secures our loans and the ability of borrowers to repay their loans. We closely monitor our loans for potential problems on a periodic basis and report to the Board of Directors at regularly scheduled monthly meetings. Each loan is reviewed at least once a month and problem loans or properties are monitored more frequently. NON-PERFORMING LOANS. It is our policy to establish an allowance for uncollectible interest on loans that are over 90 days past due or sooner when the probability of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are placed on nonaccrual status and deemed to be non-performing. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed by a charge to interest income. 13 ALLOWANCES FOR LOAN LOSSES. We maintain an allowance for loan losses at a level believed adequate to absorb estimated losses existing in the loan portfolios. The allowance is increased by provisions for loan losses charged against operations, recoveries of previously charged off credits, and allocations of discounts on purchased loans, and is decreased by charge-offs. Loans are charged off when they are deemed to be uncollectible. When we increase the allowance for loan losses related to loans, we record a corresponding increase to the provision for loan losses in the statement of operations. When we decrease the allowance for loan losses related to loans, we record a recovery of loan losses. During the year ended December 31, 2000, we reviewed the adequacy of loan loss reserves and recaptured the remaining reserve balance of $0.6 million. At December 31, 2000, we had $30.4 million of loans that are performing according to their terms with no required loan loss allowance. At December 31, 2000 and 1999, we had loans greater than 90 days delinquent of $0.1 million and $0.5 million, respectively, which were on nonaccrual status. The amounts at December 31, 2000 were purchased as a non-performing pool of loans (i.e. over 90 days delinquent). REGULATORY The Company currently owns approximately 14.4% of WFSG's common stock on a non-diluted basis. The Company is continuing to consider what course of action might best maximize the value of its investment in WFSG. As a result, the Company may decide to sell some or all of its shares of WFSG or retain its current ownership position. The Company does not believe at this time that it would seek to increase its percentage of ownership of WFSG, which would require specific Office of Thrift Supervision ("OTS") approval. Any course of conduct (including retention of the Company's current position) needs to comply with requirements of the OTS, including those relating to the "control" of savings and loan holding companies such as WFSG. In 1999, as a result of the Company's material ownership in a savings and loan holding company (WFSG), the then overlap in certain officers and directors between the two entities and other related factors, the OTS required the Company to file a change in control application (Form H(e)-1) with the OTS. The H(e)-1 Application was filed with the OTS in June 1999. As a result of discussions with the OTS, the Company decided to withdraw the Application in November 2000. In lieu of the Application, the Company had filed a rebuttal of control application ("Rebuttal Application") in January 2001 seeking to rebut "control" of WFSG if the Company later becomes one of the two largest shareholders in WFSG (the status of being one of the two largest shareholders of a savings and loan holding company creates a rebuttable presumption that such a shareholder "controls" that savings and loan holding company). In the Rebuttal Application, the Company had requested that the OTS stipulate in advance that, if the Company later becomes one of the two largest shareholders, such a circumstance would not constitute "control" of WFSG by the Company, and therefore would not necessitate the Company's sale of a substantial portion of its WFSG common stock; such a forced divestiture might not be accomplished advantageously by the Company. After further discussions with the OTS, the OTS was unwilling at this time to stipulate in advance to the Company's request and the Company has, without prejudice, withdrawn the Rebuttal Application. The Company could file the Rebuttal Application again if it does in fact become one of the two largest shareholders of WFSG. ITEM 2. PROPERTIES The Company's corporate headquarters are located in Portland, Oregon, where the Company leases approximately 12,000 square feet of office space under a lease expiring in 2003 and subleases approximately 2,000 square feet to an unrelated third party. The Company also maintains an executive office in New York and London, England. 14 ITEM 3. LEGAL PROCEEDINGS The Company, Fog Cap L.P. (a wholly-owned subsidiary of the Company and formerly known as Wilshire Real Estate Partnership L.P.) and its two top executives, Messrs. Wiederhorn and Mendelsohn, have been named in a series of lawsuits relating to the receivership of Capital Consultants, L.L.C. ("CCL"). The cases are TOM HAZZARD, ET AL., V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1338-HU; MARK EIDEM, ET AL., V. TRUSTEES UNITED ASSN. UNION LOCAL 290, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1446-HA; NANCY SCHULTZ, ET AL., V. GARY KIRKLAND, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1377-HA; LARRY MILLER, ET AL., V. LEE CLINTON, ET AL., U.S. District Court of Oregon, Civil No. CV00-1317-HA; SALVATORE J. CHILIA, ET AL., V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1633 JE; and MADOLE V. CAPITAL CONSULTANTS ET. AL., U.S. District Court of Oregon, Civil No. CV 00-1600-HU. In the HAZZARD, CHILIA and MADOLE cases, the trustees of several Taft-Hartley trusts filed suit against CCL and several individuals and organizations CCL did business with (including the Company and Messrs. Wiederhorn and Mendelsohn). In the EIDEM, SCHULTZ and MILLERcases, the trustees who are plaintiffs in HAZZARD, CHILIA and MADOLE are in turn named as defendants in class action suits filed by beneficiaries of the Taft-Hartley trusts on which they serve as plaintiff-trustees. In the cases in which the trustees are defendants, they have filed third-party complaints against several parties, including the Company and Messrs. Wiederhorn and Mendelsohn. The complaints and third-party complaints are all virtually identical. They include claims against the Company, Wiederhorn and Mendelsohn alleging breaches of fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA"); knowing participation in a fiduciary breach under ERISA; knowing participation in a prohibited transaction under ERISA; knowing transfer of trust assets under ERISA; negligence; common law claim for breach of fiduciary duty; tortuous interference with contract; conversion; constructive trust, restitution and unjust enrichment; fraud; and breach of contract. The suits also allege claims against Messrs. Wiederhorn and Mendelsohn of tortuous interference with business relationships between the Taft-Hartley trusts and CCL, as well as violations of the Racketeering Influenced and Corrupt Organization provisions of the Organized Crime Control Act of 1970, 18 U.S.C. Section 1961-1965 ("RICO"). The claimants also seek attorneys' fees under their ERISA and RICO claims. The above suits name multiple defendants in addition to the Company and its executives. In addition, the claimants have asserted but have not yet filed claims against a number of additional parties regarding the same alleged losses, including a number of professional advisors to named defendants. The claimants have not described with any specificity the proportion or share of losses which they claim are attributable to the Company or its executives, as compared to the other parties and other potential defendants. The overall remedies sought against all defendants include claims for broad relief under the remedial provisions of ERISA, such as rescission of transactions and the imposition of a constructive trust over any trust assets which plaintiffs claim were obtained in violation of ERISA. Certain of the claims against the Company appear to be covered by releases that were given by CCL to the Company and Messrs. Wiederhorn and Mendelsohn. The claimants' suits seek to rescind the transactions in which the releases were granted. The claimants also seek common law remedies such as damages and punitive damages. However, it appears that certain of these common law claims may be preempted by ERISA. Although these cases were filed during the period between October and December of 2000, they are still in preliminary stages of pleading and discovery. CCL was placed in receivership by the Department of Labor and the Securities and Exchange Commission in the cases of SEC V. CAPITAL CONSULTANTS, L.L.C., et. al., U.S. District Court of Oregon, Case No. 00-1290-KI, and HERMAN V. CAPITAL CONSULTANTS, L.L.C., et. al., U.S. District Court of Oregon, Case No. 001291-KI. When the receivership order was entered, the court stayed other proceedings against CCL for several weeks. Once the stay was partially lifted, the parties deferred discovery and delayed the filing of any answers or legal challenges to the sufficiency of the pleadings in order to facilitate a confidential global mediation 15 process. U.S. Circuit Court Judge Edward Leavy of the Ninth Circuit Court of Appeals has been selected as the mediator. Under the mediation process, the parties have only recently begun an early round of document production that has not yet been completed. No motions challenging the sufficiency of the claimants' claims have been filed or heard, and the Company and other defendants have not yet filed their answers or any cross-claims that they may have among themselves. No discovery depositions have been taken. Management has directed that these cases be defended against vigorously. Because the cases are still in early stages of the pleadings and because the amount of discovery has been limited, a financial loss to the Company, if any, cannot be reasonably estimated at this time. The employment agreements between the Company and Messrs. Wiederhorn and Mendelsohn contain provisions under which they may be entitled to indemnity for litigation expenses and personal losses that are attributable to actions which they took on account of their positions as directors or officers of the Company. Messrs. Wiederhorn and Mendelsohn have notified the Company that they are reserving their rights to seek such indemnity. At this time, it is not possible to determine the extent of liability, if any, the Company may face with regard to such indemnity claims because of the preliminary nature of the underlying litigation. In addition, certain of the litigation expenses faced by Messrs. Wiederhorn and Mendelsohn may be subject to reimbursement or payment from other sources because of employment agreements and indemnity rights they may have under the articles and bylaws of other defendants named in the litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 12, 2000, at the annual stockholders' meeting, the Company's stockholders elected five persons to the Board of Directors of the Company, approved the annual incentive bonuses for the executive officers and ratified the selection of Ernst & Young LLP as the Company's auditors for the year ending December 31, 2000. In connection with the election of directors, the shares of common stock present in person or by proxy were voted as follows:
FOR WITHHELD --------- -------- Andrew Wiederhorn........................................ 5,672,351 62,686 Lawrence Mendelsohn...................................... 5,672,485 55,552 David Egelhoff........................................... 5,674,828 50,209 Jordan Schnitzer......................................... 5,693,212 41,825 Patrick Terrell.......................................... 5,696,378 38,659
In connection with the proposal to approve the annual incentive bonuses for the executive officers: 5,610,287 shares were voted in favor of the proposal, 118,950 shares were voted against the proposal and there were 5,800 abstentions. In connection with the proposal to approve the ratification of the selection of Ernst & Young LLP, independent certified public accountants, as the Company's auditors for the year ending December 31, 2000: 5,718,613 shares were voted in favor of the proposal, 7,455 shares were voted against the proposal and there were 9,569 abstentions. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Effective April 6, 1998, our common stock, par value $0.0001 per share (the "Common Stock") became quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The Common Stock is traded under the symbol "FCCG." The approximate number of record holders (not shareholders, as most shares are held in their brokerage house's name) of our Common Stock at February 28, 2001 was 14. The following table sets forth the high and low sales prices for the Common Stock as quoted on the NASDAQ for the periods indicated.
2000 HIGH LOW - ------------------------------------------------------------ ----------- ----------- First quarter............................................... $2 9/16 $1 29/32 Second quarter.............................................. $2 13/16 $1 7/8 Third quarter............................................... $2 7/8 $2 Fourth quarter.............................................. $2 13/16 $2 5/32
1999 HIGH LOW - ------------------------------------------------------------ ----------- ----------- First quarter............................................... $4 $2 29/32 Second quarter.............................................. $4 1/2 $3 5/16 Third quarter............................................... $3 7/8 $2 9/16 Fourth quarter.............................................. $3 1/16 $2 1/8
During the years ended December 31, 2000 and 1999, the Company did not declare any cash dividends. The Company delayed the payment date of a $0.40 cash dividend payable on October 27, 1998 to shareholders of record at September 30, 1998. The Company will pay interest, at the rate of 4% per annum, on the amount due from the previously announced payment date through the date of the actual payment. During the year ended December 31, 2000, the Company paid one-half of the cash dividend payable plus interest and intends on paying the remainder equally on March 28, 2001 and June 28, 2001, subject to the financial condition, results of operations and capital requirements of the Company as well as other factors deemed relevant by the Board of Directors. The Company currently intends to retain its earnings to support its future growth strategy but may declare and pay new dividends on its common stock in 2001. On December 15, 1999, the Company declared a distribution of one right (a "Right") to purchase one-tenth of a share of the Company's Common Stock for each outstanding share of Common Stock, payable to the stockholders of record on January 3, 2000. The Board of Directors authorized and directed the issuance of one Right with respect to each Common Share issued thereafter until the Distribution Date (as defined in the Rights Agreement) and, in certain circumstances, with respect to Common Shares issued after the Distribution Date. The description and terms of the Rights are set forth in a Rights Agreement between the Company and The Bank of New York, as Rights Agent, dated as of December 23, 1999. The Rights are not exercisable until the Distribution Date and will expire at the close of business on December 23, 2009, unless earlier redeemed by the Company. 17 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical, financial and operating data on a consolidated basis at December 31, 2000, 1999 and 1998 and for the years then ended. The information contained in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical consolidated financial statements, including the notes thereto, included elsewhere in this report.
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998(1) ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Statement of Operations Data: Net Interest Income: Loans............................................... $ 3,900 $ 6,740 $ 10,838 Securities.......................................... 10,718 15,342 15,709 Other investments................................... 460 604 1,145 ----------- ----------- ----------- Total interest income............................. 15,078 22,686 27,692 Interest expense.................................... 7,704 12,897 13,608 ----------- ----------- ----------- Net interest income before loan losses............ 7,374 9,789 14,084 Recovery of (provision for) loan losses............. 555 1,150 (11,842) ----------- ----------- ----------- Net interest income after loan losses............. 7,929 10,939 2,242 Real Estate Operations: Operating income.................................... 4,870 7,148 4,939 Operating expense................................... (601) (205) (345) Interest expense.................................... (2,742) (4,546) (2,853) Gain on sale of real estate......................... 5,404 1,042 -- Provision for losses on real estate................. -- (892) -- Depreciation........................................ (993) (1,102) (963) ----------- ----------- ----------- Total real estate operations...................... 5,938 1,445 778 Other Operating (Loss) Income: Market valuation losses and impairments............. (22,257) (30,029) (54,822) Provision for disputes with WFSG.................... (225) (4,077) -- Gain on sale of securities.......................... 5,197 1,326 943 Gain on sale of loans............................... 159 -- 1,320 Other income, net................................... 29 180 23 ----------- ----------- ----------- Total other operating loss........................ (17,097) (32,600) (52,536) Operating Expenses: Compensation and employee benefits.................. 7,869 1,353 - Management fees..................................... -- 2,404 3,179 Professional fees................................... 1,973 1,250 1,220 Servicing fees...................................... 154 256 691 Other............................................... 2,316 1,168 1,782 ----------- ----------- ----------- Total operating expenses.......................... 12,312 6,431 6,872 ----------- ----------- ----------- Net Loss.............................................. $ (15,542) $ (26,647) $ (56,388) =========== =========== =========== Per Share Data: Net Loss............................................ $ (1.48) $ (2.33) $ (4.94) Dividends declared.................................. $ -- $ -- $ 0.67 Weighted average shares outstanding................. 10,507,313 11,442,921 11,421,933
18
YEAR ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998(1) --------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Cash Flow Data: Net cash (used in) provided by operating activities.... $ (91) $ (17,215) $ 4,484 Net cash provided by (used in) investing activities.... $ 71,072 $ 143,283 $(447,921) Net cash (used in) provided by financing activities.... $(73,270) $(124,969) $ 448,219 Other Data: Depreciation........................................... $ 1,144 $ 1,102 $ 963 EBITDA(2).............................................. $ (4,097) $ (8,301) $ (38,964) Ratio of EBITDA to interest expense.................... (0.39) (0.48) (2.37) Ratio of earnings to fixed charges..................... (0.65) (1.07) (2.43)
DECEMBER 31, ----------------------- 2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) Total assets................................................ $150,304 $218,666 Cash and cash equivalents................................... $ 3,394 $ 5,862 Securities available for sale, at fair value................ $ 74,731 $104,572 Loans, net.................................................. $ 30,404 $ 31,634 Investments in real estate.................................. $ 24,767 $ 63,225 Investments in WFSG and affiliates, net..................... $ 5,593 $ 9,657 Short-term borrowings....................................... $ 18,170 $ 96,815 Long-term borrowings........................................ $ 70,760 $ 64,550 Total stockholders' equity.................................. $ 55,651 $ 50,872 Ratio of total assets to stockholders' equity............... 2.70 4.30
- ------------------------ (1) We commenced operations on April 6, 1998; therefore, the information presented only reflects actual operations for the nine-month period ended December 31, 1998. (2) EBITDA means net income or (loss) plus interest expense plus taxes and depreciation plus (or minus) amortization of premiums and discounts, net. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company and notes thereto. GENERAL In response to the adverse market conditions that have significantly impacted our operations since 1998, we have focused our strategy on stabilizing the balance sheet and managing our exposure to further market fluctuations. During the year ended December 31, 2000, we restructured the asset and liability structure of our balance sheet, significantly reduced our exposure to short-term, mark-to-market-based financing for our mortgage-backed securities portfolio, disposed of the majority of our U.S. commercial property portfolio and began arranging and investing in new transactions. Our results of operations for the year ended December 31, 2000 reflect further impairment write-downs of mortgage-backed securities of $21.4 million, the majority of which had been previously deducted from stockholders' equity through "Accumulated Other Comprehensive Loss." These impairments reduce the unrealized losses included in stockholders' equity for the mortgage-backed securities portfolio to $1.6 million at December 31, 2000 from $23.2 million at December 31, 1999. 19 Despite the continued impact of the marketplace on the Company, we increased stockholders' equity to $55.7 million at December 31, 2000 from $50.9 million at December 31, 1999, an increase of $4.8 million or 9.4%. During this same period, the size of our balance sheet was reduced from $218.7 million to $150.3 million. The Company's business strategy now focuses on opportunistic investing, structuring and managing real estate-related assets such as mortgage-backed securities, mezzanine real estate loans and real estate, as well as the acquisition of companies engaged in investing in such assets. We concentrate on the acquisition of assets where our expertise in intensive asset management, mortgage and real estate credit analysis and financial structuring can create value. Further, we expect that many of these investments, particularly in corporate acquisitions, will be in conjunction with partners. RESULTS OF OPERATIONS--2000 COMPARED TO 1999 NET LOSS. Our net loss for the year ended December 31, 2000 amounted to $15.5 million, or $1.48 per share, compared to $26.6 million, or $2.33 per share for the year ended December 31, 1999. The 2000 net loss is primarily attributable to $22.3 million of market valuation losses and impairments compared to $30.0 million of market valuation losses and impairment for 1999. NET INTEREST INCOME. The following tables set forth information regarding the total amount of income from interest-earning assets and expenses from interest-bearing liabilities and the resulting average yields and rates:
FOR THE YEAR ENDED DECEMBER 31, 2000 -------------------------------------- AVERAGE INTEREST BALANCE INCOME YIELD/RATE -------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios.......................................... $ 33,204 $ 3,900 11.7% Mortgage-backed securities available for sale............ 81,159 10,718 13.2 Other investments........................................ 7,402 460 6.2 -------- -------- ------- Total interest-earning assets.......................... $121,765 $ 15,078 12.4% -------- -------- ------- Interest-Bearing Liabilities: Short-term and other borrowings.......................... 86,312 (7,704) 8.9 -------- -------- ------- Total interest-bearing liabilities..................... $ 86,312 $ (7,704) 8.9% -------- -------- ------- Net interest income before provision for loan losses/spread(1)....................................... $ 7,374 3.5% ======== ======= Net interest margin(2)................................... 6.1% =======
- ------------------------ (1) Net interest spread represents the unweighted difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (2) Net interest margin represents net interest income divided by average interest-earning assets. 20
FOR THE YEAR ENDED DECEMBER 31, 1999 -------------------------------------- AVERAGE INTEREST BALANCE INCOME YIELD/RATE -------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios.......................................... $ 68,937 $ 6,740 9.8% Mortgage-backed securities available for sale............ 122,164 15,342 12.6 Other investments........................................ 13,206 604 4.6 -------- -------- ------- Total interest-earning assets.......................... $204,307 $ 22,686 11.1% -------- -------- ------- Interest-Bearing Liabilities: Short-term and other borrowings.......................... 158,376 (12,897) 8.1 -------- -------- ------- Total interest-bearing liabilities..................... $158,376 $(12,897) 8.1% -------- -------- ------- Net interest income before provision for loan losses/spread(1)....................................... $ 9,789 3.0% ======== ======= Net interest margin(2)................................... 4.8% =======
- ------------------------ (1) Net interest spread represents the unweighted difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (2) Net interest margin represents net interest income divided by average interest-earning assets. For the year ended December 31, 2000, the Company recovered $0.6 million of the allowance for loan losses compared to a recovery of $1.1 million in 1999. These amounts are not reflected in the net interest income/spread above. Prepayments, delinquencies and defaults affect the net spread of the Company, primarily through their impact on mortgage loans that underlie the securities in the Company's mortgage-backed securities portfolio. For principal and interest subordinated mortgage-backed securities, which the Company generally purchases at a discount to principal amount, increased prepayments recapture such purchase discount sooner and therefore increase spread. Fewer prepayments would have the opposite effect, reducing spread. For IOs and residuals, prepayment increases generally reduce spread since these securities derive their value from interest payments on loans that are outstanding. IOs have no principal face amount other than a notional balance and therefore are quite responsive to changes in prepayment. Residuals have both a principal face amount and often a credit related IO component. Increased prepayment often reduces spread except to the extent that such prepayment is related to a recovery on a defaulted loan. The impact on spread, however, depends upon the degree to which prepayment is less than or exceeds the Company's assumptions for prepayment at its time of purchase. The Company buys mortgage-backed securities based on prepayment, delinquency and default assumptions. Delinquency itself has little effect on spread from the Company's mortgage-backed securities portfolio since the loan servicers for each security generally advance both principal and interest payments and, therefore, the Company generally receives payments on such loans on a timely basis. More important is the loss severity on defaulted loans. Generally, the larger the loss severity is, the greater the reduction in spread will be. However, the Company's spread is only negatively impacted to the extent the principal face amount of defaults and the cumulative loss severity exceeds or is expected to exceed the Company's assumptions at its time of purchase or as subsequently adjusted through an other than temporary impairment determination. RECOVERY OF LOAN LOSSES. During the year ended December 31, 2000, we reviewed the adequacy of loan loss reserves and recaptured the remaining reserve balance of $0.6 million. At December 31, 2000, we had $30.4 million of loans that are performing according to their terms with no required loan loss allowance. During the year ended December 31, 1999, we reversed a provision for losses of $3.9 million taken in prior periods for a loan held for sale. The loan was secured by 21 commercial properties in the United Kingdom ("UK") with a carrying value of approximately $47.9 million. This valuation allowance had been established in 1998 based upon management's estimate at that time of the ultimate recoverability of the asset. This provision reversal was partially offset by a provision for losses on loans of $0.1 million. In addition, we recognized a net write-down of $2.7 million in the carrying value of a $17.0 million note receivable from WFSG to reflect the estimated value of the common stock of WFSG. REAL ESTATE OPERATIONS. During the years ended December 31, 2000 and 1999, real estate operating income was comprised primarily of $4.9 million and $7.1 million, respectively, in gross rental and other income earned on such investments. Expenses incurred on such real estate investments for the years ended December 31, 2000 and 1999 include $2.7 million and $4.5 million, respectively, of interest expense, $0.6 million and $0.2 million, respectively, of rental operating expense and $1.0 million and $1.1 million, respectively, of depreciation expense. OTHER LOSS. Our other loss was approximately $17.1 million and $32.6 million for the years ended December 31, 2000 and 1999, respectively. The components of the Company's net non-interest loss are comprised of the following: MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses and Impairments" as used herein refers to impairment losses recognized primarily on our mortgage-backed securities and loan portfolios. Total market valuation losses and impairments for the year ended December 31, 2000 were $22.3 million. This amount includes $21.4 million of market valuation losses and impairments related to our portfolio of mortgage-backed securities available for sale and $0.9 million related to our prepaid service fees from an affiliate of WFSG. Approximately $20.0 million of these amounts were impaired in the fourth quarter of 2000 due primarily to the receipt of additional detailed information from the servicer of the underlying mortgages to certain mortgage-backed securities. Total market valuation losses and impairments for the year ended December 31, 1999 were $30.0 million. This amount includes $19.6 million of market valuation losses and impairments related to our portfolio of mortgage-backed securities available for sale, $8.7 million related to our investment in newly-issued WFSG stock, $1.0 million related to fees for advisory services in connection with our investment in WFSG stock and $0.7 million related to our holdings of WFSG's 13% Series B Notes prior to their conversion to newly-issued WFSG stock. PROVISION FOR DISPUTES WITH WFSG. The Company decided to become internally managed in the third quarter of 1999 which resulted in disputes between the Company, on the one hand, and WFSG and certain of its affiliates, on the other. In connection with these disputes, the Company recorded a reserve for potential resolution of disputes with WFSG and its affiliates of $4.1 million at September 30, 1999. Following a partial settlement of disputes with WFSG, the remaining reserve for potential resolution of disputes with WFSG and its affiliates was $2.5 million at December 31, 1999. During the year ended December 31, 2000, the Company settled all remaining disputes with WFSG and its affiliates which resulted in an additional provision of $0.2 million. GAIN ON THE SALE OF SECURITIES. During the years ended December 31, 2000 and 1999, we sold mortgage-backed securities to unrelated third parties for approximately $51.6 million and $46.6 million, respectively, resulting in gains of approximately $5.2 million and $1.3 million, respectively. OPERATING EXPENSES. As discussed above, we decided to become internally managed in the third quarter of 1999. As a result, management fees payable to our prior manager have ceased and have been replaced with compensation to the Company's employees. The Company now incurs its own overhead and operating costs that were previously incurred primarily by the manager. Professional fees during the year ended December 31, 2000 were higher than 1999 primarily due to the litigation with WFSG and its affiliates. 22 In the fourth quarter of 2000, the Company established a trust which purchased 525,000 shares of the Company's common stock from an unrelated shareholder. The Company's contribution of approximately $1.3 million is included in compensation expenses. The trust was established for the benefit of the Company's employees and directors to raise their ownership in the Company, thereby strengthening the mutuality of interests between them and the Company's shareholders. While these shares are held in trust, they will be voted ratably with ballots cast by all other shareholders. RESULTS OF OPERATIONS--1999 COMPARED TO 1998 NET LOSS. Our net loss for the year ended December 31, 1999 amounted to $26.6 million, or $2.33 per share, compared to $56.4 million, or $4.94 per share, for the year ended December 31, 1998. The 1999 net loss is primarily attributable to $30.0 million of market valuation losses and impairments compared to $54.8 million of market valuation losses and impairment and $11.8 million of provision for loan losses for 1998. NET INTEREST INCOME. The following tables set forth information regarding the total amount of income from interest-earning assets and expenses from interest-bearing liabilities and the resultant average yields and rates:
FOR THE YEAR ENDED DECEMBER 31, 1999 -------------------------------------- AVERAGE INTEREST BALANCE INCOME YIELD/RATE -------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios.......................................... $ 68,937 $ 6,740 9.8% Mortgage-backed securities available for sale............ 122,164 15,342 12.6 Other investments........................................ 13,206 604 4.6 -------- -------- -------- Total interest-earning assets.......................... $204,307 $ 22,686 11.1% -------- -------- -------- Interest-Bearing Liabilities: Short-term and other borrowings.......................... 158,376 (12,897) 8.1 -------- -------- -------- Total interest-bearing liabilities..................... $158,376 $(12,897) 8.1% -------- -------- -------- Net interest income before provision for loan losses/spread(1)....................................... $ 9,789 3.0% ======== ======== Net interest margin(2)................................... 4.8% ========
- ------------------------ (1) Net interest spread represents the unweighted difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (2) Net interest margin represents net interest income divided by average interest-earning assets. 23
FOR THE YEAR ENDED DECEMBER 31, 1998 ------------------------------------------- AVERAGE ANNUALIZED BALANCE INTEREST INCOME YIELD/RATE (1) -------- --------------- -------------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios....................................... $121,295 $ 10,838 12.1% Mortgage-backed securities available for sale......... 195,112 14,674 10.2 Other securities available for sale................... 15,617 1,035 9.0 Other investments..................................... 23,597 1,145 6.5 -------- -------- -------- Total interest-earning assets....................... $355,621 $ 27,692 10.5% -------- -------- -------- Interest-Bearing Liabilities: Short-term borrowings 254,945 (13,608) 7.2 -------- -------- -------- Total interest-bearing liabilities.................. $254,945 $(13,608) 7.2% -------- -------- -------- Net interest income before provision for loan losses/ spread(2)........................................... $ 14,084 3.3% ======== ======== Net interest margin(3)................................ 5.4% ========
- ------------------------ (1) Although the Company was in existence for all of 1998, operations were commenced on April 6, 1998 at the time of the initial public offering. Therefore, rates and yields for the year ended December 31, 1998 are annualized to reflect the Company's period of operations from April 6, 1998 to December 31, 1998. (2) Net interest spread represents the unweighted difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average interest-earning assets and is annualized based on the period of operations from April 6 to December 31, 1998. For the year ended December 31, 1999, the Company recovered $1.1 million of the allowance for loan losses compared to a provision of $11.8 million for 1998. These amounts are not reflected in the net interest income/spread above. RECOVERY OF (PROVISION FOR) LOAN LOSSES. During the year ended December 31, 1999, we reversed a provision for losses of $3.9 million taken in prior periods for a loan held for sale. The loan was secured by commercial properties in the UK with a carrying value of approximately $47.9 million. This valuation allowance had been established in 1998 based upon management's estimate at that time of the ultimate recoverability of the asset. This provision reversal was partially offset by a provision for losses on loans of $0.1 million. In addition, we recognized a net write-down of $2.7 million in the carrying value of a $17.0 million note receivable from WFSG to reflect the estimated value of the common stock of WFSG to be received in exchange for a portion of the note. Total provision for losses for the year ended December 31, 1998 was $11.8 million, which included a $5.9 million valuation adjustment of an unsecured $18.4 million receivable from WFSG and $5.9 million of loan loss provisions (including the provision for the UK loan noted above). REAL ESTATE OPERATIONS. During the years ended December 31, 1999 and 1998, real estate operating income was comprised primarily of $7.1 million and $4.9 million, respectively, in gross rental and other income earned on such investments. Such revenue represents income generated from the Company's investment in various office buildings, retail stores, and other commercial property located in Oregon, California and the UK. Expenses incurred on such real estate investments include $4.5 million (1999) and $2.9 million (1998) of interest expense, $0.2 million (1999) and $0.3 million 24 (1998) of rental operating expense and $1.1 million (1999) and $1.0 million (1998) of depreciation expense. OTHER LOSS. Our other loss was approximately $32.6 million and $52.5 million for the years ended December 31, 1999 and 1998, respectively. The components of the Company's net non-interest loss is comprised of the following: MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses and Impairments" as used herein refers to impairment losses recognized primarily on our mortgage-backed securities and loan portfolios, as a result of the international economic and financial turmoil which severely affected the market for the Company's principal investments beginning in the third quarter of 1998. Total market valuation losses and impairments for the year ended December 31, 1999 were $30.0 million. This amount includes $19.6 million of market valuation losses and impairments related to our portfolio of mortgage-backed securities available for sale, $8.7 million related to our investment in newly-issued WFSG stock, $1.0 million related to fees for advisory services in connection with our investment in WFSG stock and $0.7 million related to our holdings of WFSG's 13% Series B Notes prior to their conversion to newly-issued WFSG stock. Total market valuation losses and impairments for the year ended December 31, 1998 were $54.8 million. Of this amount, $49.5 million was recognized during the third quarter to reflect losses on loans and securities that were (i) ultimately sold in the fourth quarter to meet collateral calls or to provide liquidity; or (ii) not sold but were deemed to be other than temporarily impaired, resulting from faster than expected loan prepayments or other factors. During the fourth quarter of 1998, an additional $5.3 million of market valuation losses and impairments was recorded to reflect additional other than temporary impairment on certain securities and other assets which have not been sold. Of the total $54.8 million recognized during 1998, $32.2 million relates to assets sold during the fourth quarter and $22.4 million relates to assets not sold. Included in the $22.4 million related to assets not sold is $11.3 million related to our investment in WFSG's 13% Series B Notes due 2004, which was converted to newly issued common stock of WFSG following its restructuring. This loss reflected the write-down of this asset to the estimated value of our proportionate share of the equity in the restructured WFSG. PROVISION FOR DISPUTES WITH WFSG. The Company decided to become internally managed in the third quarter of 1999 which resulted in disputes between the Company, on the one hand, and WFSG and certain of its affiliates, on the other. In connection with these disputes, the Company recorded a reserve for potential resolution of disputes with WFSG and its affiliates of $4.1 million at September 30, 1999. Following a partial settlement of disputes with WFSG, the remaining reserve for potential resolution of disputes with WFSG and its affiliates was $2.5 million at December 31, 1999. GAIN ON THE SALE OF SECURITIES. During the years ended December 31, 1999 and 1998, we sold mortgage-backed securities to unrelated third parties for approximately $46.6 million and $133.3 million, respectively, resulting in gains of approximately $1.3 million and $0.9 million, respectively. OPERATING EXPENSES. Management fees of $2.4 million and $3.2 million for the years ended December 31, 1999 and 1998, respectively, were comprised solely of the 1% (per annum) base management fee paid to WRSC (as provided pursuant to the Management Agreement between WRSC and the Company). WRSC earned no incentive fee for these periods. In addition to the management fee, we incurred loan service fees of $0.2 million and $0.7 million during the years ended December 31, 1999 and 1998, respectively, which were paid to WFSG or an affiliate of WFSG. The service fee structure was dependent on the assets being serviced, but in general, service fees related to loans purchased at a significant discount were based on a percentage of cash received and service fees related to other loans were based on a percentage of unpaid principal balance. We also incurred $0.1 million (1999) and $0.5 million (1998) of loan related expenses which were reimbursed to the servicer for actual out of pocket servicing costs. Other expenses were comprised of professional services, insurance premiums and other sundry expenses. 25 CHANGES IN FINANCIAL CONDITION During 2000, total assets decreased to $150.3 million from $218.9 million at December 31, 1999. This decrease was primarily the result of a net reduction of $29.8 million of securities available for sale and $38.5 million of investments in real estate. Total liabilities decreased to $94.7 million during the period, primarily as a result of a net decrease of $72.4 million in borrowings associated with sales of mortgage-backed securities, loans and investments in real estate. SECURITIES AVAILABLE FOR SALE. At December 31, 2000, securities available for sale included mortgage-backed securities with an aggregate market value of $74.7 million, net of realized and unrealized losses, compared to $104.6 million at December 31, 1999. This decrease of $29.9 million is primarily due to the sale of $46.4 million of securities, net principal payments received of $3.2 million partially offset by the purchase of $19.5 million of securities. In December 2000, we refinanced the debt on approximately $43.2 million of our mortgage-backed securities portfolio. This transaction was treated as a secured financing transaction rather than a sale for accounting purposes due to certain call provisions retained by the Company. As such, our balance sheet continues to reflect these securities as well as the senior bonds of $34.2 million which replaced the short-term, mark-to-market debt previously collateralized by these securities. We mark our securities portfolio to fair value at the end of each month based upon broker/dealer valuations (if available), subject to an internal review process. For those securities that do not have an available market quotation, we determine the fair value of the securities by modeling the anticipated cash flows using certain estimates (e.g. prepayment speeds, default rates, severity of losses, and discount rate). Because our subordinated securities may not be readily marketable, as trading activity may be infrequent, the market value is typically available from only a small group of broker/dealers, and in many cases, only one broker/dealer. As of each reporting period, we evaluate whether and to what extent any unrealized loss is to be recognized as other than temporary. LOAN PORTFOLIO. During the year ended December 31, 2000, we reduced our loan portfolio to approximately $30.4 million from $31.6 million at December 31, 1999. We maintain an allowance for loan losses at a level that the Company considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. During the year ended December 31, 2000, we recovered the remaining allowance for loan losses. INVESTMENTS IN REAL ESTATE. Investments in real estate decreased approximately $38.5 million during the year ended December 31, 2000. This decrease was primarily due to sales of five retail buildings and an office complex/warehouse distribution center, all located in the State of Oregon, with a carrying value of approximately $27.0 million, and the sale of office properties located in Portland, Oregon with a carrying value of $7.3 million. In addition, we recognized approximately $1.0 million of depreciation expense related to operating properties. We are currently in the process of marketing certain other commercial properties for sale as we continue to reduce our level of investment in commercial real estate income properties to increase liquidity for working capital and reinvestment opportunities. OTHER ASSETS. Other assets increased by approximately $8.4 million during the year ended December 31, 2000. This increase is primarily due to the deposit of $6.7 million for the purchase of a 26% interest in a UK-based real estate company. See ITEM 1. BUSINESS. The purchase was completed in the first quarter of 2001, together with the Company's partners who purchased the remaining 74% interest. SHORT-TERM BORROWINGS. Short-term borrowings decreased to approximately $18.2 million during the year ended December 31, 2000, resulting primarily from the sale of subordinated mortgage-backed securities and resecuritization of certain mortgage-backed securities. 26 Interest rates on borrowings under these facilities are generally based on 30-day London Interbank Offer Rate ("LIBOR") rates, plus a spread. Repurchase agreements are secured lending arrangements which involve the borrower selling an asset to a lender at a fixed price with the borrower having an obligation to repurchase the asset within a specified period (generally 30 days) at a higher price reflecting the interest cost of the loan. If the value of the underlying asset declines or the lender marks the asset lower, the lender may request that the amount of the loan be reduced by cash payments from the borrower or additional collateral be provided by the borrower (generally known as "collateral calls"). Accordingly, in an environment where lenders consistently mark down the value of the underlying assets, a borrower can become subject to significant collateral calls. If the borrower does not have sufficient cash to meet the collateral call or additional unencumbered assets to pledge, it may be forced to sell assets to repay the loan. If the Company experiences further downward marks to market of its assets subject to repurchase agreements, it could experience cash collateral calls, thereby reducing liquidity, or be forced to sell further assets, which could result in losses. LONG-TERM BORROWINGS. At December 31, 2000, we had $70.8 million of long-term borrowings. Of this amount, $17.5 million financed real estate investments of $22.4 million, $19.0 million financed a loan with an unpaid principal balance of $25 million and $34.2 million related to senior bonds issued as part of the resecuritization discussed above. Other borrowings had a weighted average interest rate of 9.58%. STOCKHOLDERS' EQUITY. Stockholders' equity increased to $55.7 million during the year ended December 31, 2000. The net increase in stockholders' equity during this period was primarily attributable to a decrease in accumulated other comprehensive loss of $21.0 million, offset by our net loss of $15.5 million. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund investments, engage in loan acquisition and lending activities, meet collateral calls and for other general business purposes. The primary sources of funds for liquidity during the year ended December 31, 2000 consisted of net cash provided by investing activities, including the cash repayments related to our mortgage-backed securities portfolio, sales of mortgage-backed securities and investments in real estate, and resecuritization of our securities portfolio. Our borrowings and the availability of further borrowings are substantially affected by, among other things, changes in interest rates, changes in market spreads whereby the market value of the collateral securing such borrowings may decline substantially, or decreases in credit quality of underlying assets. In the event of declines in market value or credit quality, we may be required to provide additional collateral for, or repay a portion of outstanding balances of, our short-term borrowing facilities. As of December 31, 2000, we had no outstanding collateral calls. For additional information with respect to our monthly mark-to-market of our securities available for sale portfolio, see "CHANGES IN FINANCIAL CONDITION--SECURITIES AVAILABLE FOR SALE." Fluctuations in interest rates will continue to impact our net interest income to the extent our fixed rate assets are funded by variable rate debt or our variable rate assets reprice on a different schedule or in relation to a different index than any floating rate debt which in turn could impact potential returns to shareholders. See "Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK." At December 31, 2000, we had total consolidated secured indebtedness of $88.9 million, as well as $5.7 million of other liabilities. The consolidated secured indebtedness consisted of (i) $34.9 million of repurchase agreements secured by $15.9 million of mortgage-backed securities and $19.0 million of loans, (ii) lines of credit aggregating $2.3 million which are secured by loans and securities and (iii) $51.7 million outstanding of other borrowings maturing between 2000 and 2020 which are secured 27 by real estate and loans. Approximately $37.2 million of this indebtedness had terms which allowed the lender to request additional collateral if the value of the underlying collateral declined (including financing facilities for both mortgage-backed securities and loans). Although the Company believes that the likelihood of significant declines in asset values has decreased since the third quarter of 1998, the Company is seeking to maintain a larger cash position and more unencumbered assets to deal with any future potential collateral calls. Loans are financed through both short-term and long-term financing facilities. If the value of the assets securing the loan declines as determined by the lender, the lender may request that the amount of the loan be reduced by cash payments form the borrower or additional collateral be provided by the borrower (generally known as "collateral calls"). Accordingly, in an environment where lenders consistently mark down the value of the underlying assets, a borrower can become subject to collateral calls, which can have a significant impact on liquidity. Similarly, if interest rates increase significantly, the borrowing cost under the financing facility may also increase while the interest rate on the assets securing the loan may not increase at the same time or to the same degree. Real property acquisitions are financed with intermediate or long-term mortgages with banks and other financial institutions. We have historically financed acquisitions of mortgage-backed securities through committed and uncommitted thirty-day repurchase agreements with major Wall Street investment banks. Repurchase agreements are secured lending arrangements which involve the borrower selling an asset to a lender at a fixed price with the borrower having an obligation to repurchase the asset within a specified period (generally 30 days) at a higher price reflecting the interest cost of the loan. If the lender marks the asset lower, the lender may request that the amount of the loan be reduced by cash payments from the borrower or additional collateral be provided by the borrower (generally known as "collateral calls"). Mortgage-backed securities which are subject to repurchase agreements, as well as loans which secure other indebtedness, periodically are revalued by the lender, and a decline in the value that is recognized by the lender (whether or not the lender recognizes the full fair value of the security) may result in the lender requiring us to provide additional collateral to secure the indebtedness. If we are unable to fund additional collateral requirements or to repay, renew or replace maturing indebtedness on terms reasonably satisfactory to us, we may be required to sell (potentially on short notice) a portion of our assets, and could incur losses as a result. Furthermore, since from time to time there is extremely limited liquidity in the market for subordinated and residual interests in mortgage-related securities, there can be no assurance that we will be able to dispose of such securities promptly for fair value in such situations. Although we are currently operating with negative cash flow (primarily due to the continued repayment of debt and refinancing of our mortgage-backed securities portfolio), we believe that our existing sources of funds will be adequate for purposes of meeting our short-term liquidity needs. There can be no assurance that this will be the case, however. Material increases in interest expense from variable-rate funding sources, collateral calls, or material decreases in monthly cash receipts, generally would negatively impact our liquidity. On the other hand, material decreases in interest expense from variable-rate funding sources, in collateral calls or an increase in market value of our mark-to-market financial assets generally would positively affect our liquidity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, and equity prices. Although the Company's exposure to foreign currency fluctuations has increased significantly during the year ended December 31, 2000 (approximately 19% of the Company's equity is invested in the United Kingdom at December 31, 2000), the primary market risk to which the Company is exposed is interest rate risk, which is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international 28 economic and political considerations, and other factors beyond the control of the Company. Changes in the general level of interest rates can affect the Company's net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with its interest-bearing liabilities, by affecting the spread between the Company's interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, the ability of the Company to acquire loans, the value of the Company's mortgage-backed securities and other interest-earning assets, and its ability to realize gains from the sale of such assets. It is the objective of the Company to attempt to control risks associated with interest rate movements. In general, the Company's strategy is to limit our exposure to earnings variations and variations in the value of assets and liabilities as interest rates change over time. Our asset and liability management strategy is formulated and monitored regularly to review, among other things, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, including those attributable to hedging transactions, purchase and securitization activity, and maturities of investments and borrowings. The following tables quantify the potential changes in net interest income and net portfolio value as of December 31, 2000 should interest rates go up or down (shocked) by 100 to 400 basis points, assuming the yield curves of the rate shocks will be parallel to each other and instantaneous. Net portfolio value is calculated as the sum of the value of off-balance sheet instruments and the present value of cash in-flows generated from interest-earning assets net of cash out-flows in respect of interest-bearing liabilities. The cash flows associated with the loan portfolios and securities available for sale are calculated based on prepayment and default rates that vary by asset but not by changes in interest rates. Projected losses, as well as prepayments, are generated based upon the actual experience with the subject pool, as well as similar, more seasoned pools. To the extent available, loan characteristics such as loan-to-value ratio, interest rate, credit history and product types are used to produce the projected loss and prepayment assumptions that are included in the cash flow projections of the securities. The following tables apply the U.S. Treasury yield curve generally for assets and LIBOR for repurchase agreement liabilities and assume a uniform change in both rates. The tables assume that changes in interest rates occur instantaneously. The tables also reflect that the Company has a significant exposure 29 to LIBOR rates since its short-term repurchase agreement borrowings are generally based on LIBOR rates. Actual results could differ significantly from those estimated in the tables.
PROJECTED PERCENT CHANGE IN - ----------------------------------------------------------------------- CHANGE IN INTEREST RATES(1) NET INTEREST INCOME NET PORTFOLIO VALUE - --------------------------- ------------------- ------------------- -400 Basis Points 31.2% 19.3% -300 Basis Points 23.4% 13.8% -200 Basis Points 15.6% 8.8% -100 Basis Points 7.8% 4.2% 0 Basis Points 0.0% 0.0% 100 Basis Points -7.8% -3.9% 200 Basis Points -15.6% -7.5% 300 Basis Points -23.4% -10.9% 400 Basis Points -31.2% -14.0%
- ------------------------ (1) Assumes that uniform changes occur instantaneously in both the yield on 10-year U.S. Treasury notes and the interest rate applicable to U.S. dollar deposits in the London interbank market.
CHANGE IN MONTHLY CHANGE IN CHANGE IN INTEREST RATES(1) NET INTEREST INCOME NET PORTFOLIO BALANCE - --------------------------- ------------------- --------------------- -400 Basis Points $ 156,698 $10,726,274 -300 Basis Points $ 117,523 $ 7,680,969 -200 Basis Points $ 78,349 $ 4,899,161 -100 Basis Points $ 39,174 $ 2,348,058 0 Basis Points -- -- 100 Basis Points $ (39,174) $(2,168,467) 200 Basis Points $ (78,349) $(4,177,335) 300 Basis Points $(117,523) $(6,043,734) 400 Basis Points $(156,698) $(7,782,412)
- ------------------------ (1) Assumes that uniform changes occur instantaneously in both the yield on 10-year U.S. Treasury notes and the interest rate applicable to U.S. dollar deposits in the London interbank market. 30 The following table sets forth information as to the type of funding used to finance the Company's assets as of December 31, 2000. As indicated in the table, a large percentage of the Company's fixed-rate assets are financed by floating-rate liabilities and the Company's variable-rate assets are generally funded by variable-rate liabilities which use the same index. ASSETS AND LIABILITIES AS OF DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)
INTEREST-BEARING ASSETS BASIS AMOUNT COUPON TYPE LIABILITY TYPE - -------------------------------------------------- ------------ ----------- --------- -------- Fixed-Rate Assets, Financed Floating.............. $ 60,876 Fixed $52,373 LIBOR Fixed-Rate Assets, No Financing................... 19,259 Fixed -- None Floating-Rate Assets, Financed Floating........... 25,000 LIBOR 19,025 LIBOR -------- ------- Subtotal........................................ 105,135 71,398 OTHER ASSETS - -------------------------------------------------- Investments in Real Estate........................ 24,767 N/A 17,532 Fixed Cash and Cash Equivalents......................... 3,394 N/A -- None Investments in WFSG and affiliates, net........... 5,593 N/A -- None Other............................................. 11,415 N/A -- None -------- ------- Subtotal........................................ 45,169 17,532 LIABILITY ONLY - -------------------------------------------------- Dividends......................................... -- 1,718 Fixed Accounts Payable and Accrued Liabilities.......... -- 4,005 None -------- ------- Subtotal........................................ -- 5,723 -------- ------- Total......................................... $150,304 $94,653 ======== =======
Asset and liability management involves managing the timing and magnitude of the repricing of assets and liabilities. It is the objective of the Company to attempt to control risks associated with interest rate movements. Asset and liability management can utilize a wide variety of off-balance sheet financial techniques to assist it in the management of interest rate risk. For example, in hedging the interest rate and exchange rate exposure of a foreign currency denominated asset or liability, we may enter into hedge transactions to counter movements in the different currencies as well as interest rates in those currencies. These hedges may be in the form of currency and interest rate swaps, options, and forwards, or combinations thereof. No such techniques were in use as of December 31, 2000. Methods for evaluating interest rate risk include an analysis of the Company's interest rate sensitivity "gap," which is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Since different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. 31 The following table sets forth the estimated contractual maturity or repricing of the Company's interest-earning assets and interest-bearing liabilities at December 31, 2000. AS OF DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)
WITHIN 4 TO 12 ONE YEAR TO MORE THAN 3 MONTHS MONTHS 3 YEARS 3 YEARS TOTAL -------- -------- ----------- --------- -------- INTEREST-SENSITIVE ASSETS(1) Cash and cash equivalents................. $ 3,394 $ -- $ -- $ -- $ 3,394 Securities available for sale............. -- -- -- 74,731 74,731 Loans(2).................................. 25,135 405 924 3,940 30,404 ------- ------ ------ ------- -------- Total rate-sensitive assets............. $28,529 $ 405 $ 924 $78,671 $108,529 ======= ====== ====== ======= ======== INTEREST-SENSITIVE LIABILITIES Short-term borrowings..................... $18,170 $ -- $ -- $ -- $ 18,170 Long-term borrowings...................... -- -- 1,058 69,702 70,760 Dividends payable......................... 859 858 -- -- 1,717 ------- ------ ------ ------- -------- Total rate-sensitive liabilities........ $19,029 $ 858 $1,058 $69,702 $ 90,647 ======= ====== ====== ======= ======== Interest rate sensitivity gap............... $ 9,500 $ (453) $ (134) $ 8,969 Cumulative interest rate sensitivity gap.... $ 9,500 $9,047 $8,913 $17,882 Cumulative interest rate sensitivity gap as a percentage of total rate-sensitive assets.................................... 9% 8% 8% 16%
- ------------------------ (1) Real estate property holdings are not considered interest rate sensitive. (2) Amortizing fixed rate loans are assumed to prepay at a Constant Prepayment Rate ("CPR") of 10%. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On November 12, 1999, the Board of Directors of the Company appointed the firm of Ernst & Young LLP to replace Arthur Andersen LLP as the principal accountant to audit the Company's financial statements. Arthur Andersen LLP was replaced due to a potential conflict of interest with the services it performed for WFSG and its affiliates. In the third quarter of 1999, the Company decided to become internally managed. Prior to this decision, the Company's business and investment affairs had been managed by WRSC pursuant to a management agreement and the Company had received managerial and administrative services from WRSC thereunder. The report of Arthur Andersen LLP on the financial statements of the Company for the 1998 year (the Company was formed on October 24, 1997, commenced operations on April 6, 1998 and was audited for the one year ended December 31, 1998) did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles, except that, in its report dated March 19, 1999, Arthur Andersen LLP included a matter-of-emphasis paragraph stating "As discussed in Note 1, Wilshire Realty Services Corporation, a wholly owned 32 subsidiary of Wilshire Financial Services Group Inc. ("WFSG"), is the manager of the Company. Furthermore, Wilshire Credit Corporation ("WCC"), an affiliate of WFSG, provides loan servicing and real property management services to the Company. On March 3, 1999, WFSG filed a voluntary prepackaged petition for relief under Chapter 11 of the U.S. Bankruptcy Code. The WFSG plan of reorganization includes the transfer of servicing operations conducted by WCC to a newly formed subsidiary of WFSG. As discussed in Note 2, the Company has also entered into several transactions with these affiliated entities." However, the report of Arthur Andersen LLP for 1998, dated March 19, 1999 and included in this Form 10-K, does not include the matter-of-emphasis paragraph. During the period from the Company's inception, October 24, 1997, through November 12, 1999 there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its report on the financial statements of the Company. 33 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth information about our executive officers and directors as of February 28, 2001. The business address of each executive officer and director is the address of the Company, 1631 SW Columbia Street, Portland, OR 97201, and each executive officer and director is a United States citizen. ANDREW A. WIEDERHORN, age 35, has been the Chairman of the Board of Directors and Chief Executive Officer of the Company since its formation. Mr. Wiederhorn also serves as Treasurer and Secretary. Until August 1999, Mr. Wiederhorn was also the Chairman of the Board of Directors, Chief Executive Officer, Secretary, Treasurer and a director for both WFSG and WRSC. In 1987, Mr. Wiederhorn founded Wilshire Credit Corporation ("WCC") and served as the Chief Executive Officer of WCC and certain of its affiliates until August 1999. Mr. Wiederhorn received his B.S. degree in Business Administration from the University of Southern California. LAWRENCE A. MENDELSOHN, age 39, has been a director and the President of the Company since its formation. Until August 1999, Mr. Mendelsohn was also the President of WFSG and WCC. From January 1992 until February 1993, Mr. Mendelsohn was Vice President, Principal and Head of Capital Markets for Emerging Markets at Bankers Trust New York Corporation/BT Securities Corporation. From August 1987 until January 1992, Mr. Mendelsohn was the Vice President, Senior Options Principal and Head of Proprietary Trading for Equities, Equity Options and Distressed Debt at J.P. Morgan and Co./J.P. Morgan Securities. Mr. Mendelsohn received an A.B. degree in Economics from the University of Chicago, an M.A. degree in International Politics from the University of Texas, an M.S. degree in Business Research from the University of Southern California and a Ph.D./ABD in Finance from the University of Southern California. DAVID C. EGELHOFF, age 52, has been a director of the Company since its formation. Mr. Egelhoff has been President of Macadam Forbes, Inc., a commercial real estate brokerage company headquartered in Portland, Oregon since 1981. Mr. Egelhoff is a licensed real estate broker who has extensive brokerage experience. He is a member of the Oregon and National Board of Realtors and the Builders and Owners Management Association. Mr. Egelhoff received a degree in Finance and Marketing from the University of Wisconsin-Madison in 1971. JORDAN D. SCHNITZER, age 49, has been a director since March 27, 1998. Mr. Schnitzer has been President of Jordan Schnitzer Properties, an owner and developer of commercial and residential properties in Oregon, Washington and California, since 1976. Mr. Schnitzer is also President of Harsch Investment Properties, LLC, which owns and operates a portfolio of properties in seven western U.S. states. Mr. Schnitzer received his undergraduate degree in Literature from the University of Oregon in 1973 and his J.D. from the Northwestern School of Law of Lewis and Clark College in 1976. PATRICK TERRELL, age 46, became a director of the Company on December 28, 1998. Mr. Terrell has been the principal owner of Terrell & Associate Investments, private investment company, since 1992. Mr. Terrell founded Leading Technology Company in 1986 and worked as the Chief Executive Officer until he sold the company in 1992. Mr. Terrell was also founder and Chief Executive Officer of Byte Shops Computer Stores, which he founded in 1976 and sold to Pacific Telesis in 1985. Mr. Terrell currently serves on the boards of R.S. Medical, United Soil Recycling, Microware, Inc., Electrical Distributing Inc., and Lakeside Associates. Mr. Terrell attended Oregon State University prior to forming Byte Shops Computer Stores in 1976. CHRIS TASSOS, age 43, has been Executive Vice President and Chief Financial Officer of the Company since its formation. Until October 1999, Mr. Tassos was Executive Vice President and Chief Financial Officer of WFSG and Executive Vice President of WCC. From August 1995 until June 1997, he was Senior Vice President of WCC. From March 1992 until February 1995, he was the Chief 34 Financial Officer and/or Senior Vice President of Finance of Long Beach Mortgage Company (formerly Long Beach Bank). From July 1979 until April 1984 and May 1985 until September 1990, Mr. Tassos was an auditor for Deloitte & Touche LLP. Mr. Tassos received a B.A. degree from California State University, Fullerton. ROBERT G. ROSEN, age 34, is Executive Vice President of the Company. From November 1997 until October 1999, Mr. Rosen was Senior Vice President, Asset Securitization and Capital Markets for WFSG. Mr. Rosen was the Vice President of Securitization at BTM Capital Corp., a wholly-owned subsidiary of the Bank of Tokyo-Mitsubishi, Ltd. from March 1997 until October 1997. From January 1995 until March 1997, Mr. Rosen was a Director of Black Diamond Advisors, Inc., a firm specializing in securitization and capital markets needs of finance companies. From January 1994 to January 1995, Mr. Rosen was with Kidder Peabody and Co. in the Asset-Backed Securitization Group. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires a company's directors and executive officers, and beneficial owners of more than 10% of the common stock of such company, to file with the Securities and Exchange Commission initial reports of ownership and periodic reports of changes in ownership of the company's securities. Based solely on a review of Forms 3, 4 and 5 and amendments thereto furnished to us for the year ended December 31, 2000, the Company's directors, officers, or beneficial owners of more than 10% of the Company's Common Stock timely furnished reports on Forms 3, 4 or 5, except Donald Berchtold, who filed a Form 4 for December late, Robert Rosen, who filed a Form 4 for September late, Patrick Terrell, who filed a Form 4 for August late, and Jordan Schnitzer, who filed a Form 4 for January late. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS During the nine months ended September 30, 2000, each non-employee director was paid an annual director's fee equal to $12,000, with no additional fee paid for the first four meetings of the Board of Directors. Each non-employee director received a fee of $1,000 for each additional meeting of the Board of Directors or committee thereof attended in person by such non-employee director, which is not a regularly scheduled quarterly meeting. For meetings attended telephonically, each of the non-employee directors received a fee of $100 per hour. The Board of Directors approved a new compensation arrangement for non-employee directors. Effective October 1, 2000, each non-employee director will be paid an annual director's fee equal to $50,000. Each non-employee director will also receive an annual fee equal to $25,000 for each committee upon which such non-employee director serves. All non-employee directors are reimbursed for their costs and expenses in attending all meetings of the Board of Directors. In addition, on the last day of each calendar quarter through September 30, 2000, each non-employee director receives a non-statutory stock option for 1,500 shares of Common Stock at an exercise price equal to 110% of the fair market value of the Common Stock on that day. Such grants vest one-third on each of the first three anniversaries of the grant date and expire on the tenth anniversary of the grant date. Effective October 1, 2000, the directors no longer receive these quarterly grants. SUMMARY COMPENSATION TABLE The following table sets forth the total compensation paid or accrued by the Company for services rendered during the last two fiscal years to the Chief Executive Officer of the Company, and to each of the four other most highly compensated executive officers of the Company whose total cash 35 compensation for the year ended December 31, 2000 exceeded $100,000 (the "Named Executive Officers").
LONG-TERM COMPENSATION ANNUAL COMPENSATION --------------------- ---------------------------------- SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS/SARS(#) - ----------------------------------------------- -------- --------- ----------- --------------------- Andrew A. Wiederhorn........................... 2000 $393,750 $345,921 -- Chairman, Chief Executive Officer, 1999 $ 84,091 -- 630,000 Secretary and Treasurer Lawrence A. Mendelsohn......................... 2000 $321,875 $208,845 -- President 1999 $ 77,083 -- 350,000 Robert G. Rosen................................ 2000 $254,808 $841,250 -- Executive Vice President, Capital 1999 $ 46,627 $310,909 210,000 Markets Chris Tassos................................... 2000 $250,000 $162,500 -- Executive Vice President and 1999 $ 46,627 $ 92,424 120,000 Chief Financial Officer Matthew Green.................................. 2000 $167,900 $ 50,000 -- Vice President 1999 $ 27,983 -- 10,000
- ------------------------ (1) Bonuses for 1999 are shown net of a $555,000 reimbursement from WFSG to the Company under a settlement agreement. During the year ended December 31, 1998 and until their employment with the Company, the executive officers of the Company did not receive any compensation from the Company for their services. To the extent such officers were also officers of WFSG, they were compensated by WFSG for their services. WFSG is the parent company of WRSC, which received certain fees from the Company for management services it provided the Company under a management agreement. Following the Company's decision to become internally managed, the Company entered into the employment agreements with its executive officers described above. SEE ITEM 1.--BUSINESS. EMPLOYMENT AND OTHER ARRANGEMENTS The Company has entered into employment agreements with Andrew A. Wiederhorn (as Chief Executive Officer), Lawrence A. Mendelsohn (as President), Robert G. Rosen (as Executive Vice President) and Chris Tassos (as Chief Financial Officer) (each an "Executive" and collectively, the "Executives"). The employment agreements with Messrs. Wiederhorn, Mendelsohn and Rosen were amended and restated effective October 1, 2000. Each such employment agreement provides for an initial three-year term commencing October 1, 2000 which is automatically renewable for successive two-year terms unless either party gives written notice to the other at least 90 days prior to the expiration of the then employment term. The employment agreement with Mr. Tassos provides for an initial three-year term commencing October 1, 1999 which is automatically renewable for successive two-year terms unless either party gives written notice to the other at least 90 days prior to the expiration of the then employment term. The employment agreements provide for an annual base salary of $750,000 for Mr. Wiederhorn, $500,000 for Mr. Mendelsohn, and $250,000 for Mr. Rosen and Mr. Tassos (which may be increased, but not decreased, by the Compensation Committee of the Board of Directors) and an annual bonus for each. 36 For each 12-month period commencing October 1, 2000, Mr. Wiederhorn and Mr. Mendelsohn are entitled to share in a bonus pool based upon the Company achieving certain performance goals. Mr. Wiederhorn will be entitled to receive an annual bonus equal to 45% of the bonus pool and Mr. Mendelsohn will be entitled to receive an annual bonus equal to 30% of the bonus pool. If the Company's return on equity (as defined in the employment agreements) determined on a post bonus basis is 15% or more, Mr. Wiederhorn and Mr. Mendelsohn will be entitled to share in a bonus pool equal to 25% of the Company's after-tax income (prior to subtracting the amount of the bonuses paid by the Company). If the Company's return on equity (as defined in the employment agreements) determined on a post bonus basis is 10% or greater but less than 15%, Mr. Wiederhorn and Mr. Mendelsohn will be entitled to share in a bonus pool equal to 20% of the Company's after-tax income (prior to subtracting the amount of the bonuses paid by the Company). If the Company's return on equity (as defined in the employment agreements) determined on a post bonus basis is between 5% or greater but less than 10%, Mr. Wiederhorn and Mr. Mendelsohn will be entitled to share in a bonus pool equal 10% of the Company's after-tax income (prior to subtracting the amount of the bonuses paid by the Company). If the return on equity (as defined in the employment agreements) determined on a post bonus basis is less than 5%, Mr. Wiederhorn and Mr. Mendelsohn will not be entitled to a bonus. For the period commencing October 9, 1999 and ending on November 30, 2000, Mr. Rosen was entitled to receive a bonus in the amount of $368,004. The bonus was paid to Mr. Rosen in January 2001 based upon the Company materially achieving a majority of the following goals during the bonus period: (i) reduction or elimination of the liability risk associated with short-term, mark-to-market financing for those applicable assets, (ii) sale, upgrade of the ratings or improvement in the marketability of some or all of the Company's mortgage-backed securities, (iii) focus on and/or implementation of a successful resolution strategy for the Cityscape mortgage-backed securities position, (iv) completion and closure of the "P.O." deal, subject to acceptable structure, (v) exploration and provision of advice to the Company on the process of launching a collateralized bond obligation or other form of long-term financing or take-out strategy for the mortgage-backed securities portfolio and (vi) demonstration of the ability to functionally work 50% of the time away from the Portland office (as a result of being in the New York office or traveling on behalf of the Company). In addition, for each 12-month period commencing October 1, 2000, Mr. Rosen is entitled to an annual bonus of $850,000, of which $725,000 will be a minimum guaranteed bonus payable on a quarterly basis and the remainder will be an incentive bonus. An incentive bonus of $62,500 will be earned by Mr. Rosen, if one of the following two performance goals is obtained: (1) sale of the Company's GI Joes commercial real estate retail and warehouse portfolio; or (2) sale of the Company's Irwindale land investment by September 3, 2001. An incentive bonus of $62,500 will be earned by Mr. Rosen, if two of the following four performance goals are obtained: (1) an annual increase in the Company's book value from September 3, 2001; (2) the Company's income, excluding charges from the impairment of mortgage-backed securities, divided by its net shareholders' equity, exceeds the 10 year U.S. Treasury note yield as measured using the rate in effect on the first business day of each period beginning October 1; (3) the Company's Funds From Operations, including capital gains and losses, but excluding charges from the impairment of mortgage backed securities, exceeds $5 million; or (4) a recovery of more than $2,000,000 in the Company's unrealized loss allowance for its existing mortgage-backed securities portfolio of WFSG and subsidiary or affiliate issued deals from October 1, 2000 to September 30, 2001. For each 12-month period commencing September 30, 1999, Mr. Tassos is entitled to receive an annual bonus based upon the Company achieving certain performance goals. If the Company's return on equity (as defined in the employment agreement) determined on a post bonus basis is 5% or greater but less than 10%, Mr. Tassos will be entitled to receive an annual bonus pool equal to $162,500. If the Company's return on equity (as defined in the employment agreement) determined on a post bonus basis is 10% or greater but less than 15%, Mr. Tassos will be entitled to receive a bonus equal to $212,500. If the Company's return on equity (as defined in the employment agreement) 37 determined on a post bonus basis is 15% or greater, Mr. Tassos will be entitled to receive a bonus equal to $312,500. If the return on equity (as defined in the employment agreement) determined on a post bonus basis is less than 5%, Mr. Tassos will not be entitled to a bonus, unless the Compensation Committee awards Mr. Tassos a discretionary bonus. The employment agreements also provide that a portion of the annual bonus may be advanced to the Executive on a quarterly basis; provided, however, that advances shall be repaid in the event the relevant quarterly performance goals are not obtained. The employment agreements also provide that the Executives may participate in the Company's Stock Plan. The employment agreements also provide that during the Employment Term and thereafter, the Company will indemnify the Executives to the fullest extent permitted by law, in connection with any claim against the Executive as a result of the Executive serving as an officer or director of the Company or in any capacity at the request of the Company in or with regard to any other entity, employee benefit plan or enterprise. Following the Executives' termination of employment, the Company will continue to cover the Executives even if the Executives have ceased to serve in such capacity. The Executive may terminate his employment agreement at any time for Good Reason or with or without Good Reason during the Change in Control Protection Period (if a Change in Control occurs) (capitalized terms as defined in the agreement). If Mr. Wiederhorn or Mr. Mendelsohn terminates his employment agreement at any time for Good Reason or with or without Good Reason during the Change in Control Protection Period (if a Change in Control occurs), or if Mr. Wiederhorn or Mr. Mendelsohn is terminated by the Company without Cause or the employment agreement is not renewed in accordance with the employment agreement, the Executive will be entitled to receive (i) any unreimbursed business expenses, (ii) any base salary, bonus, vacation pay or other deferred compensation accrued or earned but not yet paid at the date of termination, (iii) the estimated annual bonus payable to the Executive pro rated through the end of the month in which the Executive is terminated, and (iv) one year's base salary in effect on the date of termination. If Mr. Rosen terminates his employment agreement at any time for Good Reason or with or without Good Reason during the Change in Control Protection Period (if a Change in Control occurs), or if Mr. Rosen is terminated by the Company without Cause or the employment agreement is not renewed in accordance with the employment agreement, Mr. Rosen will be entitled to receive (i) any unreimbursed business expenses and (ii) any base salary, bonus, vacation pay or other deferred compensation accrued or earned but not yet paid at the date of termination, and after Mr. Rosen signs a release of claims he will be entitled to receive (i) one year's base salary in effect on the date of termination and (ii) an amount equal to one full year's bonus (regardless of whether performance goals were attained). If Mr. Tassos terminates his employment agreement at any time for Good Reason or with or without Good Reason during the Change in Control Protection Period (if a Change in Control occurs), or if Mr. Tassos is terminated by the Company without Cause or the employment agreement is not renewed in accordance with the employment agreement, Mr. Tassos will be entitled to receive (i) the estimated annual bonus payable to the Executive for the annual period, pro rated through the end of the month in which the Executive is terminated, (ii) any unreimbursed business expenses and (iii) any base salary, bonus, vacation pay or other deferred compensation accrued or earned but not yet paid as of the date of termination. The Executive will also be entitled (in the case of Mr. Rosen, after signing a release of claims) to (i) accelerated full vesting under all outstanding equity-based and long-term incentive plans with options remaining outstanding as provided under the applicable stock option plan and a pro rata payment under any long term incentive plans based on actual coverage under such plans payment being made at the time payments would normally be made under such plans; (ii) any other amounts or benefits due Executive under the then applicable employee benefit plans of the Company (in accordance with such plan, policy or practice); (iii) one year of additional service and compensation 38 credit (at his then compensation level) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company, measured from the date of termination of employment and not credited to the extent that Executive is otherwise entitled to such credit during such one year period, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (iv) one year of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) measured from the date of termination under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); and (v) continued medical coverage for the Executive, his spouse and dependents for one year. If termination is the result of Executive's death, the Company will pay to the Executive's spouse (or his estate), an amount equal to (i) any earned but not yet paid compensation, (ii) a pro-rated bonus plus, in the case of Mr. Rosen an additional six months of bonus, (iii) accelerated full vesting under all outstanding equity--based and long term incentive plans with options remaining outstanding as provided under the applicable stock option plan and a pro rata payment under any long term incentive plans based on actual coverage under such plans at the time payments normally would be made under such plans, (iv) any other amounts or benefits due under then applicable employee benefit plans of the Company (in accordance with such plan, policy or practice), (v) payment on a monthly basis of six months of base salary to Executive's spouse or dependents and (vi) continued medical coverage for the Executive's spouse and dependents for up to one year. In addition, the Executive will receive accelerated full vesting under all outstanding equity-based and long-term incentive plans. If Executive's employment is terminated by reason of disability, the Executive will be entitled to receive payments and benefits to which his representatives would be entitled in the event of his termination by reason of death, provided that the payment of base salary will be reduced by any long-term disability payments under any policy maintained by the Company. If the Executive is terminated by the Company with Cause or the Executive terminates his employment without Good Reason outside of the Change in Control Protection Period, the Executive will be entitled to receive only his base salary through the date of termination, the estimated annual bonus pro-rated through the last day of the month in which the Executive is terminated, and any unreimbursed business expenses. The employment agreements also provide for the Company to make a recourse loan to each Executive up to $50,000 annually for the purchase of the Company's stock by such Executive up to a maximum of $250,000 (other than in the case of Mr. Rosen for whom there is no maximum). The loans bear interest at the prime rate. Interest is not paid in cash but payable in kind on an annual basis (i.e., compounded annually). Upon termination, the loan becomes due and payable six months after the date of termination. At December 31, 2000, the Company had outstanding loans of $1,026,000 to the Executives. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors of the Company (the "Committee") administers the executive compensation programs of the Company. From January 1, 2000 through September 19, 2000, the members of the Committee were Andrew A. Wiederhorn, Lawrence A. Mendelsohn, David C. Egelhoff and Patrick Terrell. Effective September 20, 2000, the Board of Directors appointed David C. Egelhoff, Patrick Terrell and Jordan D. Schnitzer, all of whom are independent directors as the members of the Committee. All actions of the Committee pertaining to executive compensation are submitted to the Board of Directors for approval. The Company's executive compensation program is designed to attract, retain, and motivate high caliber executives and to focus the interests of the executives on objectives that enhance stockholder 39 value. These goals are attained by emphasizing "pay for performance" by having a portion of the executive's compensation dependent upon business results and by providing equity interests in the Company. The principal elements of the Company's executive compensation program are base salary, bonus, and stock options. In addition, the Company recognizes individual contributions as well as overall business results, using a discretionary bonus program. BASE SALARY. Base salaries for the Company's executives are intended to reflect the scope of each executives' responsibilities, the success of the Company, and contributions of each executive to that success. Executive salaries are adjusted gradually over time and only as necessary to meet this objective. Increases in base salary may be moderated by other considerations, such as geographic or market data, industry trends or internal fairness within the Company. The base salaries for Andrew A. Wiederhorn, Lawrence A. Mendelsohn, Robert G. Rosen and Chris Tassos for 2000 are set forth in their respective employment agreements. BONUSES. The Company paid annual bonuses in 2000. The Committee determined the amount of the annual discretionary and other bonuses paid by the Company. STOCK OPTION PLAN. At its initial public offering in April 1998, the Company adopted the Stock Plan. The purpose of the Stock Plan is to enable the Company to attract, retain and motivate key employees and directors by providing them with equity participation in the Company. Accordingly, the Stock Plan permits the Company to grant stock options, restricted stock and stock appreciation rights (collectively "Awards") to employees, directors, consultants, and vendors of the Company and subsidiaries of the Company. The Board of Directors has delegated administration of the Stock Plan to the Committee. Under the Stock Plan, the Committee may grant stock options with an exercise price not less than the fair market value of the shares covered by the option on the date the option is granted. The Committee may also grant Awards of restricted shares of Common Stock. Each restricted stock Award would specify the number of shares of Common Stock to be issued to the recipient, the date of issuance, any consideration for such shares and the restrictions imposed on the shares (including the conditions of release or lapse of such restrictions). The Committee may also grant Awards of stock appreciation rights. A stock appreciation right entitles the holder to receive from the Company, in cash or Common Stock, at the time of exercise, the excess of the fair market value at the date of exercise of a share of Common Stock over a specified price fixed by the Committee in the Award, multiplied by the number of shares as to which the right is being exercised. The specified price fixed by the Committee will not be less than the fair market value of shares of Common Stock at the date the stock appreciation right was granted. In 2000, no options were issued to executive officers and employees. RESTRICTED STOCK TRUST. In the fourth quarter of 2000, the Company established a trust which purchased 525,000 shares of the Company's common stock from an unrelated shareholder. The Company's contribution to the trust of approximately $1.3 million is included in the Company's compensation expenses. The trust was established for the benefit of the Company's employees and directors to raise their ownership in the Company, thereby strengthening the mutuality of interests between them and the Company's shareholders. While these shares are held in trust, they will be voted ratably with ballots cast by all other shareholders. Lawrence Mendelsohn, Andrew Wiederhorn, and David Egelhoff are the trustees for the trust. Pursuant to the terms of the trust, the trustees will, from time to time, allocate the Contributed Shares to the Company's employees. An employee shall not have any rights with respect to any Contributed Shares allocated to him unless and until the employee completes five years of continuous service with the Company, commencing with the date the employee is first allocated such shares. Upon the 40 employee's completion of the vesting period, the trustees shall promptly distribute to such employee the shares allocated to such employee; provided, however, that the trustees may, in lieu of distributing the shares, make a cash payment to the employee equal to the fair market value of the shares allocated to such employee as of the date immediately prior to the date of distribution or distribute any combination of cash or shares, as determined by the trustees, in their sole discretion. As of February 28, 2001, the trustees had not allocated any shares to the Company's employees or directors. POLICY OF DEDUCTIBILITY OF COMPENSATION. Section 162(m) of the Internal Revenue Code limits the Company's tax deduction to $1 million for compensation paid to the Named Executive Officers, unless certain requirements are met. One of these requirements is that compensation over $1 million must be performance based. The Committee intends to continue to use performance-based compensation in the future, which should minimize the effect of this deduction limitation. However, the Committee strongly believes that its primary responsibility is to provide a compensation program that will attract, retain and reward the executive talent necessary to maximize the return to stockholders, and that the loss of a tax deduction may be necessary in some circumstances. Base salary does not qualify as performance-based compensation under IRS regulations. CEO COMPENSATION AND PRESIDENT COMPENSATION. Andrew A. Wiederhorn was appointed the Company's Chief Executive Officer and Lawrence A. Mendelsohn was appointed its President at its formation. The base salary for each of these officers for 2000 was determined by the Committee and is set forth in their employment agreements. COMPENSATION COMMITTEE David C. Egelhoff Patrick Terrell Jordan Schnitzer 41 PERFORMANCE GRAPH The Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Securities Act or the Exchange Act. The following Performance Graph covers the period beginning April 6, 1998 when our Common Stock was first traded on the NASDAQ Stock Market through December 31, 2000. The graph compares the shareholder return on the Company's Common Stock to the Standard & Poor's 500 Stock Index ("S&P 500") and a peer group of companies ("PGI"). EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
APR 6 1998 DEC 31 1998 DEC 31 1999 DEC 31 2000 FCCG $100 $18.56 $12.88 $14.39 PGI $100 $42.01 $27.99 $31.41 S&P 500 $100 $109.62 $131.02 $117.74
MEASUREMENT PERIOD(1)(2) ----------------------------------------------------- APRIL 6, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1998 1999 2000 -------- ------------ ------------ ------------ Company........................................ $100.00 $ 18.56 $ 12.88 $ 14.39 PGI(3)......................................... $100.00 $ 42.01 $ 27.99 $ 31.41 S&P 500........................................ $100.00 $109.62 $131.02 $117.74
- ------------------------ (1) Assumes all distributions to stockholders are reinvested on the payment dates. (2) Assumes $100 invested on April 6, 1998 in our Common Stock, the S&P 500 Index and the PGI. (3) The companies included in the PGI are Anthracite Capital, Amresco Capital Trust Inc., Resource America Inc., Dynex Capital Inc., Hanover Capital Mortgage Holdings, Novastar Financial Inc. and Capital Trust. 42 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows as of February 28, 2001 the beneficial ownership of common stock with respect to (i) each person who was known by the Company to own beneficially more than 5% of the outstanding shares of the Company's common stock, (ii) each director and nominee for director, (iii) each executive officer named below, and (iv) directors and executive officers as a group.
AMOUNT AND NATURE OF PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) CLASS - ------------------------------------------------------------ ------------------------ ---------- Andrew A. Wiederhorn........................................ 979,137(3) 9.2 Lawrence A. Mendelsohn...................................... 612,760(4) 5.8 Donald Berchtold............................................ 11,114(5) * Matthew Green............................................... 2,500(6) * Robert L. Moir.............................................. 5,000(7) * Robert G. Rosen............................................. 367,167(8) 3.5 Robert A. Sprouse III....................................... 2,500(6) * R. Scott Stevenson.......................................... 2,600(6) * Chris Tassos................................................ 47,943(9) * David C. Egelhoff........................................... 60,800(10) * Jordan D. Schnitzer......................................... 563,500(10) 5.3 Patrick Terrell............................................. 490,700(11) 4.6 Clarence B. Coleman and Joan F. Coleman..................... 637,189(12) 6.1 All executive officers and directors as a group (12 persons).................................................. 3,145,721(13) 28.6
- ------------------------------ (1) The address for each stockholder is c/o Fog Cutter Capital Group Inc., 1631 SW Columbia Street, Portland, OR 97201. (2) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Shares of Common Stock subject to options or warrants exercisable within 60 days of February 28, 2001 are deemed outstanding for computing the percentage beneficially owned by the person or group holding such options or warrants, but are not deemed outstanding for computing the percentage of any other person. Except as noted, each shareholder has sole voting power and sole investment power with respect to all shares beneficial owned by such shareholder. (3) Includes 603,001 shares of Common Stock held by Mr. Wiederhorn's spouse, 38,636 shares of Common Stock held by Mr. Wiederhorn's minor children, and 100,000 shares of Common Stock held by a partnership controlled by Mr. Wiederhorn's spouse. Also includes 157,500 shares of Common Stock issuable upon the exercise of outstanding options. (4) Includes 17,150 shares of Common Stock held by Mr. Mendelsohn's spouse and 403,102 shares of Common Stock held by two limited liability companies controlled by Mr. Mendelsohn's spouse and 80,000 shares of Common Stock held by a limited partnership controlled by Mr. Mendelsohn and his spouse. Also includes 87,500 shares of Common Stock issuable upon exercise of outstanding options. (5) Includes 152 shares of Common Stock held by Mr. Berchtold's spouse, 1,374 shares of Common Stock held in trust for Mr. Berchtold's minor child, and 3,758 shares of Common Stock held by Mr. Berchtold's minor child. Also includes 2,500 shares issuable upon the exercise of outstanding options. (6) Includes 2,500 shares of Common Stock issuable upon the exercise of outstanding options. (7) Includes 5,000 shares of Common Stock issuable upon the exercise of outstanding options. (8) Includes 59,167 shares of Common Stock issuable upon the exercise of outstanding options. (9) Includes 38,333 shares of Common Stock issuable upon the exercise of outstanding options. (10) Includes 48,500 shares of Common Stock issuable upon the exercise of outstanding options. (11) Includes 46,500 shares of Common Stock issuable on the exercise of outstanding options and 194,200 shares held by Mr. Terrell's spouse. (12) Based upon information obtained from a Schedule 13D filed with the Securities and Exchange Commission on or about August 26, 1999. (13) Includes 501,000 shares of Common Stock issuable upon the exercise of outstanding options. * Less than one percent. 43 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS WFSG AND ITS AFFILIATES BACKGROUND Prior to September 1999, the Company and WFSG had the same senior management team (though the Company had a different stockholder base and the majority of its directors were independent), and the Company's business affairs and day-to-day operations were managed by WRSC, pursuant to a management agreement ("Management Agreement"). After September 1999, the Company's independent directors decided that the Company should be internally managed and the Company and WFSG ceased to have the same senior executives and no longer had any common directors. Accordingly, the Company no longer views WFSG and its subsidiaries as affiliated parties. RELATIONSHIPS PRIOR TO SEPTEMBER 1999 Prior to September 1999, we had a number of contractual relationships with WFSG and its affiliates. The Company had entered into loan servicing agreements with WCC, an affiliate of WFSG, and Wilshire Servicing Company U.K. Limited, a wholly-owned subsidiary of WFSG (collectively, the "Servicers"). Under these servicing agreements, the Servicers provided loan and real property management services to us, including billing, portfolio administration and collection services. In return, we agreed to pay each of the Servicers a fee at market rates for servicing our investments and to reimburse them for certain out-of-pocket costs. During 1999, servicing fees and reimbursement for expenses totaled $256,000 and $49,000, respectively, and management fees under the Management Agreement totaled $2,404,000. We prepaid $3.2 million of future service fees as part of the WFSG and WCC restructuring described below, although WFSG had disputed this amount in the past (as well as servicing eligibility for application of the credit), suggesting that the original amount was $2.3 million. CONFLICTS RELATING TO WFSG'S RESTRUCTURING A conflict of interest also arose out of our status as a creditor of WFSG in connection with its debt restructuring. In addition to holding certain of WFSG's publicly traded notes, we had an outstanding receivable of approximately $17.0 million from WFSG, which bore interest at 13% per annum. WFSG incurred significant losses as a result of adverse market conditions in 1998 and on March 3, 1999 filed a prepackaged plan of reorganization (the "Restructuring Plan") with the U.S. Bankruptcy Court for the District of Delaware as part of a voluntary bankruptcy filing under Chapter 11 of the U.S. Bankruptcy Code. Prior to the solicitation of WFSG's Restructuring Plan, the unofficial noteholders committee of WFSG (which did not include the Company) negotiated a compromise and settlement of the Company's claim against WFSG in respect of the $17.0 million receivable. The Company's independent directors represented it in connection with the compromise and settlement negotiations. Under this compromise and settlement, if the Company funded the full amount of the debtor-in-possession facility described below, the Company would have received a new note for the full amount of the receivable bearing interest at 6% per annum, payable monthly in arrears and treated the same as the other holders of WFSG's 13% Series B Notes. The business decision to provide the debtor-in-possession facility was based on the independent directors' desire to obtain the best possible treatment for the Company's holdings of WFSG's 13% Series B Notes and the account receivable due from WFSG and the fact that the debtor-in-possession facility had priority as a matter of law and was fully secured by the stock of WFSG's banking subsidiary, First Bank of Beverly Hills, F.S.B. Without funding of the debtor-in-possession facility, it is unlikely that the Company would have received as favorable treatment for its investments. The new note bore interest at 6%, and therefore, the carrying value of the receivable was reduced by $5.9 million at December 31, 1998 to reflect the reduction in interest rate. 44 The court approved the Restructuring Plan on April 12, 1999 and, on June 10, 1999; WFSG emerged from bankruptcy pursuant to the Restructuring Plan. As part of the Restructuring Plan, during the quarter ended March 31, 1999, the Company agreed to provide WFSG with debtor-in-possession financing pursuant to which the Company agreed to lend up to $10.0 million (the "DIP Facility"). The DIP Facility bore interest at a rate of 12% per annum and was secured by the stock of First Bank of Beverly Hills, FSB. The DIP Facility would have matured on February 29, 2004 and repayment was required through fully amortizing principal and interest payments commencing on February 29, 2000. Prior to February 29, 2000, only interest payments were required. The Company loaned $5.0 million under the DIP Facility on March 3, 1999 and did not provide WFSG with the remaining balance. Accordingly, under the agreement negotiated by the Company's non-employee directors with WFSG and its creditors, 50%, or approximately $8.5 million, of WFSG's obligation was treated PARI PASSU with the claims of WFSG's noteholders and converted, together with approximately $21.4 million (in principal plus accrued but unpaid interest) of WFSG's 13% Series B Notes, to 2,874,791 shares of newly issued common stock of WFSG on June 10, 1999, the effective date of the Restructuring Plan. Additionally, on the effective date of the Restructuring Plan, the Company acquired approximately $8.5 million in principal amount of WFSG's 6% Convertible PIK Notes due 2006 (the "PIK Notes") in exchange for the remaining 50% of the $17.0 million intercompany receivable owed by WFSG to the Company. In connection with the restructuring of WCC's debt, we paid $15 million to WCC in January 1999, consisting of a payment of amounts owed by the Company to WCC of $11.8 million and the prepayment of $3.2 million of future service fees for a release of a $35 million guarantee by the Company of WCC's indebtedness and of any and all claims against us by the guaranteed party. At that time, we had approximately $3.2 million of prepaid future service fees with WCC. However, this figure (as well as servicing eligibility for application of the credit) had been disputed by WFSG in the past, which claimed that the amount owed to WCC was approximately $900,000 higher thereby reducing the amount of the prepayment credit to $2.3 million. RELATIONS FOLLOWING SEPTEMBER 1999 The decision to become internally managed and cease to utilize the services of WFSG and its affiliates resulted in disputes between the Company and WFSG, which included disputes over the termination of the Management Agreement, the applicability of a facilities sharing agreement and other matters. On August 20, 1999, the Company filed a lawsuit (the "Lawsuit") against WFSG in the Circuit Court of the State of Oregon for Multnomah County and on August 23, 1999, the Company filed an amended complaint in the lawsuit adding as additional defendants WRSC, WCC, a 50.01% subsidiary of WFSG, and Wilshire Management Leasing Corporation ("WML"), a wholly-owned subsidiary of WFSG alleging: (1) WFSG's termination of Messrs. Wiederhorn and Mendelsohn made WFSG and WRSC unable and/or unwilling to provide management to the Company as required under the Management Agreement; (2) the inability of WFSG and WRSC to manage the Company's business affairs triggered application of a facilities sharing agreement dated February 19, 1999 among the Company, WFSG, WRSC, WCC, and WML (the "Facilities Sharing Agreement"); and (3) WFSG's refusal to allow Messrs. Wiederhorn and Mendelsohn access to WFSG's facilities, personnel, and equipment for the Company's business violated the terms of the Facilities Sharing Agreement. On September 22, 1999, WFSG and WRSC filed papers in the above litigation alleging various affirmative defenses and counterclaims, including allegations that the Facilities Sharing Agreement was not in effect and was not enforceable, and that the Company breached the Management Agreement, obligating the Company to pay a termination fee. The Company entered into a partial settlement agreement dated as of December 10, 1999 with WFSG, pursuant to which the Company repurchased 992,687 shares of its common stock (the "Shares"), representing approximately 8.7% of shares outstanding, in a non-cash transaction from 45 WFSG. The Shares, as well as 1,112,500 of options and cumulative dividends payable on the Shares, were received in exchange for a reduction in value of the PIK Notes owed by WFSG to the Company. The Shares and options represented WFSG's entire ownership interest in the Company. In October 1999, the Company also purchased from WFSG approximately $20.9 million of mortgage-backed securities as part of these settlement discussions. On February 18, 2000, after the Company received permission from the court to do so, the Company filed a Second Amended Complaint which added claims against WFSG and its affiliated companies as follows: claims for declaratory relief that WFSG is entitled to no termination fee under the Management Agreement; seeking an accounting from WCC regarding the use of funds from lockbox accounts used to service assets which the Company owns or in which the Company has a beneficial interest; declaring the Company's entitlement to use prepaid service fees for the servicing of assets serviced under pooling and servicing agreements; and declaring WFSG to be in default of its Debtor-in-Possession ("DIP") loan agreement with the Company and declaring that the balance of $5.0 million is immediately due and payable. On March 2, 2000, WFSG filed an answer disputing each of the counterclaims added by the Second Amended Complaint, and realleging the counterclaims included in WFSG's original answer and counterclaim. In March 2000, we terminated the servicing relationship in the United Kingdom with the European Servicer and transferred this servicing to an unaffiliated third party. We also terminated all loan and real property servicing in the United States with WCC, reserving our rights to do so with respect to certain mortgage-backed securities. In July 2000, the court granted summary judgment to Andrew A. Wiederhorn and Lawrence A. Mendelsohn with respect to certain claims that had been made by WFSG against Messrs. Wiederhorn and Mendelsohn. On August 28, 2000, the Company announced that the Company, on behalf of itself and all of its subsidiaries and affiliates, Andrew A. Wiederhorn and Lawrence A. Mendelsohn entered into settlement agreements, dated as of August 17, 2000, with WFSG, on behalf of all of its subsidiaries and affiliates other than First Bank of Beverly Hills, F.S.B., pursuant to which all disputes among the parties have been settled, including those related to WFSG's termination of Andrew A. Wiederhorn and Lawrence A. Mendelsohn (the "Settlement"). The settlement agreements contain provisions, which provide that, except as required for compliance with laws or government requests, the terms of the Settlement shall remain confidential. As part of the Settlement, the Company and WFSG agreed to dismiss with prejudice, and without costs or attorney fees to any party, their claims, including counterclaims, in the Lawsuit and WFSG agreed that the termination of Messrs. Wiederhorn and Mendelsohn was without cause. LOANS TO OFFICERS The employment agreements with Messrs. Wiederhorn, Mendelsohn, Rosen, and Tassos provide for the Company to make a recourse loans to each executive up to $50,000 annually for the purchase of the Company's stock by such executive up to a maximum of $250,000 (other than in the case of Mr. Rosen for whom there is no maximum). The loans bear interest at the prime rate. Interest is not paid in cash but payable in kind on an annual basis (i.e., compounded annually). Upon termination of any such executive, the executive's loans will become due and payable six months after the date of termination. At December 31, 2000, the Company had outstanding loans to Messrs. Wiederhorn, Mendelsohn, and Rosen of approximately $104,000, $53,000, and $869,000, respectively. 46 FOG CUTTER LONG-TERM VESTING TRUST In the fourth quarter of 2000, the Company established a trust which purchased 525,000 shares of the Company's common stock from an unrelated shareholder. The Company's contribution to the trust of approximately $1.3 million is included in the Company's compensation expenses. The trust was established for the benefit of the Company's employees and directors to raise their ownership in the Company, thereby strengthening the mutuality of interests between them and the Company's shareholders. While these shares are held in trust, they will be voted ratably with ballots cast by all other shareholders. Andrew Wiederhorn, Lawrence Mendelsohn and David Egelhoff are the trustees for the trust. Pursuant to the terms of the trust, the trustees will, from time to time, allocate the shares to the Company's employees. An employee shall not have any rights with respect to any shares allocated to him unless and until the employee completes five years of continuous service with the Company, commencing with the date the employee is first allocated such shares. Upon the employee's completion of the vesting period, the trustees shall promptly distribute to such employee the shares allocated to such employee; provided, however, that the trustees may, in lieu of distributing the shares, make a cash payment to the employee equal to the fair market value of the shares allocated to such employee as of the date immediately prior to the date of distribution or distribute any combination of cash or shares, as determined by the trustees, in their sole discretion. As of February 28, 2001, the trustees had not allocated any shares to the Company's employees or directors. 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Financial Statements Consolidated Statements of Financial Condition at December 31, 2000 and 1999 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 All financial statement schedules of the Company are omitted because they are not required or are not applicable. (b) Reports on Form 8-K filed during the fourth quarter of the period covered by this report: Current Report on Form 8-K filed October 25, 2000 announcing the sale of five retail buildings and an office complex/warehouse/distribution center, totaling 444,864 square feet, to Madrona Park II, LLC, an unaffiliated third party. Pro forma financial information giving effect to sale was filed as an exhibit to the Current Report on Form 8-K. (c) Exhibits See Exhibit Index immediately following the signature pages. 48 INDEX TO FINANCIAL STATEMENTS
PAGE -------- Report of Independent Auditors--Ernst & Young LLP........... F-2 Report of Independent Public Accountants--Arthur Andersen LLP....................................................... F-3 Consolidated Financial Statements: Consolidated Statements of Financial Condition at December 31, 2000 and 1999......................................... F-4 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998............................................. F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998............................................. F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998............................................. F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 REPORT OF INDEPENDENT AUDITORS--ERNST & YOUNG LLP To the Board of Directors and Stockholders of Fog Cutter Capital Group Inc.: We have audited the accompanying consolidated statements of financial condition of Fog Cutter Capital Group Inc. and Subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fog Cutter Capital Group Inc. and Subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Los Angeles, California February 8, 2001 F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Fog Cutter Capital Group Inc.: We have audited the accompanying consolidated statements of operations, changes in stockholders' equity and cash flows of Fog Cutter Capital Group Inc. and Subsidiaries (the "Company") for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated statements of operations, changes in stockholders' equity and cash flows referred to above presents fairly, in all material respects, the consolidated results of operations, changes in stockholders' equity and cash flows of Fog Cutter Capital Group Inc. and Subsidiaries for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. /S/ ARTHUR ANDERSEN LLP Los Angeles, California March 19, 1999 F-3 FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------------- 2000 1999 -------- -------- ASSETS Cash and cash equivalents................................... $ 3,394 $ 5,862 Securities available for sale, at fair value................ 74,731 104,572 Loans, net.................................................. 30,404 31,634 Investments in real estate held for sale.................... 24,767 63,225 Investments in WFSG and affiliates, net..................... 5,593 9,657 Accrued interest receivable................................. 522 1,246 Other assets................................................ 10,893 2,470 -------- -------- Total assets................................................ $150,304 $218,666 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Short-term borrowings..................................... $ 18,170 $ 96,815 Long-term borrowings...................................... 70,760 64,550 Accounts payable and accrued liabilities.................. 4,006 2,339 Dividends payable......................................... 1,717 4,090 -------- -------- Total liabilities..................................... 94,653 167,794 -------- -------- Commitments and contingencies (Note 11) Stockholders' Equity: Preferred stock, $.0001 par value; 25,000,000 shares authorized; no shares issued and outstanding............ -- -- Common stock, $.0001 par value; 200,000,000 shares authorized; 11,500,000 shares issued; and 10,507,313 shares outstanding........ 166,981 166,981 Treasury stock; 992,687 common shares, at cost............ (2,171) (2,171) Accumulated deficit....................................... (106,077) (90,717) Recourse loans to officers to acquire stock............... (1,026) (198) Accumulated other comprehensive loss...................... (2,056) (23,023) -------- -------- Total stockholders' equity............................ 55,651 50,872 -------- -------- Total liabilities and stockholders' equity.................. $150,304 $218,666 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Net Interest Income: Loans............................................... $ 3,900 $ 6,740 $ 10,838 Securities.......................................... 10,718 15,342 15,709 Other investments................................... 460 604 1,145 ----------- ----------- ----------- Total interest income............................. 15,078 22,686 27,692 Interest expense.................................... 7,704 12,897 13,608 ----------- ----------- ----------- Net interest income before loan losses............ 7,374 9,789 14,084 Recovery of (provision for) loan losses............. 555 1,150 (11,842) ----------- ----------- ----------- Net interest income after loan losses............. 7,929 10,939 2,242 Real Estate Operations: Operating income.................................... 4,870 7,148 4,939 Operating expense................................... (601) (205) (345) Interest expense.................................... (2,742) (4,546) (2,853) Gain on sale of real estate......................... 5,404 1,042 -- Provision for losses on real estate................. -- (892) -- Depreciation........................................ (993) (1,102) (963) ----------- ----------- ----------- Total real estate operations...................... 5,938 1,445 778 Other Operating (Loss) Income: Market valuation losses and impairments............. (22,257) (30,029) (54,822) Provision for disputes with WFSG.................... (225) (4,077) -- Gain on sale of securities.......................... 5,197 1,326 943 Gain on sale of loans............................... 159 -- 1,320 Other income, net................................... 29 180 23 ----------- ----------- ----------- Total other operating loss........................ (17,097) (32,600) (52,536) Operating Expenses: Compensation and employee benefits.................. 7,869 1,353 -- Management fees..................................... -- 2,404 3,179 Professional fees................................... 1,973 1,250 1,220 Servicing fees...................................... 154 256 691 Other............................................... 2,316 1,168 1,782 ----------- ----------- ----------- Total operating expenses.......................... 12,312 6,431 6,872 ----------- ----------- ----------- NET LOSS.............................................. $ (15,542) $ (26,647) $ (56,388) =========== =========== =========== BASIC AND DILUTED NET LOSS PER SHARE.................. $ (1.48) $ (2.33) $ (4.94) WEIGHTED AVERAGE SHARES OUTSTANDING................... 10,507,313 11,442,921 11,421,933
The accompanying notes are an integral part of these consolidated financial statements. F-5 FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
RECOURSE LOANS TO ACCUMULATED COMMON STOCK TREASURY STOCK OFFICERS TO OTHER --------------------- ------------------- ACCUMULATED ACQUIRE COMPREHENSIVE SHARES(1) AMOUNT SHARES AMOUNT DEFICIT STOCK LOSS TOTAL ---------- -------- -------- -------- ----------- ----------- ------------- -------- Initial capital.............. -- $ 2 -- $ -- $ -- $ -- $ -- $ 2 Issuance of common stock..... 11,500,000 166,979 -- -- -- -- -- 166,979 Comprehensive loss: Net loss................... -- -- -- -- (56,388) -- -- (56,388) Other comprehensive loss: Foreign currency translation............ -- -- -- -- -- -- (7) (7) Unrealized holding losses on securities available for sale............... -- -- -- -- -- -- (67,817) (67,817) Reclassification adjustment for losses on securities included in net loss............ -- -- -- -- -- -- 37,379 37,379 -------- Total comprehensive loss..... (86,833) Dividends declared........... -- -- -- -- (7,705) -- -- (7,705) ---------- -------- ------- ------- --------- ------- -------- -------- Balance at December 31, 1998....................... 11,500,000 166,981 -- -- (64,093) -- (30,445) 72,443 Comprehensive loss: Net loss................... -- -- -- -- (26,647) -- -- (26,647) Other comprehensive loss: Foreign currency translation............ -- -- -- -- -- -- (148) (148) Unrealized holding losses on securities available for sale............... -- -- -- -- -- -- (12,015) (12,015) Reclassification adjustment for losses on securities included in net loss............ -- -- -- -- -- -- 19,585 19,585 -------- Total comprehensive loss..... (19,225) Treasury stock acquired...... (992,687) -- 992,687 (2,171) -- -- -- (2,171) Recourse loans to officers to acquire stock.............. -- -- -- -- -- (198) -- (198) Discount on dividend purchase................... -- -- -- -- 23 -- -- 23 ---------- -------- ------- ------- --------- ------- -------- -------- Balance at December 31, 1999....................... 10,507,313 166,981 992,687 (2,171) (90,717) (198) (23,023) 50,872 Comprehensive income: Net loss................... -- -- -- -- (15,542) -- -- (15,542) Other comprehensive income: Foreign currency translation............ -- -- -- -- -- -- (345) (345) Unrealized holding losses on securities available for sale............... -- -- -- -- -- -- (3,880) (3,880) Reclassification adjustment for losses on securities included in net loss............ -- -- -- -- -- -- 25,192 25,192 -------- Total comprehensive income... 5,425 Recourse loans to officers to acquire stock.............. -- -- -- -- -- (828) -- (828) Discount on dividend purchase................... -- -- -- -- 182 -- -- 182 ---------- -------- ------- ------- --------- ------- -------- -------- Balance at December 31, 2000....................... 10,507,313 $166,981 992,687 $(2,171) $(106,077) $(1,026) $ (2,056) $ 55,651 ========== ======== ======= ======= ========= ======= ======== ========
- ------------------------------ (1) Issued and outstanding. The accompanying notes are an integral part of these consolidated financial statements. F-6 FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(15,542) $(26,647) $(56,388) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation............................................ 1,144 1,102 963 Amortization of premiums and accretion of discounts, net..................................................... (145) (377) (1,322) (Recovery of) provision for loan losses................. (555) (1,150) 11,842 Provision for losses on real estate..................... -- 892 -- Market valuation losses and impairments................. 22,257 30,029 54,822 (Gain) loss on foreign currency translation............. (29) 24 -- Gain on sale of securities.............................. (5,197) (1,326) (943) Gain on sale of loans................................... (159) -- (1,320) Gain on sale of real estate............................. (5,404) (1,042) -- Change in: Investments in WFSG and affiliates, net............... 2,764 (15,034) (6,591) Accrued interest receivable........................... 724 792 (1,939) Other assets.......................................... (1,653) (559) (2,673) Accounts payable and accrued liabilities.............. 1,704 (3,919) 8,033 -------- -------- -------- Net cash (used in) provided by operating activities........................................... (91) (17,215) 4,484 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of securities available for sale................. (19,481) (30,420) (365,919) Repayments of securities available for sale............... 3,244 19,588 5,517 Proceeds from sale of securities available for sale....... 51,627 46,585 133,327 Purchase of loans......................................... (361) (663) (672,919) Principal repayments on loans............................. 2,042 39,802 21,907 Proceeds from sale of real estate......................... 43,448 20,131 -- Proceeds from sale of loans............................... 359 48,366 515,386 Investments in real estate................................ (2,215) (223) (85,648) Deposits in escrow........................................ (6,719) -- -- Other..................................................... (872) 117 428 -------- -------- -------- Net cash provided by (used in) investing activities........................................... 71,072 143,283 (447,921) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings....................... 11,068 22,301 529,851 Repayments on short-term borrowings....................... (89,713) (132,162) (306,085) Proceeds from securitized mortgage obligations............ -- -- 372,318 Repayment of securitized mortgage obligations............. -- -- (372,318) Proceeds from long-term borrowings........................ 36,356 -- 60,940 Repayments on long-term borrowings........................ (28,787) (14,622) (363) Dividend payments on common stock......................... (2,209) (486) (3,105) Proceeds from issuance of common stock.................... -- -- 166,981 Other..................................................... 15 -- -- -------- -------- -------- Net cash (used in) provided by financing activities........................................... (73,270) (124,969) 448,219 -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (179) (19) -- -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (2,468) 1,080 4,782 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 5,862 4,782 -- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 3,394 $ 5,862 $ 4,782 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest.................................... $ 11,393 $ 19,589 $ 12,655 Cash paid for taxes....................................... $ -- $ -- $ -- NONCASH FINANCING AND INVESTING ACTIVITIES: Investment in WFSG........................................ $ -- $ 3,104 $ -- Purchase of treasury stock and securities available for sale...................................................... $ -- $ (4,591) $ -- Common stock dividend declared but not paid............... $ -- $ -- $ 4,600 Additions to investment in real estate acquired in settlement of loans....................................... $ -- $ -- $ 348
The accompanying notes are an integral part of these consolidated financial statements. F-7 FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND AS NOTED) NOTE 1--ORGANIZATION AND RELATIONSHIPS The Company was originally incorporated as Wilshire Real Estate Investment Trust Inc. in the State of Maryland on October 24, 1997. The Company was initially formed with a capital investment of $2 thousand. On April 6, 1998, the Company was capitalized with the sale of 11,500,000 shares of common stock, par value $.0001 per share, at a price of $16.00 per share (the "Offering"). Total net proceeds of the Offering after underwriting and offering expenses were $167.0 million. In September 1999, in order to benefit from significant net operating loss carryforwards and to avoid any risk of not qualifying as a real estate investment trust ("REIT"), the Company, with the approval of its shareholders, elected not to be taxed as a REIT, and the Company's name was changed to Wilshire Real Estate Investment Inc. Effective January 25, 2001, the Company changed its name to Fog Cutter Capital Group Inc. to better reflect the opportunistic nature of its business and investments. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS--The operations of the Company consist primarily of the acquisition of pools of performing, sub-performing and non-performing residential and commercial mortgage loans, as well as commercial real estate and mortgage-backed securities. The Company's primary sources of revenue are from loans, mortgage-backed securities and real estate. PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of Fog Cutter Capital Group Inc. and its subsidiaries, including Fog Cap L.P. (formerly Wilshire Real Estate Partnership L.P.), WREP 1998-1 LLC, Fog Cutter Securities Corporation (formerly WREI Securities Corporation), Fog Cutter Servicing Inc. (formerly WREI Mortgage Inc.) and WREP Islands Limited. Intercompany accounts have been eliminated in consolidation. USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS--The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Significant estimates include valuation allowances for loans and real estate owned, the determination of fair values of certain financial instruments for which there is no active market, the allocation of basis between assets sold and retained, the evaluation of other than temporary market value declines, and the selection of yields utilized to recognize interest income on certain mortgage-backed securities. Estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS--For purposes of reporting the consolidated financial condition and cash flows, cash and cash equivalents include non-restricted cash and due from banks, repurchase agreements and securities with original maturities of 90 days or less. SECURITIES AVAILABLE FOR SALE--Securities available for sale include mortgage-backed securities and other securities that are designated as assets available for sale because the Company does not intend to hold them to maturity. Securities available for sale are carried at estimated fair values with the net unrealized gains or losses reported in accumulated other comprehensive loss, which is included as a separate component in stockholders' equity. The Company records its securities portfolio at estimated fair value at the end of each month based upon available broker/dealer valuations (if available), subject to an internal review process. For those securities that do not have an available market quotation, the Company determines the fair value of the securities by modeling the anticipated cash flows using certain assumptions (e.g. prepayment speeds, default rates, severity of losses, and discount rate). As of F-8 NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) each reporting period, the Company evaluates whether and to what extent any decline in the estimated fair values is to be recognized in earnings as other than temporary. Other than temporary declines in the carrying value of securities, if any, are charged to earnings and the basis of each security is adjusted, accordingly. At disposition, the realized net gain or loss is included in earnings on a specific identification basis. The amortization of premiums and accretion of discounts are computed using the interest method after considering actual and estimated prepayment rates, if applicable. Actual prepayment experience and the yields are reviewed at least quarterly. The Company considers securities available for sale to be impaired if the Company is unable to demonstrate the ability to hold such asset until a temporary decline in the market value reverses or the aggregate anticipated cash flows on such asset discounted to present value are not expected to exceed the Company's amortized basis in such asset. The Company currently believes that it has a reasonable expectation to recover its amortized basis in securities available for sale based on its post-impairment basis in these securities. LOANS--The Company acquires loan portfolios for prices generally at par or at a premium or discount to the principal face amount (i.e., unpaid principal balance plus accrued interest) and re-performing and sub-performing loan portfolios for prices generally at or below their principal amount. Unaccreted discounts or premiums represent the portion of the difference between the purchase price and the principal face amount on specific loans that is available for accretion to the income statement. The allowance for loan losses includes valuation allowances for estimated losses against the principal face amount that are established at acquisition and for subsequent valuation adjustments that are provided for through current period earnings and are based on discounted future cash flows or the fair value of the underlying real estate collateral for collateral dependent loans. If total cash received on a pool of loans exceeds original estimates, excess specific valuation allowances are recorded as additional discount accretion on the cost-recovery method. The allocated specific valuation allowances are included in the allowance for loan losses. Where appropriate, discounts are accreted into interest income on a cash basis. Interest income is recognized on an accrual basis. Deferred fees and costs and premiums are recognized in interest income over the life of the loan using a method that approximates the interest method. Certain loans are designated as held for sale and are presented at the lower of cost or fair value. If fair value is less than cost, a valuation allowance is recorded through a charge to earnings to reduce the carrying value to fair value. The Company evaluates loans for impairment. Commercial and multi-family real estate loans are considered to be impaired, for financial reporting purposes, when it is probable that the Company will be unable to collect all principal or interest due, according to the contractual terms of the loan agreement. Specific valuation allowances are established either at acquisition or through provisions for loan losses, as described above, for impaired loans based on the fair value of the underlying collateral. All specific valuation allowances established for pools of loans are recorded in the allowance for loan losses. The allowance for each pool is decreased by the amount of loans charged off and is increased by the provision for estimated losses on loans and recoveries of previously charged-off loans. The allowance for each pool is maintained at a level believed adequate by management to absorb probable losses. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, previous loan loss experience, current economic conditions, volume, growth and composition of the portfolio and other relevant factors. Actual losses may differ from management's estimates. It is the Company's policy to establish an allowance for uncollectible interest on performing loans that are past due more than 90 days or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are placed on nonaccrual status and deemed to be non-performing. When a F-9 NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed by a charge to interest income. INVESTMENTS IN REAL ESTATE--Real estate purchased directly is originally recorded at the purchase price. Real estate acquired in settlement of loans is originally recorded at fair value less estimated costs to sell. Any excess of net loan cost basis over the fair value less estimated selling costs of real estate acquired through foreclosure is charged to the allowance for loan losses. Any subsequent operating expenses or income, reductions in estimated fair values, as well as gains or losses on disposition of such properties, are recorded in current operations. Depreciation on investments in real estate is computed using the straight-line method over the estimated useful lives of the assets as follows. Buildings and improvements............... 35 years Tenant improvements...................... Lesser of lease term or useful life
Expenditures for repairs and maintenance are charged to operations as incurred. Significant renovations are capitalized and amortized over their expected useful lives. Fees and costs incurred in the successful negotiation of leases are deferred and amortized on a straight-line basis over the terms of the respective leases. Rental revenue is reported on a straight-line basis over the terms of the respective leases. INCOME TAXES--The Company files its income tax returns with the relevant tax authorities in the United States on a consolidated basis. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is not probable that some portion or all of the deferred tax assets will be realized. NET LOSS PER SHARE--Basic EPS excludes dilution and is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. During the years ended December 31, 2000, 1999 and 1998, however, the Company experienced a net loss, which resulted in common stock equivalents having an anti-dilutive effect on earnings per share. Weighted average shares outstanding are therefore equivalent for basic and diluted net loss per share. RECLASSIFICATION--Certain items in the consolidated financial statements for 1999 and 1998 were reclassified to conform to the 2000 presentation. NOTE 3--RECENTLY ISSUED ACCOUNTING STANDARDS In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, AN AMENDMENT OF FASB STATEMENT NO. 133 ("FAS 138") which amends certain provisions of Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("FAS 133"). These statements establish accounting and financial reporting for derivative instruments and hedging activities and will require the Company to recognize and report all derivative instruments at their fair value in the Company's consolidated statement of financial position with changes in fair value recorded generally in operations. These statements become effective for the F-10 NOTE 3--RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED) Company on January 1, 2001. The Company believes that the effect, if any, that FAS 133 and FAS 138 will have on the Company's operations and financial position will not be material upon adoption. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES ("FAS 140"). FAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Other provisions of the statement are effective for fiscal years ended after December 15, 2000 and include additional disclosure requirements and changes related to the recognition and reclassification of collateral. We do not expect FAS 140 will have a material effect on our earnings and financial position. FAS 140 disclosures are included in Note 4. NOTE 4--SECURITIES AVAILABLE FOR SALE At December 31, 2000 and 1999, securities available for sale were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST(1) GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- DECEMBER 31, 2000 Mortgage-backed securities.......... $ 76,288 $ -- $ 1,557 $ 74,731 DECEMBER 31, 1999 Mortgage-backed securities.......... $127,799 $3,487 $26,714 $104,572
- ------------------------ (1) The amortized cost of the securities reflects impairment adjustments deemed to be other than temporary. The total amount of impairment write-downs of $21.4 million and $19.6 million has been included in market valuation losses and impairments in the accompanying consolidated statements of operations for the years ended December 31, 2000 and 1999, respectively. The Company expects to receive payments on securities over periods that are considerably shorter than the contractual maturities of the securities, which range from 6 to 30 years due to prepayments. At December 31, 2000, the net unrealized loss on available-for-sale mortgage-backed securities totaled approximately $1.6 million. In the opinion of management, these losses represent temporary declines in the fair values of such securities. These unrealized gains and losses are reflected in "Accumulated other comprehensive loss" in stockholders' equity. Should management's estimates of the temporary nature of these market value declines change in the future to other than temporary, such changes would be reflected as losses in the Company's consolidated statement of operations. At December 31, 2000, approximately $55.6 million of securities available for sale were pledged to secure borrowings (see Note 7). During the quarter ended June 30, 2000, the Company resecuritized approximately $20.1 million of its mortgage-backed securities portfolio which resulted in no gain or loss. The cash proceeds to the Company from the resecuritization were approximately $20.1 million and no other cash flows occurred between the Company and the trust through December 31, 2000. As part of the resecuritization transaction, the Company acquired a subordinated interest in the underlying trust for approximately $6.3 million. The fair value of the Company's investment in the resecuritized mortgage-backed securities is determined at each reporting date as the present value of the anticipated cash flows from the underlying collateral (primarily "A" quality, jumbo, fixed-rate, 15- to 30-year term loans) using certain assumptions. These assumptions include: (i) future rate of prepayment; (ii) discount rate used to calculate present value; and (iii) default rates and loss severity on loan pools underlying the mortgage-backed securities in the resecuritization. At the time of the resecuritization, the key economic assumptions to determine the fair value of the retained subordinated interests were an annual F-11 NOTE 4--SECURITIES AVAILABLE FOR SALE (CONTINUED) prepayment speed of 12%, an annual default rate of 0.20%, a loss severity of 32% and a discount rate of 20%. At December 31, 2000, key economic assumptions and the sensitivity of the current fair value of the subordinated interest to immediate 10% and 20% adverse changes in assumed economics were as follows: FAIR VALUE OF THE SUBORDINATED INTEREST............. $6,933 PREPAYMENT SPEED (ANNUAL RATE)...................... 9% Fair value after 10% adverse change................. $6,635 Fair value after 20% adverse change................. $6,345 DEFAULT RATE (ANNUAL RATE).......................... 0.22% Fair value after 10% adverse change................. $6,254 Fair value after 20% adverse change................. $5,659 LOSS SEVERITY....................................... 32% Fair value after 10% adverse change................. $6,248 Fair value after 20% adverse change................. $5,646 DISCOUNT RATE (ANNUAL RATE)......................... 20% Fair value after 10% adverse change................. $6,418 Fair value after 20% adverse change................. $5,903
These sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption: in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increase credit losses), which might magnify or counteract the sensitivities. The outstanding balance (unpaid principal balance) of the underlying residential mortgage loans totaled $13.9 billion at December 31, 2000. Mortgage-backed securities sold and the underlying residential mortgage loans are serviced by entities unrelated to the Company. At December 31, 2000, underlying loans of $12.2 million were delinquent on their payments by greater than 90 days. Cumulative losses on the underlying loans were $1.7 million through December 31, 2000. NOTE 5--LOANS The Company's loans are comprised of the following loan categories at December 31, 2000 and 1999:
DECEMBER 31, ------------------- 2000 1999 -------- -------- Unpaid principal balance of real estate loans: Commercial.............................................. $30,231 $34,624 Over four residential units............................. - 349 ------- ------- Total loans secured by real estate...................... 30,231 34,973 Other loans............................................... 173 -- Less: Allowance for loan losses............................... -- 2,980 Discount on purchased loans and deferred fees........... -- 359 ------- ------- $30,404 $31,634 ======= =======
F-12 NOTE 5--LOANS (CONTINUED) As of December 31, 2000 and 1999, the unpaid principal balances of loans with adjustable rates of interest were $25.0 million and $26.1 million, respectively, and loans with fixed rates of interest were $5.4 million and $8.8 million, respectively, before allowances and discounts. Adjustable-rate loans are generally indexed to LIBOR and are subject to limitations on the timing and extent of adjustment. Most loans adjust within one month of changes in the index. At December 31, 2000 and 1999, substantially all loans were pledged to secure borrowings. At December 31, 2000, the Company had no impaired loans. Activity in the allowance for loan losses is summarized as follows:
YEAR ENDED DECEMBER 31, ------------------- 2000 1999 -------- -------- Balance, beginning of period............................... $2,980 $11,108 Charge-offs................................................ (2,457) (7,364) Recovery of loan losses.................................... (555) (1,150) Other...................................................... 32 386 ------ ------- Balance, end of period..................................... $ -- $ 2,980 ====== =======
NOTE 6--INVESTMENTS IN REAL ESTATE At December 31, 2000 and 1999, the Company's investments in real estate were comprised of the following:
DECEMBER 31, ------------------- 2000 1999 -------- -------- Commercial and multi-family real estate: Building and improvements................................. $23,521 $60,071 Undeveloped land.......................................... 2,391 4,633 Less: Accumulated depreciation............................ (1,145) (1,848) ------- ------- 24,767 62,856 Other real estate owned, net.............................. -- 369 ------- ------- $24,767 $63,225 ======= =======
At December 31, 2000 approximately $20.0 million or 80.7% of the investments in commercial and multi-family real estate were located in the United Kingdom and the remainder of commercial or multi-family properties were located in the United States. Effective October 1, 1999, the Company holds its investments in real estate as held for sale at lower of cost, less accumulated depreciation, or market value, not to exceed the net realizable value of the properties on an individual basis. F-13 NOTE 7--SHORT-TERM BORROWINGS Short-term borrowings at December 31, 2000 and 1999 include repurchase agreements, line of credit borrowings and other short-term borrowings. Proceeds from the various credit facilities are used primarily for the acquisition of mortgage-backed securities and loan pools. Following is information about short-term borrowings:
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------- 2000 1999 ----------- ----------- Average amount outstanding during the year.................. $67,399 $155,473 Maximum month-end balance outstanding during the year....... $90,658 $203,742 Weighted average rate: During the year........................................... 8.7% 8.2% At end of year............................................ 7.6% 8.9%
In certain instances, lenders on mortgage-backed securities have withheld principal and/or interest payments on such assets in order to reduce outstanding, unpaid collateral calls. At December 31, 2000 and 1999, there were no outstanding unpaid collateral calls. NOTE 8--LONG-TERM BORROWINGS At December 31, 2000, the Company had $70.8 million of long-term borrowings with a weighted average interest rate of 9.10%. Investments in real estate with a carrying amount of $22.4 million and a loan with an unpaid principal balance of $25 million were pledged as collateral against these borrowings. Maturities of these borrowings range from 2002 to 2020. At December 31, 2000, the contractual repayment terms of long-term borrowings and estimated repayment of the senior bonds issued in conjunction with a resecuritization for each of next five years and the total thereafter is as follows:
YEAR AMOUNT - ------------------------------------------------------------ -------- 2001........................................................ $ 5,455 2002........................................................ 8,706 2003........................................................ 9,370 2004........................................................ 8,671 2005........................................................ 3,592 Thereafter.................................................. 34,966 ------- $70,760 =======
The Company is subject to various covenants in the agreements evidencing its indebtedness. At December 31, 2000, management believes the Company was in compliance with all obligations under the agreements evidencing its indebtedness, as defined in the applicable agreements. NOTE 9--DIVIDENDS PAYABLE During the years ended December 31, 2000 and 1999, the Company did not declare any cash dividends. The Company delayed the payment date of a $0.40 cash dividend payable on October 27, 1998 to shareholders of record at September 30, 1998. The Company will pay interest, at the rate of 4% per annum, on the amount due from the previously announced payment date through the date of the actual payment. During the year ended December 31, 2000, the Company paid one-half of the cash dividend payable plus interest and intends on paying the remainder equally on March 28, 2001 and F-14 NOTE 9--DIVIDENDS PAYABLE (CONTINUED) June 28, 2001, subject to the financial condition, results of operations and capital requirements of the Company as well as other factors deemed relevant by the Board of Directors. In 2000, the Company purchased the dividend rights to approximately $0.7 million at a 25% discount. In 1999, the Company purchased the dividend rights to approximately $0.1 million at a 20% discount from a shareholder and $0.4 million from WFSG. NOTE 10--INCOME TAXES The Company originally was formed with a view of qualifying as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. However, to qualify as a REIT, the Company must first make an affirmative election to be taxed as a REIT when the Company files its federal income tax return. Due to the significant potential tax benefits from net operating loss carryforwards of the Company and risks of not qualifying as a REIT, the Company reevaluated its original plan to elect to be taxed as a REIT. On September 10, 1999, the Company's shareholders voted not to elect REIT status and, as a result, the Company will be subject to corporate taxation. As of December 31, 2000, the Company had, for U.S. Federal tax purposes, a net operating loss carryforward of approximately $90 million, which begins to expire in 2018. U.S. tax regulations impose limitations on the use of loss carryforwards following certain changes in ownership. If such a change were to occur with respect to the Company, the limitation could significantly reduce the amount of benefits that would be available to offset future taxable income each year, starting with the year of ownership change. To reduce the potential impact of such ownership changes, the Company established a Shareholder Rights Plan dated as of December 23, 1999 and effective January 3, 2000. The Company has not recorded any tax assets for the future benefits of the net operating loss carryforwards. A reconciliation, stated as a percentage of pretax loss, of the U.S. federal statutory rate to the effective tax rate on the loss from continuing operations is as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- U.S. federal statutory rate............................... (35.0)% (35.0)% (34.0)% State taxes, net of federal benefit....................... (6.9) (6.9) (6.9) Valuation allowance....................................... 41.9 41.9 40.6 Other..................................................... -- -- 0.3 ----- ----- ----- Effective tax rate........................................ --% --% --% ===== ===== =====
F-15 NOTE 10--INCOME TAXES (CONTINUED) The tax effects of temporary differences and carryforwards resulting in deferred income taxes are as follows:
DECEMBER 31, ------------------- 2000 1999 -------- -------- Deferred Tax Assets: Loss carryforwards........................................ $ 36,397 $ 26,175 Unrealized holding losses on available for sale securities................................................ 636 8,774 Tax mark to market adjustment............................. 3,412 2,302 Other..................................................... 202 4,975 -------- -------- Subtotal................................................ 40,647 42,226 Valuation allowance......................................... (40,647) (42,226) -------- -------- Net deferred tax asset...................................... $ -- $ -- ======== ========
Given the lack of sufficient earnings history, the Company does not believe the recognition of a deferred tax asset is appropriate at this time. NOTE 11--COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK The Company and two of its senior officers have been named, among other defendants, in a series of lawsuits related to the receivership of an unaffiliated investment company. In their claims, multiple plaintiffs allege several theories of liability, including knowing participation in fiduciary breach and prohibited transactions under the Employee Retirement Income Security Act of 1974. The plaintiffs have not described with any specificity the proportion or share of losses and related amounts which they claim are attributable to the Company or its executives. These lawsuits are still in the early stage of pleadings and limited discovery, and the likely outcome of these actions, or the amount of loss to the Company, if any, cannot be reasonably determined at this time. The Company and its executives have directed that these cases be defended against vigorously. Under their employment arrangements with the Company, the Company's senior officers may be entitled to indemnification by the Company. Due to the preliminary nature of the underlying litigation, the Company has not determined whether such indemnification will be granted, and accordingly, the Company does not believe it is possible to estimate the extent of liability, if any, related to such indemnification. The Company is involved in various other legal proceedings occurring in the ordinary course of business which the Company believes will not have a material adverse effect on the consolidated financial condition or operations of the Company. The Company may utilize a wide variety of off-balance sheet financial techniques to assist them in the management of interest rate risk. In hedging the interest rate and/or exchange rate exposure of a foreign currency denominated asset or liability, the Company may enter into hedge transactions to counter movements in the different currencies, as well as interest rates in those currencies. These hedges may be in the form of currency and interest rate swaps, options, and forwards, or combinations thereof. At December 31, 2000 and 1999, the Company had no outstanding off-balance-sheet instruments. NOTE 12--RELATIONSHIP WITH WFSG AND ITS AFFILIATES Prior to September 1999, the Company and WFSG had the same senior management team, though the Company had a different stockholder base and the majority of its directors were independent, and the Company's business affairs and day-to-day operations were managed by Wilshire Realty Services F-16 NOTE 12--RELATIONSHIP WITH WFSG AND ITS AFFILIATES (CONTINUED) Corporation ("WRSC"), a wholly-owned subsidiary of WFSG, pursuant to a management agreement ("Management Agreement"). After September 1999, the Company's independent directors decided that the Company should be internally managed and the Company and WFSG ceased to have the same senior executives and no longer had any common directors. Accordingly, the Company no longer views WFSG and its subsidiaries as affiliated parties. The Company's decision to become internally managed in the third quarter of 1999 resulted in disputes between the Company, on the one hand, and WFSG and certain of its affiliates on the other. In connection with these disputes, the Company recorded a reserve for potential resolution of disputes with WFSG and its affiliates of $4.1 million in 1999. Following a partial settlement of disputes with WFSG, the remaining reserve for potential resolution of disputes with WFSG and its affiliates was $2.5 million at December 31, 1999. During the year ended December 31, 2000, the Company settled all remaining disputes with WFSG and its affiliates which resulted in an additional provision of $0.2 million. The Company continues to maintain certain business relationships with WFSG and its affiliates which include the following: - The Company owns approximately 14.4% of WFSG's outstanding common stock. - An affiliate of WFSG services loans underlying certain mortgage-backed securities owned by the Company. - The Company has a prepaid servicing fee credit with an affiliate of WFSG to be utilized by servicing loans for the Company (exclusive of mortgage-backed securities). The following table sets forth the Company's balances with WFSG and its affiliates as of December 31, 2000 and 1999.
DECEMBER 31, ----------------------- 2000 1999 -------- -------- Investments in WFSG and Affiliates, net: WFSG Common Stock......................................... $3,593(1) $ 3,953 Prepaid Service Fees...................................... 2,000 2,974 Debtor-in-Possession Facility............................. -- 5,000(2) Other Notes Receivable.................................... -- 275 Reserve for Disputes...................................... -- (2,545) ------ ------- $5,593 $ 9,657 ====== ======= Borrowings.................................................. $ -- $ 2,569(3) ====== =======
- ------------------------ (1) Based on $1.25 per share. WFSG's common stock currently trades on the OTC Bulletin Board and the closing price as of December 31, 2000 was $1.25 per share. (2) This Facility was paid off in 2000. (3) Investments in real estate were pledged against these loans. The Company repaid these loans in 2000. F-17 NOTE 12--RELATIONSHIP WITH WFSG AND ITS AFFILIATES (CONTINUED) The effect of the various transactions between the Company and WFSG and its affiliates are summarized below for the years ended December 31:
2000 1999 -------- -------- Interest income(1).......................................... $ 387 $ 1,887 Interest expense............................................ -- -- ----- -------- 387 1,887 Provision for loan losses................................... -- 2,699 ----- -------- 387 (812) Real estate operations, net(2).............................. -- 46 Other operating income: Market valuation losses and impairments................... -- (10,443) Provision for disputes with WFSG.......................... (225) (4,077) ----- -------- 162 (15,286) Operating expenses.......................................... (87) (2,260) ----- -------- $ 75 $(17,546) ===== ========
- ------------------------ (1) Does not include interest income on MBS securities resulting from securitizations by WFSG or its affiliates. (2) Does not include rental income paid by third parties on properties partially financed by WFSG or its affiliates. NOTE 13--STOCK OPTIONS AND RIGHTS The Company adopted a non-qualified stock option plan ("the Option Plan") which provides for options to purchase shares of the Company's common stock. The maximum number of shares of common stock that may be issued pursuant to options granted under the Option Plan is 3,500,000 shares. In 1998, the Company granted options to WRSC and its independent directors under the Option Plan, representing the right to acquire 1,150,000 shares of common stock. Of these initial grants, 1,135,000 were granted to WRSC and 5,000 were granted to each of the Company's three independent directors. The initial grants of options under the Option Plan to WRSC vest at a rate of 25% per year for each of the first four anniversaries following the closing of the Initial Public Offering ("Offering"), and expire on the tenth anniversary of the Offering. The initial grants to the Independent Directors vest immediately and expire ten years from the date of grant. In the future, newly elected directors will receive 5,000 options on the day they join the Board at an exercise price equivalent to the closing price on that day. In addition, on the last day of each calendar quarter through September 30, 2000, each Independent Director received, on the last day of each quarter, an automatic non-statutory option grant to purchase 1,500 shares of common stock at 110% of the fair market value on that day. Automatic grants will vest one third on each of the first three anniversaries of the grant date and expire on the tenth anniversary of the grant date. In conjunction with a partial settlement agreement with WFSG and certain of its affiliates in 1999, the Company received 1,112,500 of the options issued to WRSC at the initial public offering, which were subsequently cancelled. F-18 NOTE 13--STOCK OPTIONS AND RIGHTS (CONTINUED) A summary of the Company's stock options as of and for the year ended December 31, 2000 is presented below:
WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------- Outstanding at beginning of year........................... 2,096,000 $4.75 Granted.................................................... 13,500 $2.61 Cancelled/forfeited........................................ (210,000) $4.53 --------- Outstanding at end of year................................. 1,899,500 $4.76 =========
WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE - -------------------------------------------- --------- ----------------- ---------------- $2.20-4.26.................................. 41,000 8.00-9.75 $ 3.10 $4.53....................................... 1,820,000 8.75 $ 4.53 $11.28-18.63................................ 38,500 7.25-7.75 $17.37
A summary of the Company's stock options as of and for the period ended December 31, 1999 is presented below:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ---------- ---------------- Outstanding at beginning of year.......................... 1,165,500 $15.89 Granted................................................... 2,048,000 $ 4.52 Cancelled/forfeited....................................... (1,117,500) $16.00 ---------- Outstanding at end of year................................ 2,096,000 $ 4.75 ==========
WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE OF EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE - -------------------------------------------- --------- ----------------- ---------------- $2.34....................................... 4,500 10.00 $ 2.48 $2.81-4.26.................................. 18,500 9.00-9.50 $ 3.57 $3.30-4.53.................................. 2,034,500 9.75 $ 4.53 $11.28-18.63................................ 38,500 8.25-8.75 $17.37
The Company applies Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related Interpretations in accounting for the Option Plan. Accordingly, no compensation expense has been recognized in the Consolidated Statements of Operations for grants under the Option Plan. Had compensation expense for the Company's Option Plan been determined based on the fair value at the grant date consistent with the methods of SFAS No. 123 "Accounting for Stock Based Compensation", the Company's net loss and loss per share for the year ended F-19 NOTE 13--STOCK OPTIONS AND RIGHTS (CONTINUED) December 31, 2000, 1999 and 1998 would have been increased to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Net loss: As reported.......................................... $(15,542) $(26,647) $(56,388) Pro forma............................................ $(15,820) $(27,083) $(58,265) Net loss per common and common share equivalent: Basic loss per share: As reported........................................ $ (1.48) $ (2.33) $ (4.94) Pro forma.......................................... $ (1.51) $ (2.37) $ (5.10) Diluted loss per share: As reported........................................ $ (1.48) $ (2.33) $ (4.94) Pro forma.......................................... $ (1.51) $ (2.37) $ (5.10)
There were no options granted with exercise prices below the market value of the stock at the grant date. The weighted average fair value of options granted during 2000, 1999 and 1998 was $0.40, $0.45 and $3.80, respectively, for options with exercise prices exceeding the market price of the stock at the grant date. Fair values were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used: 1% dividend yield, expected volatility of 25%, risk-free interest rate of 5.0% and expected lives of three to five years. On December 15, 1999, the Company declared a distribution of one right (a "Right") to purchase one one-tenth of a share of the Company's Common Stock for each outstanding share of Common Stock, payable to the stockholders of record on January 3, 2000. The Board of Directors authorized and directed the issuance of one Right with respect to each Common Share issued thereafter until the Distribution Date (as defined in the Rights Agreement) and, in certain circumstances, with respect to Common Shares issued after the Distribution Date. The description and terms of the Rights are set forth in a Rights Agreement between the Company and The Bank of New York, as Rights Agent, dated as of December 23, 1999. The Rights are not exercisable until the Distribution Date and will expire at the close of business on December 23, 2009, unless earlier redeemed by the Company. NOTE 14--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. F-20 NOTE 14--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
DECEMBER 31, 2000 DECEMBER 31, 1999 -------------------------- --------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------- ---------- -------- ---------- Assets: Cash and cash equivalents..................... $ 3,394 $ 3,394 $ 5,862 $ 5,862 Mortgage-backed securities available for sale.......................................... $74,731 $74,731 $104,572 $104,572 Loans......................................... $30,404 $29,998 $ 31,634 $ 31,727 Liabilities: Short-term borrowings......................... $18,170 $18,170 $ 96,815 $ 96,815 Long-term borrowings.......................... $70,760 $70,881 $ 64,412 $ 64,412
The methods and assumptions used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value are explained below: CASH AND CASH EQUIVALENTS--The carrying amounts approximate fair values due to the short-term nature of these instruments. MORTGAGE-BACKED SECURITIES--The fair values of securities are based upon broker dealer quotes (if available), subject to the Company's internal review process. For those securities that do not have available broker/dealer quotes, the fair value of the investment is determined by modeling the anticipated cash flows using certain assumptions (e.g. prepayment speeds, default rates, severity of losses, and discount rate). LOANS--Loans are segregated by type, such as fixed- and adjustable-rate interest terms. The fair values of fixed-rate mortgage loans are based on discounted cash flows utilizing applicable risk-adjusted spreads relative to the current pricing of similar fixed-rate loans as well as anticipated prepayment schedules. The fair values of adjustable-rate mortgage loans are based on discounted cash flows utilizing discount rates that approximate the pricing of available mortgage-backed securities having similar rate and repricing characteristics, as well as anticipated prepayment schedules. No value adjustments have been made for changes in credit within the loan portfolio. It is management's opinion that the allowance for estimated loan losses pertaining to loans results in a fair value adjustment of the credit risk of such loans. SHORT-TERM BORROWINGS--The carrying amounts of short-term borrowings approximate fair value due to the short-term nature of these instruments. LONG-TERM BORROWINGS--The fair value of other borrowings is estimated based on current market rates for similar borrowings with similar characteristics. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2000 and 1999, respectively. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein. F-21 NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED --------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 2000 2000 2000 2000 ------------ ------------- -------- --------- Interest income................................... $ 3,257 $3,682 $3,619 $4,520 Interest expense.................................. (1,784) (1,916) (1,708) (2,296) Recovery of loan losses........................... -- -- 555 -- -------- ------ ------ ------ Net interest income after recovery of loan losses.......................................... 1,473 1,766 2,466 2,224 Real estate operations, net....................... 3,303 1,222 388 1,025 Other operating (loss) income..................... (20,131) (622) 2,139 1,517 Other operating expenses.......................... (5,510) (2,096) (2,580) (2,126) -------- ------ ------ ------ (Loss) income before income taxes................. (20,865) 270 2,413 2,640 Income tax (benefit) provision.................... -- (125) 25 100 -------- ------ ------ ------ Net (loss) income................................. $(20,865) $ 395 $2,388 $2,540 ======== ====== ====== ====== (Loss) earnings per share: Basic........................................... $ (1.99) $ 0.04 $ 0.23 $ 0.24 Diluted......................................... $ (1.99) $ 0.04 $ 0.23 $ 0.24
QUARTER ENDED --------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1999 1999 1999 1999 ------------ ------------- -------- --------- Interest income................................. $4,517 $ 4,805 $ 6,280 $7,084 Interest expense................................ (3,056) (2,803) (3,345) (3,693) Recovery of loan losses......................... -- -- -- 1,150 ------ ------- -------- ------ Net interest income after recovery of loan losses........................................ 1,461 2,002 2,935 4,541 Real estate operations, net..................... 1,000 597 (91) (61) Other operating income (loss)................... 490 (10,096) (21,761) (1,233) Other operating expenses........................ (2,017) (1,675) (1,259) (1,480) ------ ------- -------- ------ Income (loss) before income taxes............... 934 (9,172) (20,176) 1,767 Income tax (benefit) provision.................. (200) 200 -- -- ------ ------- -------- ------ Net income (loss)............................... $1,134 $(9,372) $(20,176) $1,767 ====== ======= ======== ====== Earnings (loss) per share: Basic......................................... $ 0.10 $ (0.82) $ (1.75) $ 0.15 Diluted....................................... $ 0.10 $ (0.82) $ (1.75) $ 0.15
F-22 NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
QUARTER ENDED --------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, 1998 1998 1998 ------------ ------------- -------- Interest income............................................ $ 10,957 $ 11,645 $ 5,090 Interest expense........................................... (6,095) (6,012) (1,501) Provision for loan losses.................................. (8,842) (3,000) - -------- -------- ------- Net interest (loss) income after provision for loan losses................................................... (3,980) 2,633 3,589 Real estate operations, net................................ (13) 428 363 Other operating loss....................................... (3,950) (48,586) -- Other operating expenses................................... (2,607) (3,355) (910) -------- -------- ------- (Loss) income before income taxes.......................... (10,550) (48,880) 3,042 Income tax provision....................................... -- -- -- -------- -------- ------- Net (loss) income.......................................... $(10,550) $(48,880) $ 3,042 ======== ======== ======= (Loss) earnings per share: Basic.................................................... $ (0.92) $ (4.25) $ 0.27 Diluted.................................................. $ (0.92) $ (4.25) $ 0.27
NOTE 16--PARENT COMPANY INFORMATION CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ------------------- 2000 1999 -------- -------- ASSETS Cash........................................................ $ 2 $ 4 Intercompany receivable, net................................ 9,819 12,821 Investments in subsidiaries................................. 47,722 42,372 ------- ------- Total assets................................................ $57,543 $55,197 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and other liabilities...................... $ 175 $ 235 Dividend payable............................................ 1,717 4,090 ------- ------- Total liabilities........................................... 1,892 4,325 Contributed and retained equity............................. 55,651 50,872 ------- ------- Total liabilities and equity................................ $57,543 $55,197 ======= =======
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Total revenues.............................................. $ -- $ -- $ -- Total expenses.............................................. 302 412 48 -------- -------- -------- Loss before equity in losses of subsidiaries and income tax provision................................................. (302) (412) (48) Equity in losses of subsidiaries............................ (15,240) (26,235) (56,340) Income tax provision........................................ -- -- -- -------- -------- -------- Net loss.................................................... $(15,542) $(26,647) $(56,388) ======== ======== ========
F-23 NOTE 16--PARENT COMPANY INFORMATION (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss.................................................. $(15,542) $(26,647) $ (56,388) Adjustments to reconcile net loss to net cash provided by operating activities: Equity in loss of subsidiaries.......................... 15,240 26,235 56,340 Change in: Accounts payable and other liabilities................ (60) (271) 506 -------- -------- --------- Net cash (used in) provided by operating activities... (362) (683) 458 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Change in intercompany receivable......................... 3,002 1,170 19,639 Net investment in subsidiaries............................ (451) -- (183,970) -------- -------- --------- Net cash provided by (used in) investing activities... 2,551 1,170 (164,331) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividend payments on common stock......................... (2,191) (486) (3,105) Issuance of capital stock................................. -- -- 166,981 -------- -------- --------- Net cash (used in) provided by financing activities... (2,191) (486) 163,876 -------- -------- --------- NET INCREASE IN CASH........................................ (2) 1 3 CASH: Beginning of year......................................... 4 3 -- -------- -------- --------- End of year............................................... $ 2 $ 4 $ 3 ======== ======== ========= NONCASH FINANCING ACTIVITIES: Common stock dividend declared but not paid............... $ -- $ -- $ 4,600 Purchase of treasury stock................................ $ -- $ (2,171) $ --
NOTE 17--SUBSEQUENT EVENTS In December 2000, the Company (through a 26% owned Jersey, Channel Islands company known as BEP Acquisitions) announced the acceptance of a L42 million offer to purchase all of the outstanding capital stock of Bourne End Properties PLC (Bourne End). Bourne End is a specialist investor in retail property, currently owning nine town shopping centers located in England and Scotland. The centers range in size from 80,000 square feet to 340,000 square feet BEP Acquisitions was incorporated in Jersey, Channel Islands for the purpose of making the offer to acquire Bourne End. BEP Acquisitions is a wholly-owned subsidiary of BEP Property Holdings Limited, which is 26% owned by the Company, 71% owned by Merrill Lynch (Jersey) Holdings Limited (a subsidiary of Merrill Lynch & Co., Inc.) and 3% owned by Greenbau Estuary Limited. Merrill Lynch (Jersey) Holdings Limited will also provide mezzanine financing of approximately L18.5 million. Greenbau Estuary Limited will act as the day-to-day manager of Bourne End. In December 2000, the Company deposited its share of the purchase price into escrow ($6.7 million), which is included in Other Assets on the Company's Statement of Financial Condition as of December 31, 2000. The acquisition was completed in February 2001. F-24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf on March 13, 2001 by the undersigned, thereunto duly authorized. FOG CUTTER CAPITAL GROUP INC. By: /s/ LAWRENCE A. MENDELSOHN ----------------------------------------- Lawrence A. Mendelsohn PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 13, 2001 by the following persons on behalf of the Registrant and in the capacities indicated.
NAME TITLE ---- ----- /s/ ANDREW A. WIEDERHORN Chairman of the Board, ------------------------------------------- Chief Executive Officer, Andrew A. Wiederhorn Secretary and Treasurer /s/ LAWRENCE A. MENDELSOHN ------------------------------------------- President Lawrence A. Mendelsohn /s/ CHRIS TASSOS Executive Vice President ------------------------------------------- and Chief Financial Chris Tassos Officer /s/ DAVID C. EGELHOFF ------------------------------------------- Director David C. Egelhoff /s/ JORDAN D. SCHNITZER ------------------------------------------- Director Jordan D. Schnitzer /s/ PATRICK TERRELL ------------------------------------------- Director Patrick Terrell
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- *10.10 Employment Agreement dated September 4, 1999, and amended and restated October 1, 2000, between the Company and Wilshire Real Estate Partnership L.P. and Andrew A. Wiederhorn *10.11 Employment Agreement dated September 4, 1999, and amended and restated October 1, 2000, between the Company and Wilshire Real Estate Partnership L.P. and Lawrence A. Mendelsohn *10.12 Employment Agreement dated October 9, 1999, amended as of May 19, 2000 and again as of July 27, 2000, and subsequently amended and restated as of October 1, 2000, between the Company and Wilshire Real Estate Partnership L.P. and Robert G. Rosen *11 Computation of Loss Per Common Share *21.1 Subsidiaries 99.1 Settlement Agreement, dated as of December 10, 1999, among the Company, on behalf of itself and all of its subsidiaries and affiliates, Andrew A. Wiederhorn, Lawrence A. Mendelsohn, Wilshire Financial Services Group Inc., on behalf of itself and all of its subsidiaries and affiliates other than First Bank of Beverly Hills, F.S.B. (Incorporated by reference to the Company's Current Report on Form 8-K filed December 17, 1999.)
- ------------------------ * Filed herewith. EX-10.10 2 a2040821zex-10_10.txt EXHIBIT 10.10 EXHIBIT 10.10 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of September 4, 1999 (the "Original Agreement Date"), and amended and restated as of October 1, 2000, by and between Wilshire Real Estate Investment Inc. and Wilshire Real Estate Partnership L.P. (collectively and individually, the "Company"), with its principal office at 1631 SW Columbia Street, Portland, Oregon 97201 and Andrew A. Wiederhorn, residing at 4311 SW Greenleaf Drive, Portland, Oregon 97221 (the "Executive"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Executive is currently employed as the Chief Executive Officer of the Company and is also the Chairman of the Board and a director of the Company; and WHEREAS, the Company and Executive desire to enter into this agreement (the "Agreement") to set forth terms of Executive's employment by the Company, as such terms are amended as of the amendment and restatement date set forth above. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. TERM OF EMPLOYMENT. Executive's employment under this Agreement (prior to its amendment and restatement) commenced on September 4, 1999. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement (as amended and restated) shall be for a three (3) year term (the "Employment Term") commencing on October 1, 2000 (the "Commencement Date"). Subject to Section 7 hereof, the Employment Term shall be automatically extended for additional terms of successive two (2) year periods unless the Company or Executive gives written notice of the termination of Executive's employment hereunder at least ninety (90) days prior to the expiration of the then current Employment Term. 2. POSITIONS. (a) Executive shall serve as Chief Executive Officer of the Company. Executive shall also serve on the Board of Directors of the Company (the "Board") as Chairman without additional compensation. During the term of this Agreement, the Company shall recommend the Executive for election as a director and as Chairman. (b) Executive shall report directly to the Board or other managing body of the Company and shall have such duties and authority, consistent with his position as Chief Executive Officer of the Company, as shall be determined from time to time by the Board, provided that Executive shall have authority comparable to that of chief executive officers of United States public companies that are similar in size and business to the Company. (c) During the Employment Term, Executive shall devote substantially all of his business time, energy, skill and efforts to the performance of his duties and responsibilities hereunder; provided, however, that Executive shall be allowed to (i) serve as a director, employee or consultant of companies solely owned by the Executive or by Executive's family; (ii) serve as a director of other companies; (iii) engage in charitable activities; and (iv) manage his personal financial and legal affairs. 3. BASE SALARY. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $750,000. Base salary shall be payable in accordance with the usual payroll practices of the Company (including withholding). Executive's base salary shall be subject to annual review by the Board in October of each year and may be increased, but not decreased, from time to time upon recommendation of the Compensation Committee of the Board (the "Committee"). The base salary determined as aforesaid from time to time shall constitute "Base Salary" for purposes of this Agreement. 4. INCENTIVE COMPENSATION. (a) BONUS. For each 12 month period commencing on October 1, 2000 (each, an "Annual Period"), Executive shall be entitled to receive an annual bonus (the "Bonus") equal to 45% of the Bonus Pool for such Annual Period. For each Annual Period, the Bonus Pool shall be (i) if Post-Bonus ROE is 15% or greater, 25% of Pre-Bonus Earnings, (ii) if Post-Bonus ROE is 10% or greater but less than 15%, 20% of Pre-Bonus Earnings, (iii) if Post-Bonus ROE is 5% or greater but less than 10%, 10% of Pre-Bonus Earnings, or (iv) if Post-Bonus ROE is less than 5%, zero. For purposes of this agreement, the following terms shall have the following meanings: "PRE-BONUS EARNINGS" means the Company's after-tax income (as determined in accordance with generally accepted accounting principles and reflected on the Company's financial statements) for the relevant Annual Period or portion thereof determined prior to subtracting the amount of the Bonus Pool payable for that Annual Period; provided, however, that in determining Pre-Bonus Earnings for purposes of this Section 4, (i) Pre- Bonus Earnings shall be increased or decreased for the relevant Annual Period by the amount of unrealized gains or unrealized losses, as the case may be, which are incurred after the commencement of the relevant Annual Period and which are reflected directly in equity as "other comprehensive income or loss" during such Annual Period and (ii) increased by the amount of any cash bonus paid to the senior executives of the Company (the "Specified Senior Executives") listed on Exhibit 1 hereto (as the same may be amended from time to time with the consent of the parties hereto). "POST-BONUS EARNINGS" means the Company's Pre-Bonus Earnings after subtracting (i) 75% of the after-tax amount of the Bonus Pool payable for that Annual Period and (ii) the after tax amount of any cash bonus paid to the Specified Senior Executives. 2 "EQUITY" means the Company's total shareholders' equity (as determined in accordance with generally accepted accounting principles and reflected on the Company's financial statements) at the beginning of the relevant Annual Period. "POST-BONUS ROE" means the Company's Post-Bonus Earnings for the relevant Annual Period divided by its Equity at the beginning of the relevant Annual Period (expressed in percentage terms). To assist the reader in understanding the foregoing provisions, examples of such Bonus determinations are set forth on Schedule I hereto. Such annual Bonus shall be payable by November 15th of each year following the Annual Period for which the Bonus is payable and, if necessary, shall be adjusted for any subsequent amendments to the Company's financial statements. The Company will apply the annual Bonus to repay any outstanding Excess Advance (as defined below) prior to making any payment to Executive. To the extent that the Company repurchases any of its outstanding common stock or the Company's net operating losses under Section 382 of the Code (as defined below) are disallowed, the parties agree to negotiate in good faith to amend the incentive compensation provisions of this Section 4 to provide Executive with comparable goals and returns to those that existed prior to the occurrence of such events. Following the initial Employment Term, such Bonus shall be subject to shareholder approval as and to the extent required by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). (b) ADVANCES. During any quarterly period during an Annual Period, the Company shall, at the request of the Executive, pay an advance on any such Bonus; provided, however, that any such advance (together with any prior advances made during the relevant Annual Period) shall not exceed 80% of the pro rata portion of the Estimated Annual Bonus (as defined below) attributable to such quarterly period and to any prior quarterly periods during such Annual Period. The Estimated Annual Bonus is determined by annualizing the Company's Pre-Bonus Earnings and Post-Bonus Earnings (based on the Company's financial statements or projections) for the quarterly period or periods during such Annual Period (or for purposes of Section 8, monthly periods) and determining the annual Bonus payable to Executive as described in Section 4(a). In the event that the aggregate amount of advances outstanding immediately following the end of any quarterly period during the relevant Annual Period exceeds 80% of the pro rata portion of the Estimated Annual Bonus ("Permitted Advances") determined immediately following such quarterly period, the amount in excess of the Permitted Advances shall be treated as an interest free loan from the Company ("Advance Reimbursement Loan") for the next succeeding quarterly period (the "Following Quarter") and if at the end of the Following Quarter the aggregate amount of outstanding advances continues to exceed the Permitted Advances (the "Excess Advance"), Executive shall repay the Excess Advance to the Company within 30 days of the end of such Following Quarter. (c) OPTIONS. As of the Original Agreement Date, the Company granted to Executive stock options (the "Initial Options") on 630,000 shares of the Company's common stock (the "Common Stock") under the Company's Incentive Stock Plan (the "Incentive Stock Plan"). The Initial Options have an exercise price equal to the Company's book value per outstanding share as of September 30, 1999, which exercise price is in excess of the market value per share based on the 3 share price of the Common Stock as of such date. The Initial Options will be fully exercisable at the time of vesting and 25% of the Initial Options shall vest on each anniversary of the Original Agreement Date (which will result in the Initial Options being fully vested on the fourth anniversary of the Original Agreement Date). In addition, the Executive shall be entitled to participate in the Company's Incentive Stock Plan and receive nonqualified, incentive or other options ("Options") to purchase shares of the Company's Common Stock under the Incentive Stock Plan as determined by the Committee from time to time provided that the Incentive Stock Plan is approved by the shareholders of the Company to the extent required by Section 162(m) of the Code. Notwithstanding the foregoing, the Company may recommend to the Committee that Executive be granted Options under a plan other than the Incentive Stock Plan provided that such other plan contains terms and conditions which are substantially similar to the terms and conditions of the Incentive Stock Plan, and further provided, that such other plan is approved by the shareholders of the Company to the extent required by Section 162(m) of the Code. To the extent permitted under applicable law, any Options granted to Executive hereunder (including the Initial Options) may be assigned and transferred by Executive to entities created for or on behalf of Executive's immediate family for tax planning or other purposes. (d) OTHER COMPENSATION. The Company may, upon recommendation of the Committee, award to Executive such other bonuses and compensation as it deems appropriate and reasonable. 5. EMPLOYEE BENEFITS AND VACATION. (a) During the Employment Term, Executive shall be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements, including, without limitation, any nonqualified deferred compensation plans, maintained by the Company from time to time for the benefit of the senior executives of the Company in accordance with their respective terms as in effect from time to time. To the extent permitted under applicable law, the Company shall not treat as compensation to Executive fringes and perquisites provided to Executive or the items under Section 6 below. (b) As of the Original Agreement Date, the Company agreed to loan to Executive $50,000 during each year of the Employment Term to purchase shares of Common Stock of the Company up to a maximum of $250,000. Each annual loan made pursuant to this Section 5(b) (the "Stock Purchase Loans") shall mature on the earlier of (i) its fifth anniversary and (ii) six months after Executive is no longer employed by the Company. The Stock Purchase Loans shall accrue interest on the then-outstanding principal amount of the Stock Purchase Loans from the date of any Stock Purchase Loan is made until maturity at a rate equal to the prime rate as published in the Wall Street Journal on the date any Stock Purchase Loan is made pursuant hereto and shall be payable annually in arrears. Interest on the Stock Purchase Loan will not be paid in cash but shall be payable in kind (i.e. the amount of interest accrued on the Stock Purchase Loan during each annual period will be added to the principal amount of the Stock Purchase Loan at the end of such annual period). The Stock Purchase Loans will be full recourse loans against Executive, and each Stock Purchase Loan will be secured by the shares of Common Stock purchased with each such Stock Purchase Loan together with other shares of Common Stock pledged by Executive so that the aggregate value (based on the closing price on the acquisition date of such shares on the Nasdaq 4 stock market) of all such shares securing each new Stock Purchase Loan shall be at least equal to 110% of the principal amount of the Stock Purchase Loans. (c) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than five (5) weeks paid vacation per calendar year. Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. 6. BUSINESS EXPENSES. The Company shall also reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. TERMINATION. (a) The employment of Executive under this Agreement shall terminate upon the occurrence of any of the following events: (i) the death of Executive; (ii) the termination of Executive's employment by the Company due to Executive's Disability pursuant to Section 7(b) hereof; (iii) the termination of Executive's employment by Executive for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of Executive's employment by the Company without Cause; (v) the termination of employment by Executive without Good Reason upon sixty (60) days prior written notice; (vi) the termination of employment by Executive for any reason during the period commencing on the date of a Change in Control and ending on the day immediately prior to the second anniversary of the Change in Control (the "Change in Control Protection Period"); (vii) the termination of Executive's employment by the Company for Cause pursuant to Section 7(e); or (viii) the retirement of Executive by the Company at or after his sixty-fifth birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits. (b) DISABILITY. If, by reason of the same or related physical or mental reasons, Executive is unable to carry out Executive's material duties pursuant to this Agreement for more than 5 six (6) months in any twelve (12) consecutive month period (a "Disability") as determined and certified in writing by two (2) licensed physicians, one of which is Executive's regular attending physician, the Company may terminate Executive's employment for Disability upon thirty (30) days prior written notice, by a notice of Disability termination, at any time thereafter during such twelve (12) month period in which Executive is unable to carry out his duties as a result of the same or related physical or mental illness. Such termination shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day notice period. (c) TERMINATION FOR GOOD REASON. A Termination for Good Reason means a termination by Executive by written notice given within sixty (60) days after the occurrence of the Good Reason event. For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances, unless such circumstances are fully corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof): (i) any material diminution of Executive's positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence), or the assignment to Executive of duties or responsibilities that are inconsistent with Executive's position as Chief Executive Officer; (ii) removal of Executive from, or the non reelection of Executive to, the positions with the Company specified herein; (iii) a relocation of the Company's principal United States executive offices to a location more than fifty (50) miles from Portland, Oregon, or a relocation of Executive away from such principal United States executive office; (iv) a failure by the Company (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus and substantially the same level of criteria for achievability thereof as Executive participated in immediately prior to any change in such plans or awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company of any material provision of this Agreement; (vi) executive's removal from or failure to be reelected to the Board or removal or failure to be elected Chairman of the Board; (vii) a failure of any successor to the Company to assume in a writing delivered to Executive upon the assignee becoming such the obligations of the Company hereunder; or (viii) a failure of the Committee to grant Executive an award of Options in accordance with Section 4 hereof, unless the applicable circumstances under (i) through (viii) are fully corrected prior to the date of termination specified in the notice of termination for Good Reason. (d) NOTICE OF TERMINATION FOR GOOD REASON. A notice of termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination for Good Reason. The failure by Executive to set forth in the notice of termination for Good Reason any facts or circumstances which contribute to the showing of Good 6 Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The notice of termination for Good Reason shall provide for a date of termination not less than fifteen (15) nor more than sixty (60) days after the date such notice of termination for Good Reason is given. (e) CAUSE. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company or its business which has a material adverse effect on the Company; (ii) the refusal of Executive to follow the proper written direction of the Board, provided that the foregoing refusal shall not be "Cause" if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Board; (iii) Executive being convicted of a felony (other than a felony involving a traffic offense); (iv) the breach by Executive of any fiduciary duty owed by Executive to the Company which has a material adverse effect on the Company; or (v) Executive's material fraud with regard to the Company. (f) NOTICE OF TERMINATION FOR CAUSE. A notice of termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide a basis for termination for Cause. Further, a notice of termination for Cause shall be required to include a copy of a resolution duly adopted by at least two-thirds of the entire membership of the Board at a meeting of the Board which was called for the purpose of considering such termination and which Executive and his representative had the right to attend and address the Board, finding that, in the good faith opinion of the Board, Executive engaged in conduct set forth in the definition of Cause herein and specifying the particulars thereof in reasonable detail. The date of termination for a termination for Cause shall be the date indicated in the notice of termination. Any purported termination for Cause which is held by a court or arbitrator not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a termination by the Company without Cause. 8. CONSEQUENCES OF TERMINATION OF EMPLOYMENT. (a) DEATH. If Executive's employment is terminated during the Employment Term by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including without limitation, any unpaid Bonus due, any amount of Base Salary or deferred compensation accrued or earned but unpaid, any accrued vacation payable pursuant to the Company's policies and any unreimbursed business expenses payable pursuant to Section 6 which amounts shall be promptly paid in a lump sum to the trustee of the Tiffany and Andrew Wiederhorn Revocable Trust dated September 22, 1987, as amended; (ii) the Estimated Annual Bonus for the Annual Period in which Executive died, pro rated through the end of the month in which Executive died, which amount shall be paid to the trustee of the Tiffany and Andrew Wiederhorn Revocable Trust dated September 22, 1987, as amended, within 60 days after such month end; (iii) full accelerated vesting under all outstanding equity-based and long-term incentive plans (with options remaining outstanding as provided under the applicable stock option plan and a pro rata payment 7 under any long term incentive plans based on actual coverage under such plans at the time payments normally would be made under such plans); (iv) subject to Section 10 hereof, any other amounts or benefits owing to Executive under the then applicable employee benefit plans or policies of the Company, which shall be paid in accordance with such plans or policies; (v) payment on a monthly basis of six (6) months of Executive's Base Salary on the date of death, which shall be paid to the trustee of the Tiffany and Andrew Wiederhorn Revocable Trust dated September 22, 1987, as amended; (vi) any outstanding Advance Reimbursement Loan shall mature as provided in Section 4; (vii) any outstanding Stock Purchase Loan shall become due and payable six months following the date of termination, and (viii) payment of Executive's spouse's and dependents' COBRA coverage premiums to the extent, and so long as, they remain eligible for COBRA coverage, but in no event more than one (1) year. Section 12 hereof shall also continue to apply. (b) DISABILITY. If Executive's employment is terminated by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of employment by reason of his death, provided that the payment of Base Salary shall be reduced by the projected amount Executive would receive under any long-term disability policy or program maintained by the Company during the six (6) month period during which Base Salary is being paid. Section 12 hereof shall also continue to apply. (c) TERMINATION BY EXECUTIVE FOR GOOD REASON OR FOR ANY REASON DURING THE CHANGE IN CONTROL PROTECTION PERIOD OR TERMINATION BY THE COMPANY WITHOUT CAUSE OR NONEXTENSION OF THE TERM BY THE COMPANY. If (i) outside of the Change in Control Protection Period, Executive terminates his employment hereunder for Good Reason during the Employment Term, (ii) a Change in Control occurs and during the Change in Control Protection Period Executive terminates his employment for any reason, (iii) Executive's employment with the Company is terminated by the Company without Cause, or (iv) Executive's employment with the Company terminates as a result of the Company giving notice of nonextension of the Employment Term pursuant to Section 1 hereof, Executive shall be entitled to receive (1) in a lump sum within ten (10) business days after such termination, (a) any unreimbursed business expenses payable pursuant to Section 6, (b) any Base Salary, Bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies but not yet paid at the date of termination, and (c) an amount equal to one year's Base Salary in effect on the date of termination; (2) the Estimated Annual Bonus payable to Executive for the Annual Period, prorated through the end of the month in which the Executive is terminated, which amount shall be paid within 45 days after such month's end; (3) accelerated full vesting under all outstanding equity-based and long-term incentive plans with Options remaining outstanding as provided under the applicable stock option plan and a pro rata payment under any long term incentive plans based on actual coverage under such plans, payment being made at the time payments would normally be made under such plans; (4) subject to Section 10 hereof, any other amounts or benefits due Executive under the then applicable employee benefit plans of the Company as shall be determined and paid in accordance with such plans, policies and practices; (5) one (1) year of additional service and compensation credit (at his then compensation level) for pension purposes under any defined benefit type qualified or 8 nonqualified pension plan or arrangement of the Company, measured from the date of termination of employment and not credited to the extent that Executive is otherwise entitled to such credit during such one (1) year period, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (6) one (1) year of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) measured from the date of termination under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); (7) any outstanding Advance Reimbursement Loan shall mature as provided in Section 4; (8) any outstanding Stock Purchase Loan shall become due and payable six months following the date of termination; and (9) payment by the Company of the premiums for Executive (except in the case of death) and his spouse's and dependents' health coverage for one (1) year under the Company's health plans which cover the senior executives of the Company or materially similar benefits. Payments under (9) above may, at the discretion of the Company, be made by continuing participation of Executive in the plan as a terminee, by paying the applicable COBRA premium for Executive and his spouse and dependents, or by covering Executive and his spouse and dependents under substitute arrangements, provided that, to the extent Executive incurs tax that he would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Executive shall receive from the Company an additional payment in the amount necessary so that he will have no additional cost for receiving such items or any additional payment. In the circumstances described in each of (i) through (iv) above, Section 12 hereof shall also continue to apply. (d) TERMINATION FOR CAUSE OR VOLUNTARY RESIGNATION WITHOUT GOOD REASON OR RETIREMENT. If Executive's employment hereunder is terminated: (i) by the Company for Cause, (ii) by Executive without Good Reason outside of the Change in Control Protection Period, or (iii) by the Company pursuant to Section 7(a)(viii) hereof, Executive shall be entitled to receive only his Base Salary through the date of termination, the Estimated Annual Bonus prorated through the last day of the month in which Executive is terminated, and any unreimbursed business expenses payable pursuant to Section 6. In addition, any outstanding Advance Reimbursement Loan shall mature as provided in Section 4 and any outstanding Stock Purchase Loan shall become due and payable six months following the date of termination. All other benefits (including, without limitation, Options) due Executive following such termination of employment shall be determined in accordance with the plans, policies and practices of the Company. (e) ACCESS TO BOOKS AND RECORDS. Following termination of employment of the Executive, the Company shall permit such Executive reasonable access to retrieve personally (or by his designated representatives) any and all personal files, personal copies of Company files, and property that are stored at the Company. Additionally, subject to reimbursement of any out-of- pocket costs and expenses, the Company shall permit such Executive and his designated representatives and agents reasonable access to all of the Company's files, books and records, independent accountants and attorneys, as requested by him, subject to any confidentiality agreements in effect between the Executive and the Company. 9 9. [THIS SECTION IS INTENTIONALLY LEFT BLANK.] 10. NO MITIGATION; NO SET-OFF. In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and, except as explicitly set forth herein, there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Section 8 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. Such amounts are in lieu of any amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. 11. CHANGE IN CONTROL. For purposes of this Agreement, the term "Change in Control" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of common stock of the Company), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 promulgated under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than a member of the Board) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two (2) year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered in the exceptions in (i) above) acquires more than twenty- five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control; or (iv) approval by the shareholders of the Company of a plan of complete liquidation of the Company or the closing of the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least 10 fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale. 12. INDEMNIFICATION. (a) The Company agrees that if Executive is made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, other enterprise or non-profit organization, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as a director, officer, member, employee, fiduciary or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Maryland law, as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be an officer, director, member, fiduciary or agent, or is no longer employed by the company, and shall inure to the benefit of his heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive and the giving by Executive of any undertakings required by applicable law. (d) Executive shall give the Company notice of any claim made against him for which indemnity will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are reasonably convenient for Executive. (e) With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive. Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. 11 (f) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 12 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company, agreement, vote of stockholders or disinterested directors or otherwise. (h) The Company hereunder agrees to obtain officer and director liability insurance policies covering Executive and shall maintain at all times following the Commencement Date and during the Employment Term coverage under such policies in the aggregate with regard to all officers and directors, including Executive, of an amount not less than $10 million. 13. SPECIAL TAX PROVISION. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to Executive by the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership or effective control covered by Code Section 280G(b)(2) or any person affiliated with the Company or such person) as a result of a change in ownership or effective control of the Company or a direct or indirect parent thereof (or the assets of any of the foregoing) covered by Code Section 280G(b)(2) (collectively, the "Covered Payments") is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar federal or state tax that may hereafter be imposed), and/or any interest, penalties or additions to tax, with respect to such excise tax (such excise tax, together with such interest penalties and additions to tax, is hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax Reimbursement Payment") such that after payment by Executive of all taxes (including, without limitation, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income, and (B) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 13 is that (a) Executive, after paying his federal, state and local income tax and payroll taxes, will be in the same position as if he was not subject to the Excise Tax under Section 4999 of the Code (or any similar federal or state tax that may be imposed ) and did not receive the extra payments pursuant to this Section 13 and this Section 13 shall be interpreted accordingly. 12 (b) Except as otherwise provided in Section 13(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 280G(b)(2) or legal counsel (reasonably acceptable to Executive) appointed by such public accountants (or, if the public accountants decline such appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and Executive) (the "Accountant"), deliver a written opinion to Executive, reasonably satisfactory to Executive's legal counsel, that Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, Executive shall be deemed: (i) to pay federal, state and/or local income taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income. (d) (i) (A) In the event that prior to the time Executive has filed any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred, the Accountant determines, for any reason whatever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax Reimbursement Payment was made, Executive shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Tax Reimbursement Payment being repaid by Executive, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that the determination set forth in (A) above is made by the Accountant after the filing by Executive of any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of such change in ownership, Executive shall file at the request of 13 the Company an amended tax return in accordance with the Accountant's determination, but no portion of the Tax Reimbursement Payment shall be required to be refunded to the Company until actual refund or credit of such portion has been made to Executive, and interest payable to the Company shall not exceed the interest received or credited to Executive by such tax authority for the period it held such portion (less any tax Executive must pay on such interest and which he is unable to deduct as a result of payment of the refund). (C) In the event Executive receives a refund pursuant to (B) above and repays such amount to the Company, Executive shall thereafter file for refunds or credits by reason of the repayments to the Company. Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if Executive's claim for such refund or credit is denied. (D) Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if Executive's claim for refund or credit is denied. (ii) In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest, penalties or additions to tax payable with respect to such excess) once the amount of such excess is finally determined. (iii) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 13, subject to subpart (i)(D) above, Executive shall permit the Company to control issues related to this Section 13 (at its expense), provided that such issues do not potentially materially adversely affect Executive, but Executive shall control any other issues. In the event the issues are interrelated, Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, Executive shall permit the representative of the Company to accompany him and Executive and his representative shall cooperate with the Company and its representative. (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 13 (other than by mutual agreement) or, if not required, agreed to by the Company and Executive, Executive shall cooperate fully with the Company, provided that the foregoing shall not apply to actions that are provided herein to be at the sole discretion of Executive. (e) The Tax Reimbursement Payment, or any portion thereof, payable by the Company shall be paid not later than the fifth day following the determination by the Accountant, 14 and any payment made after such fifth day shall bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company shall use its best efforts to cause the Accountant to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the change in ownership event covered by Section 280G(b)(2) of the Code, the Company shall pay Executive the Tax Reimbursement Payment set forth in an opinion from counsel recognized as knowledgeable in the relevant areas selected by Executive, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. In accordance with Section 16(Guaranty), the Company may withhold from the Tax Reimbursement Payment and deposit into applicable taxing authorities such amounts as are required to be withheld by applicable law. To the extent that Executive is required to pay estimated or other taxes on amounts received by Executive beyond any withheld amounts, Executive shall promptly make such payments. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and if (e) is applicable the reasonable charges for the opinion given by Executive's counsel. (g) The Company and Executive shall mutually agree on and promulgate further guidelines in accordance with this Section 13 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 13(d)(i)(D) hereof. 14. LEGAL AND OTHER FEES AND EXPENSES. In the event that a claim for payment or benefits under this Agreement is disputed, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred by Executive in pursuing such claim, unless the claim by Executive is found to be frivolous by any court or arbitrator. 15. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration conducted in the City of Portland in the State of Oregon under the Commercial Arbitration Rules then prevailing of the American Arbitration Association and such submission shall request the American Arbitration Association to: (i) appoint an arbitrator experienced and knowledgeable concerning the matter then in dispute; (ii) require the testimony to be transcribed; (iii) require the award to be accompanied by findings of fact and the statement for reasons for the decision; and (iv) request the matter to be handled by and in accordance with the expedited procedures provided for in the Commercial Arbitration Rules. The determination of the arbitrators, which shall be based upon a DE NOVO interpretation of this Agreement, shall be final and binding and judgment may be entered on the arbitrators' award in any court having jurisdiction. All costs of arbitration, including the costs of the American Arbitration Association and the arbitrator, shall be borne by the Company. 16. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon without reference to principles of conflicts of laws. 15 (b) ENTIRE AGREEMENT/AMENDMENTS. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements, whether written or otherwise, between the Company and Executive. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) NO WAIVER. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (d) ASSIGNMENT. This Agreement shall not be assignable by Executive. This Agreement shall be assignable, with the consent of Executive, by the Company only to an acquiror of all or substantially all of the assets of the Company, provided such acquiror promptly assumes all of the obligations hereunder of the Company in a writing delivered to Executive and otherwise complies with the provisions hereof with regard to such assumption. (e) SUCCESSORS; BINDING AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement shall inure to the benefit of and be binding upon parties hereto and their personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. If Executive dies while any amount would still be payable hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Agreement to the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, legatees and permitted assignees of the parties hereto. (f) COMMUNICATIONS. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, and (ii) two business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of Lawrence A. Mendelsohn of the Company, or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (g) WITHHOLDING TAXES. The Company may withhold from any and all amounts payable under this Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 16 (h) SURVIVORSHIP. The respective rights and obligations of the parties hereunder shall survive any termination of Executive's employment. (i) COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 17 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. WILSHIRE REAL ESTATE INVESTMENT INC., on its behalf and on behalf of WILSHIRE REAL ESTATE PARTNERSHIP L.P. By: ----------------------------------------- Name: Title: -------------------------------------------- Andrew A. Wiederhorn 18 EXHIBIT 1 SPECIFIED SENIOR EXECUTIVES Robert G. Rosen EX-10.11 3 a2040821zex-10_11.txt EXHIBIT 10.11 EXHIBIT 10.11 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of September 4, 1999 (the "Original Agreement Date"), and amended and restated as of October 1, 2000, by and between Wilshire Real Estate Investment Inc. and Wilshire Real Estate Partnership L.P. (collectively and individually, the "Company"), with its principal office at 1631 SW Columbia Street, Portland, Oregon 97201 and Lawrence A. Mendelsohn, residing at 02393 SW Military Road, Portland, Oregon 97219 (the "Executive"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Executive is currently employed as the President of the Company and is also a director of the Company; and WHEREAS, the Company and Executive desire to enter into this agreement (the "Agreement") to set forth terms of Executive's employment by the Company, as such terms are amended as of the amendment and restatement date set forth above. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. TERM OF EMPLOYMENT. Executive's employment under this Agreement (prior to its amendment and restatement) commenced on September 4, 1999. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement (as amended and restated) shall be for a three (3) year term (the "Employment Term") commencing on October 1, 2000 (the "Commencement Date"). Subject to Section 7 hereof, the Employment Term shall be automatically extended for additional terms of successive two (2) year periods unless the Company or Executive gives written notice of the termination of Executive's employment hereunder at least ninety (90) days prior to the expiration of the then current Employment Term. 2. POSITIONS. (a) Executive shall serve as President of the Company. Executive shall also serve on the Board of Directors of the Company (the "Board") without additional compensation. During the term of this Agreement, the Company shall recommend the Executive for election as a director. (b) Executive shall report directly to the Chief Executive Officer of the Company and shall have such duties and authority, consistent with his position as President of the Company, as shall be determined from time to time by the Chief Executive Officer, provided that Executive shall have authority comparable to that of presidents of United States public companies that are similar in size and business to the Company. (c) During the Employment Term, Executive shall devote substantially all of his business time, energy, skill and efforts to the performance of his duties and responsibilities hereunder; provided, however, that Executive shall be allowed to (i) serve as a director, employee or consultant of companies solely owned by Executive or Executive's family; (ii) serve as a director of other companies; (iii) engage in charitable activities; and (iv) manage his personal financial and legal affairs. 3. BASE SALARY. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $500,000. Base salary shall be payable in accordance with the usual payroll practices of the Company (including withholding). Executive's base salary shall be subject to annual review by the Board in October of each year and may be increased, but not decreased, from time to time upon recommendation of the Compensation Committee of the Board (the "Committee"). The base salary determined as aforesaid from time to time shall constitute "Base Salary" for purposes of this Agreement. 4. INCENTIVE COMPENSATION. (a) BONUS. For each 12 month period commencing on October 1, 2000 (each, an "Annual Period"), Executive shall be entitled to receive an annual bonus (the "Bonus") equal to 30% of the Bonus Pool for such Annual Period. For each Annual Period, the Bonus Pool shall be (i) if Post-Bonus ROE is 15% or greater, 25% of Pre-Bonus Earnings, (ii) if Post-Bonus ROE is 10% or greater but less than 15%, 20% of Pre-Bonus Earnings, (iii) if Post-Bonus ROE is 5% or greater but less than 10%, 10% of Pre-Bonus Earnings, or (iv) if Post-Bonus ROE is less than 5%, zero. For purposes of this agreement, the following terms shall have the following meanings: "PRE-BONUS EARNINGS" means the Company's after-tax income (as determined in accordance with generally accepted accounting principles and reflected on the Company's financial statements) for the relevant Annual Period or portion thereof determined prior to subtracting the amount of the Bonus Pool payable for that Annual Period; provided, however, that in determining Pre-Bonus Earnings for purposes of this Section 4, (i) Pre- Bonus Earnings shall be increased or decreased for the relevant Annual Period by the amount of unrealized gains or unrealized losses, as the case may be, which are incurred after the commencement of the relevant Annual Period and which are reflected directly in equity as "other comprehensive income or loss" during such Annual Period and (ii) increased by the amount of any cash bonus paid to the senior executives of the Company (the "Specified Senior Executives") listed on Exhibit 1 hereto (as the same may be amended from time to time with the consent of the parties hereto). "POST-BONUS EARNINGS" means the Company's Pre-Bonus Earnings after subtracting (i) 75% of the after-tax amount of the Bonus Pool payable for that Annual Period and (ii) the after tax amount of any cash bonus paid to the Specified Senior Executives. 2 "EQUITY" means the Company's total shareholders' equity (as determined in accordance with generally accepted accounting principles and reflected on the Company's financial statements) at the beginning of the relevant Annual Period. "POST-BONUS ROE" means the Company's Post-Bonus Earnings for the relevant Annual Period divided by its Equity at the beginning of the relevant Annual Period (expressed in percentage terms). To assist the reader in understanding the foregoing provisions, examples of such Bonus determinations are set forth on Schedule I hereto. Such annual Bonus shall be payable by November 15th of each year following the Annual Period for which the Bonus is payable and, if necessary, shall be adjusted for any subsequent amendments to the Company's financial statements. The Company will apply the annual Bonus to repay any outstanding Excess Advance (as defined below) prior to making any payment to Executive. To the extent that the Company repurchases any of its outstanding common stock or the Company's net operating losses under Section 382 of the Code (as defined below) are disallowed, the parties agree to negotiate in good faith to amend the incentive compensation provisions of this Section 4 to provide Executive with comparable goals and returns to those that existed prior to the occurrence of such events. Following the initial Employment Term, such Bonus shall be subject to shareholder approval as and to the extent required by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). (b) ADVANCES. During any quarterly period during an Annual Period, the Company shall, at the request of the Executive, pay an advance on any such Bonus; provided, however, that any such advance (together with any prior advances made during the relevant Annual Period) shall not exceed 80% of the pro rata portion of the Estimated Annual Bonus (as defined below) attributable to such quarterly period and to any prior quarterly periods during such Annual Period. The Estimated Annual Bonus is determined by annualizing the Company's Pre-Bonus Earnings and Post-Bonus Earnings (based on the Company's financial statements or projections) for the quarterly period or periods during such Annual Period (or for purposes of Section 8, monthly periods) and determining the annual Bonus payable to Executive as described in Section 4(a). In the event that the aggregate amount of advances outstanding immediately following the end of any quarterly period during the relevant Annual Period exceeds 80% of the pro rata portion of the Estimated Annual Bonus ("Permitted Advances") determined immediately following such quarterly period, the amount in excess of the Permitted Advances shall be treated as an interest free loan from the Company ("Advance Reimbursement Loan") for the next succeeding quarterly period (the "Following Quarter") and if at the end of the Following Quarter the aggregate amount of outstanding advances continues to exceed the Permitted Advances (the "Excess Advance"), Executive shall repay the Excess Advance to the Company within 30 days of the end of such Following Quarter. (c) OPTIONS. As of the Original Agreement Date, the Company granted to Executive stock options (the "Initial Options") on 350,000 shares of the Company's common stock (the "Common Stock") under the Company's Incentive Stock Plan (the "Incentive Stock Plan"). The Initial Options have an exercise price equal to the Company's book value per outstanding share as 3 of September 30, 1999, which exercise price is in excess of the market value per share based on the share price of the Common Stock as of such date. The Initial Options will be fully exercisable at the time of vesting and 25% of the Initial Options shall vest on each anniversary of the Original Agreement Date (which will result in the Initial Options being fully vested on the fourth anniversary of the Original Agreement Date). In addition, the Executive shall be entitled to participate in the Company's Incentive Stock Plan and receive nonqualified, incentive or other options ("Options") to purchase shares of the Company's Common Stock under the Incentive Stock Plan as determined by the Committee from time to time provided that the Incentive Stock Plan is approved by the shareholders of the Company to the extent required by Section 162(m) of the Code. Notwithstanding the foregoing, the Company may recommend to the Committee that Executive be granted Options under a plan other than the Incentive Stock Plan provided that such other plan contains terms and conditions which are substantially similar to the terms and conditions of the Incentive Stock Plan, and further provided, that such other plan is approved by the shareholders of the Company to the extent required by Section 162(m) of the Code. To the extent permitted under applicable law, any Options granted to Executive hereunder (including the Initial Options) may be assigned and transferred by Executive to entities created for or on behalf of Executive's immediate family for tax planning or other purposes. (d) OTHER COMPENSATION. The Company may, upon recommendation of the Committee, award to Executive such other bonuses and compensation as it deems appropriate and reasonable. 5. EMPLOYEE BENEFITS AND VACATION. (a) During the Employment Term, Executive shall be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements, including, without limitation, any nonqualified deferred compensation plans, maintained by the Company from time to time for the benefit of the senior executives of the Company in accordance with their respective terms as in effect from time to time. To the extent permitted under applicable law, the Company shall not treat as compensation to Executive fringes and perquisites provided to Executive or the items under Section 6 below. (b) As of the Original Agreement Date, the Company agreed to loan to Executive $50,000 during each year of the Employment Term to purchase shares of Common Stock of the Company up to a maximum of $250,000. Each annual loan made pursuant to this Section 5(b) (the "Stock Purchase Loans") shall mature on the earlier of (i) its fifth anniversary and (ii) six months after Executive is no longer employed by the Company. The Stock Purchase Loans shall accrue interest on the then outstanding principal amount of the Stock Purchase Loans from the date of any Stock Purchase Loan is made until maturity at a rate equal to the prime rate as published in the Wall Street Journal on the date any Stock Purchase Loan is made pursuant hereto and shall be payable annually in arrears. Interest on the Stock Purchase Loan will not be paid in cash but shall be payable in kind (i.e. the amount of interest accrued on the Stock Purchase Loan during each annual period will be added to the principal amount of the Stock Purchase Loan at the end of such annual period). The Stock Purchase Loans will be full recourse loans against Executive, and each Stock Purchase Loan will be secured by the shares of Common Stock purchased with each such Stock Purchase Loan together with other shares of Common Stock pledged by Executive so that the aggregate value 4 (based on the closing price on the acquisition date of such shares on the Nasdaq stock market) of all such shares securing each new Stock Purchase Loan shall be at least equal to 110% of the principal amount of the Stock Purchase Loans. (c) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than five (5) weeks paid vacation per calendar year. Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. 6. BUSINESS EXPENSES. The Company shall also reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's policies as in effect from time to time. 7. TERMINATION. (a) The employment of Executive under this Agreement shall terminate upon the occurrence of any of the following events: (i) the death of Executive; (ii) the termination of Executive's employment by the Company due to Executive's Disability pursuant to Section 7(b) hereof; (iii) the termination of Executive's employment by Executive for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of Executive's employment by the Company without Cause; (v) the termination of employment by Executive without Good Reason upon sixty (60) days prior written notice; (vi) the termination of employment by Executive for any reason during the period commencing on the date of a Change in Control and ending on the day immediately prior to the second anniversary of the Change in Control (the "Change in Control Protection Period"); (vii) the termination of Executive's employment by the Company for Cause pursuant to Section 7(e); or (viii) the retirement of Executive by the Company at or after his sixty-fifth birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits. 5 (b) DISABILITY. If, by reason of the same or related physical or mental reasons, Executive is unable to carry out Executive's material duties pursuant to this Agreement for more than six (6) months in any twelve (12) consecutive month period (a "Disability") as determined and certified in writing by two (2) licensed physicians, one of which is Executive's regular attending physician, the Company may terminate Executive's employment for Disability upon thirty (30) days prior written notice, by a notice of Disability termination, at any time thereafter during such twelve (12) month period in which Executive is unable to carry out his duties as a result of the same or related physical or mental illness. Such termination shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day notice period. (c) TERMINATION FOR GOOD REASON. A Termination for Good Reason means a termination by Executive by written notice given within sixty (60) days after the occurrence of the Good Reason event. For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances, unless such circumstances are fully corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof): (i) any material diminution of Executive's positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence), or the assignment to Executive of duties or responsibilities that are inconsistent with Executive's position as President; (ii) removal of Executive from, or the non reelection of Executive to, the positions with the Company specified herein; (iii) a relocation of the Company's principal United States executive offices to a location more than fifty (50) miles from Portland, Oregon, or a relocation of Executive away from such principal United States executive office; (iv) a failure by the Company (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus and substantially the same level of criteria for achievability thereof as Executive participated in immediately prior to any change in such plans or awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company of any material provision of this Agreement; (vi) executive's removal from or failure to be reelected to the Board; (vii) a failure of any successor to the Company to assume in a writing delivered to Executive upon the assignee becoming such the obligations of the Company hereunder; or (viii) a failure of the Committee to grant Executive an award of Options in accordance with Section 4 hereof, unless the applicable circumstances under (i) through (viii) are fully corrected prior to the date of termination specified in the notice of termination for Good Reason. (d) NOTICE OF TERMINATION FOR GOOD REASON. A notice of termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination for Good Reason. The failure by Executive to set forth in the notice of 6 termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The notice of termination for Good Reason shall provide for a date of termination not less than fifteen (15) nor more than sixty (60) days after the date such notice of termination for Good Reason is given. (e) CAUSE. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company or its business which has a material adverse effect on the Company; (ii) the refusal of Executive to follow the proper written direction of the Board, provided that the foregoing refusal shall not be "Cause" if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Board; (iii) Executive being convicted of a felony (other than a felony involving a traffic offense); (iv) the breach by Executive of any fiduciary duty owed by Executive to the Company which has a material adverse effect on the Company; or (v) Executive's material fraud with regard to the Company. (f) NOTICE OF TERMINATION FOR CAUSE. A notice of termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide a basis for termination for Cause. Further, a notice of termination for Cause shall be required to include a copy of a resolution duly adopted by at least two-thirds of the entire membership of the Board at a meeting of the Board which was called for the purpose of considering such termination and which Executive and his representative had the right to attend and address the Board, finding that, in the good faith opinion of the Board, Executive engaged in conduct set forth in the definition of Cause herein and specifying the particulars thereof in reasonable detail. The date of termination for a termination for Cause shall be the date indicated in the notice of termination. Any purported termination for Cause which is held by a court or arbitrator not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a termination by the Company without Cause. 8. CONSEQUENCES OF TERMINATION OF EMPLOYMENT. (a) DEATH. If Executive's employment is terminated during the Employment Term by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including without limitation, any unpaid Bonus due, any amount of Base Salary or deferred compensation accrued or earned but unpaid, any accrued vacation payable pursuant to the Company's policies and any unreimbursed business expenses payable pursuant to Section 6 which amounts shall be promptly paid in a lump sum to Executive's spouse; (ii) the Estimated Annual Bonus for the Annual Period in which the Executive died, prorated through the end of the month in which Executive died, which amount shall be paid to Executive's spouse within 60 days after such month end; (iii) full accelerated vesting under all outstanding equity-based and long-term incentive plans (with options remaining outstanding as provided under the applicable stock option plan and a pro rata payment under any long term incentive plans based on actual coverage under such plans 7 at the time payments normally would be made under such plans); (iv) subject to Section 10 hereof, any other amounts or benefits owing to Executive under the then applicable employee benefit plans or policies of the Company, which shall be paid in accordance with such plans or policies; (v) payment on a monthly basis of six (6) months of Executive's Base Salary on the date of death, which shall be paid to Executive's spouse, or if she shall predecease him, then to Executive's children (or their guardian if one is appointed) in equal shares; (vi) any outstanding Advance Reimbursement Loan shall mature as provided in Section 4; (vii) any outstanding Stock Purchase Loan shall become due and payable six months after the date of termination; and (viii) payment of Executive's spouse's and dependents' COBRA coverage premiums to the extent, and so long as, they remain eligible for COBRA coverage, but in no event more than one (1) year. Section 12 hereof shall also continue to apply. (b) DISABILITY. If Executive's employment is terminated by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of employment by reason of his death, provided that the payment of Base Salary shall be reduced by the projected amount Executive would receive under any long-term disability policy or program maintained by the Company during the six (6) month period during which Base Salary is being paid. Section 12 hereof shall also continue to apply. (c) TERMINATION BY EXECUTIVE FOR GOOD REASON OR FOR ANY REASON DURING THE CHANGE IN CONTROL PROTECTION PERIOD OR TERMINATION BY THE COMPANY WITHOUT CAUSE OR NONEXTENSION OF THE TERM BY THE COMPANY. If (i) outside of the Change in Control Protection Period, Executive terminates his employment hereunder for Good Reason during the Employment Term, (ii) a Change in Control occurs and during the Change in Control Protection Period Executive terminates his employment for any reason, (iii) Executive's employment with the Company is terminated by the Company without Cause, or (iv) Executive's employment with the Company terminates as a result of the Company giving notice of nonextension of the Employment Term pursuant to Section 1 hereof, Executive shall be entitled to receive (1) in a lump sum within ten (10) business days after such termination, (a) any unreimbursed business expenses payable pursuant to Section 6, (b) any Base Salary, Bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies but not yet paid at the date of termination, and (c) an amount equal to one year's Base Salary in effect on the date of termination; (2) the Estimated Annual Bonus payable to Executive for the Annual Period, prorated through the end of the month in which the Executive is terminated, which amount shall be paid within 45 days after such month's end; (3) accelerated full vesting under all outstanding equity-based and long-term incentive plans with Options remaining outstanding as provided under the applicable stock option plan and a pro rata payment under any long term incentive plans based on actual coverage under such plans, payment being made at the time payments would normally be made under such plans; (4) subject to Section 10 hereof, any other amounts or benefits due Executive under the then applicable employee benefit plans of the Company as shall be determined and paid in accordance with such plans, policies and practices; (5) one (1) year of additional service and compensation credit (at his then compensation level) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company, measured from the date of termination 8 of employment and not credited to the extent that Executive is otherwise entitled to such credit during such one (1) year period, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (6) one (1) year of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) measured from the date of termination under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); (7) any outstanding Advance Reimbursement Loan shall mature as provided in Section 4; (8) any outstanding Stock Purchase Loan shall become due and payable six months following the date of termination; and (9) payment by the Company of the premiums for Executive (except in the case of death) and his spouse's and dependents' health coverage for one (1) year under the Company's health plans which cover the senior executives of the Company or materially similar benefits. Payments under (9) above may, at the discretion of the Company, be made by continuing participation of Executive in the plan as a terminee, by paying the applicable COBRA premium for Executive and his spouse and dependents, or by covering Executive and his spouse and dependents under substitute arrangements, provided that, to the extent Executive incurs tax that he would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Executive shall receive from the Company an additional payment in the amount necessary so that he will have no additional cost for receiving such items or any additional payment. In the circumstances described in each of (i) through (iv) above, Section 12 hereof shall also continue to apply. (d) TERMINATION FOR CAUSE OR VOLUNTARY RESIGNATION WITHOUT GOOD REASON OR RETIREMENT. If Executive's employment hereunder is terminated: (i) by the Company for Cause, (ii) by Executive without Good Reason outside of the Change in Control Protection Period, or (iii) by the Company pursuant to Section 7(a)(viii) hereof, Executive shall be entitled to receive only his Base Salary through the date of termination, the Estimated Annual Bonus prorated through the last day of the month in which Executive is terminated, and any unreimbursed business expenses payable pursuant to Section 6. In addition, any outstanding Advance Reimbursement Loan shall mature as provided in Section 4 and any outstanding Stock Purchase Loan shall become due and payable six months following the date of termination. All other benefits (including, without limitation, Options) due Executive following such termination of employment shall be determined in accordance with the plans, policies and practices of the Company. (e) ACCESS TO BOOKS AND RECORDS. Following termination of employment of the Executive, the Company shall permit such Executive reasonable access to retrieve personally (or by his designated representatives) any and all personal files, personal copies of Company files, and property that are stored at the Company. Additionally, subject to reimbursement of any out-of- pocket costs and expenses, the Company shall permit such Executive and his designated representatives and agents reasonable access to all of the Company's files, books and records, independent accountants and attorneys, as requested by him, subject to any confidentiality agreements in effect between the Executive and the Company. 9. [THIS SECTION IS INTENTIONALLY LEFT BLANK.] ------------------------------------------- 9 10. NO MITIGATION; NO SET-OFF. In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and, except as explicitly set forth herein, there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Section 8 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. Such amounts are in lieu of any amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. 11. CHANGE IN CONTROL. For purposes of this Agreement, the term "Change in Control" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of common stock of the Company), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 promulgated under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than a member of the Board) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two (2) year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered in the exceptions in (i) above) acquires more than twenty- five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control; or (iv) approval by the shareholders of the Company of a plan of complete liquidation of the Company or the closing of the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale. 10 12. INDEMNIFICATION. (a) The Company agrees that if Executive is made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, other enterprise or non-profit organization, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee, fiduciary or agent while serving as a director, officer, member, employee, fiduciary or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Maryland law, as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be an officer, director, member, fiduciary or agent, or is no longer employed by the company, and shall inure to the benefit of his heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive and the giving by Executive of any undertakings required by applicable law. (d) Executive shall give the Company notice of any claim made against him for which indemnity will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are reasonably convenient for Executive. (e) With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive. Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. (f) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written 11 consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 12 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company, agreement, vote of stockholders or disinterested directors or otherwise. (h) The Company hereunder agrees to obtain officer and director liability insurance policies covering Executive and shall maintain at all times following the Commencement Date and during the Employment Term coverage under such policies in the aggregate with regard to all officers and directors, including Executive, of an amount not less than $10 million. 13. SPECIAL TAX PROVISION. (a) Anything in this Agreement to the contrary notwithstanding, in the event that any amount or benefit paid, payable, or to be paid, or distributed, distributable, or to be distributed to or with respect to Executive by the Company (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership or effective control covered by Code Section 280G(b)(2) or any person affiliated with the Company or such person) as a result of a change in ownership or effective control of the Company or a direct or indirect parent thereof (or the assets of any of the foregoing) covered by Code Section 280G(b)(2) (collectively, the "Covered Payments") is or becomes subject to the excise tax imposed by or under Section 4999 of the Code (or any similar federal or state tax that may hereafter be imposed), and/or any interest, penalties or additions to tax, with respect to such excise tax (such excise tax, together with such interest penalties and additions to tax, is hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax Reimbursement Payment") such that after payment by Executive of all taxes (including, without limitation, any interest or penalties and any Excise Tax imposed on or attributable to the Tax Reimbursement Payment itself), Executive retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the amount of the Excise Tax imposed upon the Covered Payments, and (ii) without duplication, an amount equal to the product of (A) any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income, and (B) the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is made or is to be made. The intent of this Section 13 is that (a) Executive, after paying his federal, state and local income tax and payroll taxes, will be in the same position as if he was not subject to the Excise Tax under Section 4999 of the Code (or any similar federal or state tax that may be imposed) and did not receive the extra payments pursuant to this Section 13 and this Section 13 shall be interpreted accordingly. (b) Except as otherwise provided in Section 13(a), for purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" (within the meaning 12 of Section 280G(b)(2) of the Code) and such payments in excess of the Code Section 280G(b)(3) "base amount" shall be treated as subject to the Excise Tax, unless, and except to the extent that, the Company's independent certified public accountants appointed prior to the change in ownership covered by Code Section 280G(b)(2) or legal counsel (reasonably acceptable to Executive) appointed by such public accountants (or, if the public accountants decline such appointment and decline appointing such legal counsel, such independent certified public accountants as promptly mutually agreed on in good faith by the Company and Executive) (the "Accountant"), deliver a written opinion to Executive, reasonably satisfactory to Executive's legal counsel, that Executive has a reasonable basis to claim that the Covered Payments (in whole or in part) (A) do not constitute "parachute payments", (B) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount" allocable to such reasonable compensation, or (C) such "parachute payments" are otherwise not subject to such Excise Tax (with appropriate legal authority, detailed analysis and explanation provided therein by the Accountants); and (ii) the value of any Covered Payments which are non-cash benefits or deferred payments or benefits shall be determined by the Accountant in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Tax Reimbursement Payment, Executive shall be deemed: (i) to pay federal, state and/or local income taxes at the highest applicable marginal rate of income taxation for the calendar year in which the Tax Reimbursement Payment is made or is to be made, and (ii) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed due to the inclusion of the Tax Reimbursement Payment in Executive's adjusted gross income. (d) (i) (A) In the event that prior to the time Executive has filed any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred, the Accountant determines, for any reason whatever, the correct amount of the Tax Reimbursement Payment to be less than the amount determined at the time the Tax Reimbursement Payment was made, Executive shall repay to the Company, at the time that the amount of such reduction in Tax Reimbursement Payment is determined by the Accountant, the portion of the prior Tax Reimbursement Payment attributable to such reduction (including the portion of the Tax Reimbursement Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Tax Reimbursement Payment being repaid by Executive, using the assumptions and methodology utilized to calculate the Tax Reimbursement Payment (unless manifestly erroneous)), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. (B) In the event that the determination set forth in (A) above is made by the Accountant after the filing by Executive of any of his tax returns for the calendar year in which the change in ownership event covered by Code Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of such change in ownership, Executive shall file at the request of the Company an amended tax return in accordance with the Accountant's determination, but no portion of the Tax Reimbursement Payment shall be required to be refunded to the Company until actual refund or credit of such portion has been made to Executive, and interest payable to the Company 13 shall not exceed the interest received or credited to Executive by such tax authority for the period it held such portion (less any tax Executive must pay on such interest and which he is unable to deduct as a result of payment of the refund). (C) In the event Executive receives a refund pursuant to (B) above and repays such amount to the Company, Executive shall thereafter file for refunds or credits by reason of the repayments to the Company. Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if Executive's claim for such refund or credit is denied. (D) Executive and the Company shall mutually agree upon the course of action, if any, to be pursued (which shall be at the expense of the Company) if Executive's claim for refund or credit is denied. (ii) In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Company shall make an additional Tax Reimbursement Payment in respect of such excess (plus any interest, penalties or additions to tax payable with respect to such excess) once the amount of such excess is finally determined. (iii) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 13, subject to subpart (i)(D) above, Executive shall permit the Company to control issues related to this Section 13 (at its expense), provided that such issues do not potentially materially adversely affect Executive, but Executive shall control any other issues. In the event the issues are interrelated, Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, Executive shall permit the representative of the Company to accompany him and Executive and his representative shall cooperate with the Company and its representative. (iv) With regard to any initial filing for a refund or any other action required pursuant to this Section 13 (other than by mutual agreement) or, if not required, agreed to by the Company and Executive, Executive shall cooperate fully with the Company, provided that the foregoing shall not apply to actions that are provided herein to be at the sole discretion of Executive. (e) The Tax Reimbursement Payment, or any portion thereof, payable by the Company shall be paid not later than the fifth day following the determination by the Accountant, 14 and any payment made after such fifth day shall bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company shall use its best efforts to cause the Accountant to promptly deliver the initial determination required hereunder and, if not delivered, within ninety (90) days after the change in ownership event covered by Section 280G(b)(2) of the Code, the Company shall pay Executive the Tax Reimbursement Payment set forth in an opinion from counsel recognized as knowledgeable in the relevant areas selected by Executive, and reasonably acceptable to the Company, within five (5) days after delivery of such opinion. In accordance with Section 16(g), the Company may withhold from the Tax Reimbursement Payment and deposit into applicable taxing authorities such amounts as are required to be withheld by applicable law. To the extent that Executive is required to pay estimated or other taxes on amounts received by Executive beyond any withheld amounts, Executive shall promptly make such payments. The amount of such payment shall be subject to later adjustment in accordance with the determination of the Accountant as provided herein. (f) The Company shall be responsible for all charges of the Accountant and if (e) is applicable the reasonable charges for the opinion given by Executive's counsel. (g) The Company and Executive shall mutually agree on and promulgate further guidelines in accordance with this Section 13 to the extent, if any, necessary to effect the reversal of excessive or shortfall Tax Reimbursement Payments. The foregoing shall not in any way be inconsistent with Section 13(d)(i)(D) hereof. 14. LEGAL AND OTHER FEES AND EXPENSES. In the event that a claim for payment or benefits under this Agreement is disputed, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred by Executive in pursuing such claim, unless the claim by Executive is found to be frivolous by any court or arbitrator. 15. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration conducted in the City of Portland in the State of Oregon under the Commercial Arbitration Rules then prevailing of the American Arbitration Association and such submission shall request the American Arbitration Association to: (i) appoint an arbitrator experienced and knowledgeable concerning the matter then in dispute; (ii) require the testimony to be transcribed; (iii) require the award to be accompanied by findings of fact and the statement for reasons for the decision; and (iv) request the matter to be handled by and in accordance with the expedited procedures provided for in the Commercial Arbitration Rules. The determination of the arbitrators, which shall be based upon a DE NOVO interpretation of this Agreement, shall be final and binding and judgment may be entered on the arbitrators' award in any court having jurisdiction. All costs of arbitration, including the cost of the American Arbitration Association and the arbitrator, shall be borne by the Company. 16. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon without reference to principles of conflicts of laws. 15 (b) ENTIRE AGREEMENT/AMENDMENTS. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements, whether written or otherwise, between the Company and Executive. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) NO WAIVER. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (d) ASSIGNMENT. This Agreement shall not be assignable by Executive. This Agreement shall be assignable, with the consent of Executive, by the Company only to an acquiror of all or substantially all of the assets of the Company, provided such acquiror promptly assumes all of the obligations hereunder of the Company in a writing delivered to Executive and otherwise complies with the provisions hereof with regard to such assumption. (e) SUCCESSORS; BINDING AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement shall inure to the benefit of and be binding upon parties hereto and their personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. If Executive dies while any amount would still be payable hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Agreement to the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, legatees and permitted assignees of the parties hereto. (f) COMMUNICATIONS. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, and (ii) two business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of Andrew A. Wiederhorn of the Company, or to such other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (g) WITHHOLDING TAXES. The Company may withhold from any and all amounts payable under this Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. 16 (h) SURVIVORSHIP. The respective rights and obligations of the parties hereunder shall survive any termination of Executive's employment. (i) COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. WILSHIRE REAL ESTATE INVESTMENT INC., on its behalf and on behalf of WILSHIRE REAL ESTATE PARTNERSHIP L.P. By: ----------------------------------- Name: Title: Lawrence A. Mendelsohn 17 EXHIBIT 1 SPECIFIED SENIOR EXECUTIVES Robert G. Rosen EX-10.12 4 a2040821zex-10_12.txt EXHIBIT 10.12 EXHIBIT 10.12 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of October 9, 1999 (the "Original Agreement Date"), amended as of May 19, 2000 and again as of July 27, 2000, and subsequently amended and restated as of October 1, 2000, by and between Wilshire Real Estate Investment Inc. and Wilshire Real Estate Partnership L.P. (collectively and individually, the "Company"), with its principal office at 1631 SW Columbia Street, Portland, Oregon 97201 and Robert G. Rosen, residing at 3 Vetere Place, Mt. Kisco, New York 10549 (the "Executive"). W I T N E S S E T H: - - - - - - - - - -- WHEREAS, Executive is currently employed as an executive of the Company; and WHEREAS, the Company and Executive desire to enter into this agreement (the "Agreement") to set forth terms of Executive's employment by the Company, as such terms are amended as of the amendment and restatement date set forth above. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. TERM OF EMPLOYMENT. Executive's employment under this Agreement (prior to its Amendment and restatement) commenced on October 9, 1999. Except for earlier termination as provided in Section 7 hereof, Executive's employment under this Agreement (as amended and restated) shall be for a three (3) year term (the "Employment Term") commencing on October 1, 2000 (the "Commencement Date"). Subject to Section 7 hereof, the Employment Term shall be automatically extended for additional terms of successive two (2) year periods unless the Company or Executive gives written notice of the termination of Executive's employment hereunder at least thirty (30) days prior to the expiration of the then current Employment Term. 2. POSITION. (a) Executive shall serve as an Executive Vice President of the Company. (b) Executive shall report directly to the Chief Executive Officer of the Company and shall have such duties and authority, consistent with his position as shall be determined from time to time by the Chief Executive Officer. (c) During the Employment Term, Executive shall devote substantially all of his business time ("Business Time"), energy, skill and efforts to the performance of his duties and responsibilities hereunder; provided, however, that Executive shall be allowed to (i) engage in charitable activities and (ii) manage his personal financial and legal affairs. As of May 19, 2000, Executive shall perform his duties hereunder at the Company's Portland, Oregon office (the "Portland Office") or the New York Area Office (as defined below), at the Executive's discretion; provided, however, that Executive shall spend at least fifty percent (50%) of his Business Time in the Portland Office unless otherwise agreed to in writing by the Company. So long as the Company maintains its current Greenwich, Connecticut office (the "New York Area Office"), the Company shall provide Executive with private office space in such office to be used by Executive when working from the New York Area Office. Such office shall be provided to Executive, beginning not later than July 1, 2000, as is, with existing furniture, telephone and data setup and shall remain on a month-to-month lease. Notwithstanding the foregoing, Executive, with the Company's prior written authorization (which authorization shall be at the sole and absolute discretion of the Company), may move the New York Area Office to the New York City area; provided, that, the total monthly cost for operating such office (including, but not limited to, rent and utilities, but excluding, Bloomberg and other similar systems to which Executive has access to in the Portland Office and which are readily transportable) shall not exceed $4,000." 3. SIGNING BONUS AND BASE SALARY. (a) As of the Original Agreement Date, and subject to the execution of a release and settlement agreement between Wilshire Financial Services Group Inc. ("WFSG") and Executive acceptable to WFSG, the Company agreed to immediately pay to Executive a signing bonus of $300,000, net of any withholding taxes. In addition, in the event that the Company, through any material efforts of Executive, sells, or receives bona fide bids for, the mortgage-backed securities set forth on Exhibit 1 hereto (the "Mortgage-Backed Securities") by December 31, 1999 for a price which results, or would have resulted, in a net pre-tax profit of $1.5 million, the Company agreed to pay to Executive an additional signing bonus of $200,000, net of any withholding taxes, immediately upon completion of such sales or receipt of such bids (the "Additional Signing Bonus"). In the event such sales result in (or such bids would have resulted in) a net pre-tax profit of less than $1.5 million, such additional signing bonus shall be pro-rated accordingly. The net pre-tax profit referred to above will be calculated using the following methodology: The net pre-tax profit shall be the sales price (net of expenses) received by the Company for the Mortgage-Backed Securities (or if the Company decides not to sell, the sales price it would have received for the Mortgage-Backed Securities based on the bona fide bids received by the Company) less the lower of (a) $16 million less (i) any cash received by the Company in respect of such Mortgage-Backed Securities from the time the Company purchased the Mortgage-Backed Securities through the date of sale (or if the Mortgage-Backed Securities are not sold, the date of the receipt of bona fide bids), plus (ii) an amount equal to an annual accrual rate of 12% on the purchase price of the Mortgage-Backed Securities from the time the Company purchased the Mortgage- Backed Securities through the date of sale (or if the Mortgage-Backed Securities are not sold, the date of the receipt of bona fide bids) and (b) the actual price paid by the Company for the Mortgage- Backed Securities less (x) any cash received by the Company in respect of such Mortgage-Backed Securities from the time the Company purchased the Mortgage-Backed Securities through the date of sale (or if the Mortgage-Backed Securities are not sold, the date of the receipt of bona fide bids), plus (y) an amount equal to an annual accrual rate of 12% on the purchase price of the Mortgage- Backed Securities from the time the Company purchased the Mortgage-Backed Securities through the date of sale (or if the Mortgage-Backed Securities are not sold, the date of the receipt of bona fide bids). To the extent that the Company does not purchase the Mortgage-Backed Securities, the Company and Executive agreed to negotiate in good faith another set of reasonably achievable goals for Executive to earn the $200,000 additional signing bonus by December 31, 1999. 2 (b) During the Employment Term, the Company shall pay Executive a base salary at the annual rate of not less than $250,000. Base salary shall be payable in accordance with the usual payroll practices of the Company (including withholding). Executive's base salary shall be subject to annual review by the Board in October of each year and may be increased, but not decreased, from time to time upon recommendation of the Compensation Committee of the Board (the "Committee"). The base salary determined as aforesaid from time to time shall constitute "Base Salary" for purposes of this Agreement. 4. INCENTIVE COMPENSATION. (a) BONUS. 1999-2000 BONUS. For the period commencing on October 9, 1999 and ending November 30, 2000 (the "Initial Bonus Period"), Executive shall be eligible for a bonus (the "Initial Period Bonus") in the amount of $368,004. The Initial Period Bonus shall be paid to Executive upon materially achieving, to the Company's satisfaction, a majority of the Business Goals (as defined below) during the Initial Bonus Period. For purposes of this Agreement, "Business Goals" shall mean the (i) reduction or elimination of the liability risk associated with short-term, mark-to-market financing for those applicable assets, (ii) sale, upgrade of the ratings or improvement of the marketability of some or all of the Company's mortgage-backed securities, (iii) focus on and/or implementation of a successful resolution strategy for the Cityscape mortgage-backed securities position, (iv) completion and closure of the "P.O." deal, subject to acceptable structure, (v) exploration and provision of advice to the Company on the process of launching a collateralized bond obligation or other form of long-term financing or take- out strategy for the mortgage-backed securities portfolio and (vi) demonstration of the ability to functionally work fifty (50%) of the time away from the Portland Office (as a result of being based in the New York City Office and traveling on behalf of the Company). Notwithstanding anything in this Section 4(a) to the contrary (i) Sections 4(b) and 4(c) hereof shall not apply to the Initial Period Bonus and (ii) Executive shall be entitled to retain the payments made to him in the amounts of $112,500, $29,496 and $200,000. The foregoing Initial Bonus shall be payable without respect to the remainder of this subsection. For each 12 month period commencing on October 1, 2000 (each, an "Annual Period"), Executive shall be entitled to receive an annual bonus (the "Bonus") of $850,000. Of such Bonus Amount, $725,000 will be a minimum guaranteed bonus payable on a quarterly basis on the first payroll date following the quarter for which such minimum guaranteed bonus is earned, and paid in accordance with the Company's usual payroll practices. The remaining $125,000 will be treated as an incentive bonus and will be payable quarterly on the first payroll date following the quarter for which such incentive bonus is earned, and paid in accordance with the Company's usual payroll practices, subject to the attainment of the performance goals set forth below, if so certified as attained by the Company's Compensation Committee. An award of the incentive bonus portion of the Bonus shall be prorated as outlined below based on the achievement of a certain number of the following performance goals also outlined below which may be modified for the next Annual Period upon mutual consent of the Executive on one hand and by the Company on the other hand, based upon the recommendation of the Company's Compensation Committee. 3 A separate incentive Bonus of $62,500 will be earned if one of the two following performance goals is attained: (1) sale of the Company's GI Joes commercial real estate retail and warehouse portfolio (excluding the 10.91 acres of excess land); or (2) sale of the Company's Irwindale land investment by September 3, 2001. A separate incentive Bonus of $62,500 will be earned if two of the following four performance goals are attained: (1) an annual increase in the Company's book value from September 3, 2001; (2) the Company's income, excluding charges from the impairment of mortgage backed securities, divided by its net shareholders' equity, exceeds the 10 year U.S. Treasury note yield in effect at the beginning of each Annual Period; (3) the Company's Funds From Operations, including capital gains and losses, but excluding charges from the impairment of mortgage backed securities, exceeds $5 million; or (4) a recovery of more than $2,000,000 in the Company's unrealized loss allowance for its existing mortgage backed securities portfolio of Wilshire Financial Services Group Inc. and subsidiary or affiliate issued deals from October 1, 2000 to September 30, 2001. The incentive bonus portion of the Bonus shall also be subject to shareholder approval as and to the extent required by Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). (b) ADVANCES. During any quarterly period during an Annual Period, the Company shall, at the request of Executive, pay an advance on such quarter's minimum guaranteed portion of the Bonus to Executive. Advances of the minimum guaranteed portion of the Bonus shall not be subject to any repayment or interest requirements. During any quarterly period during an Annual Period, the Company shall, at the request of the Executive, pay an advance on such quarter's targeted incentive bonus portion of the Bonus to the Executive. Advances of the incentive bonus portion of the Bonus shall be repaid with interest at 120% of the applicable short-term federal rate in the event the relevant performance goals are not attained. Repayment must be made by the end of the second quarter following the relevant quarter in which the advance was made. (c) OPTIONS. As of the Original Agreement Date, the Company granted to Executive stock options (the "Initial Options") on 210,000 shares of the Company's common stock (the "Common Stock") under the Company's Incentive Stock Plan (the "Incentive Stock Plan"). The Initial Options have an exercise price equal to the Company's book value per outstanding share as of September 30, 1999, which exercise price is in excess of the market value per share based on the share price of the Common Stock as of such date. The Initial Options will be fully exercisable at 4 the time of vesting and 25% of the Initial Options shall vest on each anniversary of the Original Agreement Date (which will result in the Initial Options being fully vested on the fourth anniversary of the Original Agreement Date). In addition, the Executive shall be entitled to participate in the Company's Incentive Stock Plan and receive nonqualified, incentive or other options ("Options") to purchase shares of the Company's Common Stock under the Incentive Stock Plan as determined by the Committee from time to time provided that the Incentive Stock Plan is approved by the shareholders of the Company to the extent required by Section 162(m) of the Code. Notwithstanding the foregoing, the Company may recommend to the Committee that Executive be granted Options under a plan other than the Incentive Stock Plan provided that such other plan contains terms and conditions which are substantially similar to the terms and conditions of the Incentive Stock Plan, and further provided, that such other plan is approved by the shareholders of the Company to the extent required by Section 162(m) of the Code. To the extent permitted under applicable law, any Options granted to Executive hereunder (including the Initial Options) may be assigned and transferred by Executive to entities created for or on behalf of Executive's immediate family for tax planning or other purposes. (d) OTHER COMPENSATION. The Company may, upon recommendation of the Committee, award to Executive such other bonuses and compensation as it deems appropriate and reasonable. 5. EMPLOYEE BENEFITS AND VACATION. (a) During the Employment Term, Executive shall be entitled to participate in all pension, retirement, savings, welfare and other employee benefit plans and arrangements, including, without limitation, any nonqualified deferred compensation plans, maintained by the Company from time to time for the benefit of the senior executives of the Company in accordance with their respective terms as in effect from time to time. Executive acknowledges that the aforementioned items may be included as compensation for income tax purposes to the extent required by applicable law. To the extent permitted under applicable law, the Company shall not treat as compensation to Executive fringes and perquisites provided to Executive or the items under Section 6 below. (b) As of the Original Agreement Date, the Company agreed to loan to Executive $50,000 to purchase shares of Common Stock of the Company. Each loan made pursuant to this Section 5(b) (the "Stock Purchase Loans") shall mature on the earlier of (i) its fifth anniversary and (ii) six months after Executive is no longer employed by the Company. The Stock Purchase Loans shall accrue interest on the then outstanding principal amount of the Stock Purchase Loans from the date of any Stock Purchase Loan is made until maturity at a rate equal to the prime rate as published in the Wall Street Journal on the date any Stock Purchase Loan is made pursuant hereto and shall be payable annually in arrears. Interest on the Stock Purchase Loan will not be paid in cash but shall be payable in kind (i.e. the amount of interest accrued on the Stock Purchase Loan during each annual period will be added to the principal amount of the Stock Purchase Loan at the end of such annual period). The Stock Purchase Loans will be full recourse loans against Executive and each Stock Purchase Loan will be secured by the shares of Common Stock purchased with each such Stock Purchase Loan. This Section 5(b) is in addition to, and separate from, the notes and stock 5 pledge agreements between Executive and the Company in the amount of $795,300, the terms of which are contained in such separate documents. (c) During the Employment Term, Executive shall be entitled to vacation each year in accordance with the Company's policies in effect from time to time, but in no event less than five (5) weeks paid vacation per calendar year. Executive shall also be entitled to such periods of sick leave as is customarily provided by the Company for its senior executive employees. (d) Upon Executive's presentation of supporting documentation, the Company shall reimburse Executive for the reasonable moving expenses incurred by Executive in connection with his move to the New York area in an amount not to exceed $20,000. 6. BUSINESS EXPENSES. The Company shall also reimburse Executive for the travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder, (including Executive's reasonable costs associated with travel between the Portland Office and the New York Area Office pursuant to Section 2.(c) hereof) in accordance with the Company's policies as in effect from time to time. 7. TERMINATION. (a) The employment of Executive under this Agreement shall terminate upon the occurrence of any of the following events: (i) the death of Executive; (ii) the termination of Executive's employment by the Company due to Executive's Disability pursuant to Section 7(b) hereof; (iii) the termination of Executive's employment by Executive for Good Reason pursuant to Section 7(c) hereof; (iv) the termination of Executive's employment by the Company without Cause; (v) the termination of employment by Executive without Good Reason upon sixty (60) days prior written notice; (vi) the termination of employment by Executive for any reason during the period commencing on the date of a Change in Control and ending on the day immediately prior to the second anniversary of the Change in Control (the "Change in Control Protection Period"); (vii) the termination of Executive's employment by the Company for Cause pursuant to Section 7(e); or 6 (viii) the retirement of Executive by the Company at or after his sixty-fifth birthday to the extent such termination is specifically permitted as a stated exception from applicable federal and state age discrimination laws based on position and retirement benefits. (b) DISABILITY. If, by reason of the same or related physical or mental reasons, Executive is unable to carry out Executive's material duties pursuant to this Agreement for more than six (6) months in any twelve (12) consecutive month period (a "Disability") as determined and certified in writing by two (2) licensed physicians, one of which is Executive's regular attending physician, the Company may terminate Executive's employment for Disability upon thirty (30) days prior written notice, by a notice of Disability termination, at any time thereafter during such twelve (12) month period in which Executive is unable to carry out his duties as a result of the same or related physical or mental illness. Such termination shall not be effective if Executive returns to the full time performance of his material duties within such thirty (30) day notice period. (c) TERMINATION FOR GOOD REASON. A Termination for Good Reason means a termination by Executive by written notice given within sixty (60) days after the occurrence of the Good Reason event. For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence, as the case may be, without Executive's express written consent, of any of the following circumstances, unless such circumstances are fully corrected prior to the date of termination specified in the Notice of Termination for Good Reason (as defined in Section 7(d) hereof): (i) any material diminution of Executive's positions, duties or responsibilities hereunder (except in each case in connection with the termination of Executive's employment for Cause or Disability or as a result of Executive's death, or temporarily as a result of Executive's illness or other absence), or the assignment to Executive of duties or responsibilities that are inconsistent with Executive's position; (ii) removal of Executive from, or the non reelection of Executive to, the positions with the Company specified herein; (iii) except as otherwise provided in Section 2(c) hereof, a relocation of the Company's principal United States executive offices to a location more than fifty (50) miles from Portland, Oregon, or a relocation of Executive away from such principal United States executive office (except to the New York City area); (iv) a failure by the Company (A) to continue any bonus plan, program or arrangement in which Executive is entitled to participate (the "Bonus Plans"), provided that any such Bonus Plans may be modified at the Company's discretion from time to time but shall be deemed terminated if (x) any such plan does not remain substantially in the form in effect prior to such modification and (y) if plans providing Executive with substantially similar benefits are not substituted therefor ("Substitute Plans"), or (B) to continue Executive as a participant in the Bonus Plans and Substitute Plans on at least the same basis as to potential amount of the bonus and substantially the same level of criteria for achievability thereof as Executive participated in immediately prior to any change in such plans or awards, in accordance with the Bonus Plans and the Substitute Plans; (v) any material breach by the Company of any material provision of this Agreement; (vi) a failure of any successor to the Company to assume in a writing delivered to Executive upon the assignee becoming such the obligations of the Company hereunder; (vii) a failure of the Committee to grant Executive an award of Options in accordance with Section 4 hereof, unless the applicable circumstances under (i) through (vii) are fully corrected prior to the date of termination specified in the notice of termination for Good Reason; or (viii) 7 failure of the Company's Compensation Committee and the Executive to mutually agree on changes to, or new performance goals for the next Annual Period. (d) NOTICE OF TERMINATION FOR GOOD REASON. A notice of termination for Good Reason shall mean a notice that shall indicate the specific termination provision in Section 7(c) relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination for Good Reason. The failure by Executive to set forth in the notice of termination for Good Reason any facts or circumstances which contribute to the showing of Good Reason shall not waive any right of Executive hereunder or preclude Executive from asserting such fact or circumstance in enforcing his rights hereunder. The notice of termination for Good Reason shall provide for a date of termination not less than fifteen (15) nor more than sixty (60) days after the date such notice of termination for Good Reason is given. (e) CAUSE. Subject to the notification provisions of Section 7(f) below, Executive's employment hereunder may be terminated by the Company for Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i) willful misconduct by Executive with regard to the Company or its business which has a material adverse effect on the Company; (ii) the refusal of Executive to follow the direction of the Chief Executive Officer, provided that the foregoing refusal shall not be "Cause" if Executive in good faith believes that such direction is illegal, unethical or immoral and promptly so notifies the Chief Executive Officer; (iii) Executive being convicted of a felony (other than a felony involving a traffic offense) in connection with the Executive's employment with the Company; (iv) the breach by Executive of any fiduciary duty owed by Executive to the Company which has a material adverse effect on the Company; or (v) Executive's material fraud with regard to the Company. (f) NOTICE OF TERMINATION FOR CAUSE. A notice of termination for Cause shall mean a notice that shall indicate the specific termination provision in Section 7(e) relied upon and shall set forth in reasonable detail the facts and circumstances which provide a basis for termination for Cause. The date of termination for a termination for Cause shall be the date indicated in the notice of termination. Any purported termination for Cause which is held by a court or arbitrator not to have been based on the grounds set forth in this Agreement or not to have followed the procedures set forth in this Agreement shall be deemed a termination by the Company without Cause. 8. CONSEQUENCES OF TERMINATION OF EMPLOYMENT. (a) DEATH. If Executive's employment is terminated during the Employment Term by reason of Executive's death, the employment period under this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement except for: (i) any compensation earned but not yet paid, including without limitation, any unpaid Bonus due, any amount of Base Salary or deferred compensation accrued or earned but unpaid, any accrued vacation payable pursuant to the Company's policies and any unreimbursed business expenses payable pursuant to Section 6 which amounts shall be promptly paid in a lump sum to Executive's spouse; (ii) the Bonus for the Annual Period in which the Executive died pro rated through the end of the month in which Executive died, plus an additional six (6) months (irrespective of whether performance goals were attained), which 8 Bonus shall be paid to Executive's spouse within 60 days after such month end; (iii) full accelerated vesting under all outstanding equity-based and long-term incentive plans (with options remaining outstanding as provided under the applicable stock option plan and a pro rata payment under any long term incentive plans based on actual coverage under such plans at the time payments normally would be made under such plans); (iv) subject to Section 10 hereof, any other amounts or benefits owing to Executive under the then applicable employee benefit plans or policies of the Company, which shall be paid in accordance with such plans or policies; (v) payment on a monthly basis of six (6) months of Executive's Base Salary on the date of death, which shall be paid to Executive's spouse, or if she shall predecease him, then to Executive's children (or their guardian if one is appointed) in equal shares; (vi) any outstanding Stock Purchase Loan shall become due and payable six months after the date of termination, (vii) payment of Executive's spouse's and dependents' COBRA coverage premiums to the extent, and so long as, they remain eligible for COBRA coverage, but in no event more than one (1) year, and (viii) the payment of the Additional Signing Bonus if the conditions for payment of the Additional Signing Bonus are met. Section 12 hereof shall also continue to apply. (b) DISABILITY. If Executive's employment is terminated by reason of Executive's Disability, Executive shall be entitled to receive the payments and benefits to which his representatives would be entitled in the event of a termination of employment by reason of his death, provided that the payment of Base Salary shall be reduced by the projected amount Executive would receive under any long-term disability policy or program maintained by the Company during the six (6) month period during which Base Salary is being paid. Section 12 hereof shall also continue to apply. (c) TERMINATION BY EXECUTIVE FOR GOOD REASON OR FOR ANY REASON DURING THE CHANGE IN CONTROL PROTECTION PERIOD OR TERMINATION BY THE COMPANY WITHOUT CAUSE OR NONEXTENSION OF THE TERM BY THE COMPANY. If (i) outside of the Change in Control Protection Period, Executive terminates his employment hereunder for Good Reason during the Employment Term, (ii) a Change in Control occurs and during the Change in Control Protection Period Executive terminates his employment for any reason, (iii) Executive's employment with the Company is terminated by the Company without Cause, or (iv) Executive's employment with the Company terminates as a result of the Company giving notice of nonextension of the Employment Term pursuant to Section 1 hereof, Executive shall be entitled to receive, in a lump sum within ten (10) business days after such termination, (1) any unreimbursed business expenses payable pursuant to Section 6, and (2) any Base Salary, Bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies but not yet paid at the date of termination, and upon the Executive signing a release of claims in the form set forth as Exhibit 2 hereto, the Executive shall be entitled to receive: (A) in a lump sum within ten (10) business days after such termination (i) one full year's Base Salary in effect on the date of termination, and (ii) an amount equal to one full year's Bonus payable to Executive for a complete Annual Period (irrespective of whether performance goals were attained); (B) accelerated full vesting under all outstanding equity-based and long-term incentive plans with Options remaining outstanding as provided under the applicable stock option plan and a pro rata payment under any long term incentive plans based on actual coverage under such plans, payment being made at the time 9 payments would normally be made under such plans; (C) subject to Section 10 hereof, any other amounts or benefits due Executive under the then applicable employee benefit plans of the Company as shall be determined and paid in accordance with such plans, policies and practices; (D) one (1) year of additional service and compensation credit (at his then compensation level) for pension purposes under any defined benefit type qualified or nonqualified pension plan or arrangement of the Company, measured from the date of termination of employment and not credited to the extent that Executive is otherwise entitled to such credit during such one (1) year period, which payments shall be made through and in accordance with the terms of the nonqualified defined benefit pension arrangement if any then exists, or, if not, in an actuarially equivalent lump sum (using the actuarial factors then applying in the Company's defined benefit plan covering Executive); (E) one (1) year of the maximum Company contribution (assuming Executive deferred the maximum amount and continued to earn his then current salary) measured from the date of termination under any type of qualified or nonqualified 401(k) plan (payable at the end of each such year); (F) any outstanding Stock Purchase Loan pursuant to Section 5(b) hereof shall become due and payable six months after the date of termination; and (G) payment by the Company of the premiums for Executive (except in the case of death) and his spouse's and dependents' health coverage for one (1) year under the Company's health plans which cover the senior executives of the Company or materially similar benefits. Payments under (G) above may, at the discretion of the Company, be made by continuing participation of Executive in the plan as a terminee, by paying the applicable COBRA premium for Executive and his spouse and dependents, or by covering Executive and his spouse and dependents under substitute arrangements, provided that, to the extent Executive incurs tax that he would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Executive shall receive from the Company an additional payment in the amount necessary so that he will have no additional cost for receiving such items or any additional payment. In the circumstances described in each of (i) through (iv) above, Section 12 hereof shall also continue to apply. (d) TERMINATION FOR CAUSE OR VOLUNTARY RESIGNATION WITHOUT GOOD REASON OR RETIREMENT. If Executive's employment hereunder is terminated: (i) by the Company for Cause, (ii) by Executive without Good Reason outside of the Change in Control Protection Period, or (iii) by the Company pursuant to Section 7(a)(viii) hereof, Executive shall be entitled to receive only his Base Salary through the date of termination, the Estimated Annual Bonus prorated through the last day of the month in which Executive is terminated, and any unreimbursed business expenses payable pursuant to Section 6. Any outstanding Stock Purchase Loan pursuant to Section 5(b) hereof shall become due and payable six months after the date of termination. All other benefits (including, without limitation, Options) due Executive following such termination of employment shall be determined in accordance with the plans, policies and practices of the Company. 9. SOLICITATION. Executive acknowledges that the retention of nonclerical employees employed by the Company in which the Company has invested training and depends on for the operation of its business is important to the business of the Company, that Executive has obtained unique information as to such employees as an executive of the Company and has developed a unique relationship with such persons as a result of being an executive of the Company and, therefore, it is necessary for the Company to be protected from Solicitation of such employees. 10 Executive acknowledges that, by virtue of his employment with the Company, Executive has gained or will gain knowledge of the identity, characteristics and preferences of its customers, and such information may be confidential and Executive would inevitably have to draw on such confidential information if Executive were to solicit or service the Company's customers or referral sources on behalf of a competing business enterprise. Accordingly, Executive agrees that he will not engage in Solicitation for the fifteen (15) month period following the date of Executive's termination. For purposes of this Agreement, Solicitation shall mean: recruiting, soliciting or inducing of any nonclerical employee or employees of the Company to terminate his or her employment with, or otherwise cease his or her relationship with, the Company or hiring or assisting another person or entity to hire (including, but not limited to identifying a nonclerical employee to another employer for employment) any nonclerical employee of the Company or any person who within six (6) months before had been a nonclerical employee of the Company; or, soliciting or inducing any customer of the Company to cease his or her relationship with the Company. 10. NO MITIGATION; NO SET-OFF. In the event of any termination of employment under Section 8, Executive shall be under no obligation to seek other employment and, except as explicitly set forth herein, there shall be no offset against any amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain. Any amounts due under Section 8 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. Such amounts are in lieu of any amounts payable under any other salary continuation or cash severance arrangement of the Company and to the extent paid or provided under any other such arrangement shall be offset from the amount due hereunder. 11. CHANGE IN CONTROL. For purposes of this Agreement, the term "Change in Control" shall mean (i) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of common stock of the Company), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 promulgated under the Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than a member of the Board) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two (2) year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board; (iii) the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company 11 outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered in the exceptions in (i) above) acquires more than twenty- five percent (25%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control; or (iv) approval by the shareholders of the Company of a plan of complete liquidation of the Company or the closing of the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale. 12. INDEMNIFICATION. (a) The Company agrees that if Executive is made a party to or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was an officer of the Company, or is or was serving at the request of the Company as an officer, member, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, other enterprise or non-profit organization, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as an officer, member, employee, fiduciary or agent while serving as an officer, member, employee, fiduciary or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Maryland law, as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be an officer, member, fiduciary or agent, or is no longer employed by the Company, and shall inure to the benefit of his heirs, executors and administrators. (b) As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive and the giving by Executive of any undertakings required by applicable law. (d) Executive shall give the Company notice of any claim made against him for which indemnity will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are reasonably convenient for Executive. (e) With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: 12 (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive. Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. (f) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (g) The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 12 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company, agreement, vote of stockholders or disinterested directors or otherwise. (h) The Company hereunder agrees to obtain officer liability insurance policies covering Executive and shall maintain at all times following the Commencement Date and during the Employment Term coverage under such policies in the aggregate with regard to all officers and directors, including Executive, of an amount not less than $10 million. 13. LEGAL AND OTHER FEES AND EXPENSES. In the event that a claim for payment or benefits under this Agreement is disputed, the Company shall pay all reasonable attorney, accountant and other professional fees and reasonable expenses incurred by Executive in pursuing such claim, unless the claim by Executive is found to be frivolous by any court or arbitrator. 14. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration conducted in the City of Portland in the State of Oregon under the Commercial Arbitration Rules then prevailing of the American Arbitration Association and such submission shall request the American Arbitration Association to: (i) appoint an arbitrator experienced and knowledgeable concerning the matter then in dispute; (ii) require the testimony to be transcribed; (iii) require the award to be accompanied by findings of fact and the statement for reasons for the decision; and (iv) request the matter to be handled by and in accordance with the expedited procedures provided for in the Commercial Arbitration Rules. The determination of the arbitrators, which shall be based upon a DE NOVO interpretation of this Agreement, shall be final and binding and judgment may be entered on the arbitrators' award in any court having jurisdiction. 13 All costs of arbitration, including the cost of the American Arbitration Association and the arbitrator, shall be borne by the Company. 15. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon without reference to principles of conflicts of laws. (b) ENTIRE AGREEMENT/AMENDMENTS. This Agreement and the instruments contemplated herein, contain the entire understanding of the parties with respect to the employment of Executive by the Company from and after the Commencement Date and supersedes any prior agreements, whether written or otherwise, between the Company and Executive. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein and therein. This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) NO WAIVER. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any such waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. (d) ASSIGNMENT. This Agreement shall not be assignable by Executive. This Agreement shall be assignable, with the consent of Executive, by the Company only to an acquiror of all or substantially all of the assets of the Company, provided such acquiror promptly assumes all of the obligations hereunder of the Company in a writing delivered to Executive and otherwise complies with the provisions hereof with regard to such assumption. (e) SUCCESSORS; BINDING AGREEMENT; THIRD PARTY BENEFICIARIES. This Agreement shall inure to the benefit of and be binding upon parties hereto and their personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees legatees and permitted assignees of the parties hereto. If Executive dies while any amount would still be payable hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Agreement to the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, legatees and permitted assignees of the parties hereto. (f) COMMUNICATIONS. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given (i) when faxed or delivered, and (ii) two business days after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the initial page of this Agreement, provided that all notices to the Company shall be directed to the attention of Lawrence A. Mendelsohn of the Company, or to such 14 other address as any party may have furnished to the other in writing in accordance herewith. Notice of change of address shall be effective only upon receipt. (g) WITHHOLDING TAXES. The Company may withhold from any and all amounts payable under this Agreement such federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. (h) SURVIVORSHIP. The respective rights and obligations of the parties hereunder shall survive any termination of Executive's employment. (i) COUNTERPARTS. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (j) HEADINGS. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 15 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. WILSHIRE REAL ESTATE INVESTMENT INC., on its behalf and on behalf of WILSHIRE REAL ESTATE INVESTMENT INC. By: ---------------------------------- Name: Title: -------------------------------------- Robert G. Rosen 16 EXHIBIT 2 WAIVER AND GENERAL RELEASE OF CLAIMS To: Wilshire Real Estate Investment Inc. and Wilshire Real Estate Partnership L.P. 1631 SW Columbia Street Portland, Oregon 97201 1. I, Robert G. Rosen, hereby agree that my employment with Wilshire Real Estate Investment Inc. and Wilshire Real Estate Partnership L.P. (the "Company") and its affiliates will end on ____,_____ and will not be continued thereafter or resumed again at any time unless mutually agreed in writing by the Company and me. The Company and its affiliates will have no obligation to rehire or consider me for re-employment in the future. 2.(a) In consideration for the payment and/or other benefits to be provided me pursuant to Section 8(c) of my Employment Agreement with the Company dated as of October 9, 1999, amended as of May 19, 2000 and again as of July 27, 2000, and subsequently amended and restated as of October 1, 2000 (the "Employment Agreement"), I, for myself and for my heirs, executors, administrators, and assigns (hereinafter referred to collectively as "Releasors"), forever release and discharge the Company and any and all of their subsidiaries, divisions, affiliated entities, employee benefit and/or pension plans or funds, successors and assigns, and all of its or their past and present officers, directors, members, shareholders, trustees, agents and employees (hereinafter referred to as the "Entities and Persons"), from any and all claims, demands, cause of action, fees and liabilities of any kind whatsoever, whether known or unknown, which I ever had, now have, or may have against the Entities and Persons by reason of any actual or alleged act, omission, transaction, practice, conduct, occurrence, or other matter up to and including the date of this Waiver and General Release and with regard to my termination of employment. (b) In consideration for the delivery of this Waiver and General Release, the Company for itself and for its successors and assigns, forever releases and discharges me and my heirs, executors, administrators and assigns, from any and all claims, demands, cause of action, fees and liabilities of any kind whatsoever, whether known or unknown, which the Company ever had, now have, or may have against me or my heirs, executors, administrators or assigns by reason of any actual or alleged act, omission, transaction, practice, conduct, occurrence, or other matter up to and including the date of this Waiver and General Release and with regard to my termination of employment. 17 3. Without limiting the generality of the foregoing, this Waiver and General Release is intended to and shall release the Entities and Persons from any and all claims, whether known or unknown, which Releasors ever had, now has, or may have against the Entities and Persons arising out of my employment with the Company, and/or the termination of that employment, including, but not limited to: (i) any claim under Title VII of the Civil Rights Act, as amended; (ii) any other claim (whether based on federal, state, or local law, statutory or decisional) relating to or arising out of my employment by the Company, the terms and conditions of such employment, the termination of such employment, and/or any of the events relating directly or indirectly to or surrounding the termination of that employment; (iii) any claim under the Age Discrimination in Employment Act, as amended; (iv) any claim under applicable state or local law against discrimination; (v) any claim for attorneys' fees, costs, disbursements and/or the like; or (vi) any claim under, with regard to, or in connection with my Employment Agreement or any agreement or plan with regard to equity, incentive or deferred compensation. 4. Notwithstanding the foregoing, the foregoing release shall not cover rights of indemnification to which I was entitled immediately prior to my termination date under the Company's Certificate of Incorporation, By-laws, or Section 12 of the Employment Agreement or otherwise with regard to my service as an officer of the Company. 5. I agree that I will not, from any source or proceeding, seek or accept any award or settlement with respect to any claim or right covered by Section 2 above. In addition to the foregoing, except as otherwise prohibited by law, I represent and warrant that I will not sue or commence any proceeding (judicial or administrative), or participate in any action, suit or proceeding, against any of the Entities and Persons, with respect to any act, event, occurrence, or any alleged failure to act, released hereunder. If, notwithstanding the foregoing promises, I or any Releasors sue or commence a proceeding with regard to anything released hereunder, I shall be required and I agree to first repay all monies and property paid to me by the Company and the Entities and Persons pursuant to Section 8(c) of the Employment Agreement before taking such action. 6. The interpretation of this Waiver and General Release will be governed by the law of the State of Oregon without reference to principles of conflict of laws. In the event any provision of this Waiver and General Release shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision of this Waiver and General Release. 7. This Waiver and General Release is not intended, and shall not be construed, as an admission that the Entities and Persons have violated any federal, state or local law (statutory or decisional), ordinance or regulation, breached any contract or committed any wrong whatsoever against me. 8. I acknowledge that I have been advised by the Company to consult an attorney before signing this Waiver and General Release and that I have executed this Waiver and General Release after having had the opportunity to consult with an attorney of my choice. 9. I further acknowledge that I have read this Waiver and General Release and the Letter Agreement in full, have had twenty-one (21) days to consider the terms of this Waiver and General Release, that I fully understand the terms, and that I have knowingly and voluntarily assented to all the terms and conditions contained herein. 10. I further acknowledge that after executing the Waiver and General Release I have seven (7) days to revoke it by delivery of a Notice of Revocation to the Company to the attention of Andrew A. Wiederhorn or his successor prior to the eighth day after execution and delivery by me of the Waiver and General Release. I understand that if so revoked by me, the Company's obligations under this Waiver and General Release and its payment and other obligations under Section 8(c) of the Employment Agreement are null and void. 11. I understand that this Waiver and General Release, and the Employment Agreement constitute the complete understanding between the Company and me and that no other promises or agreements shall be binding unless in writing and signed by both the Company and me. Dated: WILSHIRE REAL ESTATE INVESTMENT INC. Signature: By: ------------------------- ---------------------- Witness: WILSHIRE REAL ESTATE --------------------------- PARTNERSHIP L.P. By: ---------------------- EX-11 5 a2040821zex-11.txt EXHIBIT 11 EXHIBIT 11 COMPUTATION OF LOSS PER COMMON SHARE
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Diluted net loss per share: Net loss to common shareholders................... $(15,542,000) $(26,647,000) $(56,388,000) ============ ============ ============ Average number of shares outstanding.............. 10,507,313 11,442,921 11,421,933 Net effect of dilutive stock options--based on treasury stock method........................... -- -- -- ------------ ------------ ------------ Total average shares.............................. 10,507,313 11,442,921 11,421,933 ============ ============ ============ Fully dilutive net loss per share................. $ (1.48) $ (2.33) $ (4.94) ============ ============ ============
EX-21.1 6 a2040821zex-21_1.txt EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES Fog Cap L.P. (Formerly Wilshire Real Estate Partnership L.P.) Fog Cutter Securities Corporation (Formerly WREI Securities Corporation) Fog Cutter Servicing Inc. (Formerly WREI Mortgage Inc.) Fog Cutter Servicing I Inc. WREP 2000-1PO, Inc. FCCG BSSP 2000-5 CORP WREP 1998-1 LLC WREP Islands Limited European Internet House (UK) Limited WFSG (Channel Islands) Limited BEP Islands Limited (Formerly WREP Islands No. 2 Limited) WREP Islands UGAP Limited (Formerly WREP Islands No. 1 Limited) -----END PRIVACY-ENHANCED MESSAGE-----