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