SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|X| Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
or
|_| Transitional Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-21845
Wilshire Financial Services Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 93-1223879
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1776 SW Madison Street, Portland, OR 97205
(Address of principal executive offices) (Zip Code)
(503) 223-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1999
Common Stock, par value $.01 per share 20,033,600 Shares
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Consolidated Statements of Financial Condition.................3
Consolidated Statements of Operations..........................4
Consolidated Statements of Cash Flows..........................6
Consolidated Statements of Stockholders' Equity (Deficit)......8
Notes to Interim Financial Statements..........................9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................34
Item 2. Changes in Securities............................................34
Item 3. Defaults Upon Senior Securities..................................34
Item 4. Submission of Matters to a Vote of Security Holders..............34
Item 5. Other Information................................................34
Item 6. Exhibits and Reports on Form 8-K.................................34
2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
-------------------------- -----------
June 30, May 31, December 31,
1999 1999 1998
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ...................................... $ 24,304 $ 26,552 $ 23,468
Mortgage-backed securities available for sale, at fair value ... 98,315 99,647 114,463
Mortgage-backed securities held to maturity, at amortized cost . 11,551 11,993 13,580
Securities held to maturity, at amortized cost ................. 5,971 5,969 5,962
Loans, net ..................................................... 502,175 491,576 455,561
Discounted loans, net .......................................... 27,624 29,058 51,989
Loans held for sale, net, at lower of cost or market ........... 46,301 45,757 284,672
Stock in Federal Home Loan Bank of San Francisco, at cost ...... 4,655 4,655 5,332
Real estate owned, net ......................................... 31,332 35,374 62,168
Leasehold improvements and equipment, net ...................... 6,111 6,156 8,185
Accrued interest receivable .................................... 4,509 5,138 5,468
Investment in Wilshire Real Estate Investment Trust Inc. ....... 4,027 4,218 5,979
Servicer advances .............................................. 19,568 7,552 5,007
Mortgage servicing rights, net ................................. -- -- 2,346
Income tax receivable .......................................... -- -- 9,865
Prepaid expenses and other assets .............................. 11,497 15,723 30,208
----------- ----------- -----------
TOTAL .......................................................... $ 797,940 $ 789,368 $ 1,084,253
=========== =========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits .................................................. $ 492,729 $ 497,424 $ 510,430
Short-term borrowings ..................................... 171,339 164,854 420,816
Notes payable ............................................. -- -- 184,245
Notes payable to Wilshire Real Estate Investment Trust Inc. 10,763 10,748 16,973
Accounts payable and other liabilities .................... 29,549 27,442 44,584
Minority interest in subsidiary ........................... 5,857 -- --
----------- ----------- -----------
Total liabilities ...................................... 710,237 700,468 1,177,048
----------- ----------- -----------
Commitments and Contingencies (see Note 5)
Stockholders' Equity (Deficit):
Common stock .............................................. 88,900 88,900 117,708
Treasury stock, at cost ................................... -- -- (2,852)
Retained deficit .......................................... (802) -- (183,294)
Accumulated other comprehensive loss, net ................. (395) -- (24,357)
----------- ----------- -----------
Total stockholders' equity (deficit) ................... 87,703 88,900 (92,795)
----------- ----------- -----------
TOTAL .......................................................... $ 797,940 $ 789,368 $ 1,084,253
=========== =========== ===========
</TABLE>
See notes to interim financial statements
3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
------------- ----------------------------
One Month Two Months Three Months
Ended Ended Ended
June 30, 1999 May 31, 1999 June 30, 1998
------------- ------------ -------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans .......................................... $ 4,400 $ 8,163 $ 34,157
Mortgage-backed securities ..................... 1,175 2,190 6,186
Securities and federal funds sold .............. 306 309 980
--------- --------- ---------
Total interest income .......................... 5,881 10,662 41,323
--------- --------- ---------
INTEREST EXPENSE:
Deposits ....................................... 2,145 4,437 5,736
Borrowings ..................................... 706 2,065 28,057
--------- --------- ---------
Total interest expense ......................... 2,851 6,502 33,793
--------- --------- ---------
NET INTEREST INCOME ..................................... 3,030 4,160 7,530
PROVISION FOR ESTIMATED LOSSES ON LOANS ................. 81 2,627 (1,500)
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS .................. 2,949 1,533 9,030
--------- --------- ---------
OTHER INCOME:
Servicing revenue .............................. 1,442 1,394 1,369
Real estate owned, net ......................... 153 (7) 3,399
Bankcard income, net ........................... 407 1,084 997
Gain on sale of loans .......................... 12 610 26,444
Gain on sale of securities ..................... -- -- 6,116
Trading income ................................. -- -- 172
Minority interest .............................. 160 -- --
Other, net ..................................... 1,096 1,260 2,473
--------- --------- ---------
Total other income ............................. 3,270 4,341 40,970
--------- --------- ---------
OTHER EXPENSES:
Compensation and employee benefits ............. 3,210 4,324 9,192
Loan service fees and expenses ................. 1,203 3,256 11,239
Professional services .......................... 603 (588) 1,815
Occupancy ...................................... 204 586 539
FDIC insurance premiums ........................ 97 194 208
Corporate travel and development ............... 521 395 2,178
Depreciation and amortization .................. 216 452 611
Other general and administrative expenses ...... 842 1,686 3,420
--------- --------- ---------
Total other expenses ........................... 6,896 10,305 29,202
--------- --------- ---------
(LOSS) INCOME BEFORE REORGANIZATION ITEMS, INCOME TAX
EXPENSE AND EXTRAORDINARY ITEM ..................... (677) (4,431) 20,798
REORGANIZATION ITEMS (see Note 2) ....................... -- (37,601) --
--------- --------- ---------
(LOSS) INCOME BEFORE INCOME TAX EXPENSE AND EXTRAORDINARY
ITEM ............................................... (677) (42,032) 20,798
INCOME TAX EXPENSE ...................................... 125 283 8,972
--------- --------- ---------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM ................. (802) (42,315) 11,826
EXTRAORDINARY ITEM, NET OF TAX (see Note 4) ............. -- 225,606 --
--------- --------- ---------
NET (LOSS) INCOME ....................................... $ (802) $ 183,291 $ 11,826
========= ========= =========
(LOSS) EARNINGS PER SHARE:
Basic:
(Loss) income before extraordinary item ............ $ (0.04) $ (3.89) $ 1.07
Net (loss) income .................................. (0.04) 16.84 1.07
Diluted:
(Loss) income before extraordinary item ............ N/A $ (3.89) $ 1.01
Net (loss) income .................................. N/A 16.84 1.01
</TABLE>
See notes to interim financial statements
4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
---------- -------------------------
One Month Five Months Six Months
Ended Ended Ended
June 30, May 31, June 30,
1999 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ...................................... $ 4,400 $ 21,710 $ 59,046
Mortgage-backed securities ................. 1,175 5,481 15,293
Securities and federal funds sold .......... 306 674 1,802
--------- --------- ---------
Total interest income ...................... 5,881 27,865 76,141
--------- --------- ---------
INTEREST EXPENSE:
Deposits ................................... 2,145 11,206 11,122
Borrowings ................................. 706 11,923 53,131
--------- --------- ---------
Total interest expense ..................... 2,851 23,129 64,253
--------- --------- ---------
NET INTEREST INCOME ................................. 3,030 4,736 11,888
PROVISION FOR ESTIMATED LOSSES ON LOANS ............. 81 2,697 (3,000)
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS .................. 2,949 2,039 14,888
--------- --------- ---------
OTHER INCOME:
Servicing revenue .......................... 1,442 3,309 2,740
Real estate owned, net ..................... 153 1,466 3,472
Bankcard income, net ....................... 407 2,381 1,497
Gain on sale of loans ...................... 12 3,165 26,444
Gain on sale of securities ................. -- -- 8,201
Trading income ............................. -- -- 1,630
Minority interest .......................... 160 -- --
Other, net ................................. 1,096 3,484 3,124
--------- --------- ---------
Total other income ......................... 3,270 13,805 47,108
--------- --------- ---------
OTHER EXPENSES:
Compensation and employee benefits ......... 3,210 11,796 15,109
Loan service fees and expenses ............. 1,203 8,523 20,097
Professional services ...................... 603 2,752 3,208
Occupancy .................................. 204 1,385 972
FDIC insurance premiums .................... 97 501 444
Corporate travel and development ........... 521 775 2,796
Depreciation and amortization .............. 216 1,161 892
Other general and administrative expenses .. 842 4,527 5,481
--------- --------- ---------
Total other expenses ....................... 6,896 31,420 48,999
--------- --------- ---------
(LOSS) INCOME BEFORE REORGANIZATION ITEMS, INCOME TAX
EXPENSE AND EXTRAORDINARY ITEM ................. (677) (15,576) 12,997
REORGANIZATION ITEMS (see Note 2) ................... -- (52,034) --
--------- --------- ---------
(LOSS) INCOME BEFORE INCOME TAX EXPENSE AND
EXTRAORDINARY ITEM ............................. (677) (67,610) 12,997
INCOME TAX EXPENSE .................................. 125 658 5,836
--------- --------- ---------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM ............. (802) (68,268) 7,161
EXTRAORDINARY ITEM, NET OF TAX (see Note 4) ......... -- 225,606 --
--------- --------- ---------
NET (LOSS) INCOME ................................... $ (802) $ 157,338 $ 7,161
========= ========= =========
(LOSS) EARNINGS PER SHARE:
Basic:
(Loss) income before extraordinary item ........ $ (0.04) $ (6.28) $ 0.65
Net (loss) income .............................. (0.04) 14.45 0.65
Diluted:
(Loss) income before extraordinary item ........ N/A $ (6.28) $ 0.61
Net (loss) income .............................. N/A 14.45 0.61
</TABLE>
See notes to interim financial statements
5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
--------- --------------------------
One Month Five Months Six Months
Ended Ended Ended
June 30, May 31, June 30,
1999 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .......................................................... $ (802) $ 157,338 $ 7,161
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Provision for estimated losses on loans ............................... 81 2,697 (3,000)
Provision for losses on real estate owned ............................. -- -- 1,724
Asset valuation adjustments ........................................... -- 647 --
Depreciation and amortization ......................................... 216 1,161 892
Gain on sale of real estate owned ..................................... (217) (2,192) (2,427)
Loss on disposal of equipment ......................................... -- 62 --
Origination of loans held for sale .................................... (30) -- (246,809)
Purchase of loans held for sale ....................................... -- (1,629) (378,942)
Proceeds from sale of loans held for sale ............................. -- 255,845 219,796
Gain on sale of loans ................................................. (12) (3,165) (26,444)
Gain on sale of securities ............................................ -- -- (8,201)
Unrealized gain on trading securities ................................. -- -- (172)
Amortization of discounts and deferred fees ........................... (6) 869 (11,505)
Income on equity investments .......................................... 7 (291) --
Other ................................................................. -- -- 5,181
Reorganization items:
Write-off of unamortized debt issuance costs ........................ -- 11,319 --
European reorganization costs ....................................... -- 2,492 --
Adjustments to carrying amounts of assets and liabilities pursuant
to fresh-start reporting .......................................... -- 37,601 --
Gain on extinguishment of debt ...................................... -- (225,606) --
Change in:
Trading account securities ............................................ -- -- 22,241
Servicer advances ..................................................... (12,016) (2,545) --
Accrued interest receivable ........................................... 629 330 (1,892)
Prepaid expenses and other assets ..................................... 4,250 9,039 (26,137)
Accounts payable and other liabilities ................................ 2,106 12,893 4,811
Minority interest ..................................................... 5,857 -- --
--------- --------- ---------
Net cash provided by (used in) operating activities ................... 63 256,865 (443,723)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans ..................................................... (17,694) (87,988) (514,486)
Loan repayments ....................................................... 13,940 70,412 129,116
Loan originations ..................................................... (6,504) (11,915) (16,678)
Proceeds from sale of loans ........................................... 12 -- 354,849
Proceeds from sale of mortgage-backed securities available for sale ... -- -- 129,210
Purchase of mortgage-backed securities available for sale ............. -- -- (64,293)
Repayment of mortgage-backed securities available for sale ............ 1,085 9,010 23,954
Repayments of mortgage-backed securities held to maturity ............. 438 1,544 2,134
Proceeds from FHLB stock dividend ..................................... -- 750 --
Purchase of real estate owned ......................................... -- (708) (13,070)
Proceeds from sale of real estate owned ............................... 4,580 28,359 113,927
Purchase of equity securities ......................................... -- -- (14,731)
Purchases of leasehold improvements and equipment ..................... (128) (768) (1,599)
--------- --------- ---------
Net cash (used in) provided by investing activities ................... (4,271) 8,696 128,333
--------- --------- ---------
</TABLE>
See notes to interim financial statements
6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
----------- ----------------------------
One Month Five Months Six Months
Ended Ended Ended
June 30, May 31, June 30,
1999 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits ............................. $ (4,695) $ (13,256) $ 60,142
Proceeds from short-term borrowings ............................. 24,559 99,579 1,327,828
Repayments of short-term borrowings ............................. (17,904) (353,800) (1,124,099)
Proceeds from debtor-in-possession financing .................... -- 5,000 --
Proceeds from notes to Wilshire Real Estate Investment Trust Inc. -- -- 220
Issuance of common stock ........................................ -- -- 61,811
Redemption of preferred stock ................................... -- -- (27,500)
----------- ----------- -----------
Net cash provided by (used in) financing activities ........ 1,960 (262,477) 298,402
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .................... (2,248) 3,084 (16,988)
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................. 26,552 23,468 66,115
----------- ----------- -----------
End of period ................................................... $ 24,304 $ 26,552 $ 49,127
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid for:
Interest ........................................................ $ 2,768 $ 17,083 $ 63,212
Income taxes .................................................... -- 6,252 5,690
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in settlement of loans .. 355 3,547 102,324
NONCASH FINANCING ACTIVITIES:
Pay in kind preferred stock dividend ............................ -- -- 417
NONCASH REORGANIZATION ITEMS:
Cancellation of old common stock ................................ -- 114,856 --
Issuance of new common stock in exchange for notes payable
and accrued interest thereon ............................... -- 88,900 --
</TABLE>
See notes to interim financial statements
7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Treasury Stock Retained Other
Earnings Comprehensive
Shares Amount Shares Amount Shares Amount (Deficit) Loss Total
------ ------ ------ ------ ------ ------ --------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1999 -- $ -- 11,070,000 $ 117,708 185,000 $(2,852) $(183,294) $(24,357) $(92,795)
Comprehensive income:
Net income............... 157,338 157,338
Unrealized holding losses
on available for sale
securities - net of tax (720) (720)
Unrealized loss on foreign
currency translation... (1,662) (1,662)
--------
Total comprehensive income. 154,956
Impact of reorganization:
Elimination of former
equity in connection with
bankruptcy plan.......... (11,070,000) (117,708) (185,000) 2,852 25,956 26,739 (62,161)
Issuance of new equity in
connection with bankruptcy
plan....................... 20,033,600 88,900 88,900
------------------------------------------------------------------------------------------------
BALANCE, May 31, 1999
(Fresh-start reporting date) -- $ -- 20,033,600 $ 88,900 -- $ -- $ -- $ -- $ 88,900
Comprehensive loss:
Net loss................. (802) (802)
Unrealized holding losses
on available for sale
securities - net of tax (394) (394)
Unrealized losses on
foreign currency
translation............ (1) (1)
--------
Total comprehensive loss... (1,197)
------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999 -- $ -- 20,033,600 $ 88,900 -- $ -- $ (802) $ (395) $ 87,703
================================================================================================
</TABLE>
See notes to interim financial statements
8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share data and where noted)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of Wilshire
Financial Services Group Inc. and Subsidiaries (the "Company" or "WFSG") are
unaudited and should be read in conjunction with the report on Form 8-K dated
June 10, 1999 relating to the emergence from bankruptcy and change in control of
the Company. A summary of the Company's significant accounting policies is set
forth in Note 4 to the Consolidated Financial Statements in the Company's 1998
Annual Report on Form 10-K.
On June 10, 1999, the Company completed its plan of reorganization under
Chapter 11 of the United States Bankruptcy Code and emerged from bankruptcy, as
discussed further in Note 2. The Company adopted fresh-start reporting (see Note
3), and restated its assets and liabilities to reflect their current fair values
as of the close of business on May 31, 1999, the day management concluded that
substantially all conditions precedent to the plan of reorganization had been
satisfied. Under the provisions of fresh-start reporting, the Company's retained
deficit and other equity accounts were reclassified to common stock. The
financial statements presented include consolidated statements of financial
condition of the reorganized company as of May 31, 1999 and June 30, 1999;
consolidated statements of operations of the predecessor company for the
two-month and five-month periods ended May 31, 1999; and a consolidated
statement of operations of the reorganized company for the month ended June 30,
1999.
In the opinion of management, all adjustments, other than the adjustments
described below, generally comprised of normal recurring accruals necessary for
fair presentation of the interim consolidated financial statements, have been
included and all intercompany accounts and transactions have been eliminated in
consolidation. Operating results for the month ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the period ending
December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications of 1998 amounts were made in order to conform to
the 1999 presentation, none of which affect previously reported net income.
2. RESTRUCTURING OF THE COMPANY
In order to address liquidity concerns and to improve the Company's
financial condition, the Company and an unofficial committee of holders of a
majority of the Company's $184.2 million in outstanding publicly issued notes
agreed, in November 1998, to a restructuring of the Company whereby (i) the
noteholders would exchange their notes for new common stock in the Company; (ii)
the Company's existing common stock and options would be canceled; and (iii)
noteholders would reallocate up to 0.6% of the new common stock to the then
existing stockholders of the Company.
9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
In connection with the plan of reorganization (the "Plan"), the Company
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code in the Federal Court of Wilmington, Delaware on March 3, 1999. On April 12,
1999, the Plan was approved by the bankruptcy court. On June 10, 1999, the Plan
became effective, the Company emerged from bankruptcy and a new Board of
Directors was seated. However, there can be no assurance that the reorganization
of the Company will have the desired economic effect.
Pursuant to the Plan, the holders of the Company's $184.2 million in
outstanding publicly issued notes received approximately 96.16 shares of new
common stock for every $1,000 of notes, including accrued interest through March
2, 1999 (see Note 4 - Extraordinary Item). A portion of the new common stock was
reallocated by the noteholders so that holders of the old common stock received
approximately 0.6% of the outstanding shares of new common stock. The principal
shareholders, Andrew A. Wiederhorn and Lawrence A. Mendelsohn, received 1 share
of new common stock for every 136.07 shares of old common stock held by them.
The registered holders other than the principal shareholders received
approximately 1 share of new common stock for every 77.28 shares of old common
stock. An affiliate of the Company, Wilshire Real Estate Investment Trust
("WREIT"), holds 2,874,791 shares of new common stock, representing a 14.4%
ownership interest in the Company (see Note 8--Investment in WREIT).
In addition, as part of the Plan, the servicing of the Company's assets
will be conducted by WCC Inc., a newly formed, majority-owned subsidiary of the
Company. Prior to the reorganization, the Company's assets were serviced by
Wilshire Credit Corporation, a company owned by Andrew A. Wiederhorn and
Lawrence A. Mendelsohn, the Company's principal shareholders. Wilshire Credit
Corporation was also adversely affected by the market turmoil of late 1998.
Accordingly, the Company entered into concurrent negotiations with the owners of
Wilshire Credit Corporation and the principal creditor of Wilshire Credit
Corporation, Capital Consultants, Inc. ("CCI"), to incorporate the servicing
operations of WCC into WFSG as part of the Plan.
Pursuant to such negotiations, the Company exchanged the net assets of
Wilshire Servicing Corporation ("WSC"), a wholly owned subsidiary of the
Company, for 100% of the voting common stock (representing 50.01% of the
economic value) of WCC Inc. The remaining 49.99% economic interest of WCC Inc.
is held by an affiliate of Capital Consultants, Inc., which took control of
Wilshire Credit Corporation as part of the Plan. The affiliate received 100% of
the Class B non-voting common stock of WCC Inc. in exchange for the transfer of
the assets and certain liabilities of Wilshire Credit Corporation.
As part of the agreement for the transfer of the servicing operations from
Wilshire Credit Corporation to WCC Inc., Wilshire Credit Corporation continues
to service some of the accounts for WCC Inc. through August 1999. Wishire Credit
Corporation uses the facilities and employees of WCC Inc. for this servicing.
WCC Inc. pays Wilshire Credit Corporation a fee for this servicing and Wilshire
Credit Corporation, in turn, reimburses WCC Inc. for its facilities and
employees.
In January 1999, WREIT agreed to provide the Company debtor-in-possession
financing of up to $10.0 million (the "DIP Facility") as part of a compromise
and settlement of a $17.0 million obligation payable from the Company to WREIT.
The DIP Facility bears interest at 12% and is secured by the stock of First Bank
of Beverly Hills, FSB ("First Bank"), WFSG's savings bank subsidiary. WREIT
funded $5.0 million of the DIP Facility on March 3, 1999, but did not provide
the remaining balance. Accordingly, 50%, or approximately $8.5 million, of the
obligation was treated pari passu with WFSG's noteholders and converted to newly
issued common stock of WFSG on the effective date of the Plan. Following the
completion of WFSG's reorganization, the DIP Facility became an ordinary secured
lending facility with no special priority accorded by bankruptcy law.
Revenues and expenses resulting from the reorganization of the Company
while it was in Chapter 11 have been segregated and recorded as Reorganization
Items in the consolidated statements of operations and include the following for
the two months and five months ended May 31, 1999:
10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
<TABLE>
<CAPTION>
Two Months Ended Five Months Ended
May 31, 1999 May 31, 1999
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Write-off of unamortized debt issuance costs ............... $ -- $11,319
Professional services ...................................... -- 609
European restructuring costs ............................... -- 2,492
Fresh-start reporting adjustments to assets and liabilities. 37,601 37,601
Other general and administrative expenses .................. -- 13
------- -------
$37,601 $52,034
======= =======
</TABLE>
Costs incurred to issue the notes were previously capitalized and were
being amortized over the life of the notes. The remaining unamortized balance of
such costs associated with the notes have been written-off. Professional
services included in Reorganization Items represent services provided in
connection with the Plan after the March 3, 1999 Chapter 11 filing date.
In March 1999, WFSG developed and communicated a plan to restructure its
European operations and reduce its workforce. Costs included in Reorganization
Items as of May 31, 1999 consist primarily of severance related compensation,
the write-off of certain leasehold improvements and other office closure related
costs.
The effects of the fresh-start reporting adjustments are detailed on the
following page in reconciling the predecessor Company's balance sheet to the
successor Company's balance sheet as of May 31, 1999.
Due to the reorganization of the Company, management of the Company does
not believe that the results of operations of the predecessor company for the
five months ended May 31, 1999 are indicative of the performance of the
reorganized company following the effective date of the Plan.
3. FRESH-START REPORTING
The Company's Plan was accounted for in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7").
The accounting of SOP 90-7 resulted in the creation of a new entity for
financial reporting purposes. The Company adopted fresh-start reporting because
holders of the Company's existing common stock immediately before filing and
confirmation of the Plan received less than 50% of the new common stock of the
emerging entity and the Company's reorganized value is less than its
postpetition liabilities and allowed claims. The reorganization value of the
Company was determined by estimating the fair value of its net assets as of the
fresh-start reporting date.
For financial reporting purposes, the Company accounted for the
consummation of the reorganization effective May 31, 1999. The periods prior to
this date have been designated "Predecessor Company" and the period subsequent
to this date has been designated "Reorganized Company." As a result of the
adoption of the fresh-start reporting, the reorganized Company's consolidated
financial statements are not comparable to the predecessor Company's
consolidated financial statements.
11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
The effect of the plan of reorganization and the implementation of
fresh-start reporting on the Company's balance sheet as of May 31, 1999 is as
follows (unaudited):
<TABLE>
<CAPTION>
Adjustments to Record Confirmation of Plan
Predecessor ----------------------------------------------------- Reorganized
Company's Forgiveness Fresh-Start Cancellation ssuance of Company's
Balance Sheet of Debt Adjustments of Old Stock New Stock Balance Sheet
------------- ------- ----------- ------------ --------- -------------
ASSETS (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents................... $ 26,552 $ $ $ $ $ 26,552
Mortgage-backed securities available for sale 99,124 523 99,647
Mortgage-backed securities held to maturity. 11,993 11,993
Securities held to maturity................. 5,969 5,969
Loans, net.................................. 490,498 1,078 491,576
Discounted loans, net....................... 29,058 29,058
Loans held for sale, net, at lower of cost or
market 45,757 45,757
Stock in Federal Home Loan Bank of
San Francisco, at cost.................. 4,655 4,655
Real estate owned, net...................... 33,966 1,408 35,374
Leasehold improvements and equipment, net... 6,474 (318) 6,156
Accrued interest receivable................. 5,138 5,138
Investment in Wilshire Real Estate
Investment Trust Inc.................... 6,370 (2,152) 4,218
Servicer advances........................... 7,552 7,552
Mortgage servicing rights, net.............. 2,192 (2,192) --
Prepaid expenses and other assets........... 19,219 -- (3,496) -- -- 15,723
---------- ------- -------- -------- ------- ----------
TOTAL ASSETS $ 794,517 $ -- $( 5,149) $ -- $ -- $ 789,368
========== ======= ======== ======== ======= ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Liabilities not subject to compromise:
Deposits............................... $ 497,174 $ $ 250 $ $ $ 497,424
Short-term borrowings.................. 163,064 1,790 164,854
Notes payable to Wilshire Real Estate
Investment Trust Inc................. 13,486 (2,738) 10,748
Accounts payable and other liabilities. 26,165 1,277 27,442
Liabilities subject to compromise........ 225,606 (225,606) -- -- -- --
---------- ------- -------- -------- ------- ----------
Total liabilities................... 925,495 (225,606) 579 -- -- 700,468
---------- ------- -------- -------- ------- ----------
Stockholders' Equity:
Common stock .......................... 117,708 (117,708) 88,900 88,900
Treasury stock ........................ (2,852) 2,852 --
Retained deficit ...................... (213,961) 225,606 (37,601) 114,856 (88,900) --
Accumulated other comprehensive loss,
net ................................. (31,873) -- 31,873 -- -- --
---------- ------- -------- -------- ------- ----------
Total stockholders' equity ......... (130,978) 225,606 (5,728) -- -- 88,900
---------- ------- -------- -------- ------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ................................ $ 794,517 $ -- $ (5,149) $ -- $ -- $ 789,368
========== ======= ======== ======== ======= ==========
</TABLE>
12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
4. EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT
In connection with its restructuring, the Company exchanged its notes
payable and certain other outstanding claims for new common stock in the
Company. This gain on extinguishment of debt is reported in the consolidated
statements of operations for the period ended May 31, 1999 as an extraordinary
item in the amount of $225,606, and is comprised of the following liabilities:
(Dollars in thousands)
Notes payable ........................................... $184,245
Accrued interest on notes payable ....................... 14,536
Payable to Wilshire Credit Corporation .................. 18,338
Payable to Wilshire Real Estate Investment Trust Inc. ... 8,487
--------
$225,606
========
The above debt was cancelled as part of the Plan, and the Notes payable,
accrued interest thereon and payable to Wilshire Real Estate Investment Trust
Inc. were converted into equity of the Reorganized Company. No funds were
expended in the extinguishment of such debt.
It is anticipated that the gain on extinguishment of debt will cause a
reduction of tax attributes, such as net operating losses, capital losses and
the tax basis of assets.
5. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
First Bank had approximately $36.7 million notional principal amount of
interest rate swap agreements outstanding at June 30, 1999, which were
designated as hedges of certain fixed rate loans in order to convert fixed rate
income streams on loans to variable rate. These swaps had the effect of
decreasing the Company's net interest income by approximately $28 thousand for
the month ended June 30, 1999, $56 thousand for the two months ended May 31,
1999, and $182 thousand for the five months ended May 31, 1999. The market value
of these swaps currently deferred was $0.1 million at June 30, 1999.
From time to time, the Company enters into various commitments and letters
of intent relating to purchases of loans, foreclosed real estate portfolios and
discrete operating companies. There can be no assurance that any of such
transactions will ultimately be consummated. It is the Company's policy to
generally record such transactions in the financial statements in the period in
which such transactions are closed.
The Company is a defendant in legal actions arising from transactions
conducted in the ordinary course of business. Management, after consultation
with legal counsel, believes the ultimate liability, if any, arising from such
actions will not materially affect the Company's consolidated results of
operations or financial position.
As part of the restructuring the Company issued a Liquidation Bond to CCI
which is a non-interest bearing obligation to pay CCI, upon any liquidation or
dissolution of WCC Inc., $19.3 million less any distributions that CCI receives
from its 49.99% ownership interest in WCC Inc. WCC Inc. is obligated to keep the
bond collateralized with assets of WCC Inc. or WFSG having a fair market value
equal to the bond and, to the extent that it does not do so, WFSG is responsible
for the deficiency.
6. INCOME TAXES
The Company files consolidated federal income tax returns with its
domestic subsidiaries. Certain state and foreign tax returns are also filed on a
consolidated basis while others are filed on a separate entity basis. Deferred
tax assets and liabilities represent the tax effects, based on current tax law,
of future deductible or taxable amounts attributable to events that have been
recognized in the consolidated financial statements.
13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
In connection with the Plan, the Company recorded gains relating to the
extinguishment of certain debt, which are expected to reduce or eliminate the
Company's net operating loss carryforward. Any remaining net operating loss
carryforward will be subject to limitations based on the fair value of the
Company on the effective date of the Plan.
The Company has established a valuation allowance against all deferred tax
assets, consisting primarily of federal, state and foreign net operating loss
carryforwards, as there is not presumptive evidence that it is more likely than
not that the deferred tax assets will be realized. Benefits realized from the
ultimate utilization of such deferred tax assets subsequent to the effective
date will be recorded as direct additions to equity.
The future utilization of the loss carryforwards will be subject to
significant limitations as a result of the Company's reorganization. In
addition, the net operating loss carryforwards, and possibly other tax
attributes, will be reduced by the cancellation of the Company's notes payable
and other indebtedness.
7. (LOSS) EARNINGS PER SHARE
For the month ended June 30, 1999, loss per share is calculated by
dividing net loss by the 20,033,600 outstanding shares of the Company's new
common stock. There are no common stock equivalents, as all of the Company's
outstanding stock options on its old common stock were cancelled as part of its
restructuring.
For the two months and five months ended May 31, 1999, (loss) earnings per
share is calculated by dividing (loss) income by the 10,885,000 outstanding
shares of the Company's old common stock. The weighted average shares
outstanding is the same for basic and diluted (loss) earnings per share, because
the exercise price of the options exceeded the average market price of the
common stock during the periods, and the exercise of the options would have been
anti-dilutive. The loss per share is as follows:
<TABLE>
<CAPTION>
Two Months Five Months
Ended Ended
May 31, 1999 May 31, 1999
------------ ------------
<S> <C> <C>
Loss before extraordinary item ...................... $ (3.89) $ (6.28)
Extraordinary item, net of tax ...................... 20.73 20.73
Net income .......................................... 16.84 14.45
Weighted average shares outstanding-basic and diluted 10,885,000 10,885,000
</TABLE>
For the three and six months ended June 30, 1998, the company had
outstanding stock options which were considered common stock equivalents in the
calculation of earnings per share. The weighted average shares outstanding were
as follows:
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
Weighted average shares outstanding-basic ........ 11,065,000 10,403,889
Weighted average shares outstanding-diluted ...... 11,672,711 11,019,162
8. INVESTMENT IN WREIT
In April 1998, the Company sponsored the initial public offering of WREIT,
whereby WREIT received approximately $167.0 million of proceeds. A subsidiary of
the Company is the manager of WREIT and earns a management fee based on the
level of WREIT's investment assets and is entitled to an incentive fee if
certain targets are met. The Company, through its subsidiary, earned management
fee income of $0.3 million for the one month ended June 30, 1999, $0.6 million
for the two months ended May 31, 1999 and $1.5 million for the five months ended
May 31, 1999. No incentive fees were earned.
14
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
The Company purchased 990,000 shares of WREIT common stock in connection
with the initial public offering. This investment is accounted for by the equity
method of accounting and, therefore, is not adjusted for changes in the market
price of the underlying shares but rather, increases and decreases based on the
stockholders' equity of WREIT.
In accordance with the provisions of fresh-start reporting, the Company's
investment in WREIT was restated to reflect the current fair value based on the
WREIT's closing stock price on May 31, 1999. The fair value of the investment
was less than the Company's pro rata interest in the WREIT's book value as of
that day. The difference, approximately $2.2 million, is presented as a contra
asset to the Investment in WREIT balance in the accompanying consolidated
statements of financial condition as of May 31, 1999 and June 30, 1999 and is
considered negative goodwill. The difference is being amortized over the average
life of WREIT's assets.
At June 30, 1999, the Company had notes payable to WREIT totaling $10.8
million which included a $5.0 million note payable bearing interest at 12% and
an $8.5 million unsecured note (book value of $5.7 million) bearing interest at
6%. Pursuant to the Company's reorganization, WREIT owned 14.4% of the Company's
outstanding common stock at June 30, 1999.
9. SIGNIFICANT TRANSACTIONS
During the quarter ended June 30, 1999, the Company sold approximately
$103.3 million carrying value of loans held for sale to unrelated third parties
for $103.9 million. These sales were made primarily to repay short-term
borrowing facilities for which the assets served as collateral and to provide
liquidity.
10. REGULATORY MATTERS
On June 3, 1999, the OTS issued a directive that indicates that it
considers First Bank to be in "troubled condition." This directive places
restrictions on First Bank's ability to engage in certain activities without
prior approval of the OTS, including, but not limited to: increasing asset size;
making new loans, investments or capital expenditures; paying dividends or
making other capital distributions; and hiring senior executive officers,
directors or consultants. First Bank does not agree with the "troubled
institution" designation and is deciding whether to appeal the restrictions
imposed by the OTS directive. However, there can be no assurance as to whether
any such appeal would be successful.
11. OPERATING SEGMENTS
The Company's reportable operating segments, as defined by the Company's
management, are thrift banking and non-banking operations. The operating
segments vary in terms of regulatory environment, funding sources and asset
acquisition focus. A description of the Company's operating segments is as
follows:
Thrift Banking - The Company's thrift banking operations are conducted
through First Bank. First Bank engages in the acquisitions of mortgage loans,
origination of mortgage loans, and merchant bankcard processing. The primary
source of financing for First Bank's acquisitions and originations is wholesale
and brokered certificates of deposit, and to a lesser extent, committed
short-term line of credit facilities and FHLB advances. First Bank is a
federally chartered savings bank and is regulated by the Office of Thrift
Supervision.
Non-banking - The Company's non-banking operations are conducted primarily
through Wilshire Funding Corporation, and to a lesser extent, WCC Inc. and
Wilshire Financial Services Group Europe Inc. In addition to mortgage loan
acquisition, the non-banking operating segment also conducts loan sale,
securitization and servicing
15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
operations. Historically, the primary funding sources utilized for non-banking
operations were line of credit and repurchase agreement facilities with
nationally recognized investment banking firms.
Segment data for the one month ended June 30, 1999, two months ended May
31, 1999 and three months ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
One Month Ended June 30, 1999 Two Months Ended May 31, 1999
---------------------------------- ----------------------------------
Thrift Non- Thrift Non-
Banking Banking Total Banking Banking Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income ....................... $ 4,207 $ 1,674 $ 5,881 $ 7,368 $ 3,294 $ 10,662
Interest expense ...................... 2,398 453 2,851 4,829 1,673 6,502
--------- --------- --------- --------- --------- ---------
Net interest income ................... 1,809 1,221 3,030 2,539 1,621 4,160
Provision for loan losses ............. -- 81 81 -- 2,627 2,627
--------- --------- --------- --------- --------- ---------
Net interest income (loss) after
provision for loan losses ........... 1,809 1,140 2,949 2,539 (1,006) 1,533
Other income .......................... 921 2,349 3,270 1,701 2,640 4,341
Other expense ......................... 1,614 5,282 6,896 3,312 6,993 10,305
--------- --------- --------- --------- --------- ---------
Income (loss) before reorganization
items, taxes and extraordinary item . 1,116 (1,793) (677) 928 (5,359) (4,431)
Reorganization items .................. -- -- -- -- (37,601) (37,601)
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes and
extraordinary item .................. 1,116 (1,793) (677) 928 (42,960) (42,032)
Income tax provision (benefit) ........ 480 (355) 125 399 (116) 283
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item 636 (1,438) (802) 529 (42,844) (42,315)
Extraordinary item, net of tax ........ -- -- -- -- 225,606 225,606
--------- --------- --------- --------- --------- ---------
Net income (loss) ..................... $ 636 $ (1,438) $ (802) $ 529 $ 182,762 $ 183,291
========= ========= ========= ========= ========= =========
Total assets .......................... $ 611,304 $ 186,636 $ 797,940 $ 606,954 $ 182,414 $ 789,368
========= ========= ========= ========= ========= =========
</TABLE>
Three Months Ended June 30, 1998
-------------------------------------------
Thrift Non-
Banking Banking Total
----------- ----------- -----------
Interest income ................. $ 11,461 $ 29,862 $ 41,323
Interest expense ................ 8,018 25,775 33,793
----------- ----------- -----------
Net interest income ............. 3,443 4,087 7,530
Provision for loan losses ....... (3,000) 1,500 (1,500)
----------- ----------- -----------
Net interest income after
provision for loan losses ..... 6,443 2,587 9,030
Other income .................... 1,314 39,656 40,970
Other expense ................... 3,238 25,964 29,202
----------- ----------- -----------
Income before taxes ............. 4,519 16,279 20,798
Income tax provision ............ 1,976 6,996 8,972
----------- ----------- -----------
Net income ...................... $ 2,543 $ 9,283 $ 11,826
=========== =========== ===========
Total assets .................... $ 635,714 $ 1,313,154 $ 1,948,868
=========== =========== ===========
16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
Segment data for the one month ended June 30, 1999, five months ended May
31, 1999 and six months ended June 30, 1998 is as follows:
<TABLE>
<CAPTION>
One Month Ended June 30, 1999 Five Months Ended May 31, 1999
---------------------------------- ----------------------------------
Thrift Non- Thrift Non-
Banking Banking Total Banking Banking Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income ....................... $ 4,207 $ 1,674 $ 5,881 $ 17,771 $ 10,094 $ 27,865
Interest expense ...................... 2,398 453 2,851 11,680 11,449 23,129
--------- --------- --------- --------- --------- ---------
Net interest income (loss) ............ 1,809 1,221 3,030 6,091 (1,355) 4,736
Provision for loan losses ............. -- 81 81 -- 2,697 2,697
--------- --------- --------- --------- --------- ---------
Net interest income (loss) after
provision for loan losses ........... 1,809 1,140 2,949 6,091 (4,052) 2,039
Other income .......................... 921 2,349 3,270 4,278 9,527 13,805
Other expense ......................... 1,614 5,282 6,896 7,678 23,742 31,420
--------- --------- --------- --------- --------- ---------
Income (loss) before reorganization
items, taxes and extraordinary item . 1,116 (1,793) (677) 2,691 (18,267) (15,576)
Reorganization items .................. -- -- -- -- (52,034) (52,034)
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes and
extraordinary item .................... 1,116 (1,793) (677) 2,691 (70,301) (67,610)
Income tax provision (benefit) ........ 480 (355) 125 1,357 (699) 658
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary item 636 (1,438) (802) 1,334 (69,602) (68,268)
Extraordinary item, net of tax ...... -- -- -- -- 225,606 225,606
--------- --------- --------- --------- --------- ---------
Net income (loss) ..................... $ 636 $ (1,438) $ (802) $ 1,334 $ 156,004 $ 157,338
========= ========= ========= ========= ========= =========
Total assets .......................... $ 611,304 $ 186,636 $ 797,940 $ 606,954 $ 182,414 $ 789,368
========= ========= ========= ========= ========= =========
</TABLE>
Six Months Ended June 30, 1998
------------------------------------------
Thrift Non-
Banking Banking Total
----------- ----------- -----------
Interest income ................. $ 19,614 $ 56,527 $ 76,141
Interest expense ................ 13,852 50,401 64,253
----------- ----------- -----------
Net interest income ............. 5,762 6,126 11,888
Provision for loan losses ....... (5,100) 2,100 (3,000)
----------- ----------- -----------
Net interest income after
provision for loan losses ..... 10,862 4,026 14,888
Other income .................... 1,446 45,662 47,108
Other expense ................... 7,097 41,902 48,999
----------- ----------- -----------
Income before taxes ............. 5,211 7,786 12,997
Income tax provision ............ 2,271 3,565 5,836
----------- ----------- -----------
Net income ...................... $ 2,940 $ 4,221 $ 7,161
=========== =========== ===========
Total assets .................... $ 635,714 $ 1,313,154 $ 1,948,868
=========== =========== ===========
17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of Wilshire Financial Services Group Inc.
and the notes thereto included elsewhere in this filing. References in this
filing to "Wilshire Financial Services Group Inc.," "WFSG," the "Company," "we,"
"our," and "us" refer to Wilshire Financial Services Group Inc. and our wholly
owned subsidiaries, unless the context indicates otherwise.
Wilshire Financial Services Group Inc. is a diversified financial services
company. We conduct business in the U.S. and Europe, specializing in loan
portfolio acquisition and securitization, and servicing. We offer wholesale
banking through our subsidiary, First Bank of Beverly Hills, F.S.B. ("First
Bank"). First Bank is a federally chartered savings institution regulated by the
Office of Thrift Supervision ("OTS") with one branch and a merchant bankcard
processing center in Southern California. Administrative headquarters of WFSG
and First Bank are located in Portland, Oregon.
OVERVIEW AND RESTRUCTURING OF WFSG
In response to adverse market conditions in the second half of 1998 and
the resulting effect on our operations, we focused our efforts during the six
months ended June 30, 1999 on stabilizing the assets remaining at our non-thrift
banking subsidiaries and restructuring WFSG through a voluntary prepackaged
Chapter 11 bankruptcy filing. First Bank remained focused on the execution of
its primary business plan as it was relatively unaffected by the severe market
conditions which dramatically affected the non-banking subsidiaries during the
second half of 1998.
In connection with the plan of reorganization (the "Plan"), we filed a
voluntary petition for relief under Chapter 11 Bankruptcy Code in the Federal
Court of Wilmington, Delaware on March 3, 1999. On April 12, 1999, the Plan was
approved by the bankruptcy court. On June 10, 1999, the Plan became effective,
we emerged from bankruptcy and a new Board of Directors was seated. Upon the
Plan becoming effective, we adopted fresh start reporting (as
described in Note 3 to the interim consolidated financial statements), which had
the effect of revaluing our assets and liabilities to fair value and eliminating
the stockholders' deficit as of the Plan's effective date. Due to
the Company's restructuring, management believes that the financial results for
the quarter and six months ended June 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999.
Wilshire Credit Corporation, a former affiliate of the Company, provided
loan servicing to us prior to the reorganization. As part of the Plan, the loan
servicing operations of Wilshire Credit Corporation, and the assets and stock of
a wholly-owned subsidiary, Wilshire Servicing Corporation, were transferred to
WCC Inc., a newly formed, majority-owned subsidiary. This will allow us to
service our own assets and provide third-party servicing. We own 50.01% of WCC
Inc. with the remaining 49.99% owned by an unaffiliated third party.
On June 3, 1999, the OTS issued a directive that indicates that it
considers First Bank to be in "troubled condition." This directive places
restrictions on First Bank's ability to engage in certain activities without
first obtaining OTS approval, including, but not limited to: increasing asset
size; making new loans, investments or capital expenditures; paying dividends or
making other capital distributions; and hiring senior executive officers,
directors or consultants. First Bank does not agree with the "troubled
institution" designation and is deciding whether to appeal the restrictions
imposed by the OTS directive. However, there can be no assurance as to whether
any such appeal would be successful.
During the six months ended June 30, 1999, and continuing to the present,
we remain committed to reducing corporate overhead where deemed appropriate by
management. We have made strategic reductions in overhead
18
<PAGE>
related to our operations in Europe, which still have adequate capacity to
absorb additional investment activity. We continue to review our expense levels
on a line of business basis and will make strategic reductions or investments,
as necessary, to counter reductions in business activities or to build for
anticipated growth.
RESULTS OF OPERATIONS--ONE MONTH ENDED JUNE 30, 1999
For financial reporting purposes, we accounted for the consummation of our
restructuring effective May 31, 1999 (though the restructuring was completed on
June 10, 1999). The following discussion relates to the operating results of the
"Reorganized Company" for the one-month period subsequent to our restructuring.
Net Loss
Our net loss for the month ended June 30, 1999 was approximately $0.8
million, or $0.04 per share. The net loss is primarily attributable to other
operating expenses of $6.9 million, partially offset by net interest income
after provision for loan losses of $2.9 million and other income of $3.3
million.
Net Interest Income
Our net interest income for the month ended June 30, 1999 was
approximately $3.0 million, which consisted of interest income of $5.9 million,
partially offset by interest expense of $2.9 million. Approximately $4.4
million, or 75%, of our interest income was derived from our portfolio of loans
and discounted loans, with the other $1.5 million, or 25%, from mortgage-backed
and other securities. Our interest expense consisted of $2.2 million of interest
on deposits at First Bank and $0.7 million of interest on short-term debt
facilities. We no longer incur interest expense on our 13% Series B notes (the
"Notes") payable, as the Notes were cancelled and converted to equity as part of
our restructuring.
Provisions for Estimated Losses on Loans
Provision for losses on loans for the month ended June 30, 1999 was
approximately $0.1 million, resulting from additional provisions taken on
Discounted Loans in our European portfolio.
Other Income
Our other income was approximately $3.3 million for the month ended June
30, 1999, consisting primarily of servicing revenue of $1.4 million, bankcard
income, net, of $0.4 million, income from real estate operations of $0.2 million
and other, net, of $1.1 million.
Approximately 97% of the servicing revenue was derived from the loan
servicing operations of WCC Inc., a newly formed, majority-owned subsidiary.
These operations were previously conducted by an affiliate, Wilshire Credit
Corporation, but were transferred to WCC Inc. as part of our restructuring. As
part of the agreement for the transfer of the servicing operations from Wilshire
Credit Corporation to WCC Inc., Wilshire Credit Corporation continues to service
some of the accounts for WCC Inc. through August 1999. Wilshire Credit
Corporation uses the facilities and employees of WCC Inc. for this servicing.
WCC Inc. pays Wilshire Credit Corporation a fee for this servicing (included in
Loan service fees and expenses) and Wilshire Credit Corporation, in turn,
reimburses WCC Inc. for its facilities and employees (included in Servicing
revenue).
During the month ended June 30, 1999, gross bankcard processing revenue
was $1.4 million, of which $0.6 million was attributable to internet commerce,
$0.6 million was from mail order transaction processing, and $0.2 million
resulted from audiotext transactions. These bankcard revenues were partially
offset by bankcard processing expenses of $1.0 million.
19
<PAGE>
Real estate owned, net consisted primarily of gains on sales of property
acquired in foreclosure or deed-in-lieu thereof. Other, net includes primarily
$0.8 million of loan fees and charges and $0.3 million of management fees earned
from WREIT.
Other Expenses
Our other expenses totaled approximately $6.9 million for the month ended
June 30, 1999. These expenses consisted primarily of compensation and employee
benefits expenses of $3.2 million, loan service fees and expenses of $1.2
million (see Servicing revenue), professional services of $0.6 million,
corporate travel and development of $0.5 million and other general and
administrative expenses (consisting primarily of insurance, taxes and general
corporate overhead) of approximately $0.8 million.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998
In the following discussion, the amounts for the six months ended June 30,
1999 represent the sum of the Predecessor Company's operations for the five
months ended May 31, 1999 and the Reorganized Company's operations for the one
month ended June 30, 1999, as reported in the accompanying consolidated
statements of operations.
Net Income
Our net income for the six months ended June 30, 1999 was approximately
$156.5 million, which included an extraordinary gain on the extinguishment of
debt of $225.6 million (see Note 4 - Extraordinary Item). Excluding the
extraordinary gain, our net loss for the six months ended June 30, 1999 was
approximately $69.1 million, compared with net income of approximately $7.2
million for the six months ended June 30, 1998. The decline in operating results
is primarily attributable to $52.0 million of costs related to our
restructuring, a $30.0 million decrease in other income, a $5.8 million increase
in provisions for estimated losses on loans and a $4.1 million decrease in net
interest income, partially offset by a $10.7 million decrease in other expenses.
Net Interest Income
Our net interest income was approximately $7.8 million for the six months
ended June 30, 1999, compared with approximately $11.9 million for the six
months ended June 30, 1998. This decrease was due to a decline in interest
income of $42.4 million, partially offset by a decline in interest expense of
$38.3 million, reflecting our reduction in the levels of loans and other
interest-earning assets and paydown of the related short-term borrowing
facilities and the reduction of interest expense on the Notes, as discussed
further below.
Interest Income. Our interest income was approximately $33.7 million for
the six months ended June 30, 1999 compared with approximately $76.1 million for
the six months ended June 30, 1998, a decrease of $42.4 million. This decrease
was primarily due to a decrease in our interest-earning assets from
approximately $1.6 billion at June 30, 1998, to approximately $692 million at
June 30, 1999, resulting from the sale of certain loans and other assets to
provide liquidity and repay certain short-term borrowing facilities.
Interest Expense. Our interest expense was approximately $26.0 million for
the six months ended June 30, 1999, compared with approximately $64.3 million
for the six months ended June 30, 1998, a decrease of $38.3 million. The
decrease in interest expense was primarily due to a decrease in our
interest-bearing liabilities from approximately $1.8 billion at June 30, 1998 to
approximately $675 million at June 30, 1999, resulting primarily from the
repayments of short-term borrowing facilities with proceeds from the asset sales
described above. In addition, during the six months ended June 30, 1999, we
recognized interest on the Notes only through the date on which we filed our
voluntary Chapter 11 petition, which was March 3, 1999. As a result, the amount
of interest expense recognized on the Notes for the six months ended June 30,
1999 was approximately $4.2 million, compared with approximately $12.0 million
for the six months ended June 30, 1998. Upon the completion of our
restructuring, the Notes were cancelled and converted to equity of WFSG.
20
<PAGE>
Provisions for Estimated Losses on Loans
Provision for estimated losses on loans for the six months ended June 30,
1999 was approximately $2.8 million, resulting primarily from additional
provisions taken at our non-banking subsidiaries. This compares with a net
recovery of $3.0 million for the six months ended June 30, 1998, which was
primarily due to First Bank's recapture of reserves on loans sold or paid off.
Other Income
Our other income decreased to approximately $17.1 million for the six
months ended June 30, 1999 from approximately $47.1 million for the six months
ended June 30, 1998. The components of our other income are reflected in the
following table:
Six Months Ended
June 30,
----------------------
1999 1998
------- -------
(Dollars in thousands)
Other income:
Servicing revenue ....................... $ 4,751 $ 2,740
Real estate owned, net .................. 1,619 3,472
Bankcard income, net .................... 2,788 1,497
Gain on sale of loans ................... 3,177 26,444
Gain on sale of securities .............. -- 8,201
Trading income .......................... -- 1,630
Minority interest ....................... 160 --
Other, net .............................. 4,580 3,124
------- -------
Total other income ............. $17,075 $47,108
======= =======
The decrease in other income was primarily attributable to a $23.3 million
decrease in gain on sale of loans, an $8.2 million decrease in gain on sale of
securities, a $1.9 million decrease in real estate owned, net and a $1.6 million
decrease in trading income, partially offset by a $2.0 million increase in
servicing revenue, a $1.5 million increase in other, net and a $1.3 million
increase in bankcard income, net. The components of other income are further
described below.
Servicing Revenue. Servicing revenue for the six months ended June 30,
1999 was $4.7 million, compared with $2.7 million for the comparable period in
1998, an increase of $2.0 million. The increase reflects the servicing activity
for the month of June, 1999 of WCC Inc., a newly formed, majority-owned
subsidiary. Such operations were previously performed by a former affiliate,
Wilshire Credit Corporation, but were transferred to WCC Inc. effective May 31,
1999 as part of our reorganization (see Note 2). As part of the agreement for
the transfer of the servicing operations from Wilshire Credit Corporation to WCC
Inc., Wilshire Credit Corporation continues to service some of the accounts for
WCC Inc. through Auust 1999. Wilshire Credit Corporation uses the facilities and
employees of WCC Inc. for this servicing. WCC Inc. pays Wilshire Credit
Corporation a fee for this servicing (included in Loan service fees and
expenses) and Wilshire Credit Corporation, in turn, reimburses WCC Inc. for its
facilities and employees (included in Servicing revenues).
Real Estate Owned, net. Real estate owned, net decreased approximately
$1.9 million from the six months ended June 30, 1998 to the six months ended
June 30, 1999 primarily due to a decrease in gains on the sale of properties
acquired through foreclosure or deed-in-lieu thereof, reflecting our decision to
focus more on non-discounted loans.
Bankcard Income, net. Bankcard income, net was approximately $2.8 million
for the six months ended June 30, 1999, an increase of $1.3 million from the six
months ended June 30, 1998. This increase is attributable to the expansion of
bankcard processing operations which includes internet commerce processing
activity. During the six months ended June 30, 1999, gross bankcard processing
revenue was $7.8 million, of which $4.5 million was attributable to internet
commerce and $1.3 million was attributable to audio text transactions. The
remainder of approximately $2.0 million is primarily attributable to mail order
transaction processing.
21
<PAGE>
The financial results of First Bank's bankcard processing operations for
the six months ended June 30, 1999 and 1998 have been as follows:
Six Months Ended
June 30,
------------------------
1999 1998
------- -------
(Dollars in thousands)
Bankcard revenues ............................ $ 7,750 $ 4,723
Bankcard processing expenses ................. (4,962) (3,226)
Other expenses ............................... (1,458) (1,094)
------- -------
Net .......................................... $ 1,330 $ 403
======= =======
Gain on Sale of Loans. Gain on sale of loans decreased by approximately
$23.3 million from the six months ended June 30, 1998 to the six months ended
June 30, 1999. The decrease is primarily due to gains of $26.4 million on sales
of approximately $402.3 million unpaid principal balance of loans during the six
months ended June 30, 1998 and reduced sales activity during the six months
ended June 30, 1999.
Gain on Sale of Securities. Gain on sale of securities was $8.2 million
for the six months ended June 30, 1999 compared to no gain on sale of securities
for the six months ended June 30, 1999, a decrease of $8.2 million. This
decrease reflected the lack of sales activity in the most recent period.
Other, net. Other, net increased by approximately $1.5 million from the
six months ended June 30, 1998 to the six months ended June 30, 1999. The
increase is primarily attributable to an increase in management fees earned from
WREIT of $0.8 million for the six months ended June 30, 1999. WREIT did not
commence operations until April 6, 1998 and therefore, the fees earned from
WREIT for the six months ended June 30, 1998 represent only three months'
activity.
Other Expenses
Our other expenses totaled approximately $38.3 million for the six months
ended June 30, 1999 compared with approximately $49.0 million for the six months
ended June 30, 1998, a decrease of $10.7 million. This decrease was primarily
due to decreases in loan service fees and expenses of $10.4 million and
corporate travel and development of $1.5 million, partially offset by an
increase in depreciation and amortization of $0.5 million.
Loan Service Fees and Expenses. Loan service fees and expenses decreased
from approximately $20.1 million for the six months ended June 30, 1998 to
approximately $9.7 million for the six months ended June 30, 1999. This decrease
was primarily due to a decline in the balance of loans from $1.3 billion at June
30, 1998 to $576 million at June 30, 1999, as we sold a large portion of our
loan portfolio to increase liquidity and reduce outstanding debt.
Corporate Travel and Development. Corporate travel and development
decreased from approximately $2.8 million for the six months ended June 30, 1998
to approximately $1.3 million for the six months ended June 30, 1999, primarily
due to substantially reduced travel activity in 1999 as acquisition activity
declined.
Depreciation and Amortization. Depreciation and Amortization increased
from approximately $0.9 million for the six months ended June 30, 1998 to
approximately $1.4 million for the six months ended June 30, 1999, primarily due
to additional investments in leasehold improvements and equipment (including a
new internal accounting and reporting system) and growth at First Bank.
Reorganization Items
22
<PAGE>
During the six months ended June 30, 1999, we incurred approximately $52.0
million of expenses related to the WFSG restructuring (see Note 2). These
expenses primarily consisted of net write-downs of the reported amounts of
assets and liabilities of approximately $37.6 million, the write-off of
unamortized debt issuance costs of $11.3 million, professional services of $0.6
million and costs related to the restructuring of our European operations of
$2.5 million. There were no such reorganization items for the six months ended
June 30, 1998. The $52.0 million of reorganization expenses, as well as $4.2
million of interest expense recognized during the period related to the Notes,
will be non-recurring due to WFSG's reorganization. We recognized interest
expense on the Notes only through March 3, 1999, the date WFSG filed its
petition under Chapter 11 of the Bankruptcy Code.
RESULTS OF OPERATIONS--QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED
JUNE 30, 1998
In the following discussion, the amounts for the three months ended June
30, 1999 represent the sum of the Predecessor Company's operations for the two
months ended May 31, 1999 and the Reorganized Company's operations for the one
month ended June 30, 1999, as reported in the accompanying consolidated
statements of operations.
Net Income
Our net income for the quarter ended June 30, 1999 was approximately
$182.5 million, which included an extraordinary gain on the extinguishment of
debt of $225.6 million (see Note 4 - Extraordinary Item). Excluding the
extraordinary gain, our net loss for the three months ended June 30, 1999 was
approximately $43.1 million, compared with net income of approximately $11.8
million for the quarter ended June 30, 1998. The decline in operating results is
primarily attributable to $37.6 million of costs related to our restructuring, a
$33.4 million decrease in other income, a $4.2 million increase in provisions
for estimated losses on loans and a $0.3 million decrease in net interest
income, partially offset by a $12.0 million decrease in other expenses.
Net Interest Income
Our net interest income was approximately $7.2 million for the quarter
ended June 30, 1999, compared with approximately $7.5 million for the quarter
ended June 30, 1998. This decrease was due to a decline in interest income of
$24.8 million, partially offset by a decline in interest expense of $24.4
million, reflecting our reduction in the levels of loans and other
interest-earning assets and paydown of the related short-term borrowing
facilities.
Interest Income. Our interest income was approximately $16.5 million for
the quarter ended June 30, 1999, compared with approximately $41.3 million for
the quarter ended June 30, 1998, a decrease of $24.8 million. This decrease was
primarily due to a decrease in our interest-earning assets from approximately
$1.6 billion at June 30, 1998, to approximately $692 million at June 30, 1999,
resulting from the sale of certain loans and other assets to provide liquidity
and repay certain short-term borrowing facilities.
Interest Expense. Our interest expense was approximately $9.4 million for
the quarter ended June 30, 1999, compared with approximately $33.8 million for
the quarter ended June 30, 1998, a decrease of $24.4 million. The decrease in
interest expense was primarily due to a decrease in our interest-bearing
liabilities from approximately $1.8 billion at June 30, 1998, to approximately
$675 million at June 30, 1999 resulting primarily from the repayments of
short-term borrowing facilities with proceeds from the asset sales described
above. In addition, during the quarter ended June 30, 1999, we did not recognize
interest on our 13% Notes, as we stopped accruing such interest as of the March
3, 1999 Chapter 11 filing date, which was prior to the start of the second
quarter. During the quarter ended June 30, 1998, we incurred interest expense on
the Notes of approximately $6.0 million. Upon the completion of our
restructuring, the Notes were cancelled and converted to equity of WFSG.
23
<PAGE>
Provisions for Estimated Losses on Loans
Provision for estimated losses on loans for the quarter ended June 30,
1999 was approximately $2.7 million, resulting primarily from additional
provisions taken at our non-banking subsidiaries. This compares with a net
recovery of $1.5 million for the quarter ended June 30, 1998, which was
primarily due to First Bank's recapture of reserves on loans sold or paid off.
Other Income
Our other income decreased to approximately $7.6 million for the quarter
ended June 30, 1999 from approximately $41.0 million for the quarter ended June
30, 1998. The components of our other income are reflected in the following
table:
Quarter Ended
June 30,
----------------------
1999 1998
------- -------
(Dollars in thousands)
Other income:
Servicing revenue ....................... $ 2,836 $ 1,369
Real estate owned, net .................. 146 3,399
Bankcard income, net .................... 1,491 997
Gain on sale of loans ................... 622 26,444
Gain on sale of securities .............. -- 6,116
Trading income .......................... -- 172
Minority interest ....................... 160 --
Other, net .............................. 2,356 2,473
------- -------
Total other income ............. $ 7,611 $40,970
======= =======
The decrease in other income was primarily attributable to a $25.8 million
decrease in gain on sale of loans, a $6.1 million decrease on gain on sale of
securities and a $3.3 million decrease in real estate owned, net, offset in part
by a $1.5 million increase in servicing revenue and a $0.5 million increase in
bankcard income, net. The components of other income are further described
below.
Servicing Revenue. Servicing revenue for the three months ended June 30,
1999 was $2.8 million, compared with $1.4 million for the comparable period in
1998, an increase of $1.4 million. The increase reflects the servicing activity
for the month of June, 1999 of WCC Inc., a newly formed, majority-owned
subsidiary. Such operations were previously performed by a former affiliate,
Wilshire Credit Corporation, but were transferred to WCC Inc. effective May 31,
1999 as part of our reorganization (see Note 2). As part of the agreement for
the transfer of the servicing operations from Wilshire Credit Corporation to WCC
Inc., Wilshire Credit Corporation continues to service some of the accounts for
WCC Inc. through August 1999. Wilshire Credit Corporation uses the facilities
and employees of WCC Inc. for this servicing. WCC Inc. pays Wilshire Credit
Corporation a fee for this servicing (included in Loan service fees and
expenses) and Wilshire Credit Corporation, in turn, reimburses WCC Inc. for its
facilities and employees (included in Servicing revenues).
Real Estate Owned, net. Real estate owned, net decreased approximately
$3.3 million from the quarter ended June 30, 1998 to the quarter ended June 30,
1999 due to a decrease in gains on the sale of properties acquired through
foreclosure or deed-in-lieu thereof.
Bankcard Income, net. Bankcard income, net was approximately $1.5 million
during the quarter ended June 30, 1999, an increase of $0.5 million from the
comparable period in 1998. This increase is attributable to the expansion of
bankcard processing operations which includes internet commerce processing
activity. During the quarter ended June 30, 1999, gross bankcard processing
revenue was $4.3 million, of which $2.7 million was
24
<PAGE>
attributable to internet commerce and $0.8 million was attributable to audio
text transactions. The remainder of approximately $0.8 million is primarily
attributable to mail order transaction processing.
The financial results of First Bank's bankcard processing operations for
the quarters ended June 30, 1999 and 1998 have been as follows:
Quarter Ended
June 30,
------------------------
1998 1999
------- -------
(Dollars in thousands)
Bankcard revenues ............................ $ 4,264 $ 3,126
Bankcard processing revenues ................. (2,773) (2,129)
Other expenses ............................... (733) (588)
------- -------
Net .......................................... $ 758 $ 409
======= =======
Gain on Sale of Loans. Gain on sale of loans decreased by approximately
$25.8 million from the quarter ended June 30, 1998 to the quarter ended June 30,
1999. The decrease is primarily due to gains of $26.4 million on sales of
approximately $402.3 million unpaid principal balance of loans during the
quarter ended June 30, 1998 and reduced sales activity during the quarter ended
June 30, 1999.
Gain on Sale of Securities. Gain on sale of securities decreased by
approximately $6.1 million due to sales of securities during the quarter ended
June 30, 1998 resulting in gains of approximately $6.1 million and no sales
activity during the quarter ended June 30, 1999.
Other, net. Other, net consists primarily of management fees earned from
WREIT and loan fees and charges. These revenues remained stable from the quarter
ended June 30, 1998, to the quarter ended June 30, 1999.
Other Expenses
Our other expenses totaled approximately $17.2 million for the quarter
ended June 30, 1999 compared with approximately $29.2 million for the quarter
ended June 30, 1998, a decrease of $12.0 million. This decrease was primarily
due to decreases in loan service fees and expenses of $6.8 million, professional
services of $1.8 million, compensation and employee benefits of $1.7 million,
corporate travel and development of $1.3 million, and other general and
administrative expenses of $0.9 million.
Loan Service Fees and Expenses. Loan service fees and expenses decreased
from $11.2 million for the quarter ended June 30, 1998 to approximately $4.4
million for the quarter ended June 30, 1999. This decrease was primarily due to
a decline in the balance of loans from $1.3 billion at June 30, 1998 to $576
million at June 30, 1999, as we sold a large portion of our loan portfolio to
increase liquidity and reduce outstanding debt.
Professional Services. Professional services decreased by approximately
$1.8 million from the quarter ended June 30, 1998 to the quarter ended June 30,
1999. Expense for the 1999 quarter included the reversal of approximately $1.5
million of previously accrued expenses pursuant to a review by management and
determination that the recorded liability balance exceeded revised estimated
liabilities.
Compensation and Employee Benefits. Compensation and employee benefits
totaled approximately $7.5 million for the quarter ended June 30, 1999, compared
with approximately $9.2 million for the quarter ended June 30, 1998. The
decrease was primarily due to the reduction in workforce in our European
operations in March 1999, the effects of which were realized during the second
quarter of 1999.
Corporate Travel and Development. Corporate travel and development
decreased from approximately $2.2 million for the three months ended June 30,
1998 to approximately $0.9 million for the three months ended June 30, 1999 due
to substantially reduced travel activity in 1999 as acquisition activity
declined.
25
<PAGE>
Other General and Administrative Expenses. Other general and
administrative expenses decreased from approximately $3.7 million for the three
months ended June 30, 1998 to approximately $2.5 million for the three months
ended June 30, 1999. The decrease was primarily due to a $0.6 million decrease
in due diligence expense which reflected the decline in acquisition activity, a
$0.4 million decrease in advertising and a $0.2 million decrease in recruiting
and hiring costs.
Reorganization Items
During the quarter ended June 30, 1999, we incurred approximately $37.6
million of expenses related to the WFSG restructuring (see Note 2). These
expenses consisted of net write-downs of the reported amounts of assets and
liabilities to their fair values pursuant to the adoption of fresh-start
reporting (see Note 3). These reorganization expenses will be non-recurring due
to the consummation of WFSG's restructuring in June 1999. There were no such
items for the quarter ended June 30, 1998.
CHANGES IN FINANCIAL CONDITION
The following discussion compares the balances of certain asset, liability
and stockholders' equity (deficit) amounts of the Reorganized Company as of June
30, 1999 with those of the Predecessor Company as of December 31, 1998 as
reported in the accompanying consolidated statements of financial condition.
Mortgage-Backed and Other Securities. For accounting purposes, our
mortgage-backed and other securities are classified as available for sale or
held to maturity. Our holdings of mortgage-backed securities available for sale
decreased approximately $16.1 million during the six months ended June 30, 1999.
This decrease was primarily due to principal repayments of $10.1 million and
write-downs to fair value of $5.7 million. Our holdings of mortgage-backed
securities held to maturity decreased approximately $2.0 million during the six
months ended June 30, 1999 primarily due to principal repayments. The following
table sets forth our holdings of mortgage-backed and other securities as of June
30, 1999 and December 31, 1998:
Mortgage-Backed Securities and Other Securities
June 30, December 31,
1999 1998
-------- --------
(Dollars in thousands)
Available for sale:
Mortgage-backed securities .................... $ 60,300 $ 66,829
Agency mortgage-backed securities ............. 38,015 47,634
Held to maturity:
U.S. Government and other securities .......... 5,971 5,962
Mortgage-backed securities .................... 11,551 13,580
-------- --------
Total investment securities .............. $115,837 $134,005
======== ========
Loans, net. Our portfolio of loans, net of discounts and allowances,
increased by approximately $46.6 million during the six months ended June 30,
1999. This increase is primarily attributable to the acquisition of
Non-Discounted Loans at First Bank, reflecting our emphasis on increasing the
level of investment in Non-Discounted Loans as a percentage of the total loan
portfolio. See "Discounted Loans, net" below.
Discounted Loans, net. Our portfolio of Discounted Loans decreased by
approximately $24.4 million during the six months ended June 30, 1999. The
decrease is primarily attributable to our sale of Discounted Loans to repay
certain short-term borrowing facilities and provide liquidity. It is anticipated
that our future investments in Discounted Loans as a percentage of our total
loan portfolio will be reduced. Discounted Loans require significant
26
<PAGE>
capital resources prior to resolution, which is generally six to nine months
following acquisition. We believe we can create a more predictable and less
capital intensive earnings stream by reducing the level of investment in these
assets. Nonetheless, we make our investment decisions on an opportunistic basis
and will evaluate investment opportunities as they arise.
Loans Held for Sale, Net, at Lower of Cost or Market. Loans held for sale,
net, at lower of cost or market decreased by approximately $238.4 million during
the six months ended June 30, 1999 primarily as a result of the sale of loans to
increase liquidity and reduce outstanding borrowings.
Real estate owned, net. Real estate owned, net decreased by approximately
$30.8 million during the six months ended June 30, 1999. The decrease was
primarily due to sales of properties for proceeds of approximately $32.9 million
partially offset by acquisitions of real estate through foreclosure or
deed-in-lieu thereof from our portfolio of discounted loans.
Mortgage Servicing Rights, net. Mortgage servicing rights, net decreased
by $2.3 million during the six months ended June 30, 1999, primarily due to the
write-off, for fresh-start reporting purposes (see Note 3), of previously
capitalized or purchased servicing rights.
Investment in Wilshire Real Estate Investment Trust Inc. Investment in
WREIT decreased by approximately $2.0 million primarily due to a write-down in
the carrying value in accordance with the provisions of fresh-start reporting.
Deposits. First Bank's deposits decreased by approximately $17.7 million
during the six months ended June 30, 1999. This decrease is primarily
attributable to a corresponding reduction in First Bank's asset portfolio. On
June 3, 1999, the OTS issued a directive which, among other things, prohibits
First Bank, without prior OTS approval, from increasing total assets during any
quarter in excess of an amount equal to net interest credited on deposits for
the quarter.
Short-Term Borrowings. Short-term borrowings decreased by approximately
$249.5 million during the six months ended June 30, 1999, resulting primarily
from our reduction of total loans from $792.2 million at December 31, 1998 to
$576.1 million at June 30, 1999.
Notes payable. The Notes payable of $184.2 million at December 31, 1998
were cancelled in June 1999. Pursuant to our prepackaged Chapter 11 bankruptcy
filing, these Notes were converted into equity of WFSG, as described more fully
in Note 2 to the interim consolidated financial statements.
Accounts Payable and Other Liabilities. WREIT has prepaid certain
servicing fees to WFSG. These amounts are included in Accounts payable and other
liabilities. The initial amount of the prepaid fees may be in dispute between
WREIT and WFSG with WFSG contending that the initial amount is as low as $2.3
million and WREIT contending the amount is $3.2 million. Without admission, the
Company has recorded the amount at $3.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase pools of loans, and for general business purposes. Our
sources of cash flow include certificates of deposit, securitizations, whole
loan and mortgage-backed securities sales, net interest income and borrowings
under warehouse and repurchase financing facilities (if available) and from
institutional investors and other lenders and public and private debt offerings.
We also have borrowed money from WREIT. In addition, First Bank has available
funding through FHLB advances. Our liquidity is actively managed on a daily
basis and was and will be reviewed periodically by our Board of Directors. This
process is intended to ensure the maintenance of sufficient funds to meet the
needs of the Company, including adequate cash flows for off-balance sheet
instruments.
27
<PAGE>
The Company has repurchase agreements outstanding that mature monthly and,
with the parties' agreement, may be rolled into new 30 day repurchase
agreements. In addition, the Company has discussed additional lending
arrangements with investment banks which may provide financing on a transaction
by transaction basis. There can be no assurance that lenders will continue to
roll the repurchase agreements or will not change material terms, including, but
not limited to, advance rates and interest rates on these financing
arrangements. In addition, given current market conditions, the Company may not
be able to securitize loans as a source of liquidity.
The dramatic events in the financial markets in late 1998, which included
a significant reduction in valuations of and liquidity for mortgage-backed
securities, has had a significant adverse impact on our liquidity and financial
condition. Many of our lenders determined that the value of these assets had
decreased and demanded cash or securities to continue lending, which reduced our
cash position and eventually prompted asset sales at depressed prices to meet
these calls and provide liquidity. While these asset sales have improved our
liquidity position, the market for mortgage-backed securities, particularly
subordinate mortgage-backed securities, remains depressed and the financial
markets generally continue to be volatile. Further, certain of the Company's
lenders have expressed concern about continued lending to this industry given
market conditions and to the Company given the losses incurred by the Company.
It is not clear to what extent the Company can rely on short-term warehouse or
repurchase agreements as a source of liquidity. At June 30, 1999, our cash
balances totaled approximately $24.3 million; however, $17.2 million of the
balance was held at First Bank and is not available for use by any Wilshire
company other than First Bank.
We mark our securities portfolio to fair value at the end of each month
based upon broker/dealer marks, subject to an internal review process. With
respect to many of our subordinate securities, marks are typically available
from either a single or, at most, a small group of broker/dealers. For those
securities that are subject to repurchase or other financing arrangements with
broker/dealers, we employ the mark supplied by the financing broker even if, as
is sometimes the case, we believe that the mark represents less than fair value.
As of each reporting period, we evaluate whether and to what extent any
unrealized loss is to be recognized as other than temporary.
Our restructuring as described in Note 2 to the consolidated financial
statements significantly improved our financial position by reducing
indebtedness, eliminating the ongoing interest cost associated with that
indebtedness, and significantly increasing our equity account.
Based on our current and expected asset size, capital levels, and
organizational infrastructure, management believes that cash flows will be
sufficient to meet our needs. However, we intend to aggressively seek new
capital to permit us to more fully and more efficiently utilize our acquisition
and loan servicing platforms. There can be no assurance, however, that we will
be able to obtain new capital.
Following the losses incurred by the Company in the second half of 1998,
the Company began discussions with a number of potential new equity investors in
order to strengthen its diminished equity base and obtain additional capital to
operate and develop the business. These discussions were suspended pending the
completion of our restructuring. There can be no assurance that any such
discussions will be recommenced or will lead to any investments being made.
Sources of liquidity for First Bank include wholesale and brokered
certificates of deposit. At June 30, 1999, First Bank had approximately $479.3
million of certificates of deposit. At June 30, 1999, scheduled maturities of
certificates of deposit during the 12 months ending June 30, 2000 and thereafter
amounted to approximately $405.0 million and approximately $74.3 million,
respectively. Brokered and other wholesale deposits generally are more
responsive to changes in interest rates than core deposits and, thus, are more
likely to be withdrawn by the investor upon maturity as changes in interest
rates and other factors are perceived by investors to make other investments
more attractive. However, management of First Bank believes it can adjust the
rates paid on certificates of deposit to retain deposits in changing interest
rate environments and that brokered and other wholesale deposits can be both a
relatively cost-effective and stable source of funds.
29
<PAGE>
Mortgage-backed securities which are subject to repurchase agreements, as
well as loans and real estate which secure other indebtedness, periodically are
revalued by the lender, and a decline in the value that is recognized by the
lender (whether or not the lender recognized the full fair value of the
security) may result in the lender requiring us to provide additional collateral
to secure the indebtedness. Primarily as a result of asset sales, we have had
adequate cash and cash equivalents to meet calls for additional collateral to
repay a portion of the related indebtedness or to meet our other operating and
financing requirements. In certain instances, lenders under repurchase
agreements secured by mortgage-backed securities have withheld principal and/or
interest payments on such securities in order to reduce outstanding, unpaid
margin calls. At June 30, 1999, there were approximately $10.9 million of
outstanding collateral calls, as determined by our lenders, net of withheld
principal and interest payments. If we are unable to fund additional collateral
requirements or to repay, renew or replace maturing indebtedness on terms
reasonably satisfactory to us, we may be required to sell (on short notice) a
portion of our assets, and could incur losses as a result. Furthermore, since,
from time to time, there is extremely limited liquidity in the market for
subordinate and residual interests in mortgage-related securities, there can be
no assurance that we will be able to dispose of such securities promptly for
fair value in such situations.
We are party to various off-balance sheet financial instruments in the
normal course of business to manage our interest rate risk. We conduct business
with a variety of financial institutions and other companies in the normal
course of business, including counterparties to our off-balance sheet financial
instruments. We are subject to potential financial loss if the counterparty is
unable to complete an agreed upon transaction. We seek to limit counterparty
risk through financial analysis and other monitoring procedures.
Adequate credit facilities and other sources of funding, including our
ability to securitize loans, are essential to the continuation of the Company's
ability to purchase pools of loans and mortgage-backed securities. During the
third and fourth quarters of 1998, financial markets were severely and
negatively impacted by various factors which have resulted in reduced
availability of liquidity and capital to specialty finance companies and other
holders of non-investment grade assets and certain types of loans. This includes
the ability to raise new equity capital and long-term debt, as well as the
ability to securitize or finance certain types of loans. The Company's growth
strategy is dependent on its ability to raise additional debt and/or equity
financing and growth at First Bank. To the extent this market environment
persists, such growth is likely to be significantly curtailed or delayed.
First Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less that 1%. Monetary penalties may be
imposed for failure to meet applicable liquidity requirements. First Bank has
complied with these requirements.
Federally insured savings associations such as the Bank are required to
maintain minimum levels of regulatory capital. Those standards generally are as
stringent as the comparable capital requirements imposed on national banks. The
OTS also is authorized to impose capital requirements in excess of these
standards on a case-by-case basis. In connection with the 1998 examination the
OTS indicated that the capital level of First Bank exceeds the minimum
requirement for "well capitalized" status under provisions of the Prompt
Corrective Action Regulation. On June 3, 1999, the OTS issued a directive that
indicates that it considers First Bank to be in "troubled condition." This
directive places restrictions on First Bank's ability to engage in certain
activities, including, but not limited to: increasing asset size; making new
loans, investments or capital expenditures; paying dividends or making other
capital distributions; and hiring senior executive officers, directors or
consultants. First Bank does not agree with the "troubled institution"
designation and is deciding whether to appeal the restrictions imposed by the
OTS directive. However, there can be no assurance as to whether any such appeal
will be successful.
30
<PAGE>
OTHER-YEAR 2000 COMPLIANCE
Many existing computer software programs and other technologically
dependent systems use two digits to indicate the year in date fields and, as
such, could fail or create erroneous results by or at the Year 2000. We utilize
a number of technologically dependent systems to operate, service mortgage loans
and manage mortgage assets. WFSG, together with WCC Inc. (a subsidiary
controlled by WFSG) and Wilshire Servicing Company U.K. Limited (a wholly-owned
subsidiary of WFSG), who are our two Servicers, formed a committee to address
year 2000 issues ("the Committee") that reports directly to WFSG's executive
committee. The Committee is headed by WFSG's Chief Information Officer and
includes representatives from across departments within WFSG and our Servicers
as well as our management.
The Committee established and completed a project plan with respect to
Year 2000 readiness. In the first phase of the project, the Committee conducted
an inventory of all systems for WFSG and our Servicers, classifying each as
either "critical" or "non-critical". For systems deemed "critical", the
Committee developed detailed test plans and created separate Year 2000 test
environments. After the testing phase, in which Year 2000 issues were
identified, phases of resolution, re-testing, implementation and certification
were completed.
We began testing of all critical systems in 1997 and completed all
necessary testing of such systems, including both systems supplied by outside
vendors and internally developed systems, by the end of February 1999. In each
case, issues which were identified were resolved. Changes which resulted from
testing were coded, retested and implemented and moved into production.
Following these phases, each department's executive management certified that
their staff had tested critical code and deemed it adequate. In addition, for
all critical systems supplied by outside vendors, the Committee obtained a
written certification from the vendor that the applicable package is "Year 2000
compliant". With respect to non-critical systems supplied by outside vendors,
the Committee has consulted substantially all of the vendors' Internet sites and
has obtained copies of Year 2000 compliance certifications from those sites. All
phases of the Committee's Year 2000 readiness project were completed by the end
of April 1999. As a result, WFSG's management believes that the Company is Year
2000 compliant in all material respects.
In addition to the information technology systems ("IT systems"), various
"environmental systems" ("non-IT systems") used for the Company's business,
including the telephone, elevator and security systems, incorporate technology
that could be impaired by the year 2000 date change. The Committee has received
written certification that each significant non-IT system is Year 2000
compliant.
The financial impact of becoming Year 2000 compliant has not been and is
not expected to be material to us or our results of operations. Aside from
limited hardware costs, our primary expense related to Year 2000 compliance is
allocation of existing staff. The Committee estimates the total cost related to
Year 2000 compliance to be approximately $0.5 million, substantially all of
which had been incurred by December 31, 1998.
Our most likely worst case Year 2000 scenario would be one in which we are
unable to perform necessary loan servicing activities. To the extent the loan
servicing system is not Year 2000 compliant, the ability to service loans would
be in jeopardy. This, in turn, would limit the collections of payments on
mortgage loans, which would, further, hinder the Company's ability to meet its
own debt service and other cash requirements. Although we do not believe that it
is reasonably likely that the Year 2000 date change will cause such a scenario
to occur, the Committee has developed a contingency plan with procedures for
manual loan servicing, for up to a week, should the loan servicing system cease
to be operational. The loan servicing system was developed internally, and we
believe that, in the event of an unexpected Year 2000 issue, the source of the
issue could be isolated, and the issue could be corrected, rapidly by our
existing staff without significant cost. Accordingly, we do not believe that
such a failure of the loan servicing system would result in any material loss of
revenue or have any other material impact on the Company.
Based on the results of the Committee's Year 2000 readiness project, we
are confident that we are appropriately addressing the Year 2000 issues.
Critical IT systems supplied by outside vendors have undergone testing not only
by us, but by other customers of the vendors as well. Our loan servicing system
is an internally developed system and therefore, information technology
personnel are very familiar with the system and believe their efforts will have
favorable results.
31
<PAGE>
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. All of the statements
contained in this Quarterly Report on Form 10-Q which are not identified as
historical should be considered forward-looking. In connection with certain
forward-looking statements contained in this Quarterly Report on Form 10-Q and
those that may be made in the future by or on behalf of the Company which are
identified as forward- looking, the Company notes that there are various factors
that could cause actual results to differ materially from those set forth in any
such forward-looking statements. Such factors include but are not limited to the
real estate market, the cease and desist order, the availability of loan
portfolios at acceptable prices, the availability of financing for loan
portfolio acquisitions, interest rates and expansion outside the U.S.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Quarterly Report on Form 10-Q will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by or subjected to agreed-upon
procedures by independent accountants, and no third-party has independently
verified or reviewed such statements. Readers of this Quarterly Report on Form
10-Q should consider these facts in evaluating the information contained herein.
The inclusion of the forward-looking statements contained in this Quarterly
Report on Form 10-Q should not be regarded as a representation by the Company or
any other person that the forward-looking statements contained in this Quarterly
Report on Form 10-Q will be achieved. In light of the foregoing, readers of this
Quarterly Report on Form 10-Q are cautioned not to place undue reliance on the
forward-looking statements contained herein.
32
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
It is our objective to attempt to control risks associated with interest
rate movements. In general, management's strategy is to limit our exposure to
earnings variations and variations in the value of assets and liabilities as
interest rates change over time. Our asset and liability management strategy is
formulated and monitored by the asset and liability committees for the Company
and First Bank (the "Asset and Liability Committees") which meet regularly to
review, among other things, the sensitivity of our assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and securitization activity, and maturities of
investments and borrowings. The Asset and Liability Committees coordinate with
First Bank's Board of Directors and the Company's investment committees with
respect to overall asset and liability composition.
The Asset and Liability Committees are authorized to utilize a wide
variety of off-balance sheet financial techniques to assist them in the
management of interest rate risk. These techniques include interest rate swap
agreements, pursuant to which the parties exchange the difference between
fixed-rate and floating-rate interest payments on a specified principal amount
(referred to as the "notional amount") for a specified period without the
exchange of the underlying principal amount. Interest rate swap agreements are
utilized to reduce our exposure caused by the narrowing of the interest spread
between fixed rate loans held for investment and associated liabilities funding
those loans caused by changes in market interest rates. First Bank had
approximately $36.7 million notional principal amount of interest rate swap
agreements outstanding at June 30, 1999, which were designated as hedges of
certain fixed rate loans in order to convert variable rate liabilities to fixed
rate. These swaps had the effect of decreasing our net interest income by
approximately $0.2 million during the six months ended June 30, 1999.
At times, we have also hedged the interest rate exposure of fixed-rate or
lagging-index loans or securities that are either held or available for sale.
The Company creates a hedge which matches the principal amortization of such
assets against the maturity of our liabilities generally by entering into short
sales or forward sales of U.S. Treasury securities, Government securities,
interest rate futures contracts or interest rate swap agreements. This results
in market gains or losses on hedging instruments, in response to interest rate
increases or decreases, respectively, which approximate the amount of
corresponding market losses or gains, respectively, on assets being hedged. We
evaluate the interest rate sensitivity of each pool of loans or securities in
conjunction with the current interest rate environment and decide whether to
hedge the interest rate exposure of a particular pool. We generally do not hedge
the interest rate risk associated with holding non-lagging index adjustable-rate
mortgages pending their sale or securitization due to the decreased significance
of such risk. In general, when a pool of loans or securities are acquired, we
will determine whether or not to hedge and, with respect to any sale or
financing of any pool of loans through securitization, will determine whether or
not to discontinue its duration-matched hedging activities with respect to the
relevant loans.
In addition, as required by OTS regulations, First Bank's Asset and
Liability Committee also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and
market value of portfolio equity ("MVPE"), which is defined as the net present
value of an institution's existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential changes
in net interest income and MVPE that is authorized by the board of directors of
First Bank.
32
<PAGE>
The following table quantifies the potential changes in First Bank's net
portfolio value, at May 31, 1999, should interest rates go up or down (shocked)
by 100 to 300 basis points, assuming the yield curves of the rate shocks will be
parallel to each other.
Net Portfolio
Change in Rates Value
--------------- ---------------------------------------------
$ Amount $ Change % Change
-------- --------- --------
300 Basis Points $ 1,501 $(49,099) -97%
200 Basis Points 19,975 (30,625) -61%
100 Basis Points 36,861 (13,739) -27%
0 Basis Points 50,600 -- --
-100 Basis Points 59,816 9,216 18%
-200 Basis Points 65,795 15,195 30%
-300 Basis Points 69,998 19,398 38%
Management also believes that the assumptions (including prepayment
assumptions) used by it to evaluate the vulnerability of First Bank's operations
to changes in interest rates approximate actual experience and considers them
reasonable; however, the interest rate sensitivity of First Bank's assets and
liabilities and the estimated effects of changes in interest rates on First
Bank's net interest income and MVPE could vary substantially if different
assumptions were used or actual experience differs from the historical
experience on which they are based.
33
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal proceedings occurring
in the ordinary course of business which management of the Company
believes will not have a material adverse effect on the financial
condition or operations of the Company.
Item 2. Changes in Securities
Pursuant to the Company's plan of reorganization, which became
effective on June 10, 1999, (i) the holders of the Company's $184.2
million in publicly issued notes exchanged their notes for new
common stock of the Company and (ii) the Company's existing common
stock and options were cancelled. In connection with the
reorganization, the Company amended and restated its articles of
incorporation and by-laws. Pursuant to the amended and restated
articles of incorporation, the Company is now authorized to issue
90,000,000 shares of common stock and 10,000,000 shares of preferred
stock. Previously, the Company had been authorized to issue
50,000,000 shares of common stock and 10,000,000 shares of preferred
stock. The amended and restated by-laws no longer require a
staggered board of directors.
Item 3. Defaults Upon Senior Securities
The recent dramatic events in financial markets, which
included a significant reduction in valuations of, and liquidity
for, mortgage-backed securities, has had a significant adverse
impact on the Company's liquidity and financial condition. Primarily
as a result of these market conditions and the resulting losses, the
Company was unable to comply with the minimum net worth and other
requirements for certain of its outstanding indebtedness. Pursuant
to the Company's restructuring plan, which became effective on June
10, 1999, such indebtedness was converted into new common stock of
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during
the period covered by this report.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Amendment No. 1 to Management Agreement
10.2 Loan Servicing Agreement
34
<PAGE>
10.3 Amended and Restated Loan Servicing Agreement with UK Servicer
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K during the three months ended June 30,
1999:
(i) Report on Form 8-K dated June 10, 1999, reporting the
emergence from bankruptcy and change in control of the
Company; the resignation of a Director of the Company;
the resignation of the Chief Executive Officer of First
Bank; and the imposition of restrictions on First Bank.
(ii) Report on Form 8-K dated June 23, 1999 reporting the
denial of the Company's request for continued listing of
its common stock on the Nasdaq National Stock Market.
35
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
WILSHIRE FINANCIAL SERVICES GROUP INC.
Date: August 16, 1999
By: /s/ LAWRENCE A. MENDELSOHN
--------------------------------------
Lawrence A. Mendelsohn
President
By: /s/ CHRIS TASSOS
--------------------------------------
Chris Tassos
Chief Financial Officer
36
AMENDMENT NO. 1 TO MANAGEMENT AGREEMENT
THIS AMENDMENT NO. 1 TO MANAGEMENT AGREEMENT, dated as of April 6, 1998 by
and between WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Maryland corporation
("WREIT" and, together with its subsidiaries and partnerships, and as the
general partner of Wilshire Real Estate Partnership, L.P., a Delaware limited
partnership (the "Company")), and WILSHIRE REALTY SERVICES CORPORATION, a
Delaware corporation (the "Manager");
WITNESSETH:
WHEREAS, the Management Agreement dated as of April 6, 1998 (the
"Management Agreement") between WREIT and the Manager defined Primary
Investments by reference to WREIT's preliminary prospectus dated March 13, 1998
and various parties have suggested that such definition is ambiguous; and
WHEREAS, the formula set forth in Section 9(b) of the Management Agreement
contains a typographical error; and
WHEREAS, the parties to the Management Agreement wish to eliminate any
ambiguity and correct any errors;
NOW THEREFORE, in consideration of the mutual agreements herein set forth,
the undersigned agree to amend and restate the Management Agreement as follows:
SECTION 1. Amendments.
(a) Section 1 of the Management Agreement is hereby amended to insert
therein the following definition of Primary Investments as new subsection (h):
"(h) "Primary Investments" means (i) commercial and
multi-family mortgage loans that are delinquent in payments and
commercial and multi-family real properties in the United States;
(ii) subordinated interests in mortgage-backed securities (other
than mortgage-backed securities backed by mortgage loans and/or real
properties previously owned by Wilshire Financial Services Group
Inc. or its affiliates); and (iii) international mortgage loans and
real properties."
(b) Section 9(b) of the Management Agreement is hereby deleted in its
entirety and replaced with the following new subsection (b):
<PAGE>
"(b) The Company shall pay to the Manager incentive
compensation for each calendar quarter, commencing in the calendar
quarter ending June 30, 1998, in an amount equal to the product of
(A) 25% of the dollar amount by which (1)(a) Funds from Operations
(before the incentive fee) of the Company per share of Common Stock
(based on the weighted average number of shares outstanding) (b)
plus gains (or minus losses) from debt restructuring and sales of
property per share of Common Stock (based on the weighted average
number of shares outstanding), exceed (2) an amount equal to (a) the
weighted average of the price per share at the initial public
offering and the prices per share at any secondary offerings by the
Company multiplied by (b)(i) the sum of the Ten-Year U.S. Treasury
Rate and five percent per annum (ii) divided by 4, multiplied by (B)
the weighted average number of shares of Common Stock outstanding
during such period. "Funds from Operations" as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), on
the date hereof means net income (computed in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets,
and after adjustments for unconsolidated partnerships and joint
ventures. As used in calculating the Manager's compensation, the
term "Ten Year U.S. Treasury Rate" means the arithmetic average of
the weekly average yield to maturity for actively traded current
coupon U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years) published by the Federal Reserve
Board during a quarter, or, if such rate is not published by the
Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company. If the
Company determines in good faith that the Ten Year U.S. Treasury
Rate cannot be calculated as provided above, then the rate shall be
the arithmetic average of the per annum average yields to
maturities, based upon closing asked prices on each business day
during a quarter, for each actively traded marketable U.S. Treasury
fixed interest rate security with a final maturity date not less
than eight nor more than twelve years from the date of the closing
asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in
U.S. government securities selected by the Company."
SECTION 2. Execution in Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No.1
to Management Agreement as of the date first written above.
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.,
a Maryland corporation and the general partner of
Wilshire Real Estate Partnership L.P.
By /s/ Andrew A. Wiederhorn
-----------------------------------------------
Andrew A. Wiederhorn
Chairman of the Board, Chief Executive Officer,
Treasurer and Secretary
WILSHIRE REALTY SERVICES CORPORATION,
a Delaware corporation
By /s/ Andrew A. Wiederhorn
-----------------------------------------------
Andrew A. Wiederhorn
Chairman of the Board, Chief Executive Officer,
Treasurer and Secretary
LOAN SERVICING AGREEMENT
This LOAN SERVICING AGREEMENT (the "Agreement") is dated April 6, 1998
between Wilshire Credit Corporation, a Nevada corporation ("the Servicer") and
Wilshire Real Estate Investment Trust Inc., a Maryland corporation (the
"Company").
RECITALS
The Company and certain of its affiliates intend to acquire and/or
originate mortgage loans, real estate, mortgage backed securities and other real
estate related assets (the "Real Estate Assets") during the term of this
Agreement. The Company desires that the Servicer service such loans and the
Servicer desires to do the same.
The parties hereby agree for good and valuable consideration as follows:
1. Exclusive Servicing of Real Estate Assets. The Servicer shall provide
portfolio management services, including billing, portfolio administration and
collection services ("Services") for all Real Estate Assets unless the Servicer
and the Company agree that specific Real Estate Assets shall not be so serviced
("Excluded Real Estate Assets"). The Company agrees that the Servicer shall not
be required to service Real Estate Assets for which the Servicer may not have
applicable licenses. The Company agrees that all of its Real Estate Assets and
any Affiliate's Real Estate Assets, except for Excluded Real Estate Assets,
shall be serviced by the Servicer under this Agreement. The Company or one of
its subsidiaries (or any partnership managed by it) shall assign all of its
servicing rights (including any Special Servicing Rights as described in the
Company's prospectus relating to its initial public offering) in Real Estate
Assets acquired by it to the relevant Servicer; provided, however, with respect
to Special Servicing Rights, the Company shall retain the right to direct
foreclosure.
2. Manner and Performance of Service. Except as otherwise specifically
provided herein, the Servicer shall be entitled to exercise its sole discretion
in servicing the Real Estate Assets. The Servicer shall devote such time and
attention as shall be necessary to provide the Company with the Services
described herein. The Servicer may service its own loans, real estate and
financial assets and render services to any current or future clients, provided
that such activities do not interfere with the Servicer's performance of the
Services. The Services to be provided by the Servicer include the following:
2.1 The Servicer's Duties in General. The Servicer shall administer
the Real Estate Assets with reasonable care, using that degree of skill and
attention that the Servicer exercises with respect to comparable Real Estate
Assets that it services for its own account or as a fiduciary for others. The
Servicer shall take all necessary actions which the Servicer in good faith
determines are commercially reasonable in regard to each Real Estate Asset,
which in the case of a loan shall continue until it is collected
<PAGE>
or the Servicer, in its good faith judgment, determines that it is no longer
commercially reasonable to continue to try to collect the outstanding
indebtedness on such loan.
2.2 Compliance. The Servicer shall use its best efforts to comply
throughout the term of this Agreement with all requirements of applicable
federal, state and local laws and foreign laws and regulations thereunder,
including to the extent applicable, any consumer and debt collection protection
laws and any other consumer credit, equal opportunity and disclosure laws.
2.3 Collection. The Servicer shall use its reasonable efforts, but
not less than the same efforts it uses with respect to comparable Real Estate
Assets that it services for its own account or for others, to collect all
payments due and to become due under each of the Real Estate Assets from the
party or parties liable thereunder (a "Borrower").
2.4 [Reserved].
2.5 Indemnity. The Servicer shall reimburse and indemnify the
Company and its successors and assigns for and against, and hold the Company and
its successors and assigns harmless from and against, any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses and disbursements, including without limitation reasonable fees and
disbursements of counsel, which may be imposed upon, or incurred by the Company
in any way relating to or arising out of the Servicer's gross negligence in its
performance of its duties hereunder. The Company shall reimburse and indemnify
the Servicer and its successors and assigns for and against, and hold the
Servicer and its successors and assigns harmless from and against, any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses and disbursements, including without limitation reasonable fees
and disbursements of counsel, which may be imposed upon, or incurred by the
Servicer in any way relating to or arising out of the Servicer's performance of
its duties hereunder, the Real Estate Assets or the servicing thereof prior to
the servicing by the Servicer other than arising out of the Servicer's gross
negligence.
2.6 Modifications, Adjustable Rate, and Payoffs. In connection with
its collection efforts the Servicer may modify or change the interest rate of
any loan, and quote to, and accept from, a Borrower a full or partial payoff
amount on any loan as full settlement.
2.7 Monthly Accounting Reports. For each month during the term of
this Agreement, the Servicer will furnish the Company with a monthly report
regarding the Real Estate Assets by the twenty-fifth (25th) day of the following
month. The Servicer shall furnish at the Servicer's cost such other information
regarding the Servicer, the Real Estate Assets and this Agreement as the Company
may from time to time reasonably request, provided, that if the information or
data requested by the Company is something the Servicer cannot produce
internally from its then existing reporting systems without manual compilation
or production, or reprogramming its computer system, the Company shall reimburse
the Servicer for its cost for furnishing such information.
-2-
<PAGE>
3. Term. This Agreement shall commence on the date hereof and shall
continue in force for two (2) years, and thereafter, will automatically renew
for successive one-year periods unless either party delivers a notice of
termination at least 120 days prior to the end of the then current term.
Notwithstanding any other provision to the contrary, this Agreement shall be
terminated if the Management Agreement, dated April 6, 1998 between the Company
and Wilshire Realty Services Corp., a Delaware corporation ("WRSC") is
terminated by either the Company or WRSC.
4. Subservicing Agreements.
4.1 Engagement of Subservicer. The Servicer shall not enter into
Subservicing Agreements, permit the subservicing of, or delegate any of its
duties to any Subservicers with respect to, all or part of the Real Estate
Assets except under the circumstances described in the next sentence or as
approved by WRSC. In the event that the Servicer is not permitted to service one
or more Real Estate Assets in any jurisdiction pursuant to the laws, ordinances,
rules or regulations ("Laws") of such jurisdiction that are applicable to such
Real Estate Assets, the Servicer may retain a Subservicer under a Subservicing
Agreement for the purpose of performing any servicing of such Real Estate Assets
that the Servicer is not permitted by such Laws to perform; provided, however,
that such Subservicer shall be retained only for so long as and to the extent
that such Laws do not permit the Servicer to perform particular servicing
duties. The Servicer shall notify the Company and/or WRSC of each Subservicing
Agreement entered into by it pursuant to this Section 4.1 within twenty (20)
business days after such Subservicing Agreement is entered into, which notice
shall set forth the reasons such Subservicing Agreement is necessary and is
permitted under this Section 4.1 and shall attach a copy of such Subservicing
Agreement. The Servicer shall also notify the Company and/or WRSC as soon as any
Subservicing Agreement is no longer necessary with respect to any Real Estate
Assets and shall immediately terminate such Subservicing Agreement as to such
Real Estate Assets. Each Subservicing Agreement shall provide that it is
terminable at will without payment of a termination fee or penalty.
4.2 Qualification to do Business. Each Subservicer shall be licensed
to transact business and to perform its obligations under its Subservicing
Agreement in each jurisdiction required by the Laws applicable to the Real
Estate Assets being serviced by such Subservicer. Each Subservicing Agreement
will be upon such terms and conditions as are not inconsistent with this
Agreement and as the Servicer and the Subservicer have agreed. As part of its
servicing activities hereunder, the Servicer shall enforce the obligations of
each Subservicer under the related Subservicing Agreement.
4.3 Liability. Notwithstanding any Subservicing Agreement, any of
the provisions of this Agreement relating to agreements or arrangements between
the Servicer and Subservicer or reference to actions taken through a Subservicer
or otherwise, the Servicer shall remain obligated and liable to the Company for
the servicing and administering of the Real Estate Assets in accordance with the
provisions of this Agreement without diminution of such obligation or liability
by virtue of indemnification from a Subservicer and to the same extent and under
the same terms and conditions as if the Servicer alone were servicing and
administering the Real Estate Assets.
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4.4 Indemnity. Any Subservicing Agreement and any other transactions
or services relating to the Real Estate Assets involving a Subservicer shall be
deemed to be between such Subservicer and Servicer alone, and the Company shall
have no obligation, duty or liability with respect to such Subservicer,
including, without limitation, any obligation, duty or liability to pay such
Subservicer's fees and expenses. For purposes of remittances by the Servicer
pursuant to this Agreement, the Servicer shall be deemed to have received a
payment on a Mortgage Loan when the applicable Subservicer has received such
payment.
4.5 Action of Subservicer. References in this Agreement to actions
taken or to be taken by the Servicer in servicing the Real Estate Assets include
actions taken or to be taken by a Subservicer on behalf of the Servicer to the
extent that under applicable Laws the Servicer may not take such actions
directly.
5. Maintenance of Insurance and Errors and Omissions and Fidelity
Coverage.
5.1 Insurance Coverage Requirements. The Servicer shall use its best
efforts to cause the borrower on each mortgage loan to maintain for such
mortgage loan all insurance required by the terms of the such mortgage loan and
related documents. If the borrower fails to maintain such insurance, then the
Servicer shall notify the Company and/or WRSC of such failure and cause to be
maintained prior to the termination of any existing such policy, or if there is
no existing such policy, as promptly as is practicable and as conforms with
accepted servicing practices (i) fire and hazard insurance with extended
coverage in an amount which is at least equal to the lesser of the current
principal balance of such mortgage loan and the replacement cost of the
improvements which are a part of the related property and (ii) to the extent
that the mortgage loan is located in a federally designated special flood hazard
area, flood insurance in respect thereof. Such flood insurance shall be in an
amount equal to the lesser of (y) the unpaid principal balance of the mortgage
loan or (z) the maximum amount of such insurance as is available for the
mortgage loan under the National Flood Insurance Act. After notifying the
Company pursuant to the second preceding sentence, the Servicer shall take such
action as the Company and/or WRSC reasonably requests with respect to the
maintenance of any other forms of insurance which are required to be maintained
pursuant to the documents governing the mortgage loan. Any amounts collected by
the Servicer under any such policies (other than amounts to be applied to the
restoration or repair of the underlying property or amounts released to the
borrower in accordance with the terms of the mortgage loan) shall be paid to the
Company. To the extent the Servicer has expended its own funds to pay for
insurance premiums under this Subsection 5.1, the cost of such premiums shall be
deemed a servicing advance, which is reimbursable to the Servicer.
5.2 Servicer Insurance Requirement. In the event that the Servicer
shall obtain and maintain a blanket policy insuring against losses on mortgage
loans serviced for the Company with a qualified insurer, to the extent such
policy provides no less coverage in scope and amount with respect to each Real
Estate Assets than the insurance required to be maintained by the Servicer
pursuant to Section 5.1, the Servicer shall conclusively be deemed to have
satisfied its obligations as set forth in Section 5.1, it being understood and
agreed that such policy may contain a deductible clause, in which case the
Servicer
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shall, in the event that there shall not have been maintained on any mortgage
loan a policy complying with Section 5.1 and there shall have been a loss which
would have been covered by such policy, pay to the Company the amount not
otherwise payable under the blanket policy because of such deductible clause to
the extent that any such deductible exceeds the deductible limitation that
pertained to the mortgage loan, or, in the absence of any such deductible
limitation, the deductible limitation which is consistent with accepted
servicing practices. In connection with its activities as administrator and
servicer of the mortgage loans, the Servicer agrees to present, on behalf of
itself and the Company, claims under any such blanket policy.
5.3 Servicer Bond and Insurance Requirement for Officers and
Directors. The Servicer shall obtain and maintain at its own expense, and keep
in full force and effect throughout the term of this Agreement, a blanket
fidelity bond and an errors and omissions insurance policy covering the
Servicer's officers and employees acting on behalf of the Servicer in connection
with its activities under this Agreement. The amount of such coverage shall meet
the servicing requirements of prudent institutional commercial or residential
mortgage loan servicers for the relevant market. In the event that any such bond
or policy ceases to be in effect, the Servicer shall obtain a comparable
replacement bond or policy. Coverage of the Servicer under a policy or bond
obtained by an affiliate of the Servicer and providing the coverage required by
this Section shall satisfy the requirements of this Section.
6. Annual Statement as to Compliance. The Servicer will deliver to the
Company, on or before December 31 of each year, beginning December 31, 1998, an
officer's certificate stating as to each signatory thereof, that (a) a review of
the activities of the Servicer during the preceding calendar year (or during the
period from the date of execution of this Agreement until the end of the
preceding calendar year in the case of the first such certificate) and of
performance under this Agreement has been made under such officer's supervision;
and (b) to the best of such officer's knowledge, based on such review, the
Servicer has fulfilled in all material respects all of its obligations under
this Agreement throughout such period, or if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof.
7. Annual Independent Public Accountants' Servicing Report. On or before
December 31 of each year, beginning December 31, 1998, the Servicer, at its
expense, shall cause a firm of independent public accountants that is a member
of the American Institute of Certified Public Accountants to furnish a statement
to the Company to the effect that such firm has examined certain documents and
records relating to the servicing practices of the Servicer for the preceding
calendar year (or during the period from the date of execution of this Agreement
until the end of the preceding calendar year in the case of the first such
certificate) and that, on the basis of such examination conducted substantially
in compliance with generally accepted auditing standards and the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC, such firm is of the opinion that such servicing during such
period has been conducted generally in compliance with this Agreement except for
such exceptions that, in the opinion of such firm, generally accepted auditing
standards and the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for FHLMC requires it to report, in which
case such exceptions shall be set forth in such statement.
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8. Access to Certain Documentation Regarding the Real Estate Assets. Upon
reasonable advance notice, the Servicer will provide reasonable access during
its normal business hours at its offices to the Company and/or WRSC, and with
the Company's consent, to a savings and loan association, bank or insurance
company to certain reports and to information and documentation regarding the
Real Estate Assets sufficient to permit the Company, the Office of Thrift
Supervision, the FDIC, the supervisory agents and the examiners of any such
entity to comply with applicable regulations of the Office of Thrift Supervision
or other regulatory authorities with respect to investment in the Real Estate
Assets.
9. Fees and Costs. The Company shall pay the Servicer and the Servicer may
retain or disburse from any Asset proceeds the following amounts:
9.1 Reimbursement of Costs. All bona fide amounts paid by the
Servicer to third parties in connection with this Agreement, including without
limitation, stationery suppliers, related printing costs, fees for recordings
and filings, mailgrams, repossession agency fees, legal fees, travel, insurance
costs, and payments arising out of acts or omissions of third parties (including
persons from which the Real Estate Assets are acquired), and the Servicer's
standard photocopy charges.
9.2 Service Fee. The Servicer shall be entitled to a fee (the
"Servicer's Service Fee") for servicing Real Estate Assets equal to (a) all
interest and other earnings paid or accrued on amounts from time to time on
deposit in any accounts in which proceeds of Real Estate Assets are deposited
plus (b) a monthly fee equal to an amount negotiated by the parties for each
particular Real Estate Assets portfolio, which monthly fee shall be comparable
to fees charged by other industry participants for servicing comparable loan
portfolios.
9.3 Payment. The Servicer may withdraw on a monthly basis from all
Real Estate Assets proceeds all escrow payments, costs, and the Servicer's
Service Fee. Within twenty-five (25) days after the last day of each calendar
month the Servicer shall pay to the Company or the Affiliate owning the Real
Estate Assets the net proceeds received in that calendar month. The Company or
the applicable Affiliate shall pay the Servicer within fifteen (15) days after
billing for any excess fees and costs. The Servicer shall receive any ancillary
income, other than any float revenue.
10. Independent Contractor. The Servicer shall provide the Services in the
capacity of an independent contractor. Nothing in this Agreement shall be
construed as establishing an employment, partnership or joint venture between
the Company and the Servicer.
11. Representations of the Company. The Company represents and warrants as
follows:
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11.1 The Company has been duly organized and is validly existing and
in good standing under the laws of the jurisdiction of its organization, with
power and authority to own its properties and to conduct its business as such
properties are currently owned and such business is currently conducted.
11.2 The Company has the power and authority to execute and deliver
this Agreement and to carry out its terms; and the execution, delivery, and
performance of this Agreement have been duly authorized by the Company by all
necessary action on the part of the Company.
11.3 This Agreement constitutes a legal, valid and binding
obligation of the Company enforceable in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting enforcement of creditor rights generally.
12. Representations of the Servicer. The Servicer represents and warrants
as follows:
12.1 The Servicer has been duly organized and is validly existing
and in good standing under the laws of the jurisdiction of its organization,
with power and authority to own its properties and to conduct its business as
such properties are currently owned and such business is currently conducted and
has corporate power, authority and legal right to service the Real Estate Assets
as provided in this Agreement.
12.2 The Servicer has the power and authority to execute and deliver
this Agreement and to carry out its terms; and the execution, delivery, and
performance of this Agreement have been duly authorized by WCC and the European
Servicer by all necessary corporate action on the part of WCC or the European
Servicer.
12.3 This Agreement constitutes a legal, valid and binding
obligation of WCC and the European Servicer enforceable in accordance with its
terms, subject to bankruptcy, insolvency, reorganization, moratorium, or other
similar laws affecting enforcement of creditor rights generally.
13. Audits and Examinations.
13.1 The Servicer shall use reasonable efforts to maintain in good
order and condition throughout the term of this Agreement all Real Estate Assets
files and relevant materials that the Servicer has received regarding the Real
Estate Assets.
13.2 The Servicer shall maintain a copy of each Real Estate Assets
file at its office or elsewhere within its control, provided, that at the
Company's request, the Servicer will deliver copies of such Real Estate Assets
to the Company or a designee of the Company. The Servicer shall make available
to the Company or its duly authorized representatives, attorneys or auditors the
Real Estate Assets files and the related accounts, records and computer systems
maintained by the Servicer at such times as the Company shall reasonably
request.
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13.3 The Servicer shall permit the Company, and its agents to audit
the books and records of the Servicer applicable to the Real Estate Assets at
the Servicer's business premises during the Servicer's normal business hours
upon reasonable prior notice to the Servicer. The Company shall have direct
access to the Servicer's management information system for the Real Estate
Assets or, if applicable, to any service bureau used by the Servicer for the
Real Estate Assets.
14. Substitute Servicer; Limited Arbitration.
14.1 If at any time during the term of this Agreement the Servicer
shall breach, or default in the performance of a material obligation of the
Servicer undertaken in this Agreement, the Company and the Servicer shall
consult for such period of time as the Company may determine is reasonable under
the circumstances to determine a mutually acceptable resolution. In the event
the Company and the Servicer fail to agree thereon within such period as the
Company may specify, then the Company may, by written notice to the Servicer and
without limitation of any other right or remedy of the Company, require that the
Servicer transfer the Real Estate Assets, and all of the Servicer's servicing
and related rights and obligations in and with respect to the Real Estate
Assets, to a substitute servicer to be designated by the Company. Such
substitute servicer shall thereupon perform, pursuant to a servicing contract
acceptable to the Company, all of the Servicer's duties and obligations under
this Agreement. Upon the Company's designation of such a substitute servicer,
the Servicer shall within a reasonable time and to the extent it holds
possession thereof, deliver to such substitute servicer all written evidence and
documentation of the Real Estate Assets and the Servicer thereafter shall
cooperate and follow all instructions of the Company in all reasonable respects
to facilitate such substitute servicer's performance of the Servicer's duties
and obligations under this Agreement. The fees and expenses of the substitute
servicer shall be paid by the Company. The Servicer, however, shall continue to
be entitled to the Servicer's Service Fee with regard to any Real Estate Assets
being serviced under this section, net of all servicing fees paid by the Company
to the substitute servicer for such Real Estate Assets.
14.2 If the Servicer wishes to contest or dispute the Company's
appointment of a substitute servicer, The Servicer shall so notify the Company
in writing within thirty (30) days after such appointment, specifying in the
notice the Servicer's reasons for doing so. Such controversy or dispute
regarding the Company's appointment of a substitute servicer shall be settled by
arbitration, by one arbitrator in Portland, Oregon in accordance with the Rules
of the American Arbitration Association ("AAA"), subject to the provisions of
Section 9.3 and any other applicable provisions of this Agreement. The
arbitrator, whether appointed by the parties or pursuant to the Rules of the
AAA, shall be impartial and neutral and shall have experience in the management
of operations of an institution which performs financing and collection services
similar to those to be performed by the Servicer under this Agreement. The
decision of the arbitrator shall be final, binding and conclusive upon the
parties. The arbitrator shall comply with the privacy restrictions provided in
Section 14.7 regarding publication of any award.
14.3 In no event shall the arbitrator have power or authority to add
to or detract from the agreements of the parties nor to award punitive or
consequential damages. The arbitrator shall be authorized only to render an
award regarding a dispute or controversy concerning the Company's
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appointment of a substitute servicer pursuant to Section 14.1 hereof, including
an award of costs and expenses as herein provided, and the arbitrator shall not
purport to determine, or issue an award regarding, any other legal or equitable
rights or remedies of the parties.
14.4 The arbitration hearing will conclude and the arbitrator's
award shall be rendered in writing within 30 days after it commences. The
arbitrator will make every effort to enforce this requirement strictly, but may
extend the time for the hearing upon a showing that exceptional circumstances
require extension to prevent manifest injustice.
14.5 The parties will share equally the expense of deposits and
advances required by the AAA but either party may advance such amounts, subject
to recovery thereof as an addition or offset to any award. The arbitrator shall
award to the prevailing party, as determined by the arbitrator, all costs, fees
and expenses related to the arbitration, including reasonable fees and expenses
of attorneys, experts and other professionals incurred by the prevailing party.
14.6 In the event of any legal action relating to the arbitration,
including any action to stay the arbitration, to vacate, modify or correct any
award or otherwise, the prevailing party in such action as determined by the
court shall be entitled to recover from the other party its court costs and
reasonable fees and expenses of attorneys, experts and other professionals
incurred in connection with the action, including such costs, fees and expenses
upon appeal. The institution and maintenance of an action for judicial relief,
or the pursuit of any provisional, ancillary, or judicial remedy by any party,
shall not constitute a waiver of the right of any party, including the plaintiff
in such judicial action, to submit the controversy or claim to arbitration
pursuant to Section 14.2 hereof.
14.7 The Servicer and the Company acknowledge that the existence,
progress and results of any arbitration held under this Agreement, and any
arbitral award, are to remain private. Each party agrees not to publish or
disclose any information regarding the arbitration or any such award by any
means, except as may be required for enforcement of any arbitral award and
further agrees to take reasonable care, but in no event less care than it takes
to protect its own confidential business information generally, to prevent
disclosure and dissemination of such information.
14.8 The award rendered in any arbitration may be enforced in any
court of competent jurisdiction.
15. General Provisions.
15.1 Written Notices. Notices under this Agreement must be in
writing and mailed, U.S. Mail with first class postage prepaid or overnight
mail, or telecopied, to the appropriate address shown above unless the address
has been changed by notice given as provided herein at least three (3) business
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days in advance of the effective date of such change. Notice will be effective
three (3) business days after mailing or one business day after telecopy.
Wilshire Credit Corporation
1776 SW Madison Street
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
with a copy to: James M. Waddington, Esq.
Proskauer Rose LLP
1585 Broadway
New York, NY 10036-8299
Wilshire Real Estate Investment Trust Inc.
1776 SW Madison Street
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
with a copy to: James M. Waddington, Esq.
Proskauer Rose LLP
1585 Broadway
New York, NY 10036-8299
Wilshire Realty Services Corp.
1776 SW Madison Street
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
with a copy to: James M. Waddington, Esq.
Proskauer Rose LLP
1585 Broadway
New York, NY 10036-8299
15.2 Attorneys' Fees. If any judicial proceeding is initiated by
either of the parties arising out of the subject matter of this Agreement,
including without limitation any suit or action arising under state or federal
securities laws, trial, appeal, or bankruptcy, the prevailing party in such
proceeding will be entitled to recover, in addition to any judgment obtained in
such proceeding, reasonable attorneys' fees and court costs incurred.
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15.3 Events Beyond the Control of the Parties. Performance by either
party hereunder will not be deemed to be in default where the delay or default
is due to events beyond its reasonable control, including without limitation
war, insurrection, strike, lock-outs, riots, floods, earthquakes, fires,
casualties, acts of God, epidemics, quarantine restrictions, governmental
restrictions, inability to secure necessary labor or materials, acts of the
other party or failure to act of any public or governmental agency or entity.
15.4 Further Assurances. Following the execution of this Agreement,
the Servicer and the Company, respectively, shall, from time to time at the
request of the other, execute and deliver such other documents and instruments,
and shall take such other actions, as may be reasonably necessary or appropriate
to carry out and perform more effectively the terms and purposes of this
Agreement.
15.5 Governing Law. This Agreement will be governed by the laws of
the state of Oregon. Any dispute arising from or in connection with this
Agreement, other than as provided in Section 9, shall be resolved in the
applicable state or federal court in Portland, Oregon.
15.6 Severability. If any provision herein is deemed unenforceable
in whole or in part, such provision shall be deemed severable solely to the
extent of such enforceability without impacting the remainder of this Agreement.
15.7 Counterparts. This Agreement may be executed in one or more
counterparts. Each signed counterpart shall be deemed an original, but all of
them together constitute one and the same instrument.
15.8 Entire Agreement. This Agreement constitutes the entire
agreement between the parties as to its subject matter and supersedes all
proposals, oral or written, and all negotiations, conversations or discussions
heretofore had between the parties related to the subject matter of this
Agreement. Any amendment to this Agreement must be in writing signed by the
party to be charged.
[SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, this agreement has been duly signed by the Servicer
and on behalf of the Company on the day and year first above written.
Wilshire Credit Corporation
/s/ Andrew A. Wiederhorn
-----------------------------------------------
Andrew A. Wiederhorn
Chairman of the Board, Chief Executive Officer,
Treasurer and Secretary
Wilshire Real Estate Investment Trust Inc.
/s/ Andrew A. Wiederhorn
-----------------------------------------------
Andrew A. Wiederhorn
Chairman of the Board, Chief Executive Officer,
Treasurer and Secretary
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WCC - WREIT
LOAN SERVICING AGREEMENT
SERVICING FEE SCHEDULE
Pursuant to the Loan Servicing Agreement dated April 6, 1998, between Wilshire
Credit Corporation ("WCC") and Wilshire Real Estate Investment Trust Inc.,
("WREIT") the parties agree that the Servicer's Service Fees shall be as follows
for the following assets. These service fees are in addition to any management
fees to be paid by WREIT under its Management Agreement with Wilshire Realty
Services Corporation.
Asset Service Fees
- ----- ------------
Real Property 3% of cash receipts (gross rent) collected
Commercial Mortgage Loans 5% of cash collected for
discounted loans and REO; 37.5 basis
points per annum on unpaid principal
balance for non-discounted loans.
Residential Mortgage Loans To be negotiated
Mortgage Backed Securities 0
Mezzanine Loans 0
Dated as of January 1, 1999
Wilshire Credit Corporation Wilshire Real Estate Investment Trust Inc.
By: /s/ Lawrence A. Mendelsohn By: /s/ Andrew A. Wiederhorn
---------------------------- --------------------------------------
Name: Lawrence A. Mendelsohn Name: Andrew A. Wiederhorn
Title: President Title: Chief Executive Officer
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Amended and Restated Loan Servicing Agreement
THIS AMENDED AND RESTATED LOAN SERVICING AGREEMENT ("the Agreement") is made as
of December 23, 1998, between Wilshire Servicing Company UK Limited a company
incorporated in England under Company Registration Number 3277447 whose
registered office is at 4 St Paul's Churchyard, London EC4M 8AY ("the Servicer")
and Wilshire Real Estate Investment Trust Inc., a Maryland corporation ("the
Company").
RECITALS
The Company and certain of its affiliates intend to acquire and/or originate
mortgage loans, real estate mortgage backed securities and other real estate
related assets in the United Kingdom ("the Real Estate Assets") during the term
of this Agreement. The Company desires that the Servicer service such loans and
the Servicer desires to do the same. The Company and Servicer previously entered
into a Loan Servicing Agreement dated April 6, 1998 ("Original Agreement") and
the parties wish to amend and restate the Original Agreement.
The parties hereby agree as follows:
1. Exclusive Servicing of Real Estate Assets. The Servicer shall provide
portfolio management services including billing, portfolio administration and
collection services ("Services") for all Real Estate Assets unless the Servicer
and the Company agree that specific Real Estate Assets shall not be so serviced
("Excluded Real Estate Assets"). The Company agrees that the Servicer shall not
be required to service Real Estate Assets for which the Servicer may not have
applicable licences. The Company agrees that the Servicer shall service all of
its Real Estate Assets and any affiliate's Real Estate Assets, except for
Excluded Real Estate Assets under this Agreement.
2. Manner and performance of Services. Except as otherwise specifically
provided herein the Servicer shall be entitled to exercise its sole discretion
in servicing the Real Estate Assets. The Servicer shall devote such time and
attention as shall be necessary to provide the Company with the Services
described herein. The Servicer may service its own loans, real estate and
financial assets and render services to any current or future clients, provided
that such activities do not interfere with the Servicer's performance of the
Services. The Services to be provided by the
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Servicer include the following:
2.1 The Servicer's Duties in General. The Servicer shall administer the
Real Estate Assets with reasonable care, using that degree of skill and
attention that the Servicer exercises with respect to comparable Real Estate
Assets that it services for its own account or as a fiduciary for others. The
Servicer shall take all necessary actions which the Servicer in good faith
determines are commercially reasonable in regard to each Real Estate Asset,
which in the case of a loan shall continue until it is collected or the
Servicer, in its good faith judgement, determines that is no longer commercially
reasonable to continue to try to collect the outstanding indebtedness on the
loan.
2.2 Compliance. The Servicer shall use its best efforts to comply
throughout the term of the Agreement with all requirements of applicable laws
and regulations including to the extent applicable, any consumer and debt
collection protection laws and any other consumer credit and disclosure laws.
2.3 Collection. The Servicer shall use its reasonable efforts, but not
less than the same efforts it uses with respect to comparable Real Estate Assets
that it services for others, to collect all payments due and to become due under
each of the Real Estate Assets from the party or parties liable thereunder (a
"Borrower").
2.4 Subcontractors. The Servicer may subcontract services but no such
subcontract shall relieve or reduce the Servicer's obligation to perform
services as provided in this Agreement. The Servicer shall notify the Company
and/or WRSC of each subcontract entered into by it within twenty (20) business
days after such subcontract is entered into, and shall attach a copy of such
subcontract. The Servicer shall also notify the Company and/or WRSC as soon as
any subcontract is no longer necessary with respect to any Real Estate Assets
and shall immediately terminate such subcontract is no longer necessary with
respect to any Real Estate Assets and shall immediately terminate such
subcontract as to such Real Estate Assets. Each subcontract shall provide that
it is terminable at will without payment of a termination fee or penalty. Each
subcontract will be upon such terms and conditions as are not inconsistent with
this Agreement. As part of its servicing activities hereunder, the Servicer
shall enforce the obligations of each subcontractor under the related
subcontract. Any subcontract and any other transactions or services relating to
the Real Estate Assets involving a subcontractor shall be deemed to be between
such subcontractor and
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<PAGE>
Servicer alone, and the Company shall have no obligation, duty or liability with
respect to such subcontractor, including, without limitation, any obligation,
duty or liability to pay such subcontractor fees and expenses. For purposes of
remittances by the Servicer pursuant to this Agreement, the Servicer shall be
deemed to have received a payment on a Mortgage Loan when the applicable
subcontractor has received such payment.
2.5 Indemnity. The Servicer shall reimburse and indemnify the Company and
its successors and assigns for and against, and hold the Company and its
successors and assigns harmless from and against, any and all liabilities,
obligations, losses, damages, penalties, actions, judgements, suits, costs,
expenses and disbursements, including without limitation reasonable legal fees
and disbursements, which may be imposed upon, or incurred by the Company in any
way relating to or arising out of the Servicer's gross negligence in its
performance of its duties hereunder. The Company shall reimburse and indemnify
the Servicer and its successors and assigns and hold the Servicer and its
successors and assigns harmless from and against, any all liabilities,
obligations, losses, damages, penalties, actions, judgements, suits, costs,
expenses and disbursements, including without limitation reasonable legal fees
and disbursements, which may be imposed upon, or incurred by the Servicer in any
way relating to or arising out of the Real Estate Assets or the servicing,
thereof prior to the servicing thereof by the Servicer other than arising out of
the Servicer's gross negligence.
2.6 Amendments, Variable Rate and Redemptions. In connection with its
collection efforts the Servicer may modify or change the interest rate of any
loan, and quote to, and accept from a Borrower a full or partial redemption
amount on any loan as full settlement.
2.7 Monthly Accounting Reports. For each month during the term of this
Agreement, the Servicer will furnish the Company with a monthly report regarding
the Real Estate Assets by the twenty-fifth (25th) day of the following month.
The Servicer shall furnish at the Servicer's cost such other information
regarding the Servicer, the Real Estate Assets and this Agreement as the Company
may from time to time reasonably request, provided, that if the information or
data requested by the Company is something the Servicer cannot produce
internally from its then existing reporting systems without manual compilation
or production, or reprogramming its computer system, the Company shall reimburse
the Servicer for its cost for furnishing such information.
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3. Term. This Agreement shall commence on April 6, 1998 and shall continue
in force for two (2) years and thereafter will automatically renew for
successive one year periods unless either party delivers a notice of termination
at least 120 days prior to the end of the them current term. Notwithstanding any
other provision to the contrary, this Agreement shall be terminated if the
Management Agreement dated 6 April 1998 between the Company and Wilshire Realty
Services Corp. a Delaware corporation ("WRSC") is terminated by either the
Company or WRSC.
4. Insurance
4.1 Insurance Coverage Requirements. The Servicer shall use its best
endeavours to cause the Borrower to maintain for each Real Estate Asset which is
a loan all buildings insurance required by the terms of the relevant facility
letter or loan agreement of the amount set forth therein. If the Borrower fails
to maintain such insurance the Servicer shall notify the Company as promptly as
possible and in accordance with usual servicing practice shall put in place and
maintain a buildings insurance policy covering all the usual risks in an amount
by reference to the current valuation. To the extent that the Servicer has
expended its own funds to pay insurance premiums under this clause the cost of
such premiums shall be deemed a servicing advance. The Servicer shall promptly
notify the Company as soon as it is notified of a change of insurance carrier or
increase in deductible or a decrease in the scope or amount of coverage with
regard to any insurance policy maintained by a Borrower.
4.2 Servicer Insurance Requirement. In the event that the Servicer shall
obtain and maintain a block buildings insurance policy in respect of the Real
Estate Assets with a reputable insurer to the extent that such policy provides
no less coverage in scope than the insurance required to be maintained by the
Servicer under clause 4.1 above the Servicer shall conclusively be deemed to
have satisfied its obligations as set forth in clause 4.1. If the amount of the
deductible under that policy is greater than it would have been under a policy
effected under clause 4.1 the Servicer shall pay the difference into a custodial
account prior to the date on which the fund due to the Company under the policy
are required to be distributed to the Company. In accordance with its
obligations under this Agreement the Servicer agrees to make any claim under any
such block buildings insurance policy on behalf of itself and the Company.
- --------------------------------------------------------------------------------
4
<PAGE>
4.3 Servicer Insurance Requirement. The Servicer shall obtain and maintain
at its own expense, and keep in full force and effect throughout the term of
this Agreement, a blanket fidelity bond and errors and omissions insurance
policy covering the Servicer's officers and employees acting on behalf of the
Servicer in connection with its activities under this Agreement. The amount of
such coverage shall meet the servicing requirements of prudential institutional
commercial or residential mortgage loan servicers for the relevant market. In
the event that such bond or policy ceases to be in effect, the Servicer shall
obtain a comparable replacement bond or policy. Coverage of the Servicer under a
policy or bond obtained by an affiliate of the Servicer and providing the
coverage required by this section shall satisfy the requirements of this clause.
5. Annual Statement as to Compliance. The Servicer will deliver to the
Company on or before 31 December in each year beginning 31 December 1998 an
officer's certificate stating as to each signatory thereof that (a) a review of
the activities of the Servicer during the preceding calendar year (or during the
period from the date of execution of this Agreement until the end of the
calendar year in the case of the first certificate) and of performance of under
this Agreement has been made under such officer's supervision; and (b) to the
best of such officer's knowledge based on such review the Servicer has fulfilled
in all material respects all its obligations under this Agreement throughout
such period or if there has been a material default in the fulfilment of any
such obligation specifying each such default known to such officer and the
nature and status thereof.
6. Access. Upon reasonable advance notice, the Servicer will provide
reasonable access, during its normal business hours at its offices, to the
Company to the Servicer's books and records regarding the Real Estate Assets.
7. Fees and Costs. The Company shall pay the Servicer and the Servicer may
retain or disburse from any Real Estate Asset proceeds the following amounts:
7.1 Reimbursement of Costs. All bona fide amounts paid by the Servicer to
third parties in connection with this Agreement, including without limitation,
stationery suppliers, related printing costs, estate agents fees, legal fees,
travel, insurance costs and payments arising out of acts and omissions of third
parties (including persons from whom the Real Estate Assets are acquired) and
the Servicer's standard photocopying charges.
- --------------------------------------------------------------------------------
5
<PAGE>
7.2 Service Fee. The Servicer shall be entitled to a fee ("the Service
Fee") for servicing the Real Estate Assets equal to (a) all interest and other
earnings paid or accrued on amounts from time to time on deposit in any accounts
in which proceeds of Real Estate Assets are deposited plus (b) a monthly fee
together with VAT at the current rate equal to an amount negotiated by the
parties for each particular Real Estate Assets portfolio which monthly fee shall
be comparable to fees charged by other industry participants for servicing
comparable Real Estate portfolios.
7.3 Payment. The Servicer may withdraw on a monthly basis from all Real
Estate Assets proceeds all escrow payments, costs and the Service Fee. Within
twenty-five (25) days after the last day of each calendar month the Servicer
shall pay to the Company or the affiliate owning the Real Estate Assets the net
proceeds received in that calendar month. The Company or the applicable
affiliate shall pay the Servicer within fifteen (15) days after billing for any
excess fees and costs. The Servicer shall receive any ancillary income, other
than float revenue.
8. Independent Contractor. The Servicer shall provide the Services in the
capacity of an independent contractor. Nothing in this Agreement shall be
construed as establishing an employment partnership or joint venture between the
Company and the Servicer.
9. Representations of the Company
9.1 The Company has been duly organised and is validly existing and of
good standing under the laws of the jurisdiction of its organisation with power
and authority to own its own properties and to conduct its business as such
properties are currently owned and such business is currently conducted.
9.2 The Company has the power and authority to execute and deliver this
Agreement and to carry out its terms and the execution, delivery and performance
of this Agreement have been duly authorised by the Company by all necessary
action on the part of the Company.
9.3 This Agreement constitutes a legal valid and binding obligation of the
Company enforceable in accordance with its terms.
- --------------------------------------------------------------------------------
6
<PAGE>
9.4 In those instances in which the Real Estate Assets are owned by an
affiliate of the Company, the Company will cause the affiliate to comply with
the Company's obligations hereunder with regard to such asset.
10. Representations of the Servicer. The Servicer represents to the
Company that it is duly incorporated under the Companies Act 1985 and that it
has power under its Memorandum and Articles of Association and all necessary
corporate authority has been obtained and action taken to carry on its business
as it is now being conducted and to sign and deliver and perform the
transactions contemplated in this Agreement.
11. Audits and Examination.
11.1 The Servicer shall use reasonable efforts to maintain in good order
and condition throughout the term of this Agreement all Real Estate Assets files
and relevant materials that the Servicer has received regarding the Real Estate
Assets.
11.2 The Servicer shall maintain a copy of each Real Estate Asset file at
its office or elsewhere within its control provided that at the Company's
request the Servicer will deliver copies of such Real Estate Asset files to the
Company or a designee of the Company. The Servicer shall make available to the
Company or its duly authorised representatives lawyers or auditors the Real
Estate Assets files and the related accounts records and computer systems
maintained by the Servicer at such times as the Company shall reasonably
request.
11.3 The Servicer shall permit the Company and its agents to audit the
books and records of the Servicer applicable to the Real Estate assets at the
Servicer's business premises during the Servicer's normal business hours upon
reasonable prior notice to the Servicer. The Company shall have direct access to
the Servicer's management information system for the Real Estate Assets or if
applicable to any service bureau used by the Servicer for the Real Estate
Assets.
12. Substitute Servicer: Limited Arbitration
12.1 If at any time during the term of this Agreement the Servicer shall
breach or default in the performance of a material obligation of the Servicer
undertaken in this Agreement, the
- --------------------------------------------------------------------------------
7
<PAGE>
Company and the Servicer shall consult for such period of time as the Company
may determine is reasonable under the circumstances to determine a mutually
acceptable resolution. In the event that the Company and the Servicer fail to
agree thereon within such a period as the Company may specify, the Company may
by written notice to the Servicer and without limitation of any other right or
remedy of the Company, require that the Servicer transfer the Real Estate
Assets, and all of the Servicer's servicing and related rights and obligations
in and with respect to the Real Estate Assets, to a substitute servicer to be
designated by the Company. Such substitute servicer shall thereupon perform
pursuant to a servicing contract acceptable to the Company, all of the
Servicer's duties and obligations under this Agreement. Upon the Company's
designation of such a substitute servicer the Servicer shall within a reasonable
time and to the extent that it holds possession thereof deliver to such
substitute servicer all written evidence and documentation of the Real Estate
Assets and the Servicer shall thereafter cooperate and follow all instructions
of the Company in all reasonable respects to facilitate such substitute
servicer's performance of the Servicer's duties and obligations under this
Agreement. The fees and expenses of the substitute servicer shall be paid by the
Company. The Servicer, however shall continue to be entitled to the Servicer's
Service Fee with regard to any Real Estate Assets being serviced under this
section, net of all servicing fees paid by the Company to the substitute
servicer for such Real Estate Assets.
12.2 If the Servicer wishes to contest or dispute the Company's
appointment of a substitute servicer, the Servicer shall so notify the Company
in writing within thirty (30) days after such appointment specifying in the
notice the Servicer's reasons for doing so. Such dispute regarding the Company's
appointment of a substitute servicer shall be settled by arbitration by one
arbitrator in England appointed jointly by the parties or in default of
agreement by the president of the Law Society. The arbitrator shall be impartial
and neutral and shall have experience in the management of operations of an
institution which performs services similar to those to be performed by the
Servicer under this Agreement. The decision of the arbitrator shall be final,
binding and conclusive on the parties. The arbitrator shall comply with the
privacy restrictions provided in clause 12.6 regarding publication of any award.
12.3 In no event shall the arbitrator have power or authority to add to or
to detract from the agreements of the parties nor to award punitive or
consequential damages. The arbitrator shall be authorised only to render an
award regarding a dispute or controversy concerning the Company's appointment of
a substitute servicer pursuant to clause 12.1 hereof, including an award of
costs and
- --------------------------------------------------------------------------------
8
<PAGE>
expenses as herein provided and the arbitrator shall not purport to determine or
issue an award regarding any other legal or equitable rights or remedies of the
parties.
12.4 The arbitration hearing will conclude and the arbitrator's award
shall be rendered in writing within 30 days after it commences. The arbitrator
will make every effort to enforce this requirement strictly but may extend the
time for the hearing upon a showing that exceptional circumstances require
extension to prevent manifest injustice.
12.5 The arbitrator shall award to the prevailing party as determined by
the arbitrator all costs fees and expenses related to the arbitration including
reasonable legal fees and fees of experts and other professional incurred by the
prevailing party.
12.6 The Servicer and the Company acknowledge that the existence, progress
and results of any arbitration held under this Agreement and any arbitral award
are to remain private. Each party agrees not to publish or disclose any
information regarding the arbitration or any such award by any means except as
may be required for enforcement of any arbitral award and further agrees to take
reasonable care but in any event no less care than it takes to protect its own
confidential business information generally, to prevent disclose and
dissemination of such information.
12.7 The award rendered in any arbitration may be enforced in any court of
competent jurisdiction.
13. General Provisions
13.1 Written Notices. Notices under this Agreement must be in writing and
sent by first class postage prepaid to the appropriate addresses shown above
unless that address has been changed by notice given as provided herein at least
three (3) business days in advance of the effective date of such change. Notice
will be effective three (3) business days after postage.
Wilshire Real Estate Investment Trust Inc.
1776 SW Madison Street
Portland, OR 97207 U.S.A.
- --------------------------------------------------------------------------------
9
<PAGE>
With a copy to
James M Waddington
Proskauer Rose LLP
1585 Broadway
New York, NY 10036-8299 U.S.A.
Wilshire Servicing Company UK Ltd
4 St Paul's Churchyard
London EC4M 8AY
With a copy to
Bo Aberg
Wilshire Servicing Company UK Ltd
Wilshire House
19/21 Woolmead
Farnham
Surrey GU9 7TT
13.2 Events beyond the Control of the Parties. Performance by either party
hereunder will not be deemed to be in default where the delay or default is due
to events beyond its reasonable control including without limitation war,
insurrection, strike, lock out, riots, floods, earthquakes, fires, casualties,
acts of God, epidemics, quarantine restrictions, governmental restrictions,
inability to secure necessary labour or materials, acts of the other party, or
failure to act of any public to governmental agency or entity.
13.3 Further Assurances. Following the execution of this Agreement the
Servicer and the Company, respectively, shall, from time to time at the request
of the other, execute and deliver such other, documents and instruments and
shall take such other actions as may be reasonable necessary or appropriate to
carry out and perform more effectively the terms and purposes of this Agreement.
- --------------------------------------------------------------------------------
10
<PAGE>
13.4 Counterparts. This Agreement may be executed in one or more
counterparts. Each signed counterpart shall be deemed an original, but all of
them together constitute one and the same instrument.
13.5 Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes all proposals oral or written, including
without limitation, the Original Agreement, and all negotiations conversations
or discussions heretofore had between the parties relating to the subject matter
of this Agreement. Any amendment to this Agreement must be in writing signed by
the party to be charged.
13.6 Governing Law This Agreement is to be governed by and construed in
accordance with English Law and each party agrees to submit to arbitration in
England and the exclusive jurisdiction of the English courts as regards any
claim or matter arising under it.
13.7 Severability. If any provision herein is deemed unenforceable in
whole or in part such provision shall be deemed severable solely to the extent
of such enforceability without impacting on the remainder of this Agreement.
SIGNED FOR AND ON BEHALF OF
WILSHIRE SERVICING COMPANY /s/ Bo Aberg
UK LIMITED ----------------------------------------
(Authorised Signatory) Bo Aberg
----------------------------------------
Print Name
SIGNED FOR AND ON BEHALF OF
WILSHIRE REAL ESTATE /s/ Andrew Wiederhorn
INVESTMENT TRUST Inc. ----------------------------------------
(Authorised Signatory) Andrew Wiederhorn
----------------------------------------
Print Name
- --------------------------------------------------------------------------------
11
<PAGE>
AMENDED AND RESTATED LOAN SERVICING AGREEMENT
SERVICING FEE SCHEDULE
Pursuant to the Amended and Restated Loan Servicing Agreement made as of
December 23, 1998 between Wilshire Servicing Company UK Limited and Wilshire
Real Estate Investment Trust Inc., the parties agree that the Service Fees shall
be as follows for the following assets.
Asset Service Fees
- ----- ------------
WREP Islands (Warners)
Management Fees per annum 1% of invested amount
Service Fees 5% of cash receipts
Savoy
Management Fees per annum 1% of invested amount (i.e. UPB)
Service Fees 20 basis points of UPB
Albany Loans
Management Fees per annum 1% of average invested amount
Service Fees 50 basis points on invested amount of
performing loans or 5% of cash
receipts on non-performing
Dated as of December 23, 1998
Wilshire Servicing Company UK Limited Wilshire Real Estate Investment
Trust Inc.
By:/s/ Bo Aberg By: /s/ Andrew Wiederhorn
---------------------------------- ----------------------------------
Name: Bo Aberg Name: Andrew Wiederhorn
Title:_______________________________ Title:________________________________
- --------------------------------------------------------------------------------
12
<PAGE>
AMENDED AND RESTATED LOAN SERVICING AGREEMENT
SERVICING FEE SCHEDULE
Pursuant to the Amended and Restated Loan Servicing Agreement made as of
December 23, 1998 between Wilshire Servicing Company UK Limited ("UK") and
Wilshire Real Estate Investment Trust Inc., ("WREIT") the parties agree that the
Service Fees shall be as follows for the following assets. These Service Fees
are in addition to any management fees to be paid by WREIT under its Management
Agreement with Wilshire Realty Services Corporation.
Asset Service Fees
- ----- ------------
WREP Islands (Warners) 5% of cash receipts (gross rent)
collected (UK shall be responsible
for all other third party servicing
fees and costs, including without
limitation, Cardelles).
Savoy 0
Albany Loans 50 basis points per annum on unpaid
principal balance of performing
loans and 5% of cash receipts on
non-performing loans
A loan is non-performing if payments are more than 90 days delinquent. Servicer
shall inform the Company as soon as practicable of any change in status of
performing loans and non-performing loans.
Dated as of December 23, 1998
Wilshire Servicing Company UK Limited Wilshire Real Estate Investment
Trust Inc.
By:/s/ Bo Aberg By: /s/ Andrew Wiederhorn
---------------------------------- ----------------------------------
Name: Bo Aberg Name: Andrew Wiederhorn
Title:_______________________________ Title:________________________________
Exhibit 11
<TABLE>
<CAPTION>
Reorganized
Company Predecessor Company
------------ ----------------------------
One Month Two Months Three Months
Ended Ended Ended
June 30, 1999 May 31, 1999 June 30, 1998
------------- ------------ -------------
(Dollars in thousands, except share data)
<S> <C> <C> <C>
Diluted net (loss) income per share:
Net (loss) income ................................................. $ (802) $ 183,291 $ 11,826
------------ ------------ ------------
Average number of shares outstanding .............................. 20,033,600 10,885,000 11,065,000
Net effect of dilutive stock options-based on treasury stock method -- -- 607,711
------------ ------------ ------------
Total average shares .......................................... 20,033,600 10,885,000 11,672,711
============ ============ ============
Diluted net (loss) income per share ............................... $ (0.04) $ 16.84 $ 1.01
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Predecessor Company
----------------------------
Five Months Six Months
Ended Ended
May 31, 1999 June 30, 1998
------------ -------------
(Dollars in thousands, except share data)
<S> <C> <C>
Diluted net income per share:
Net income ........................................................ $ 157,338 $ 7,161
Preferred Stock dividend .......................................... -- (417)
------------ ------------
Net income available to common shareholders .................... $ 157,338 $ 6,744
============ ============
Average number of shares outstanding .............................. 10,885,000 10,403,889
Net effect of dilutive stock options-based on treasury stock method -- 615,273
------------ ------------
Total average shares ........................................... 10,885,000 11,019,162
============ ============
Diluted net income per share ...................................... $ 14.45 $ 0.61
============ ============
</TABLE>
37
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF JUNE 30, 1999 AND STATEMENT OF EARNINGS FOR THE
SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 24,304
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 98,315
<INVESTMENTS-CARRYING> 98,315
<INVESTMENTS-MARKET> 98,315
<LOANS> 576,100
<ALLOWANCE> 0
<TOTAL-ASSETS> 797,940
<DEPOSITS> 492,729
<SHORT-TERM> 171,339
<LIABILITIES-OTHER> 35,406
<LONG-TERM> 0
0
0
<COMMON> 88,900
<OTHER-SE> (1,197)
<TOTAL-LIABILITIES-AND-EQUITY> 797,940
<INTEREST-LOAN> 26,110
<INTEREST-INVEST> 6,656
<INTEREST-OTHER> 980
<INTEREST-TOTAL> 33,746
<INTEREST-DEPOSIT> 13,351
<INTEREST-EXPENSE> 25,980
<INTEREST-INCOME-NET> 7,766
<LOAN-LOSSES> 2,778
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 38,316
<INCOME-PRETAX> (42,032)
<INCOME-PRE-EXTRAORDINARY> (42,315)
<EXTRAORDINARY> 225,606
<CHANGES> 0
<NET-INCOME> 156,536
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
