<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NO. 0-23911
------------------------
WILSHIRE REAL ESTATE INVESTMENT INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 52-2081138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1310 SW 17TH STREET
PORTLAND, OR 97201
(Address of principal executive offices) (Zip Code)
(503) 721-6500
(Registrant's telephone number, including area code)
Wilshire Real Estate Investment Trust Inc.
1776 SW Madison Street
Portland, OR 97205
(Former name and address of Registrant)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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.
<TABLE>
<S> <C>
CLASS OUTSTANDING AT OCTOBER 31, 1999
Common Stock, par value $0.0001 per share 11,500,000 shares
</TABLE>
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<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Consolidated Statements of Financial Condition........ 3
Consolidated Statements of Operations................. 4
Consolidated Statements of Changes in Stockholders'
Equity................................................. 5
Consolidated Statements of Cash Flows................. 6
Notes to Consolidated Financial Statements............ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................. 30
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................... 33
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................................... 35
Item 6. Exhibits............................................ 35
Signatures.................................................. 36
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
WILSHIRE REAL ESTATE INVESTMENT INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 7,802 $ 4,782
Securities available for sale, at fair value............ 105,087 158,738
Loans held for sale, net................................ -- 44,006
Loans, net.............................................. 30,393 69,124
Discounted loans, net................................... 1,191 2,498
Investments in real estate, net......................... 69,424 85,005
Investment in WFSG (see Note 6)......................... 3,594 --
Notes receivable from WFSG (see Note 6)................. 10,977 --
Due from WFSG (see Note 6).............................. -- 12,352
Accrued interest receivable............................. 1,156 1,939
Prepaid servicing fees to WCC (see Note 6).............. 2,953 --
Other assets............................................ 1,887 2,673
-------- --------
Total assets........................................ $234,464 $381,117
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowings................................... $121,662 $225,566
Other borrowings........................................ 48,986 60,577
Accounts payable and accrued liabilities................ 7,120 6,233
Payable to Old WCC (see Notes 2 & 6).................... -- 11,698
Dividends payable....................................... 4,600 4,600
-------- --------
Total liabilities................................... 182,368 308,674
-------- --------
Commitments and Contingencies (see Note 7)
Stockholders' Equity:
Preferred stock, $.0001 par value; 25,000,000 shares
authorized; no shares issued and outstanding.......... -- --
Common stock, $.0001 par value; 200,000,000 shares
authorized; 11,500,000 shares issued and
outstanding........................................... 166,981 166,981
Accumulated deficit..................................... (91,874) (64,093)
Accumulated other comprehensive loss.................... (23,011) (30,445)
-------- --------
Total stockholders' equity.......................... 52,096 72,443
-------- --------
Total liabilities and stockholders' equity.......... $234,464 $381,117
======== ========
</TABLE>
3
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS SIX MONTHS
SEPTEMBER 30, ENDED ENDED
------------------------- SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net Interest Income:
Loans and discounted loans.............. $ 959 $ 4,167 $ 4,081 $ 5,491
Securities.............................. 3,291 7,152 12,025 10,758
Other investments....................... 555 326 2,063 486
----------- ----------- ----------- -----------
Total interest income................. 4,805 11,645 18,169 16,735
Interest expense........................ 2,803 6,012 9,841 7,513
----------- ----------- ----------- -----------
Net interest income before provision
for losses.......................... 2,002 5,633 8,328 9,222
Provision for (recovery of) losses...... -- 3,000 (1,150) 3,000
----------- ----------- ----------- -----------
Net interest income after provision
for losses.......................... 2,002 2,633 9,478 6,222
----------- ----------- ----------- -----------
Real Estate Operations:
Operating income........................ 1,625 2,011 5,468 2,960
Operating expense....................... (35) (129) (158) (192)
Interest expense........................ (1,043) (1,060) (3,579) (1,408)
Provision for losses on real estate..... (325) -- (892) --
Gain on sale of real estate............. 708 -- 718 --
Depreciation............................ (333) (394) (1,102) (569)
----------- ----------- ----------- -----------
Net income from real estate
operations.......................... 597 428 455 791
----------- ----------- ----------- -----------
Other Operating Income (Loss):
Gain (loss) on sale of securities....... 232 934 (697) 934
Gain (loss) on foreign currency
translation........................... 35 -- (41) --
Other revenue........................... 53 -- 242 --
Provision for disputes with WFSG........ (4,077) -- (4,077) --
Market valuation losses and
impairments........................... (6,339) (49,520) (28,527) (49,520)
----------- ----------- ----------- -----------
Total other operating loss.......... (10,096) (48,586) (33,100) (48,586)
----------- ----------- ----------- -----------
Operating Expenses:
Management fees to WRSC................. 663 1,340 2,414 1,942
Servicing fees.......................... 127 204 175 252
Loan expenses........................... 31 193 36 278
Other................................... 854 1,618 1,789 1,793
----------- ----------- ----------- -----------
Total operating expenses............ 1,675 3,355 4,414 4,265
----------- ----------- ----------- -----------
Net loss before provision for income
taxes................................... (9,172) (48,880) (27,581) (45,838)
Provision for income taxes................ 200 -- 200 --
----------- ----------- ----------- -----------
NET LOSS.................................. $ (9,372) $ (48,880) $ (27,781) $ (45,838)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE.......... $ (0.82) $ (4.25) $ (2.42) $ (4.03)
WEIGHTED AVERAGE SHARES OUTSTANDING....... 11,500,000 11,500,000 11,500,000 11,381,356
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
--------------------- ACCUMULATED COMPREHENSIVE
SHARES AMOUNT DEFICIT LOSS TOTAL
---------- -------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C>
Initial capital.................................... -- $ 2 $ -- $ -- $ 2
Issuance of common stock........................... 11,500,000 166,979 -- -- 166,979
Comprehensive loss:
Net loss......................................... -- -- (56,388) -- (56,388)
Other comprehensive (loss) income:
Foreign currency translation................... -- -- -- (7) (7)
Unrealized holding losses on securities
available for sale........................... -- -- -- (67,817) (67,817)
Reclassification adjustment for losses on
securities included in net loss.............. -- -- -- 37,379 37,379
--------
Total comprehensive loss........................... -- -- -- -- (86,833)
Dividends declared................................. -- -- (7,705) -- (7,705)
---------- -------- -------- -------- --------
Balance at December 31, 1998....................... 11,500,000 166,981 (64,093) (30,445) 72,443
Comprehensive loss:
Net loss (unaudited)............................. -- -- (27,781) -- (27,781)
Other comprehensive (loss) income (unaudited):
Unrealized holding losses on securities
available for sale (unaudited)............... -- -- -- (11,512) (11,512)
Reclassification adjustment for losses on
securities included in net loss
(unaudited).................................. -- -- -- 19,013 19,013
Foreign currency translation (unaudited)....... -- -- -- (67) (67)
--------
Total comprehensive loss........................... -- -- -- -- (20,347)
---------- -------- -------- -------- --------
Balance at September 30, 1999 (unaudited).......... 11,500,000 $166,981 $(91,874) $(23,011) $ 52,096
========== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (27,781) $ (45,838)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Provision for (recovery of) losses.................... (1,150) 3,000
Provision for losses on real estate owned............. 892 --
Depreciation.......................................... 1,102 569
Amortization of premiums and discounts, net........... (290) (336)
Market valuation losses and impairments............... 28,527 49,520
Loss (gain) on sale of securities..................... 697 (934)
Gain on sale of real estate........................... (718) --
Loss on foreign currency translation.................. 5 --
Change in:
Due from WFSG....................................... 1,159 (325)
Accrued interest receivable......................... 783 (4,809)
Prepaid servicing fees to WCC....................... (2,953) --
Other assets........................................ (237) (2,934)
Payable to Old WCC.................................. (11,698) --
Accounts payable and accrued liabilities............ 844 4,540
Other, net............................................ -- 400
--------- -----------
Net cash (used in) provided by operating activities... (10,818) 2,853
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale................. (8,885) (365,918)
Purchase of loans and discounted loans.................... -- (651,100)
Repayments of securities available for sale............... 9,100 3,859
Proceeds from sale of securities available for sale....... 32,331 16,817
Loan originations......................................... (489) --
Proceeds on sale of loans................................. 48,366 --
Principal payments received on loans and discounted
loans................................................... 39,764 6,338
Investments in real estate................................ (223) (81,256)
Proceeds on sale of real estate........................... 14,019 --
Loan to WFSG.............................................. (5,000) --
Other..................................................... 247 28
--------- -----------
Net cash provided by (used in) investing activities... 129,230 (1,071,232)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings....................... 1,251 508,230
Proceeds from other borrowings............................ -- 60,940
Proceeds from securitized mortgage obligations............ -- 372,318
Repayments on short-term borrowings....................... (105,185) (32,879)
Repayments on other borrowings............................ (11,454) (136)
Dividend payments on common stock......................... -- (3,105)
Proceeds from issuance of common stock, net of offering
costs................................................... -- 166,979
--------- -----------
Net cash (used in) provided by financing activities... (115,388) 1,072,347
--------- -----------
Effect of exchange rate changes on cash..................... (4) --
--------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 3,020 3,968
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 4,782 2
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 7,802 $ 3,970
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--
Cash paid for interest................................ $ 9,475 $ 7,347
NON CASH INVESTING ACTIVITIES--
Investment in WFSG.................................... 12,289 --
NON CASH FINANCING ACTIVITIES--
Common stock dividends declared but not paid.......... -- 4,600
Additions to investment real estate acquired in
settlement of loans.................................. 26 276
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 1--BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of Wilshire Real
Estate Investment Inc. and Subsidiaries ("WREI" or the "Company") (previously
Wilshire Real Estate Investment Trust Inc. and Subsidiaries) are unaudited and
have been prepared in conformity with the requirements of Regulation S-X
promulgated under the Securities Exchange Act of 1934 as amended (the "Exchange
Act"), particularly Rule 10-01 thereof, which governs the presentation of
interim financial statements. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
("GAAP") for complete financial statements. The accompanying interim
consolidated financial statements should be read in conjunction with the
Company's 1998 Annual Report on Form 10-K/A. A summary of the Company's
significant accounting policies is set forth in Note 4 to the consolidated
financial statements in the 1998 Annual Report on Form 10-K/A.
In the Company's opinion, all adjustments, comprised of normal recurring
accruals necessary for the fair presentation of the interim financial
statements, have been included in the accompanying financial statements.
Operating results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company 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.
Prior to April 6, 1998, the Company had substantially no operating activity
and, therefore, comparative 1998 consolidated statements of operations are
presented only for the three and six months ended September 30, 1998.
Certain items in the previously reported consolidated financial statements
were reclassified to conform to the September 30, 1999 presentation, none of
which affect previously reported net loss.
NOTE 2--ORGANIZATION AND RELATIONSHIPS
The Company was originally incorporated as Wilshire Real Estate Investment
Trust Inc. ("WREIT") in the State of Maryland on October 24, 1997. However, due
to the benefit of significant net operating loss carryforwards and to avoid any
risk of not qualifying as a real estate investment trust ("REIT"), the Company
elected in September 1999 (with shareholder approval) not to be taxed as a REIT
(see Note 3), and the Company's name was changed to Wilshire Real Estate
Investment Inc. The Company was initially formed with a capital investment of
$2 thousand. On April 6, 1998, the Company was capitalized with the sale of
11,500,000 shares of common stock, par value $.0001 per share, at a price of
$16.00 per share (the "Offering"). Total net proceeds of the Offering after
underwriting and offering expenses were $167.0 million.
Until recently, the Company was a party to a management agreement with
Wilshire Realty Services Corporation ("WRSC"), a wholly-owned subsidiary of
Wilshire Financial Services Group Inc. ("WFSG"), under which WRSC advised the
Company on various facets of its business and managed its day-to-day operations,
subject to the supervision of the Company's Board of Directors. WFSG currently
owns 992,587
7
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 2--ORGANIZATION AND RELATIONSHIPS (CONTINUED)
shares, or 8.6%, of the Company's outstanding common stock and has options to
purchase an additional 1,135,000 shares (of which options on 57,500 shares were
granted to officers of WRSC) at an exercise price of $16.00 per share. For its
services, WRSC received a base management fee of 1% per annum of the first
$1.0 billion of average invested assets, as defined in the agreement, 0.75% of
the next $500 million of average invested assets and 0.50% of average invested
assets above $1.5 billion, payable quarterly. In addition, WRSC could receive
additional incentive compensation in an amount generally equal to 25% of the
dollar amount by which funds from operations ("FFO"), as adjusted, exceeded an
amount equal to the product of: (i) $16.00; and, (ii) the ten-year Treasury rate
plus 5% per annum, multiplied by the weighted average number of shares of common
stock outstanding during such period. Finally, WRSC was entitled to receive
reimbursements of all due diligence costs and reasonable out-of-pocket expenses.
For the three months and nine months ended September 30, 1999, the Company
incurred approximately $663 and $2,414, respectively, of management fees.
Management fees for the three months and six months ended September 30, 1998
were approximately $1,340 and $1,942. No incentive fees have been incurred under
the management agreement.
WFSG experienced financial difficulties in 1998 resulting in its bankruptcy
restructuring. On March 3, 1999, WFSG submitted a prepackaged plan of
reorganization as part of a Chapter 11 bankruptcy filing in the Federal Court of
Wilmington, Delaware. On April 12, 1999, the WFSG restructuring plan was
approved by the Bankruptcy Court, and on June 10, 1999, WFSG emerged from
bankruptcy pursuant to the restructuring plan. See Note 6 for discussion of
accounting matters related to this restructuring.
Prior to WFSG's reorganization, Wilshire Credit Corporation ("Old WCC"), an
affiliate of WFSG, provided loan and real property servicing to the Company. As
part of the Restructuring Plan, the servicing operations conducted by Old WCC
were transferred to WCC Inc. ("WCC"), a newly formed company controlled by WFSG.
Relations between WFSG and the Company declined as the Company was not
allowed to fully participate in the restructuring of WFSG and did not obtain any
representation on WFSG's new board of directors despite a 14.4% ownership
interest. On August 19, 1999, the Company was notified that WFSG had suspended
its Chief Executive Officer, Andrew Wiederhorn, and its President, Lawrence
Mendelsohn, from their duties as employees of WFSG and its subsidiaries and
terminated their employment with WFSG and its subsidiaries purportedly for cause
on September 3, 1999. Mr. Wiederhorn and Mr. Mendelsohn were also terminated as
Chief Executive Officer and President of WRSC. The Company and its independent
directors have long considered that Mr. Wiederhorn and Mr. Mendelsohn are key
personnel on which the stability and future growth of the Company are dependent.
As the principal architects of the development of both WFSG and the Company,
Mr. Wiederhorn and Mr. Mendelsohn are familiar with the Company's strengths and
weaknesses, have a firm understanding of the complex real estate and financial
markets in which the Company operates, have longstanding relationships within
the industry (and in particular with the Company's lenders) and are familiar
with the Company's assets (including its portfolio of subordinated
mortgage-backed securities) and its liabilities (including short-term repurchase
agreements). Accordingly, the independent directors of the Company believe that
the termination of Mr. Wiederhorn and Mr. Mendelsohn had a material, adverse
effect on WRSC's ability to perform its obligations under the management
agreement.
8
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 2--ORGANIZATION AND RELATIONSHIPS (CONTINUED)
During the third quarter of 1999, the Company decided to become internally
managed, and this has resulted in disputes between the Company, on the one hand,
and WRSC and WFSG on the other. Prior to this decision, the Company's business
and investment affairs had been managed by WRSC pursuant to a management
agreement, and the Company had received managerial and administrative services
from WRSC thereunder. Accordingly, prior to this decision, the Company had no
employees and instead relied on WRSC for management, facilities, reporting, and
other services. WRSC itself is a shell company and has no employees. WFSG
provided managerial and administrative services to WRSC to allow it to fulfil
its obligations under the management agreement.
On August 20, 1999, the Company filed a lawsuit against WFSG in the Circuit
Court of the State of Oregon for Multnomah County. On August 23, 1999, the
Company filed an amended Complaint in the lawsuit adding as additional
defendants WRSC, WCC, a 50.01% subsidiary of WFSG, and Wilshire Management
Leasing Company ("WML"), a wholly-owned subsidiary of WFSG alleging: (1) the
termination of Wiederhorn and Mendelsohn made WFSG and WRSC unable and/or
unwilling to provide management to the Company as required under the management
agreement; (2) the inability of WFSG and WRSC to manage the Company's business
affairs triggered application of a facilities sharing agreement dated
February 19, 1999 between the Company, WFSG, WRSC, WCC, and WML (the "Facilities
Sharing Agreement"); and (3) WFSG's refusal to allow Wiederhorn and Mendelsohn
access to WFSG's facilities, personnel, and equipment for the Company's business
violated the terms of the Facilities Sharing Agreement. Messrs. Wiederhorn and
Mendelsohn have also brought suit against WFSG and its directors alleging
wrongful termination and defamation. The Facilities Sharing Agreement had been
entered into by the parties to provide for the orderly transition of the
Company's management in the event the management agreement was no longer
operative and the Company was to become internally, rather than externally,
managed. Under the Facilities Sharing Agreement, WFSG, WRSC, and the other
parties were required to provide to the Company, for a period of two years, the
facilities, services, equipment, and personnel necessary for the Company to
internally manage itself, in return for the payment by the Company of the
pro-rata cost to provide facilities, services, equipment, and personnel. On
September 22, 1999, WFSG and WRSC filed papers in the above litigation alleging
various affirmative defenses and counterclaims, including allegations that the
Facilities Sharing Agreement was not in effect and was unenforceable, and that
the Company breached the management agreement, obligating the Company to pay a
termination fee.
On September 22, 1999, the Company sent a letter to WRSC reserving its
rights with respect to prior declarations of default by WRSC, and providing
formal notice of non-renewal and termination "for cause" of the management
agreement. The letter outlined various breaches of the management agreement by
WRSC, including: failing to provide competent management to the Company; failing
to provide necessary services and facilities; and taking actions contrary to the
interests of the Company. WRSC has disputed the characterization of the
termination as one "for cause" and has claimed that under the management
agreement it is entitled to a termination fee (a sum equal to the management
fees paid to WRSC for the preceding twelve months) from the Company.
Notwithstanding the foregoing, the Company has sought to discuss the parties'
disagreements with a view to reaching an amicable arrangement for severing the
relationships between WFSG and the Company. As a result of the Company's
overtures, the Company and WFSG began discussions to resolve their differences
in late September. There can be no assurance that
9
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 2--ORGANIZATION AND RELATIONSHIPS (CONTINUED)
these discussions will result in a resolution of these disagreements. In
connection with this matter, the Company, without admission, recorded a
provision for potential resolution of disputes with WFSG of $4.1 million as of
September 30, 1999.
As part of the Company's decision to become independently managed, the
Company has entered into employment agreements with Andrew Wiederhorn, as
Chairman and Chief Executive Officer; Lawrence Mendelsohn, as President; Chris
Tassos, as Chief Financial Officer and Executive Vice President; Richard
Brennan, as Executive Vice President; and Robert Rosen, as Executive Vice
President.
NOTE 3--INCOME TAXES
Due to the significant net operating loss carryforwards of the Company and
risks of not qualifying as a REIT, the Company reevaluated its original plan to
elect to be taxed as a REIT. The Company's Board of Directors had been informed
that potentially serious adverse tax consequences could result (including tax
penalties) in the event that the Company elected to be a REIT but was unable to
qualify as such under the Internal Revenue Code of 1986, as amended. As a result
of these factors and the Company's significant net loss during the year ended
December 31, 1998, the Company concluded that it was in the best interests of
the Company and its shareholders not to elect REIT status, and included for vote
at the annual shareholders' meeting a proposal to proceed in that manner. On
September 10, 1999, the Company's shareholders voted not to elect REIT status
and, as a result, the Company will be subject to corporate taxation.
As of September 30, 1999, the Company had, for U.S. Federal tax purposes, a
net operating loss carryforward in excess of $65 million, which expires in 2018.
U.S. tax regulations impose limitations on the use of net operating loss
carryforwards following certain changes in ownership. If such a change were to
occur with respect to the Company, the limitation could significantly reduce the
amount of benefits that would be available to offset future taxable income each
year, starting with the year of ownership change. The Company has not recorded
any tax assets for the future benefits of the net operating loss carryforwards.
NOTE 4--SIGNIFICANT TRANSACTIONS
In October 1999, the Company and Credit Suisse First Boston, the Company's
largest lender, agreed to replace the existing monthly repurchase facility with
a longer-term facility, for the continued financing of certain mortgage-backed
securities and a $25 million commercial mortgage loan. The Company believes that
this arrangement significantly reduces risk and reliance on short-term
borrowings while still providing adequate amortization and collateral
requirements for its lender.
In July 1999, the Company sold a commercial warehouse in Salem, Oregon for
net proceeds of approximately $7.4 million, and in August 1999, the Company sold
a commercial warehouse in Eugene, Oregon for net proceeds of approximately
$2.3 million. The gains on these sales of $0.2 million and $0.5 million,
respectively, are reported in the consolidated statements of operations for the
three and nine months ended September 30, 1999. Proceeds were used to repay
$7.4 million of other borrowings.
10
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 4--SIGNIFICANT TRANSACTIONS (CONTINUED)
During the three months ended September 30, 1999, the Company sold
mortgage-backed securities with a carrying value of $5.5 million. The cumulative
gain on these sales of $0.2 million is reported in the consolidated statements
of operations for the three and nine months ended September 30, 1999. Proceeds
of $5.7 million were used to repay short-term borrowings.
NOTE 5--MARKET VALUATION LOSSES AND IMPAIRMENTS
The Company evaluates, on an ongoing basis, the carrying value of its
securities portfolio, which is accounted for as available-for-sale. To the
extent differences between the book basis of the securities and their current
market values are deemed to be temporary in nature, such unrealized gains or
losses are reflected directly in equity, as "other comprehensive income or
loss." In calculating the extent to which declines in the value of
available-for-sale securities are other than temporary, the Company analyzes
actual performance of the securities and underlying collateral, including
prepayment and default statistics, as well as expectations for such performance
in the future. To the extent reasonable expectations for future performance are
not likely to offset reductions in current market valuations, a write down is
recorded in "Market Valuation Losses and Impairments."
During the three and nine months ended September 30, 1999, market valuation
losses and impairments of $6.3 million and $28.5 million, respectively, were
recorded. An $8.7 million write down of the Company's interest in WFSG stock and
$1.0 million of fees for advisory services in connection with its investment in
WFSG stock (see Note 6) are included in the nine months ended September 30,
1999. The Company believes that the decline in value of its investment in WFSG
stock is other than temporary, based on WFSG's operating results and other
factors, and has written down such investment to the market price of $1.25 per
share as of September 29, 1999. In addition, during such periods, $6.3 million
and $18.0 million, respectively, of market valuation losses and impairments were
recorded related to our portfolio of mortgage-backed securities primarily
reflecting unprecedented prepayment rates on certain residual securities. During
the three months ended September 30, 1999, the Company impaired its investment
in Cityscape 1997-A, 1997-B, and 1997-C economic residual interests by
$4.9 million. This charge primarily reflects the continuation of rapid
prepayment on the loans underlying these securities despite an overall increase
in the level of prevailing market mortgage rates. The remaining carrying value
of all our economic residuals is $16.6 million at September 30, 1999. The
Company also impaired its investment in Wilshire Consumer Obligation Structured
Trust 1995-A by $1.4 million. This charge primarily reflects the potential
impairment of two related loans secured by a commercial property that sustained
considerable flooding. The loans represent approximately 30% of the remaining
loan pool balance underlying the trust. The recording of this market valuation
loss and impairment had the effect of transferring such amounts between
components of equity (from "other comprehensive loss" to "accumulated deficit"),
but had no net effect on net equity of the Company. See also the Consolidated
Statements of Changes in Stockholders' Equity.
NOTE 6--TRANSACTIONS WITH WFSG, ITS SUBSIDIARIES OR OLD WCC
In January 1999, the Company entered into an agreement to provide WFSG with
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 receivable due from WFSG.
The DIP Facility bears interest at 12% and is secured by the
11
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 6--TRANSACTIONS WITH WFSG, ITS SUBSIDIARIES OR OLD WCC (CONTINUED)
stock of First Bank of Beverly Hills, FSB, WFSG's savings bank subsidiary. The
DIP Facility matures on February 29, 2004 and repayment is made through fully
amortizing principal and interest payments commencing on February 29, 2000.
Prior to February 29, 2000, only interest payments are required. The Company
loaned $5.0 million under the DIP Facility (which is included in "Notes
receivable from WFSG" in the statements of financial condition) on March 3,
1999, but did not provide WFSG with the remaining half. Accordingly, under the
agreement negotiated by the Company's Independent Directors with WFSG and its
creditors, 50%, or approximately $8.5 million, of WFSG's obligation was treated
PARI PASSU with the claims of WFSG's noteholders and converted, together with
approximately $21.4 million (in principal plus accrued but unpaid interest) of
WFSG's 13% Series B Notes held by WREI, to 2,874,791 shares of newly issued
common stock of WFSG on June 10, 1999, the effective date of the Restructuring
Plan. Additionally, on the effective date of the Restructuring Plan, the Company
received approximately $8.5 million in principal amount ($6.0 million carrying
value) of WFSG's 6% Convertible PIK Notes due 2006 (the "PIK Notes"), which is
also included in "Notes receivable from WFSG" in the statements of financial
condition, in exchange for the remaining 50% of the $17.0 million aforementioned
receivable due from WFSG. The Company may elect to convert the PIK Notes into
new common stock of WFSG upon receipt of a notice of redemption of the PIK Notes
by WFSG.
On June 30, 1999 the Company filed an H-(e)1 application with the Office of
Thrift Supervision. The application requests OTS approval to be a material
shareholder of a savings and loan holding company (WFSG). Currently, the Company
is not obligated to obtain such approval under OTS regulations. The Company has
filed such application; however, to protect itself from circumstances such as
dilution or sales by other holders that would obligate the Company at a later
date to obtain such OTS approval.
In January 1999, the Company remitted $15 million to Old WCC, consisting of
a payment of amounts owed by the Company to Old WCC of $11.8 million and the
prepayment of $3.2 million of future servicing fees for a release of a guarantee
by the Company of $35 million of Old WCC's indebtedness and of any and all
claims against the Company relating thereto. The amortized balance of the
prepaid servicing fee is included in the accompanying consolidated statement of
financial condition as of September 30, 1999. However, the noteholders of WFSG
claim that less than $3.2 million of future servicing fees were prepaid by the
Company. The noteholders of WFSG claim that the amount owed to Old WCC was
approximately $900,000 higher, thereby reducing the amount of the prepayment
credit to $2.3 million. The Company believes that the $3.2 million figure is
correct and is currently negotiating this issue with WFSG as part of an overall
settlement between WFSG and the Company.
NOTE 7--COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK
The Company's Asset and Liability Committee is authorized to utilize a wide
variety of off-balance sheet financial techniques to assist the Company in the
management of interest rate risk. In hedging the interest rate and/or exchange
rate exposure of a foreign currency denominated asset or liability, the Company
may enter into hedge transactions to counter movements in the different
currencies, as well as interest rates in those currencies. These hedges may be
in the form of currency and interest rate swaps, options, and forwards, or
combinations thereof. At September 30, 1999, the Company had no outstanding
positions in these instruments.
12
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 7--COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK (CONTINUED)
With the exception of disputes with WFSG and WRSC discussed in Notes 2 and
6, the Company is involved in various legal proceedings occurring in the
ordinary course of business which the Company believes will not have a material
adverse effect on the financial condition or operations of the Company.
NOTE 8--SUBSEQUENT EVENTS
In October 1999, the Company acquired mortgage-backed securities from WFSG
for approximately $20.9 million by assuming short-term borrowings of
$18.5 million and a $2.4 million reduction in the carrying amount of the PIK
Notes.
The Company is currently in the process of marketing certain commercial
properties for sale during the fourth quarter 1999, many of which are under
contract for sale. Management expects net proceeds to approximate or exceed the
carrying values of such properties. The net proceeds resulting from these
transactions are expected to be used to reduce short-term and other borrowings.
There can be no assurance, however, that the Company will sell such properties,
that any outstanding sale contracts will close, or the Company will receive net
proceeds in excess of their respective carrying values.
13
<PAGE>
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
INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF WILSHIRE REAL ESTATE
INVESTMENT INC. AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS FILING.
REFERENCES IN THIS FILING TO "WILSHIRE REAL ESTATE INVESTMENT INC.," "WE,"
"OUR," AND "US" REFER TO WILSHIRE REAL ESTATE INVESTMENT INC. AND ITS
SUBSIDIARIES UNLESS THE CONTEXT INDICATES OTHERWISE.
GENERAL
Wilshire Real Estate Investment Inc. ("WREI" or the "Company") (formerly
known as Wilshire Real Estate Investment Trust Inc.) is a Nasdaq-listed
corporation that was formed in October 1997 and commenced operations in
April 1998 following the completion of our initial public offering.
In response to adverse market conditions in the second half of 1998 and the
resulting effect on our operations, we focused our efforts on stabilizing our
existing asset base and greatly reduced acquisition activities during the nine
months ended September 30, 1999. General market conditions and availability of
financing for certain of our asset categories, especially subordinated
mortgage-backed securities and mezzanine loans, continue to be uncertain. Our
results of operations for the three and nine months ended September 30, 1999
reflect this continued difficult marketplace, which include further impairment
write downs of mortgage-backed securities, the preponderance of which had
previously been deducted from stockholders' equity, through "Accumulated other
comprehensive loss."
Notwithstanding this uncertainty, we expect gradually to resume acquisition
activities, with an increased emphasis on investment in loans and related assets
and a decreased emphasis on commercial operating properties. We believe that
investments in loans provide higher yields and allow us to more efficiently
leverage our existing capital, thereby providing us a higher return on equity.
In addition, we believe there may be attractive opportunities for additional
investments in Europe. We may also seek to invest in other companies that invest
in real estate related assets, especially where the market capitalizations of
such companies do not reflect the inherent values of the underlying assets or
franchises. Nonetheless, we continue to make investment decisions on an
opportunistic basis and will evaluate investment opportunities as they arise.
RESTRUCTURING OF WFSG
As a result of the market turmoil in the second half of 1998, Wilshire
Financial Services Group Inc. ("WFSG"), the parent of Wilshire Realty Services
Corporation ("WRSC"), submitted on March 3, 1999 a prepackaged plan of
reorganization as part of a Chapter 11 bankruptcy filing in the Federal Court of
Wilmington, Delaware. On April 12, 1999, the WFSG restructuring plan was
approved by the Bankruptcy Court and on June 10, 1999, WFSG's bankruptcy
reorganization was consummated.
Through our independent directors, we were a party to the restructuring
negotiations since we owned $20 million in principal amount of WFSG's 13%
Series B Notes and had a $17.0 million unsecured receivable from WFSG, bearing
interest at 13%. In January 1999, we entered into an agreement to provide WFSG
with debtor-in-possession financing of up to $10.0 million (the "DIP Facility")
as part of a compromise and settlement of the $17.0 million receivable due from
WFSG. Under this compromise and settlement, if the Company funded the full
amount of the DIP Facility, the Company would have received a new note for the
full amount of the receivable, bearing interest at 6% per annum payable monthly
in arrears. The DIP Facility bears interest at 12% and is secured by the stock
of First Bank of Beverly Hills, FSB, WFSG's savings bank subsidiary. The DIP
Facility matures on February 29, 2004 and repayment is made through fully
amortizing principal and interest payments commencing on February 29, 2000.
Prior to February 29, 2000, only interest payments are required. The business
decision to provide the DIP Facility was based on the independent directors'
desire to obtain the best possible treatment for the Company's holdings of
WFSG's 13% Series B Notes and the account receivable due from WFSG and the fact
that the
14
<PAGE>
debtor-in-possession facility was fully secured by the stock of WFSG's bank
subsidiary. We funded $5.0 million of the DIP Facility on March 3, 1999 but did
not provide WFSG with the remaining half. Accordingly, under the agreement
negotiated by the Company's independent directors with WFSG and its creditors,
50%, or approximately $8.5 million, of WFSG's obligation was treated pari passu
with the claims of WFSG's noteholders and converted, together with approximately
$21.4 million (in principal plus accrued but unpaid interest) of WFSG's 13%
Series B Notes, to 2,874,791 shares of newly issued common stock of WFSG on
June 10, 1999, the effective date of the restructuring plan. Additionally, on
the effective date of the restructuring plan, we received approximately
$8.5 million in principal amount of WFSG's 6% Convertible PIK Notes due 2006
(the "PIK Notes") in exchange for the remaining 50% of the $17.0 million
intercompany receivable due from WFSG. We may elect to convert the PIK Notes
into new common stock of WFSG upon receipt of a notice of redemption of the PIK
Notes by WFSG. Following the completion of WFSG's restructuring plan, we held
2,874,791 shares, or approximately 14.4%, of common stock of WFSG.
The following table sets forth the Company's investments in WFSG and
subsidiaries as of December 31, 1998, which was prior to WFSG's bankruptcy
filings, and as of September 30, 1999, which was following the completion of
WFSG's bankruptcy. Following the completion of WFSG's restructuring plan on
June 10, 1999, the $5 million loaned to WFSG under the DIP Facility no longer
has priority over other creditors and will be treated like any other secured
loan.
THE COMPANY'S INVESTMENTS IN WFSG
<TABLE>
<CAPTION>
PRE-BANKRUPTCY POST BANKRUPTCY
TYPE OF INVESTMENT (AS OF 12/31/98) (AS OF 9/30/99)
- ------------------ ---------------- ---------------
<S> <C> <C>
WFSG's 13% Series B Notes................................... $9,933,000(1) $ --
Receivable From WFSG........................................ 17,000,000(2) --
PIK Notes................................................... -- 5,977,000(3)
WFSG's Common Stock......................................... -- 3,594,000(4)
DIP Facility................................................ -- 5,000,000
Prepaid Servicing Fees to WCC............................... -- 2,953,000
------------ -----------
TOTAL....................................................... $ 26,933,000 $17,524,000
============ ===========
</TABLE>
- ------------------------
(1) Based on the value of the 13% Series B Notes as shown on the Company's
financial statements as of December 31, 1998. The principal amount of the
13% Series B Notes held by the Company was $20 million.
(2) Based on the face amount owed.
(3) In October 1999, the Company acquired approximately $20.9 million of
mortgage-backed securities from WFSG by assuming short-term borrowings of
$18.5 million and a $2.4 million reduction in the carrying amount of the PIK
Notes.
(4) Based on $1.25 per share. WFSG's common stock currently trades on the OTC
Bulletin Board and the closing price as of September 29, 1999 was $1.25 per
share.
INCOME TAX STATUS
Due to the significant net operating loss carryforwards and risks of not
qualifying as a real estate investment trust ("REIT"), we reevaluated our
original plan to elect to be taxed as a REIT. Our Board of Directors had been
informed that potentially serious adverse tax consequences could result
(including tax penalties) in the event that we elected to be a REIT but were
unable to qualify as such under the Internal Revenue Code of 1986, as amended.
As a result of these factors and our significant net loss during the year
15
<PAGE>
ended December 31, 1998, we concluded that it was in our best interests not to
elect REIT status. On September 10, 1999, our shareholders voted not to elect
REIT status.
Since we elected not to be taxed as a REIT, we will be subject to corporate
taxation. However, as of September 30, 1999 we had, for U.S. Federal tax
purposes, a net operating loss carryforward in excess of $65 million, which
expires in 2018. U.S. tax regulations impose limitations on the use of net
operating loss carryforwards following certain changes in ownership. If such a
change were to occur with respect to the Company, the limitation could
significantly reduce the amount of benefits that would be available to offset
future taxable income each year starting with the year of the ownership change.
The Company has not recorded any tax assets for the future benefits of the net
operating loss carryforwards.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1999
NET LOSS. Our net loss for the nine months ended September 30, 1999 was
$27.8 million, or $2.42 per share. The net loss is primarily attributable to
market valuation losses and impairments of $28.5 million (of which
$18.0 million is attributable to our portfolio of mortgage-backed securities,
$8.7 million is attributable to our investment in WFSG stock, $1.0 million is
attributable to fees for advisory services in connection with our investment in
WFSG stock and $0.8 million is attributable to our holdings of WFSG 13% Notes
due 2004, which were subsequently converted to newly issued common stock of
WFSG), a provision for potential resolution of disputes with WFSG of
$4.1 million, operating expenses and management fees of $4.4 million, partially
offset by net interest income after recovery of losses of $9.5 million and
income on real estate operations of $0.5 million.
NET INTEREST INCOME. The following table sets forth information regarding
the total amount of income from interest-earning assets and expense from
interest-bearing liabilities and the resulting average yields and rates:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
--------------------------------
AVERAGE INTEREST ANNUALIZED
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-Earning Assets:
Loan portfolios (1)....................................... $ 52,703 $ 4,081 10.2%
Mortgage-backed securities available for sale............. 131,061 12,025 12.1
Other securities available for sale (2)................... 9,325 108 1.5
Due from WFSG............................................. 13,001 1,251 12.7
Notes receivable from WFSG................................ 4,190 382 12.0
Other investments......................................... 8,858 322 4.8
-------- ------- ----
Total interest-earning assets........................... 219,138 18,169 10.9
-------- ------- ----
Interest-Bearing Liabilities:
Short-term and other borrowings........................... 166,933 9,841 7.8
-------- ------- ----
Total interest-bearing liabilities...................... 166,933 9,841 7.8
-------- ------- ----
Net interest income before provision for loan
losses/spread (3)....................................... $ 8,328 3.1%
------- ----
Net interest margin (4)................................... 5.0%
----
</TABLE>
- ------------------------
(1) In April 1999, we sold a loan secured by five luxury hotels in London,
England, including the Savoy Hotel, the Connaught and Claridge's Hotel, with
a carrying value of approximately $47.9 million. The net interest margin
attributable to this loan, net of related swaps, was approximately 5.2%
during the nine months ended September 30, 1999.
16
<PAGE>
(2) Other securities available for sale consists of a U.S. Treasury Bill
yielding approximately 4.7%, which was purchased in June 1999, and WFSG's
13% Series B Notes, which we held from January 1999 to June 10, 1999. On
June 10, 1999, on WFSG's emergence from bankruptcy, WFSG's 13% Series B
Notes due 2004 were converted to common stock of WFSG. Accordingly, we did
not accrue interest income on these securities during the nine months ended
September 30, 1999.
(3) Net interest spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
RECOVERY OF LOSSES. During the nine months ended September 30, 1999, we
reversed a provision for losses of $3.9 million taken in prior periods for a
loan held for sale. This loan, which was secured by five luxury hotels in
London, England, including the Savoy Hotel, the Connaught and Claridge's Hotel,
was sold on April 29, 1999 and resulted in this recovery. This provision
reversal was partially offset by a provision for losses on loans of
$0.1 million. In addition, during the nine months ended September 30, 1999 we
recognized a net write down of $2.7 million in the carrying value of a
$17.0 million note receivable from WFSG to reflect the estimated value of the
common stock of WFSG to be received in exchange for a portion of the note (see
also Note 6 to the interim consolidated financial statements). The write down is
included in provision for losses in the consolidated statements of operations
for the nine months ended September 30, 1999.
REAL ESTATE OPERATIONS. Real estate operations represent activity from our
investment in various office buildings, retail stores, and other commercial
property located in Oregon, California and the United Kingdom. During the nine
months ended September 30, 1999, we realized income of approximately
$0.5 million on these properties. This income was attributable to rental income
of $5.5 million, partially offset by interest expense of $3.6 million,
depreciation expense of $1.1 million, gain on sale of real estate of
$0.7 million, provision for losses on real estate of $0.9 million and operating
expenses of $0.2 million.
OTHER LOSS. Our other loss was approximately $33.1 million for the nine
months ended September 30, 1999. This loss was primarily due to $28.5 million of
market valuation losses and impairments, a provision for potential resolution of
disputes with WFSG of $4.1 million, and a loss on sales of mortgage-backed
securities of $0.7 million, partially offset by other revenue of $0.2 million.
During the nine months ended September 30, 1999, we recorded $18.0 million of
market valuation losses and impairments related to our portfolio of
mortgage-backed securities available for sale, $8.7 million related to our
investment in newly-issued WFSG stock, $1.0 million related to fees for advisory
services in connection with our investment in WFSG stock and $0.8 million
related to our holdings of WFSG's 13% Series B Notes prior to their conversion
to newly-issued WFSG stock.
These market valuation losses and impairments were deemed by the Company to
be other than temporary in nature. In calculating the extent to which declines
in the value of available-for-sale securities are other than temporary, the
Company analyzes actual performance of the securities and underlying collateral,
including prepayment and default statistics, as well as expectations for such
performance in the future. To the extent reasonable expectations for future
performance are not likely to offset reductions in current market valuations, a
write down is recorded in "Market valuation losses and impairments." The decline
in value and subsequent write down of mortgage-backed securities available for
sale generally reflects unprecedentedly high prepayment rates on certain
residual securities. During the three months ended September 30, 1999, the
Company impaired its investment in Cityscape 1997-A, 1997-B, and 1997-C economic
residual interests by $4.9 million. This charge primarily reflects the
continuation of rapid prepayment on the loans underlying these securities
despite an overall increase in the level of prevailing market mortgage rates.
The remaining carrying value of all our economic residuals is $16.6 million at
September 30, 1999. The Company also impaired its investment in Wilshire
Consumer Obligation Structured Trust 1995-A by $1.4 million. This charge
primarily reflects the potential impairment of two
17
<PAGE>
related loans secured by a commercial property that sustained considerable
flooding. The loans represent approximately 30% of the remaining loan pool
balance underlying the trust.
The Company believes that the decline in value of its investment in WFSG
stock is other than temporary, based on WFSG's operating results and other
factors, and has written down such investment to the market value of $1.25 per
share as of September 29, 1999.
Without admission, a provision for potential resolution of disputes with
WFSG of $4.1 million was recorded in the three months ended September 30, 1999.
The Company has sought to discuss the parties' disagreements with a view to
reaching an amicable arrangement for severing the relationships between WFSG and
the Company. As a result of the Company's overtures, the Company and WFSG began
discussions to resolve their differences in late September. There can be no
assurance that these discussions will result in a resolution of these
disagreements. See Notes 2 and 6 to the consolidated financial statements and
Part II, Item 1, Legal Proceedings.
OPERATING EXPENSES. Management fees of $2.4 million for the nine months
ended September 30, 1999 were comprised of the 1% (per annum) base management
fee to WRSC for the period, as provided pursuant to our management agreement
with WRSC. WRSC earned no incentive fee for this period. Other expenses were
comprised of professional services, insurance premiums and other sundry
expenses. During the nine months ended September 30, 1999, we recaptured loan
service fees of approximately $0.1 million. The recapture of service fees
resulted from a review of, and retroactive reduction in, certain property
servicing fees charged to us by Old WCC.
RESULTS OF OPERATIONS--SIX MONTHS ENDED SEPTEMBER 30, 1998
NET LOSS. Our net loss for the six months ended September 30, 1998 was
$45.8 million, or $4.03 per share. The net loss was primarily attributable to
$49.5 million of market valuation adjustments and a provision for loan losses of
$3.0 million.
NET INTEREST INCOME. The following tables set forth information regarding
the total amount of income from interest-earning assets and expense from
interest-bearing liabilities and the resultant average yields and rates:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998
--------------------------------
AVERAGE INTEREST ANNUALIZED
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-Earning Assets:
Loan portfolios........................................... $ 92,585 $ 5,491 11.9%
Mortgage-backed securities available for sale............. 205,444 9,723 9.5
Other securities available for sale....................... 19,700 1,035 10.5
Other investments......................................... 24,963 486 3.9
-------- ------- ----
Total interest-earning assets........................... 342,692 16,735 9.7
-------- ------- ----
Interest-Bearing Liabilities:
Short-term and other borrowings........................... 231,328 7,513 6.5
-------- ------- ----
Total interest-bearing liabilities...................... $231,328 7,513 6.5
-------- ------- ----
Net interest income before provision for loan
losses/spread (1)....................................... $ 9,222 3.2%
------- ----
Net interest margin (2)................................... 5.4%
----
</TABLE>
- ------------------------
(1) Net interest spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
18
<PAGE>
For the six months ended September 30, 1998, we provided $3.0 million for
the allowance for loan losses. This provision is not reflected in net interest
income/spread above.
REAL ESTATE OPERATIONS. Such income represents income generated from our
investment in various office buildings, retail stores, and other commercial
property located in Oregon, California and the United Kingdom. During the six
months ended September 30, 1998, operating income was comprised primarily of
$3.0 million in gross rental and other income earned on such investments.
Additionally, expenses incurred on real estate investments include $1.4 million
of interest expense, $0.2 million of rental operations and $0.6 million of
depreciation expense.
OTHER LOSS. Our other loss was approximately $48.6 million for the six
months ended September 30, 1998. The components of our net non-interest loss is
comprised of the following:
MARKET VALUATION LOSSES AND IMPAIRMENTS. During the six months ended
September 30, 1998, we recorded $49.5 million of market valuation losses and
impairments that were deemed by management to be other than temporary in nature
and duration.
During the week of October 12, 1998, we sold certain assets in response to
adverse global market conditions. The carrying values of these assets were
reduced by $32.6 million, and the reductions were recognized in the market
valuation losses and impairments for the six months ended September 30, 1998.
Additionally, a market valuation loss and impairment of $16.9 million relates to
other than temporary impairment on other investment securities not sold.
The following table sets forth information regarding the total amount of
losses recognized in earnings from the market valuation losses and impairments.
Valuation of the other than temporary losses were determined primarily through
the subsequent sales of certain assets and by analyzing actual performance of
the securities and underlying collateral, as well as expectations for such
performance in the future for our securities available-for-sale that were
retained.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998
------------------------------------
ASSETS TOTAL
RETAINED SUBSEQUENTLY MARKET
ASSETS SOLD ADJUSTMENT
-------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan portfolio.............................................. $ -- $16,499 $16,499
Mortgage-backed securities available for sale............... 9,646 16,096 25,742
Other securities available for sale......................... 7,279 -- 7,279
------- ------- -------
Total....................................................... $16,925 $32,595 $49,520
======= ======= =======
</TABLE>
GAIN ON THE SALE OF SECURITIES. During the six months ended September 30,
1998, we sold to unrelated third parties mortgage-backed securities for
approximately $16.8 million, resulting in gains of approximately $0.9 million.
The carrying values of assets sold subsequent to September 30, 1998 have been
reduced through market valuation losses and impairments for the six months ended
September 30, 1998.
OPERATING EXPENSES. Management fees of $1.9 million for the six months ended
September 30, 1998, were comprised solely of the 1% (per annum) base management
fee to WRSC as provided pursuant to our management agreement with WRSC. WRSC
earned no incentive fee for this period. In addition to the management fee, we
incurred loan service fees and expenses of $0.5 million during the six months
ended September 30, 1998, which were paid by WRSC on behalf of us and for which
WRSC was subsequently reimbursed by us. Other expenses were comprised of
professional services, insurance premiums and other sundry expenses.
19
<PAGE>
RESULTS OF OPERATIONS--QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER
ENDED SEPTEMBER 30, 1998
NET LOSS. Our net loss for the quarter ended September 30, 1999 was
$9.4 million, or $0.82 per share, compared with a loss of $48.9 million, or
$4.25 per share, for the quarter ended September 30, 1998. The net loss for the
1999 period is attributable to market valuation losses and impairments on our
portfolio of mortgage-backed securities of $6.3 million, other operating
expenses of $1.7 million and a provision for potential resolution of disputes
with WFSG of $4.1 million, partially offset by net interest income of
$2.0 million and income from real estate operations of $0.6 million. Our net
loss for the corresponding 1998 period was primarily due to market valuation
losses and impairments as a result of the market turmoil which occurred in the
second half of 1998.
NET INTEREST INCOME. Our net interest income for the three months ended
September 30, 1999 was $2.0 million, compared with $5.6 million for the three
months ended September 30, 1998. The decrease is primarily attributable to a
significantly smaller balance sheet resulting in decreases in interest income on
securities and loans of $3.9 million and $3.2 million, respectively, partially
offset by a decrease in interest expense of $3.2 million, reflecting our sales
of mortgage-backed securities, real estate, and loans and paydowns of the
related debt facilities. The following tables set forth information regarding
the total amount of income from interest-earning assets and expense from
interest-bearing liabilities and the resulting average yields and rates:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
--------------------------------
AVERAGE INTEREST ANNUALIZED
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-Earning Assets:
Loan portfolios....................................... $ 31,591 $ 959 11.9%
Mortgage-backed securities available for sale......... 100,609 3,291 12.8
Other securities available for sale (1)............... 8,958 108 4.7
Due from WFSG......................................... 5,917 185 12.2
Notes receivable from WFSG............................ 5,000 153 12.0
Other investments..................................... 8,056 109 5.3
-------- ------- ----
Total interest-earning assets..................... 160,131 4,805 11.7
-------- ------- ----
Interest-Bearing Liabilities:
Short-term and other borrowings....................... 124,546 2,803 8.8
-------- ------- ----
Total interest-bearing liabilities................ 124,546 2,803 8.8
-------- ------- ----
Net interest income before provision for loan
losses/spread (2)................................... $ 2,002 2.9%
------- ----
Net interest margin (3)............................... 4.9%
----
</TABLE>
- ------------------------
(1) Other securities available for sale consist of a U.S. Treasury Bill yielding
approximately 4.7%.
(2) Net interest spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
20
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
--------------------------------
AVERAGE INTEREST ANNUALIZED
BALANCE INCOME YIELD/RATE
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-Earning Assets:
Loan portfolios....................................... $151,632 $ 4,167 11.0%
Mortgage-backed securities available for sale......... 274,093 6,575 9.6
Other securities available for sale................... 21,500 577 10.7
Other investments..................................... 23,486 326 5.6
-------- ------- ----
Total interest-earning assets..................... 470,711 11,645 9.9
-------- ------- ----
Interest-Bearing Liabilities:
Short-term and other borrowings....................... 363,133 6,012 6.6
-------- ------- ----
Total interest-bearing liabilities................ 363,133 6,012 6.6
-------- ------- ----
Net interest income before provision for loan
losses/spread (1)................................... $ 5,633 3.3%
------- ----
Net interest margin (2)............................... 4.8%
----
</TABLE>
- ------------------------
(1) Net interest spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
REAL ESTATE OPERATIONS. Such operations represent activity from our
investment in various office buildings, retail stores, and other commercial
property located in Oregon, California and the United Kingdom. During the three
months ended September 30, 1999, we realized income from real estate operations
of approximately $0.6 million, compared with income of $0.4 million for the
three months ended September 30, 1998. This increase was primarily attributable
to gain on sale of real estate of $0.7 million partially offset by provision for
loss of $0.3 million.
OTHER INCOME (LOSS). Our other loss was approximately $10.1 million for the
three months ended September 30, 1999, compared with a loss of approximately
$48.6 million for the three months ended September 30, 1998. The loss for the
1999 period was primarily due to a provision for potential resolution of
disputes with WFSG of $4.1 million and market valuation losses and impairments
on our portfolio of mortgage-backed securities of $6.3 million. The loss for the
1998 period was primarily due to market valuation losses and impairments of
$49.5 million reflecting the adverse global market conditions experienced in the
second half of 1998, partially offset by gains on sales of securities of
$0.9 million.
OPERATING EXPENSES. Our other operating expenses were approximately
$1.7 million for the three months ended September 30, 1999, compared with
approximately $3.4 million for the three months ended September 30, 1998. This
decrease was primarily due to a decrease in management fees of $0.7 million, a
decrease in investment due diligence costs of $0.5 million and a decrease in
debt offering costs of $0.3 million.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets decreased from approximately $381.1 million at
December 31, 1998 to approximately $234.5 million at September 30, 1999. The
decrease in total assets is primarily attributable to sales of $33.0 million of
mortgage-backed securities available-for-sale, the sale of a loan held for sale
with a carrying value of $44.0 million at December 31, 1998, and a reduction of
$38.9 million in loans, net resulting primarily from the payoff of a loan with a
carrying value of $38.6 million at December 31, 1998. Total liabilities
decreased from approximately $308.7 million at December 31, 1998 to
approximately $182.4 million at September 30, 1999 primarily as a result of a
reduction in short-term borrowings related
21
<PAGE>
to the repayment of borrowings used to finance such mortgage-backed securities
and loans and the payment of an $11.7 million payable to Old WCC. Stockholders'
equity decreased by approximately $20.3 million resulting primarily from the net
loss of $27.8 million for the nine months ended September 30, 1999, partially
offset by a reduction of $7.5 million in unrealized loss on available-for-sale
securities.
SECURITIES AVAILABLE FOR SALE. The balance of securities available for sale
decreased from $158.7 million at December 31, 1998 to $105.1 million at
September 30, 1999. This decrease was comprised of a decrease in mortgage-backed
securities available for sale of $52.7 million and a decrease in other
securities available for sale of $0.9 million. The decrease in mortgage-backed
securities available for sale was primarily due to the sale of mortgage-backed
securities with a carrying value of $33.0 million, the recognition of other than
temporary impairment of approximately $18.0 million, and cash receipts in excess
of income accrued of approximately $9.1 million due to high rates of prepayments
on non-interest only securities, partially offset by a net decrease in the
unrealized loss on available-for-sale securities of approximately $7.5 million
from December 31, 1998 to September 30, 1999.
The decrease in other securities available for sale resulted from the
conversion of our WFSG 13% Series B Notes with a carrying value of approximately
$9.9 million at December 31, 1998 into new common stock of WFSG, partially
offset by the purchase of a U.S. Treasury Bill for approximately $8.9 million
and discount accretion thereon of $0.1 million.
We mark our securities portfolio to fair value at the end of each month
based upon broker/dealer valuations, subject to an internal review process. With
respect to many of our subordinate securities, valuations are typically
available from either a single or a small group of broker/dealers. For those
securities that are subject to repurchase or other financing arrangements with
broker/dealers, we employ the valuation supplied by the financing broker even
if, as is sometimes the case, we believe that the valuation represents less than
fair value.
The difference between our amortized cost of available for sale securities
and current market values, which was $22.9 million at September 30, 1999, is
included in "Accumulated Other Comprehensive Loss" in stockholders' equity. This
amount, unlike "market valuation losses and impairments," represents a market
value decline that we believe is temporary. If held to maturity, the anticipated
cash flow on these securities based on current interest rates, rate of
prepayment and the amount and severity of defaults would result in our receiving
amounts in excess of the current market value and would allow us to recover our
amortized cost plus our original expected return from the time of acquisition.
Notwithstanding the foregoing, payments on mortgage-backed securities are
subject to a number of market factors which can significantly affect the amount
and rate of payments on mortgage-backed securities, including defaults on the
underlying mortgage loans, the level of subordination of the mortgage-backed
securities, changes in interest rates and the rate of prepayments on the
underlying mortgage loans. To the extent that these factors change, the
anticipated cash flow on our mortgage-backed securities may not be sufficient to
cover our amortized cost or if we sell one of these mortgage-backed securities
at market prices which are below its amortized cost, we will realize a loss in
the amount of that portion of "Accumulated Other Comprehensive Loss"
attributable to such mortgage-backed security. In calculating the extent to
which declines in the value of available-for-sale securities are other than
temporary, we analyze actual performance of the securities and underlying
collateral, including prepayment and default statistics, as well as expectation
for such performance in the future. To the extent reasonable expectations for
future performance are not likely to offset reductions in current market
valuations, a writedown is recorded in "Market valuation losses and
impairments."
22
<PAGE>
At September 30, 1999, we valued our securities available for sale portfolio
and gross unrealized gains and losses thereon as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST (1) GAINS LOSSES FAIR VALUE
------------------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities.................... $119,031 $755 $(23,692) $ 96,094
Other securities (2).......................... 8,993 -- -- 8,993
-------- ---- -------- --------
$128,024 $755 $(23,692) $105,087
======== ==== ======== ========
</TABLE>
(1) The amortized cost of the investment securities reflects the market
valuation losses and impairments discussed above and in "Results of
Operations".
(2) U.S. Treasury Bill.
LOAN PORTFOLIO. During the nine months ended September 30, 1999, our loan
portfolio of non-discounted loans (including loans and loans held for sale)
decreased by approximately $82.7 million due primarily to the sale of a loan
held for sale (secured by five luxury hotels in London, England, including the
Savoy Hotel, the Connaught and Claridge's Hotel) with a carrying value of
approximately $44.0 million at December 31, 1998 and the payoff of a loan to
Southern Pacific Funding Corporation (secured by certain mortgage-backed
securities) with a carrying value of approximately $38.6 million.
As we begin to return our focus to execution of our business plan, it is
likely that our investment activities will focus more on the purchase of loans
and related assets and less on investments in commercial operating properties.
We remain optimistic about investment opportunities in Europe, as well as
investments in other real estate related operating companies. Nonetheless, we
continue to make investment decisions on an opportunistic basis and will
evaluate investment opportunities as they arise.
The following table sets forth certain information relating to the payment
status of loans in the Company's loan portfolio at September 30, 1999:
<TABLE>
<CAPTION>
UNPAID PRINCIPAL
BALANCE CARRYING VALUE
---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current......................................... $30,778 $30,393
Past due less than 31 days...................... -- --
Past due 31 to 89 days.......................... -- --
------- -------
$30,778 $30,393
======= =======
</TABLE>
We maintain an allowance for loan losses on non-discounted loans at a level
that we consider adequate to provide for probable losses based upon an
evaluation of known and inherent risks.
DISCOUNTED LOAN PORTFOLIO. The balance of discounted loans declined from
$2.5 million at December 31, 1998 to $1.2 million at September 30, 1999
primarily due to principal repayments of $1.0 million. During the nine months
ended September 30, 1999, we did not purchase or sell any discounted loan
assets. As noted above, we currently plan to increase our concentration of
investment into loan related assets, including discounted loans when
appropriate.
23
<PAGE>
The following table sets forth certain information relating to the payment
status of loans in our discounted loan portfolio at September 30, 1999:
<TABLE>
<CAPTION>
UNPAID PRINCIPAL
BALANCE CARRYING VALUE
---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current......................................... $1,198 $ 971
Past due less than 31 days...................... -- --
Past due 31 to 89 days.......................... -- --
Past due 90 days or greater..................... 2,959 220
------ ------
$4,157 $1,191
====== ======
</TABLE>
We maintain an allowance for loan losses on discounted loans at a level that
we consider adequate to provide for probable losses on discounted loans based
upon an evaluation of known and inherent risks. No additional allowance for loan
losses for discounted loans was provided for during the nine months ended
September 30, 1999.
INVESTMENTS IN REAL ESTATE. Investments in real estate decreased
approximately $15.6 million from December 31, 1998 to September 30, 1999. This
decrease was primarily due to sales of an industrial business park located in
Tigard, Oregon for proceeds of approximately $4.1 million, a commercial
warehouse in Salem, Oregon for proceeds of approximately $7.4 million, and a
commercial warehouse in Eugene, Oregon for proceeds of approximately
$2.3 million. In addition, we recognized approximately $1.1 million of
depreciation expense related to operating properties and recorded a
$0.9 million provision for real estate losses during the nine months ended
September 30, 1999.
We are currently in the process of marketing other commercial properties for
sale during the fourth quarter of 1999 (many of which are under contract for
sale) as we continue to reduce our level of investment in commercial real estate
income properties.
INVESTMENT IN WFSG, NOTES RECEIVABLE FROM WFSG, DUE FROM WFSG, PREPAID
SERVICING FEES TO WCC, PAYABLE TO OLD WCC. As a result of the market turmoil in
the second half of 1998, on March 3, 1999, Wilshire Financial Services
Group Inc. ("WFSG"), the parent of our former manager, Wilshire Realty Services
Corporation ("WRSC"), submitted a prepackage plan of reorganization as part of a
Chapter 11 bankruptcy filing in the Federal Court of Wilmington, Delaware. On
April 12, 1999, the WFSG restructuring plan was approved by the Bankruptcy Court
and on June 10, 1999, WFSG's bankruptcy reorganization was consummated.
Through our independent directors, we were a party to the restructuring
negotiations since we owned $20 million of principal amount of WFSG's 13%
Series B Notes and we had a $17.0 million unsecured receivable from WFSG,
bearing interest at 13%. In January 1999, we entered into an agreement to
provide WFSG with debtor-in-possession financing of up to $10.0 million (the
"DIP Facility") as part of a compromise and settlement of the $17.0 million
receivable due from WFSG. Under this compromise and settlement, if the Company
funded the full amount of the DIP Facility, the Company would have received a
new note for the full amount of the receivable, bearing interest at 6% per annum
payable monthly in arrears. The DIP Facility bears interest at 12% and is
secured by the stock of First Bank of Beverly Hills, FSB, WFSG's savings bank
subsidiary. The DIP Facility matures on February 29, 2004 and repayment is made
through fully amortizing principal and interest payments commencing on
February 29, 2000. Prior to February 29, 2000, only interest payments are
required. The business decision to provide the DIP Facility was based on the
independent directors' desire to obtain the best possible treatment for the
Company's holdings of WFSG's 13% Series B Notes and the account receivable due
from WFSG and the fact that the debtor-in-possession facility was fully secured
by the stock of WFSG's bank subsidiary. We funded $5.0 million of the DIP
Facility on March 3, 1999 but did not provide WFSG with the remaining half.
Accordingly, under the agreement negotiated by the Company's independent
directors with WFSG and its
24
<PAGE>
creditors, 50%, or approximately $8.5 million, of WFSG's obligation was treated
PARI PASSU with the claims of WFSG's noteholders and converted, together with
approximately $21.4 million (in principal plus accrued but unpaid interest) of
WFSG's 13% Series B Notes, to 2,874,791 shares of newly issued common stock of
WFSG on June 10, 1999, the effective date of the restructuring plan.
Additionally, on the effective date of the restructuring plan, we received
approximately $8.5 million in principal amount of WFSG's 6% Convertible PIK
Notes due 2006 (the "PIK Notes") in exchange for the remaining 50% of the
$17.0 million intercompany receivable due from WFSG. We may elect to convert the
PIK Notes into new common stock of WFSG upon receipt of a notice of redemption
of the PIK Notes by WFSG. Following the completion of WFSG's restructuring plan,
we held 2,874,791 shares, or approximately 14.4%, of common stock of WFSG.
In January 1999, the Company remitted $15 million to Old WCC, consisting of
a payment of amounts owed by the Company to Old WCC of $11.8 million and the
prepayment of $3.2 million of future servicing fees for a release of a guarantee
by the Company of $35 million of Old WCC's indebtedness and of any and all
claims against the Company relating thereto. The amortized balance of the
prepaid servicing fee of approximately $3.0 million as of September 30, 1999 is
included in Prepaid Servicing Fees to WCC in the accompanying consolidated
statement of financial condition. However, the noteholders of WFSG claim that
the amount owed to Old WCC was approximately $900,000 higher, thereby reducing
the amount of the prepayment credit to $2.3 million. The Company believes that
the $3.2 million figure is correct and is currently negotiating this issue with
WFSG as part of an overall settlement of the disputes between WFSG and the
Company.
The following table sets forth the Company's investments in WFSG and
subsidiaries as of December 31, 1998, which was prior to WFSG's bankruptcy
filing, and as of September 30, 1999, which was after the completion of WFSG's
bankruptcy reorganization. Following the completion of WFSG's restructuring plan
on June 10, 1999, the $5 million loaned to WFSG under the DIP Facility no longer
has priority over other creditors and will be treated like any other secured
loan.
THE COMPANY'S INVESTMENTS IN WFSG
<TABLE>
<CAPTION>
PRE-BANKRUPTCY POST BANKRUPTCY
TYPE OF INVESTMENT (AS OF 12/31/98) (AS OF 9/30/99)
- ------------------ ---------------- ---------------
<S> <C> <C>
WFSG's 13% Series B Notes................................... $9,933,000(1) $ --
Receivable From WFSG........................................ 17,000,000(2) --
WFSG's 6% Convertible PIK Notes............................. -- 5,977,000(3)
WFSG's Common Stock......................................... -- 3,594,000(4)
DIP Loan.................................................... -- 5,000,000
Prepaid Servicing Fees to WCC............................... -- 2,953,000
------------ -----------
TOTAL....................................................... $ 26,933,000 $17,524,000
============ ===========
</TABLE>
- ------------------------
(1) Based on the value of the 13% Series B Notes as shown on the Company's
financial statements as of December 31, 1998. The principal amount of the
13% Series B Notes held by the Company was $20 million.
(2) Based on the face amount owed.
(3) In October 1999, the Company acquired approximately $20.9 million of
mortgage-backed securities from WFSG by assuming short-term borrowings of
$18.5 million and a $2.4 million reduction in the carrying amount of the PIK
Notes.
(4) Based on $1.25 per share. WFSG's common stock currently trades on the OTC
Bulletin Board and the closing price as of September 29, 1999 was $1.25 per
share.
25
<PAGE>
SHORT-TERM BORROWINGS. Short-term borrowings decreased by approximately
$103.9 million during the nine months ended September 30, 1999 due to the
repayment of borrowings related to a loan held for sale and mortgage-backed
securities which were sold and a loan which paid off. The balances of the
outstanding borrowings related to these loans were approximately $33.3 million
and $20.0 million, respectively. The remaining decrease in short-term borrowings
is primarily attributable to the repayment of short-term borrowings from sales
proceeds and other payments on our mortgage-backed securities. On October 12,
1999, the Company and Credit Suisse First Boston, the Company's largest lender,
agreed to replace the Company's short-term (monthly) repurchase facility with a
longer-term repurchase facility for the financing of approximately
$64.0 million of subordinate mortgage-backed securities and approximately
$20 million for the financing of a $25 million commercial loan. The Company
believes that this significantly reduces the Company's reliance on short-term
borrowings.
OTHER BORROWINGS. Other borrowings decreased approximately $11.6 million
during the nine months ended September 30, 1999 due primarily to the repayment
of borrowings related to the commercial properties which were sold during the
reporting period.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased by approximately
$20.3 million during the nine months ended September 30, 1999. This decrease was
primarily due to a net loss of $27.8 million for the nine months ended
September 30, 1999, partially offset by a $7.5 million decrease in unrealized
holding losses on available for sale securities. This decrease in unrealized
holding losses resulted from the recognition of other than temporary impairment
in the value of our mortgage-backed securities portfolio of $19.0 million,
partially offset by additional unrealized holding losses of $11.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, engage in loan acquisition and lending activities, meet collateral
calls and for other general business purposes. The primary sources of funds for
liquidity during the nine months ended September 30, 1999 consisted of net cash
provided by investing activities, including the cash repayments related to our
mortgage-backed securities portfolio, a loan receivable which paid off in
January 1999, a loan which was sold in April 1999, and sales of mortgage-backed
securities in June 1999.
The adverse market conditions, which negatively impacted us during the third
and fourth quarters of 1998, began to stabilize during the nine months ended
September 30, 1999, but remained somewhat uncertain. As of September 30, 1999,
we had outstanding collateral calls as determined by one of our lenders, net of
cash retained, of approximately $2.3 million, compared with collateral calls
outstanding as of December 31, 1998 of $4.4 million. As of November 12, 1999, we
have met all collateral calls and have no outstanding amounts owed to lenders
for such collateral calls.
On October 12, 1999, the Company and Credit Suisse First Boston, the
Company's largest lender, agreed to replace the Company's short-term (monthly)
repurchase facility with a longer-term repurchase facility for the financing of
approximately $64 million of subordinate mortgage-backed securities and
approximately $20 million facility for the financing of a $25 million commercial
mortgage loan. The Company believes that this significantly reduces the
Company's reliance on short-term borrowings and eliminated all remaining
outstanding collateral calls.
Our short-term borrowings and the availability of further borrowings are
substantially affected by, among other things, changes in interest rates,
changes in market spreads whereby the market value of the collateral securing
such borrowings may decline substantially, or decreases in credit quality of
underlying assets. In the event of declines in market value or credit quality,
we may be required to provide additional collateral for, or repay a portion of
outstanding balances of, our short-term, floating-rate borrowing facilities. For
additional information with respect to our monthly mark-to-market of our
securities available for sale portfolio, see "Changes in Financial
Condition--Securities Available for Sale."
26
<PAGE>
In addition, given the current relative lack of liquidity for
below-investment grade securities and the possibility that Y2K concerns may
adversely affect market liquidity, we are maintaining a relatively high degree
of liquidity in the form of cash and treasury securities.
Fluctuations in interest rates will continue to impact our net interest
income to the extent our fixed rate assets are funded by variable rate debt or
our variable rate assets reprice on a different schedule or in relation to a
different index than any floating rate debt which in turn could impact potential
returns to shareholders. See "Item 3--Quantitative and Qualitative Disclosures
about Market Risk."
At September 30, 1999, we had total consolidated secured indebtedness of
$170.6 million, a reserve relating to the provision for the potential resolution
of disputes with WFSG of $4.1 million, accrued interest payable of
$1.0 million, accrued management fee of $0.7 million, a dividend payable of
$4.6 million, as well as $1.4 million of other liabilities. The consolidated
secured indebtedness consisted of (i) $82.4 million of repurchase agreements,
(ii) lines of credit aggregating $39.2 million which are secured by loans and
securities and (iii) $49.0 million outstanding of other borrowings maturing
between 2000 and 2008 which are secured by real estate.
We often finance acquisitions of mortgage-backed securities through
uncommitted thirty-day repurchase agreements with major Wall Street investment
banks. Loans are financed through short-term warehouse facilities or
intermediate term loans. Warehouse agreements are secured lending arrangements.
If the value of the assets securing the loan declines as determined by the
lender, the lender may request that the amount of the loan be reduced by cash
payments from the borrower or additional collateral be provided by the borrower
(generally know as "collateral calls"). Accordingly, in an environment where
lenders consistently mark down the value of the underlying assets, a borrower
can become subject to collateral calls, which can have a significant impact on
liquidity. Similarly, if interest rates increase significantly, the borrowing
cost under the short-term warehouse agreement may also increase while the
interest rate on the assets securing the loan may not increase at the same time
or to the same degree. Real property acquisitions are financed with intermediate
or long-term mortgages with banks and other financial institutions.
Repurchase agreements are secured lending arrangements which involve the
borrower selling an asset to a lender at a fixed price with the borrower having
an obligation to repurchase the asset within a specified period (generally
30 days) at a higher price reflecting the interest cost of the loan. As with
warehouse agreements, if the lender marks the asset lower, the lender may
request that the amount of the loan be reduced by cash payments from the
borrower or additional collateral be provided by the borrower (generally known
as "collateral calls"). Mortgage-backed securities which are subject to
repurchase agreements, as well as loans which secure other indebtedness,
periodically are revalued by the lender, and a decline in the value that is
recognized by the lender (whether or not the lender recognizes the full fair
value of the security) may result in the lender requiring us to provide
additional collateral to secure the indebtedness. As of September 30, 1999, the
Company had approximately $105.7 million of indebtedness under the terms of
which the lender could request additional collateral if the value of the
underlying collateral declined. Although the Company believes that the
likelihood of significant declines in asset values has decreased since the
fourth quarter of 1998, the Company is seeking to maintain a larger cash
position and more unencumbered assets to deal with future potential collateral
calls. In addition, the Company is seeking to refinance some of this
indebtedness with longer-term indebtedness which would not be subject to the
same collateral calls.
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.
27
<PAGE>
Based on our monthly interest and other expenses, monthly cash receipts and
collateral calls through October 31, 1999, we believe that our existing sources
of funds will be adequate for purposes of meeting our short-term liquidity
needs. There can be no assurance that this will be the case, however. Material
increases in interest expense from variable rate funding sources, collateral
calls, or material decreases in monthly cash receipts, generally would
negatively impact our liquidity. On the other hand, material decreases in
interest expense from variable rate funding sources or in collateral calls
generally would positively affect our liquidity.
YEAR 2000 COMPLIANCE
Many existing computer software programs and other technologically dependent
systems use two digits to identify the year in date fields and, as such, could
fail or create erroneous results by or at the Year 2000. We, WRSC and the
companies that service our loan portfolio (our "Servicers") utilize a number of
technologically dependent systems to operate, service mortgage loans and manage
mortgage assets. WRSC, 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 WRSC 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 WRSC 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, retesting, implementation and certification were completed.
WRSC and our Servicers 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, WRSC'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 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.
Our operations were overseen by WRSC, and in accordance with the management
agreement, all operating costs including costs related to the Year 2000 issue
were covered in the management fee agreement. 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, WRSC's parent
company's 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.
28
<PAGE>
Our most likely worst case Year 2000 scenario would be one in which our
Servicers 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 WRSC
and the Company 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 WRSC has advised us that it believes 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 WRSC's 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 Committee's Year 2000 readiness project, we are
confident that we, WRSC, and our Servicers have/or are appropriately addressing
the Year 2000 issues. Critical IT systems supplied by outside vendors have
undergone testing not only by WRSC and our Servicers, but by other customers of
the vendors as well. WCC's 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. The Company
does not expect the disputes between WREI and WFSG to have a material effect on
Y2K risk.
The Company also owns mortgage-backed securities which are serviced by
mortgage loan servicers other than WFSG entities. These mortgage loan servicers
consist primarily of Norwest, General Electric Capital Mortgage Services,
Residential Funding Corporation, and Bank of America. We have not done a Y2K
analysis of these entities but understand that these entities have been reviewed
extensively by their other customers, rating agencies, and in some cases,
government regulatory agencies.
29
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices, and equity prices. The
primary market risk to which the Company is exposed is interest rate risk, which
is highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations, and
other factors beyond the control of the Company. Changes in the general level of
interest rates can affect the Company's net interest income, which is the
difference between the interest income earned on interest-earning assets and the
interest expense incurred in connection with its interest-bearing liabilities,
by affecting the spread between the Company's interest-earning assets and
interest-bearing liabilities. Changes in the level of interest rates also can
affect, among other things, the ability of the Company to acquire loans, the
value of the Company's mortgage-backed securities and other interest-earning
assets, and its ability to realize gains from the sale of such assets.
It is the objective of the Company to attempt to control risks associated
with interest rate movements. In general, the Company's strategy is to limit its
exposure to earnings variations and variations in the value of assets and
liabilities as interest rates change over time. The Company's asset and
liability management strategy is formulated and monitored regularly to review,
among other things, the sensitivity of the Company's assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and securitization activity, and maturities of
investments and borrowings.
The following table quantifies the potential changes in net interest income
and net portfolio value, at September 30, 1999, should interest rates go up or
down (shocked) by 100 to 400 basis points, assuming the yield curves of the rate
shocks will be parallel to each other. Net portfolio value is calculated as the
sum of the value of off-balance sheet instruments and the present value of cash
in-flows generated from interest-earning assets net of cash out-flows in respect
of interest-bearing liabilities. The cash flows associated with the loan
portfolios and securities available for sale are calculated based on prepayment
and default rates that vary by asset. Projected losses, as well as prepayments,
are generated based upon the actual experience with the subject pool, as well as
similar, more seasoned pools. To the extent available, loan characteristics such
as loan-to-value ratio, interest rate, credit history and product types are used
to produce the projected loss and prepayment assumptions that are included in
the cash flow projections of the securities. Actual results could differ
significantly from those estimated in the table.
<TABLE>
<CAPTION>
PROJECTED PERCENT CHANGE IN
- --------------------------------------------------------------------
CHANGE IN INTEREST RATES NET INTEREST INCOME NET PORTFOLIO VALUE
- ------------------------ ------------------- -------------------
<S> <C> <C>
-400 Basis Points 35.6% 20.0%
-300 Basis Points 26.7% 14.1%
-200 Basis Points 17.8% 10.1%
-100 Basis Points 8.9% 6.1%
0 Basis Points 0.0% 0.0%
100 Basis Points (8.9%) (2.0%)
200 Basis Points (17.8%) (6.0%)
300 Basis Points (26.7%) (10.0%)
400 Basis Points (35.6%) (13.8%)
</TABLE>
Asset and liability management involves managing the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
the Company's strategy is to match asset and liability balances within maturity
categories to limit its exposure to earnings variations in the value of assets
and liabilities as interest rates change over time.
30
<PAGE>
The Company's Asset and Liability Committee is authorized to utilize a wide
variety of off-balance sheet financial techniques to assist us in the management
of interest rate risk. In hedging the interest rate and exchange rate exposure
of a foreign currency denominated asset or liability, we may enter into hedge
transactions to counter movements in the different currencies as well as
interest rates in those currencies. No such techniques were in use as of
September 30, 1999.
Methods for evaluating interest rate risk include an analysis of the
Company's interest rate sensitivity "gap", which is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities. A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Since different
types of assets and liabilities with the same or similar maturities may react
differently to changes in overall market rates or conditions, changes in
interest rates may affect net interest income positively or negatively even if
an institution were perfectly matched in each maturity category.
The following table sets forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at
September 30, 1999.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------
(DOLLARS IN THOUSANDS)
ONE
WITHIN 4 TO 12 YEAR TO MORE THAN
3 MONTHS MONTHS 3 YEARS 3 YEARS TOTAL
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
INTEREST SENSITIVE ASSETS (1):
Cash and cash equivalents.................. $ 7,802 $ -- $ -- $ -- $ 7,802
Securities available for sale (2).......... 8,993 -- -- 96,094 105,087
Loans(3)................................... 25,199 596 397 5,393 31,585
Notes receivable from WFSG................. -- -- -- 10,977 10,977
-------- -------- -------- -------- --------
Total rate sensitive assets................ $ 41,994 $ 596 $ 397 $112,464 $155,451
======== ======== ======== ======== ========
INTEREST SENSITIVE LIABILITIES:
Short-term borrowings:
Reverse repurchase agreements............ $ 85,779 $ -- $ -- $ -- $ 85,779
Notes payable............................ 35,883 -- -- -- 35,883
Other borrowings........................... -- 1,082 -- 47,904 48,986
Dividends payable.......................... 4,600 -- -- -- 4,600
-------- -------- -------- -------- --------
Total rate sensitive liabilities........... $126,262 $ 1,082 $ -- $ 47,904 $175,248
======== ======== ======== ======== ========
Interest rate sensitivity gap.............. $(84,268) $ (486) $ 397 $ 64,560
Cumulative interest rate sensitivity gap... $(84,268) $(84,754) $(84,357) $(19,797)
Cumulative interest rate sensitivity gap
As a percentage of total rate sensitive
assets................................. (54%) (55%) (54%) (13%)
</TABLE>
- ------------------------
(1) Real estate property holdings are not considered interest rate sensitive. At
September 30, 1999 the Company had $69.4 million of real estate property
holdings.
(2) Includes U.S. Treasury Bill maturing in October 1999.
(3) Discounted (non-performing) loans are assumed to be converted to cash at a
constant rate over 18 months.
In hedging the interest rate and exchange rate exposure of a foreign
currency denominated asset or liability, the Company may enter into hedge
transactions to counter movements in the different currencies as well as
interest rates in those currencies. These hedges may be in the form of currency
and interest rate swaps, options, and forwards, or combinations thereof. No such
instruments were in use as of September 30, 1999.
31
<PAGE>
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE
FILINGS BY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. FORWARD- LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS
(SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL) MAY BE IDENTIFIED BY REFERENCE
TO A FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY,
SUCH AS "MAY," "WILL," "BELIEVE," "EXPECT," "ANTICIPATE," "CONTINUE," OR SIMILAR
TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING
STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
RELATED TO THE ECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH
THE COMPANY OPERATES, COMPETITIVE PRODUCTS AND PRICING, FISCAL AND MONETARY
POLICIES OF THE U.S. GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES,
ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK MANAGEMENT,
ASSET/LIABILITY MANAGEMENT, YEAR 2000 COMPLIANCE ISSUES, THE FINANCIAL AND
SECURITIES MARKETS AND UNLESS OTHERWISE REQUIRED BY LAW, THE AVAILABILITY OF AND
COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY. THE COMPANY DOES NOT UNDERTAKE, AND
SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS.
32
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Except as set forth below, the registrant is not a party to any other
material legal proceedings. The Company recently decided to become internally
managed, and this has resulted in disputes between the Company, on the one hand,
and WRSC and WFSG on the other. Until recently, the Company's business and
investment affairs have been managed by WRSC pursuant to a management agreement,
and the Company has received managerial and administrative services from WRSC
thereunder. Accordingly, during this period, the Company has had no employees
and instead has relied on WRSC for management, facilities, reporting, and other
services. WRSC itself is a shell company and has no employees. WFSG provided
managerial and administrative services to WRSC to allow it to fulfil its
obligations under the management agreement.
WFSG has experienced financial difficulties resulting in its bankruptcy
restructuring. On March 3, 1999, WFSG submitted a prepackaged plan of
reorganization as part of a Chapter 11 bankruptcy filing in the Federal Court of
Wilmington, Delaware. On April 12, 1999, the WFSG restructuring plan was
approved by the Bankruptcy Court, and on June 10, 1999, WFSG emerged from
bankruptcy pursuant to the restructuring plan. See Note 6 of Notes to
Consolidated Financial Statements for discussion of accounting matters related
to this restructuring.
Prior to WFSG's reorganization, Wilshire Credit Corporation ("Old WCC"), an
affiliate of WFSG, provided loan and real property servicing to the Company. As
part of the Restructuring Plan, the servicing operations conducted by Old WCC
were transferred to WCC Inc. ("WCC"), a newly formed company controlled by WFSG.
Relations between WFSG and the Company declined as the Company was not
allowed to fully participate in the restructuring of WFSG and did not obtain any
representation on WFSG's new board of directors despite a 14.4% ownership
interest. On August 19, 1999, the Company was notified that WFSG had suspended
its Chief Executive Officer, Andrew Wiederhorn, and its President, Lawrence
Mendelsohn, from their duties as employees of WFSG and its subsidiaries and
terminated their employment with WFSG and its subsidiaries purportedly for cause
on September 3, 1999. Mr. Wiederhorn and Mr. Mendelsohn were also terminated as
Chief Executive Officer and President of WRSC. The Company and its independent
directors have long considered that Mr. Wiederhorn and Mr. Mendelsohn are key
personnel on which the stability and future growth of the Company are dependent.
As the principal architects of the development of both WFSG and the Company,
Mr. Wiederhorn and Mr. Mendelsohn are familiar with the Company's strengths and
weaknesses, have a firm understanding of the complex real estate and financial
markets in which the Company operates, have longstanding relationships within
the industry (and in particular with the Company's lenders) and are familiar
with the Company's assets (including its portfolio of subordinated
mortgage-backed securities) and its liabilities (including short-term repurchase
agreements). Accordingly, the independent directors of the Company believe that
the termination of Mr. Wiederhorn and Mr. Mendelsohn had a material, adverse
effect on WRSC's ability to perform its obligations under the management
agreement.
On August 20, 1999, the Company filed a lawsuit against WFSG in the Circuit
Court of the State of Oregon for Multnomah County. On August 23, 1999, the
Company filed an amended Complaint in the lawsuit adding as additional
defendants WRSC, WCC, a 50.01% subsidiary of WFSG, and Wilshire Management
Leasing Company ("WML"), a wholly-owned subsidiary of WFSG alleging: (1) the
termination of Wiederhorn and Mendelsohn made WFSG and WRSC unable and/or
unwilling to provide management to the Company as required under the Management
Agreement; (2) the inability of WFSG and WRSC to manage the Company's business
affairs triggered application of a facilities sharing agreement dated
February 19, 1999 between the Company, WFSG, WRSC, WCC, and WML (the "Facilities
Sharing Agreement"); and (3) WFSG's refusal to allow Wiederhorn and Mendelsohn
access to WFSG's facilities, personnel, and equipment for the Company's business
violated the terms of the
33
<PAGE>
Facilities Sharing Agreement. Messrs. Wiederhorn and Mendelsohn have also
brought suit against WFSG and its directors alleging wrongful termination and
defamation. The Facilities Sharing Agreement had been entered into by the
parties to provide for the orderly transition of the Company's management in the
event the management agreement was no longer operative and the Company was to
become internally, rather than externally, managed. Under the Facilities Sharing
Agreement, WFSG, WRSC, and the other parties were required to provide to the
Company, for a period of two years, the facilities, services, equipment, and
personnel necessary for the Company to internally manage itself, in return for
the payment by the Company of the pro-rata cost to provide facilities, services,
equipment, and personnel. On September 22, 1999, WFSG and WRSC filed papers in
the above litigation alleging various affirmative defenses and counterclaims,
including allegations that the Facilities Sharing Agreement was not in effect
and was unenforceable, and that the Company breached the management agreement,
obligating the Company to pay a termination fee.
On September 22, 1999, the Company sent a letter to WRSC reserving its
rights with respect to prior declarations of default by WRSC, and providing
formal notice of non-renewal and termination "for cause" of the management
agreement. The letter outlined various breaches of the management agreement by
WRSC, including: failing to provide competent management to the Company; failing
to provide necessary services and facilities; and taking actions contrary to the
interests of the Company. WRSC has disputed the characterization of the
termination as one "for cause" and has claimed that under the management
agreement it is entitled to a termination fee (a sum equal to the management
fees paid to WRSC for the preceding twelve months) from the Company.
Notwithstanding the foregoing, the Company has sought to discuss the parties'
disagreements with a view to reaching an amicable arrangement for severing the
relationships between WFSG and the Company. As a result of the Company's
overtures, the Company and WFSG began discussions to resolve their differences
in late September. There can be no assurance that these discussions will result
in a resolution of these disagreements. In connection with this matter, the
Company, without admission, recorded a provision for potential resolution of
disputes with WFSG of $4.1 million as of September 30, 1999.
As part of the Company's decision to become independently managed as
described above, the Company has entered into employment agreements with Andrew
Wiederhorn, as Chairman and Chief Executive Officer; Lawrence Mendelsohn, as
President; Chris Tassos, as Chief Financial Officer and Executive Vice
President; Richard Brennan, as Executive Vice President; and Robert Rosen, as
Executive Vice President.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 10, 1999, at the annual stockholders' meeting, the Company's
shareholders voted 8,055,504 to 20,481, with 5,372 abstentions, not to elect
Real Estate Investment Trust (REIT) status for the Company.
The stockholders also ratified the appointment of Arthur Andersen LLP as the
independent accountants for the fiscal year ending December 31, 1999, (with
10,050,890 shares voting for, 60,711 shares voting against, and 5,847 shares
abstaining). On November 12, 1999, the Board of Directors of the Company
appointed the firm of Ernst & Young LLP to replace Arthur Andersen LLP as the
principal accountant to audit the Company's financial statements. Arthur
Andersen LLP was replaced due to a potential conflict
34
<PAGE>
of interest with the services it performs for Wilshire Realty Services
Corporation ("WRSC"), the Company's former manager, and Wilshire Financial
Services Group Inc. ("WFSG"), the parent of WRSC.
The stockholders also voted to change the Company's name from Wilshire Real
Estate Investment Trust Inc. to Wilshire Real Estate Investment Inc. (with
7,976,112 shares voting for, 25,961 voting against, and 5,772 shares
abstaining).
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Report on 8-K during and after the three months ended September 30,
1999:
Report on Form 8-K dated August 19, 1999, reporting the Company's
determination to become internally managed and its termination of its
management agreement with Wilshire Realty Services Corporation.
Report on Form 8-K dated November 15, 1999 reporting the replacement of
Arthur Andersen LLP as the independent accountant and appointment of
Ernst & Young LLP to serve in that capacity.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the exchange act, the registrant has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C> <C>
WILSHIRE REAL ESTATE INVESTMENT INC.
By: /s/ LAWRENCE A. MENDELSOHN
-----------------------------------------
Lawrence A. Mendelsohn
President
By: /s/ CHRIS TASSOS
-----------------------------------------
Chris Tassos
Executive Vice President and Chief
Financial Officer
</TABLE>
Date: November 22, 1999
36
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
(A Stock Corporation)
Wilshire Real Estate Investment Trust Inc., a Maryland corporation having
its principal office in the State of Maryland in Baltimore City, Maryland
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland (the "SDAT") that:
FIRST: The Charter of the Corporation is hereby amended and restated in its
entirety as follows:
I.
The name of the corporation (which is hereinafter called the "Corporation")
is:
WILSHIRE REAL ESTATE INVESTMENT INC.
II.
The purpose for which this Corporation is formed is to transact any and all
lawful act or activity for which corporations may be organized under the General
Laws of the State of Maryland now or hereafter in force.
III.
The total number of shares of stock of all classes which the Corporation
has authority to issue is 225,000,000 shares of capital stock (par value $.0001
per share), of which 200,000,000 shares are initially classified as "Common
Stock" and 25,000,000 shares are initially classified "Preferred Stock." The
aggregate par value of all authorized shares of stock having par value is
$22,500. The Board of Directors may classify and reclassify any unissued shares
of capital stock by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such shares of capital stock.
<PAGE>
No holder of any stock or any other securities of the Corporation, whether
now or hereafter authorized, shall have any preemptive right to subscribe for or
purchase any stock or any other securities of the Corporation, including,
without limitation: (i) any shares of any class of the Corporation; (ii) any
warrants, rights, or options to purchase any such shares; or (iii) any
securities or obligations convertible into any such shares or into warrants,
rights, or options to purchase any such shares.
The Board of Directors is hereby empowered to authorize the issuance from
time to time of shares of its stock of any class, whether now or hereafter
authorized, or securities convertible into shares of its stock of any class or
classes, whether now or hereafter authorized, for such consideration as may be
deemed advisable by the Board of Directors and without any action by the
stockholders. Also, the Preferred Stock may be issued from time to time by the
Board of Directors of the Corporation, in such series and with such preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or other provisions as may be fixed by the Board of
Directors without any action by the stockholders.
IV.
The present address of the principal office of the Corporation in this
State is 11 East Chase Street, Suite 9E, Baltimore, Maryland 21202.
V.
The name and address of the resident agent of the Corporation in this State
are CSC-Lawyers Incorporating Service Company, 11 East Chase Street, Suite 9E,
Baltimore, Maryland 21202. Said resident agent is a Maryland corporation.
2
<PAGE>
VI.
A. The number of directors of the Corporation shall be five (5), which
number may be increased or decreased pursuant to the Bylaws of the Corporation;
provided that in no case shall the Board of Directors consist of less than three
(3) or more than nine (9) members unless otherwise determined from time to time
by resolution adopted by the affirmative vote of at least eighty percent (80%)
of the members of the Board of Directors; provided further that in any case the
number of directors of the Corporation shall never be less than the minimum
number permitted by the General Laws of the State of Maryland now or hereafter
in force. Any director, or the entire Board of Directors, may be removed from
office at any time, but only for cause and then only by the affirmative vote of
not less than two-thirds (2/3) of all the votes entitled to be cast by the
outstanding shares of capital stock of the Corporation generally in the election
of directors which are cast on the matter at any meeting of the stockholders
called for that purpose, voting together for this purpose as a single class. A
director need not be a stockholder. At each annual meeting of the stockholders,
the stockholders shall elect directors to serve a one (1) year term and until
successors are elected and qualify.
B. The following Persons are the current directors of the Corporation, to
serve until their successors are elected and qualified: Andrew Wiederhorn,
Lawrence Mendelsohn, David Egelhoff, Jordan Schnitzer and Patrick Terrell.
C. Notwithstanding anything herein to the contrary, at all times (except
during a period not to exceed sixty (60) days following the death, resignation,
incapacity, or removal from office of a director prior to expiration of the
director's term of office), a majority of the Board of Directors shall be
"Independent Directors." "Independent Director" shall mean a director who,
within the last two years, has not (i) been employed by WFSG or any of its
Affiliates, (ii) been an officer or director of WFSG or any of its Affiliates,
(iii) or whose business or employer within the last two years has not performed
services for WFSG or any of its Affiliates that annually exceeded the lesser of
(a) the dollar amount provided in Item 404(a) of Regulation S-K or (b) 10% of
the gross revenue of the entity that provided such services, or (iv) had any
material business or professional relationship with WFSG or any of its
Affiliates. "WFSG" shall mean Wilshire Financial Services Group Inc., a Delaware
corporation. "Affiliate" shall mean (i) any person directly or indirectly
owning, controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling, controlled by, or under common control with
such other person, (iv) any executive officer, director, trustee or general
partner of such other person, and (v) any legal entity for which such person
acts as an executive officer, director, trustee or general partner. The term
"person means" and includes any natural person, corporation, partnership,
association, limited liability company or any other legal entity. An indirect
relationship shall include circumstances in which a person's spouse, children,
parents,
3
<PAGE>
siblings or mothers-, fathers-, sisters- or brothers-in-law is or has been
associated with a person.
D. To the extent permitted by applicable law, and subject to such
approval of the Independent Directors and such other conditions, if any, as
may be required by any applicable law or other applicable rule or regulation,
the Board of Directors may engage a manager to advise the Board of Directors
and be responsible for directing the day-to-day affairs of the Corporation (a
"Manager") pursuant to a written agreement (a "Management Agreement"). The
approval of any Management Agreement and the renewal or termination thereof
shall require the affirmative vote of a majority of the Independent Directors.
E. A majority of the Independent Directors shall approve general
guidelines ("Guidelines") for the Corporation's investments, borrowings and
operations, and the Independent Directors shall conduct a quarterly review of
all transactions engaged in by the Corporation. The Independent Directors shall
approve any transactions with WFSG or any Affiliate of WFSG, in advance, to
insure compliance with the Guidelines.
F. Notwithstanding any other provisions of the Charter or the Bylaws of
the Corporation (and notwithstanding that some lesser percentage may be
specified by law, the Charter or the Bylaws of the Corporation), the provisions
of this Article VI shall not be amended, altered, changed, or repealed, and no
provision inconsistent with this Article VI shall be adopted, without the
affirmative vote of at least eighty percent (80%) of the members of the Board of
Directors and by the affirmative vote of not less than two-thirds (2/3) of all
the votes entitled to be cast by the outstanding shares of capital stock of the
Corporation generally in the election of directors which are cast on the matter
at any meeting of the stockholders called for that purpose, voting together for
this purpose as a single class.
VII.
A. The Corporation shall indemnify (A) its directors and officers,
whether serving the Corporation or, at its request, any other entity, to the
full extent required or permitted by the General Laws of the State of Maryland
now or hereafter in force, including the advance of expenses under the
procedures and to the full extent permitted by law and (B) other employees and
agents to such extent as shall be authorized by the Board of Directors of the
Corporation or the Corporation's Bylaws and be permitted by law. The foregoing
rights of indemnification shall not be exclusive of any other rights to which
those seeking indemnification may be entitled. The Board of Directors may take
such action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve, and amend from time to time such bylaws,
resolutions, or contracts, implementing such provisions or such further
indemnification arrangements as may be permitted by law. No amendment of the
Charter of the Corporation or repeal of any of its provisions shall limit or
eliminate the right to indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal.
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B. To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no director or officer of this Corporation shall
be personally liable to the Corporation or its stockholders for money damages.
No amendment of the Charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the limitation on liability provided to
directors and officers hereunder with respect to any act or omission occurring
prior to such amendment or repeal.
VIII.
The Corporation shall not, without the affirmative vote of at least
eighty percent (80%) of the members of the Board of Directors and the
affirmative vote of a majority of shares present in person or represented by
proxy and entitled to vote on the matter at any meeting of the stockholders
called for that purpose at which a quorum is present, seek to elect to be taxed
as a real estate investment trust ("REIT") under Section 856 under the Internal
Revenue Code of 1986, as amended from time to time (the "Code"). However, in the
event the Board of Directors and the stockholders should so vote, (i) it shall
be the duty of the Board of Directors to ensure that the Corporation satisfies
the requirements for qualification as a REIT under the Code, including, but not
limited to, the ownership of its outstanding stock, the nature of its assets,
the sources of its income, and the amount and timing of its distributions to its
stockholders, and (ii) the Board of Directors shall take no action thereafter to
disqualify the Corporation as a REIT or to otherwise revoke the Corporation's
election to be taxed as a REIT without the affirmative vote of at least eighty
percent (80%) of the members of the Board of Directors and the affirmative vote
of a majority of shares present in person or represented by proxy and entitled
to vote on the matter at any meeting of the stockholders called for that purpose
at which a quorum is present.
IX.
A. Restrictions on Transfer.
1. Definitions. The following terms shall have the
following meanings:
"Beneficial Ownership" shall mean ownership of shares of
Equity Stock by a Person who would be treated as an owner of such shares of
Equity Stock either directly or indirectly through the application of Section
544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have
correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or
more organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the
Corporation as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section (B)(1) of Article IX hereof.
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"Board of Directors" shall mean the Board of Directors of
the Corporation.
"Closing Price" on any date shall mean the average of the high
bid and low asked prices in the over-the-counter market, as reported by The
Nasdaq Stock Market, or, if such system is no longer in use, the principal other
automated quotations system that may then be in use or, if the shares of Equity
Stock are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the shares of Equity Stock selected by the Board of Directors.
"Constructive Ownership" shall mean ownership of shares of
Equity Stock by a Person who would be treated as an owner of such shares of
Equity Stock either directly or indirectly through the application of Section
318 of the Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructive Owner," "Constructively Owns," and "Constructively Owned" shall
have correlative meanings.
"Disqualified Person" means (A) the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, (B) any
organization (other than a cooperative described in Section 521 of the Code)
which is exempt from tax unless such organization is subject to the tax imposed
by Section 511 of the Code, and (C) any organization described in Section
1381(a)(2)(c) of the Code.
"Equity Stock" shall mean Preferred Stock and Common Stock of
the Corporation. The term "Equity Stock" shall include all shares of Preferred
Stock and Common Stock of the Corporation that are held as Shares-in-Trust in
accordance with the provisions of Section (B) of Article IX hereof.
"Market Price" on any date shall mean the average of the
Closing Price for the five consecutive Trading Days ending on such date.
"Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause any Person to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limit,
including, but not limited to, the granting of any option or entering into any
agreement for the sale, transfer, or other disposition of shares of Equity Stock
or the sale, transfer, assignment, or other disposition of any securities or
rights convertible into or exchangeable for shares of Equity Stock.
"Operating Partnership" shall mean Wilshire Real Estate
Partnership L.P., a Delaware limited partnership.
"Operating Partnership Agreement" shall mean the agreement of
limited partnership governing the Operating Partnership.
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"Ownership Limit" shall mean the restriction on ownership (or
deemed ownership by virtue of the attribution provisions of the Code) of more
than 9.8% of the number of shares or value (whichever is more restrictive) of
the outstanding Common Stock by any Person other than Wilshire Financial
Services Group Inc., a Delaware corporation ("WFSG"), or twenty percent (20%) of
the number of shares or value (whichever is more restrictive) of Common Stock by
WFSG (provided that the Board of Directors has obtained representations and
undertakings from WFSG in form and substance satisfactory to the Board of
Directors in its sole discretion as it may deem necessary or advisable in order
to determine that WFSG's Beneficial Ownership or Constructive Ownership will not
impair the Corporation's status as a REIT and provided further that WFSG agrees
that any actual or attempted violation of such representations or undertakings
(or other action which is contrary to the restrictions contained in Section
(A)(2) of Article IX hereof) will result in the transfer of such Equity Stock to
a Trustee in his capacity as trustee of a Trust in accordance with Section
(A)(3) of Article IX hereof) or 9.8% of the number of shares or value (whichever
is more restrictive) of the outstanding Preferred Stock (or such other number or
value of Preferred Stock as the Board of Directors may determine in fixing the
terms of the Preferred Stock). In determining the Ownership Limit, the number
and value of Common Stock and/or Preferred Stock of the Corporation shall be
determined by the Board in good faith, which determination shall be conclusive
for all purposes hereof.
"Permitted Transferee" shall mean any Person designated as a
Permitted Transferee in accordance with the provisions of Section (B)(5) of
Article IX hereof.
"Person" shall mean an individual, corporation, limited
liability company, partnership, estate, trust, a portion of a trust permanently
set aside for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the meaning of
Section 509(a) of the Code, joint stock company, or other entity and also
includes a "group" as that term is used for purposes of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended.
"Prohibited Owner" shall mean, with respect to any purported
Transfer or Non-Transfer Event, any Person who, but for the provisions of
Section (A)(3) of Article IX hereof, would be the actual owner (within the
meaning of Treasury Regulation Section 1.857-8(b)) of shares of Equity Stock.
"Redemption Rights" shall mean the rights granted under the
Operating Partnership Agreement to the limited partners to redeem, under certain
circumstances, their limited partnership interests for shares of Common Stock
(or cash at the option of the Corporation).
"REIT Disqualification Meeting" shall mean an annual or
special meeting of the stockholders of the Corporation at which a proposal to
delete provisions of the Articles of Incorporation that require the Corporation
to elect to be taxed as a REIT is approved by the
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affirmative vote of not less than two-thirds (2/3) of all the votes entitled
to be cast by the outstanding shares of the capital stock of the Corporation
on the matter, voting together for this purpose as a single class.
"Restriction Termination Date" shall mean (A) if the
Corporation has elected not to be taxed as a REIT, the first day after at least
80% of the Board of Directors determines in writing that it is no longer in the
best interests of the Corporation to retain the restrictions on transfer and
ownership contained in Article IX; or (B) if the Corporation has elected to be
taxed as a REIT, the first day after (i) at least 80% of the Board of Directors
determines in writing that it is no longer in the best interests of the
Corporation to retain the restrictions on transfer and ownership contained in
Article IX and (ii) such restrictions are no longer required for the Corporation
to qualify, or to continue to qualify, as a REIT.
"Shares-in-Trust" shall mean any shares of Equity Stock
designated Shares-in-Trust pursuant to Section (A)(3) of Article IX hereof.
"Tax Benefits" shall mean the Corporation's net operating loss
carryforwards, capital loss carryforwards and built-in losses.
"Tenant" shall mean any Person (other than an individual) from
whom the Corporation derives (or is deemed to derive for purposes of applying
Section 856 of the Code to the Corporation), directly or indirectly, gross
income.
"Tenant Interest" shall mean an interest, expressed as a
percentage, of the total combined voting power or total number of shares of all
classes of stock of a Tenant that is a corporation, or an interest, expressed as
a percentage, of the assets or net profits (within the meaning of Section
856(d)(2)(B) of the Code) of a Tenant that is not a corporation.
"Trading Day" shall mean any day other than a Saturday, a
Sunday, or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
"Transfer" shall mean any sale, transfer, gift, assignment,
devise, or other disposition of shares of Equity Stock, whether voluntary or
involuntary, whether of record, constructively or beneficially, and whether by
operation of law or otherwise.
"Trust" shall mean any separate trust created pursuant to
Section (A)(3) of Article IX hereof and administered in accordance with the
terms of Section (B) of Article IX hereof, for the exclusive benefit of any
Beneficiary.
"Trustee" shall mean any Person or entity unaffiliated with
both the Corporation and any Prohibited Owner, such Trustee to be designated by
the Corporation to act as trustee of any Trust, or any successor trustee
thereof.
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2. Restriction on Transfers.
a. Except as provided in Section (A)(7) of
Article IX hereof, from the date of a REIT Disqualification Meeting and prior
to the Restriction Termination Date, (i) no Person shall Beneficially Own or
Constructively Own outstanding shares of Equity Stock in excess of the
Ownership Limit and (ii) any Transfer that, if effective, would result in any
Person Beneficially Owning or Constructively Owning shares of Equity Stock in
excess of the Ownership Limit shall be void AB INITIO as to the Transfer of
that number of shares of Equity Stock which would be otherwise Beneficially
Owned or Constructively Owned by such Person in excess of the Ownership
Limit, and the intended transferee shall acquire no rights in such excess
shares of Equity Stock.
b. Except as provided in Section (A)(7) of
Article IX hereof, from the date of a REIT Disqualification Meeting and prior
to the Restriction Termination Date, any Transfer that, if effective, would
result in shares of Equity Stock being beneficially owned by fewer than 100
Persons (determined without reference to any rules of attribution) shall be
void AB INITIO as to the Transfer of that number of shares which would be
otherwise beneficially owned (determined without reference to any rules of
attribution) by the transferee, and the intended transferee shall acquire no
rights in such shares of Equity Stock.
c. From the date of a REIT Disqualification
Meeting and prior to the Restriction Termination Date, any Transfer of shares
of Equity Stock that, if effective, would result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code shall be void
AB INITIO as to the Transfer of that number of shares of Equity Stock which
would cause the Corporation to be "closely held" within the meaning of
Section 856(h) of the Code, and the intended transferee shall acquire no
rights in such shares of Equity Stock.
d. From the date of a REIT Disqualification
Meeting and prior to the Restriction Termination Date, any Transfer of shares
of Equity Stock that, if effective, would cause the Corporation to
Constructively Own a Tenant Interest of ten percent (10%) or more shall be
void AB INITIO as to the Transfer of that number of shares of Equity Stock
which would cause the Corporation to Constructively Own a Tenant Interest of
ten percent (10%) or more and the intended transferee shall acquire no rights
in such excess shares of Equity Stock.
e. From the date of a REIT Disqualification
Meeting and prior to the Restriction Termination Date, any Transfer of shares
of Equity Stock that, if effective, would result in shares of Equity Stock
being Beneficially Owned by a Disqualified Person shall be void AB INITIO as
to the Transfer of that number of shares which would be otherwise
Beneficially Owned by the transferee, and the intended transferee shall
acquire no rights in such shares of Equity Stock.
f. It is expressly intended that the
restrictions on ownership and Transfer described in this Section (A)(2) of
Article IX shall apply to the Redemption Rights.
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Notwithstanding any of the provisions of the Operating Partnership Agreement
to the contrary, a partner of the Operating Partnership shall not be entitled
to effect an exchange of an interest in the Operating Partnership for Common
Stock if the Beneficial Ownership or Constructive Ownership of Common Stock
would be prohibited under the provisions of this Article IX.
3. Transfer to Trust.
a. If, notwithstanding the other provisions
contained in this Section (A) of Article IX, at any time after a REIT
Disqualification Meeting and prior to the Restriction Termination Date, there
is a purported Transfer or Non-Transfer Event such that any Person would
either Beneficially Own or Constructively Own shares of Equity Stock in
excess of the Ownership Limit, then, (i) except as otherwise provided in
Section (A)(7) of Article IX hereof, the purported transferee shall acquire
no right or interest (or, in the case of a Non-Transfer Event, the actual
owner (within the meaning of Treasury Regulation Section 1.857-8(b)) of the
shares of Equity Stock Beneficially Owned or, Constructively Owned by such
Beneficial Owner or Constructive Owner, shall cease to own any right or
interest) in such number of shares of Equity Stock which would cause such
Beneficial Owner or Constructive Owner to Beneficially Own or Constructively
Own shares of Equity Stock in excess of the Ownership Limit, (ii) such number
of shares of Equity Stock in excess of the Ownership Limit (rounded up to the
nearest whole share) shall be designated Shares-in-Trust and, in accordance
with the provisions of Section (B) of Article IX hereof, transferred
automatically and by operation of law to a Trustee in his capacity as trustee
of a Trust to be held in accordance with that Section (B) of Article IX, and
(iii) the Prohibited Owner shall submit such number of shares of Equity Stock
to the Corporation for registration in the name of the Trustee. Such transfer
to a Trustee and the designation of shares as Shares-in-Trust shall be
effective as of the close of business on the business day prior to the date
of the Transfer or Non-Transfer Event, as the case may be.
b. If, notwithstanding the other provisions
contained in this Section (A) of Article IX (after application of paragraph
(a) above), at any time after a REIT Disqualification Meeting and prior to
the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would (i) result in the shares of
Equity Stock being Beneficially Owned by fewer than 100 Persons (determined
without reference to any rules of attribution), (ii) result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code, or (iii) cause the corporation to Constructively Own a Tenant Interest
of ten percent (10%) or more, or (iv) result in the shares of Equity Stock
being Beneficially Owned by a Disqualified Person, then (x) the purported
transferee shall not acquire any right or interest (or, in the case of a
Non-Transfer Event, the Person who, but for the provisions of this Section
(A)(3), would be the actual owner (within the meaning of Treasury Regulation
Section 1.857-8(b)) of the shares of Equity Stock with respect to which such
Non-Transfer Event occurred, shall cease to own any right or interest) in
such number of shares of Equity Stock, the ownership of which by such
purported transferee or purported actual owner would (A) result in the shares
of Equity Stock being beneficially owned by fewer
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than 100 Persons (determined without reference to any rules of attribution),
(B) result in the Corporation being "closely held" within the meaning of
Section 856(h) of the Code, (C) cause the Corporation to Constructively Own a
Tenant Interest of ten percent (10%) or more or (D) result in the shares of
Equity Stock being Beneficially Owned by a Disqualified Person, (y) such
number of shares of Equity Stock (rounded up to the nearest whole share)
shall be designated Shares-in-Trust and, in accordance with the provisions of
Section (B) of Article IX hereof, transferred automatically and by operation
of law to a Trustee in his capacity as trustee of a Trust to be held in
accordance with that Section (B) of Article IX, and (z) the Prohibited Owner
shall submit such number of shares of Equity Stock to the Corporation for
registration in the name of the Trustee. Such transfer to a Trustee in his
capacity as trustee of a Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the
business day prior to the date of the Transfer or Non-Transfer Event, as the
case may be.
4. Remedies for Breach. If the Corporation, or its designees,
shall at any time determine in good faith that a Transfer or Non-Transfer Event
has taken place that, if effective, would result in a violation of Section
(A)(2) of Article IX hereof or that a Person intends to acquire or has attempted
to acquire Beneficial Ownership or Constructive Ownership of any shares of
Equity Stock in violation of Section (A)(2) of Article IX hereof, the
Corporation shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or acquisition of Beneficial Ownership or
Constructive Ownership, including, but not limited to, causing the Corporation
to redeem shares of Equity Stock, refusing to give effect to such Transfer on
the books of the Corporation or instituting proceedings to enjoin such Transfer
or acquisition.
5. Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire Beneficial Ownership or Constructive Ownership of shares of
Equity Stock in violation of Section (A)(2) of Article IX hereof, or any Person
who owned shares of Equity Stock that were transferred to a Trustee in his
capacity as trustee of a Trust pursuant to the provisions of Section (A)(3) of
Article IX hereto, shall immediately give written notice to the Corporation of
such event and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer or Non-Transfer Event, as the case may be, on the Corporation's status
as a REIT.
6. Owners Required To Provide Information. From the date of a
REIT Disqualification Meeting and prior to the Restriction Termination Date:
a. Every Beneficial Owner or Constructive
Owner of more than five percent (5%), or such lower percentages as required
pursuant to regulations under the Code, of the outstanding shares of all
classes of capital stock of the Corporation shall, within thirty (30) days
after January 1 of each year, provide to the Corporation a written statement
or affidavit stating the name and address of such Beneficial Owner or
Constructive Owner, the number of shares of Equity Stock Beneficially Owned
or Constructively Owned, and a description of how such shares are held. Each
such Beneficial Owner or Constructive Owner shall provide to the
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Corporation such additional information as the Corporation may request in
order to determine the effect, if any, of such Beneficial Ownership or
Constructive Ownership on the Corporation's status as a REIT and to ensure
compliance with the restrictions on ownership set forth in this Article IX.
b. Each Person (including the stockholder of
record) who is holding shares of Equity Stock for a Beneficial Owner or
Constructive Owner shall provide to the Corporation a written statement or
affidavit stating such information as the Corporation may request in order to
determine the Corporation's status as a REIT and to ensure compliance with
the Ownership Limit.
7. Exceptions.
a. The provisions of Section (A)(2) of
Article IX hereof shall not apply to the acquisition of shares of Equity
Stock by an underwriter that participates in a public offering of such shares
or securities convertible into such shares for a period of ninety (90) days
following the purchase by such underwriter of such shares provided that the
restrictions contained in Section (A)(2) of Article IX hereof will not be
violated following the distribution by such underwriter of such shares.
b. The Board of Directors, in its sole
discretion, may exempt a Person from the restrictions set forth in Section
(A)(2) of this Article IX if:
(i) the Board of Directors obtains
such representations and undertakings from such Person as are deemed
by the Board of Directors to be reasonably necessary to ascertain
that no individual's Beneficial Ownership of shares of Equity Stock
will violate the restrictions set forth in Section (A)(2) of this
Article IX or that any such violation will not cause the Corporation
to fail to qualify as a REIT under the Code, and such Person agrees
that any actual or attempted violation of such representations or
undertakings (or other action which is contrary to the restrictions
contained in Section (A)(2) of this Article IX) will result in the
transfer of such Equity Stock to a Trustee in his capacity as
trustee of a Trust in accordance with Section (A)(3) of this Article
IX; or
(ii) such Person does not own, and
represents that it will not own, actually or Constructively, a
Tenant Interest that would cause the Corporation to own, actually or
Constructively, a Tenant Interest of more than 9.8%, the Corporation
obtains such other representations and undertakings from such Person
(or any other Person who could be treated as Constructively Owning
the Equity Shares actually or Constructively Owned by such Person)
as are deemed by the Board of Directors to be reasonably necessary
to ascertain this fact and such Person agrees that any actual or
attempted violation of such representations or undertakings will
result in the transfer of such Equity Stock to a Trustee in his
capacity as trustee of a Trust in accordance with
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Section (A)(3) of this Article IX. Notwithstanding the foregoing,
the inability of a Person to make the certification described in
this paragraph shall not prevent the Board of Directors, in its sole
discretion, from exempting such Person from the restrictions set
forth in Section (A)(2) of this Article IX if the Board of Directors
determines that the resulting application of Section 856(d)(2)(B) of
the Code would affect the characterization of less than 0.5% of the
gross income (as such term is used in Section 856(c)(2) of the Code)
of the Corporation in any taxable year.
c. Prior to granting any exception pursuant
to Section (A)(7)(b)(i) or (ii) of this Article IX, the Board of Directors
may require a ruling from the IRS, or an opinion of counsel, in either case
in form and substance satisfactory to the Board of Directors in its sole
discretion, as it may deem necessary or advisable in order to determine or
ensure the Corporation's status as a REIT or otherwise would not affect the
Corporation's status as a REIT.
B. Shares-in-Trust.
1. Trust. Any shares of Equity Stock transferred to a Trustee
in his capacity as trustee of a Trust and designated Shares-in-Trust pursuant to
Section (A)(3) of Article IX hereof shall be held for the exclusive benefit of
the Beneficiary. The Corporation shall name a Beneficiary (such that the shares
of Equity Stock held in the Trust would not violate the restrictions set forth
in Section (A)(2) of Article IX hereof) for each Trust within five (5) days
after discovery of the existence thereof. Any transfer to a Trust, and
subsequent designation of shares of Equity Stock as Shares-in-Trust, pursuant to
Section (A)(3) of Article IX hereof shall be effective as of the close of
business on the business day prior to the date of the Transfer or Non-Transfer
Event that results in the transfer to the Trust. Shares-in-Trust shall remain
issued and outstanding shares of Equity Stock of the Corporation and shall be
entitled to the same rights and privileges on identical terms and conditions as
are all other issued and outstanding shares of Equity Stock of the same class
and series. When transferred to a Permitted Transferee in accordance with the
provisions of Section (B)(5) of Article IX hereof, such Shares-in-Trust shall
cease to be designated as Shares-in-Trust.
2. Dividend Rights. The Trust, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions as
may be declared by the Board of Directors on such shares of Equity Stock and
shall hold such dividends or distributions in trust for the benefit of the
Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall be
required to repay to the Trust the amount of any dividends or distributions
received by it that (i) are attributable to any shares of Equity Stock
designated Shares-in-Trust and (ii) the record date of which was on or after the
date that such shares became Shares-in-Trust. The Corporation shall take all
measures that it determines reasonably necessary to recover the amount of any
such dividend or distribution paid to a Prohibited Owner, including, if
necessary, withholding any portion of future dividends or distributions payable
on shares of Equity Stock Beneficially Owned or Constructively Owned by the
Person who, but for the
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provisions of Section (A)(3) of Article IX hereof, would Constructively Own
or Beneficially Own the Shares-in-Trust; and, as soon as reasonably
practicable following the Corporation's receipt or withholding thereof, shall
pay over to the Trust for the benefit of the Beneficiary the dividends so
received or withheld, as the case may be.
3. Rights upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of, or any distribution of
the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled
to receive, ratably with each other holder of shares of Equity Stock of the same
class or series, that portion of the assets of the Corporation which is
available for distribution to the holders of such class and series of shares of
Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts
received upon such liquidation, dissolution, or winding up, or distribution;
provided, however, that the Prohibited Owner shall not be entitled to receive
amounts pursuant to this Section (B)(3) of Article IX in excess of, in the case
of a purported Transfer in which the Prohibited Owner paid fair market value for
shares of Equity Stock and which Transfer resulted in the transfer of the shares
to the Trustee in his capacity as trustee of a Trust, the price per share, if
any, such Prohibited Owner paid for the shares of Equity Stock and, in the case
of a Non-Transfer Event or Transfer in which the Prohibited Owner did not pay
fair market value for such shares (E.G., if the shares were received through a
gift or devise) and which Non-Transfer Event or Transfer, as the case may be,
resulted in the transfer of shares to a Trustee in his capacity as trustee of a
Trust, the price per share equal to the Market Price on the date of such
Non-Transfer Event or Transfer. Any remaining amount in such Trust shall be
distributed to the Beneficiary.
4. Voting Rights. The Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by the Corporation that the shares of Equity Stock
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void AB INITIO with respect to such Shares-in-Trust and the Prohibited Owner
shall be deemed to have given, as of the close of business on the business day
prior to the date of the purported Transfer or Non-Transfer Event that results
in the transfer to the Trust of shares of Equity Stock under Section (A)(3) of
Article IX hereof, an irrevocable proxy to the Trustee to vote the
Shares-in-Trust in the manner in which the Trustee, in its sole and absolute
discretion, desires.
5. Designation of Permitted Transferee. The Trustee shall have
the exclusive and absolute right to designate a Permitted Transferee of any or
all Shares-in-Trust. In an orderly fashion so as not to materially adversely
affect the Market Price of the Shares-in-Trust, the Trustee shall either sell
the Shares-in-Trust using the facilities of a national stock exchange on which
the class and series of such Shares-in-Trust are then actively traded, if any,
or designate any Person as Permitted Transferee, provided, however, that (i) the
Permitted Transferee so designated purchases for valuable consideration (whether
in a public or private sale) the Shares-in-Trust and (ii) the Permitted
Transferee so designated may acquire such Shares-in-Trust without such
acquisition resulting in a transfer to a Trustee in his capacity as trustee of
the Trust and the redesignation of such shares of Equity Stock so acquired as
Shares-
14
<PAGE>
in-Trust under Section (A)(3) of Article IX hereof. Upon the sale of
Shares-in-Trust by the Trustee of a Permitted Transferee in accordance with
the provisions of this Section (B)(5) of Article IX, the Trustee shall (i) if
such sale was to a Permitted Transferee, cause to be transferred to the
Permitted Transferee that number of Shares-in-Trust acquired by the Permitted
Transferee, (ii) if such sale was to a Permitted Transferee, cause to be
recorded on the books of the Corporation that the Permitted Transferee is the
holder of record of such number of shares of Equity Stock, (iii) cause the
Shares-in-Trust to be canceled, and (iv) distribute to the Beneficiary any
and all amounts held with respect to the Shares-in-Trust after making that
payment to the Prohibited Owner pursuant to Section (B)(6) of Article IX
hereof.
6. Compensation to Record Holder of Shares of Equity Stock
that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
discovery of the Shares-in-Trust and subsequent sale of such Shares-in-Trust in
accordance with Section (B)(5) of Article IX hereof or following the acceptance
of the offer to purchase such shares in accordance with Section (B)(7) of
Article IX hereof) to receive from the Trustee following the sale or other
disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a
purported Transfer in which the Prohibited Owner paid fair market value for
shares of Equity Stock and which Transfer resulted in the transfer of the shares
to the Trust, the price per share, if any, such Prohibited Owner paid for the
shares of Equity Stock, or (b) a Non-Transfer Event or Transfer in which the
Prohibited Owner did not pay fair market value for such shares (E.G., if the
shares were received through a gift or devise) and which Non-Transfer Event or
Transfer, as the case may be, resulted in the transfer of shares to the Trust,
the price per share equal to the Market Price on the date of such Non-Transfer
Event or Transfer, and (ii) the price per share received by the Trustee from the
sale or other disposition of such Shares-in-Trust in accordance with Section
(B)(5) of Article IX hereof. Any amounts received by the Trustee in respect of
such Shares-in-Trust and in excess of such amounts to be paid the Prohibited
Owner pursuant to this Section (B)(6) shall be distributed to the Beneficiary in
accordance with the provisions of Section (B)(5) of Article IX hereof. Each
Beneficiary and Prohibited Owner waive any and all claims that the may have
against the Trustee and the Trust arising out of the disposition of
Shares-in-Trust, except for claims arising to or out of the gross negligence or
willful misconduct of, or any failure to make payments in accordance with this
Section (B), by such Trustee or the Corporation.
7. Purchase Right in Shares-in-Trust. Shares-in-Trust shall be
deemed to have been offered for sale to the Corporation, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or
Non-Transfer Event) and (ii) the Market Price on the date the Corporation or its
designee accepts such offer. The Corporation shall have the right to accept such
offer for a period of ninety (90) days after the later of (i) the date of the
Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust
and (ii) the date the Corporation determines in good faith that a Transfer or
Non-Transfer Event resulting in Shares-in-Trust has occurred, if the
15
<PAGE>
Corporation does not receive a notice of such Transfer or Non-Transfer Event
pursuant to Section (A)(5) of Article IX hereof.
C. Remedies Not Limited. Nothing contained in this Article IX shall
limit the authority of the Board of Directors to take such other action to the
extent permitted by law as it deems necessary or advisable to protect the
Corporation and the interests of its stockholders by preserving the ability of
the Corporation to elect to be taxed as a REIT or, once such election has been
made, preserving the Corporation's status as a REIT or preserving the Tax
Benefits. Without limiting the generality of the foregoing, the Board of
Directors may, by adopting a written resolution, (i) extend the Restriction
Termination Date, (ii) modify the Ownership Limit, or (iii) modify the
definitions of any terms set forth in this Article IX; provided, however, that
the Board of Directors shall not cause there to be such extension, change or
modification unless it concludes in writing that such action is reasonably
necessary or advisable to preserve the Corporation's status as a REIT or to
preserve the Tax Benefits, or that the continuation of these restrictions is no
longer reasonably necessary for the preservation of the Corporation's status as
a REIT or the preservation of the Tax Benefits. Such written conclusion shall be
filed with the Secretary of the Corporation and shall be mailed by the Secretary
to all stockholders of this Corporation within 10 days after the date of any
such conclusion.
D. The Corporation and the members of the Board of Directors shall be
fully protected in relying in good faith upon the information, opinions, reports
or statements of the chief executive officer, the chief financial officer or the
chief accounting officer of the Corporation or of the Corporation's legal
counsel, independent auditors, transfer agent, investment bankers or other
employees and agents in making the determinations and findings contemplated by
this Article IX and the members of the Board of Directors shall not be
responsible for any good faith errors made in connection therewith.
E. Ambiguity. In the case of an ambiguity in the application of any of
the provisions of this Article IX, including any definition contained in Section
(A)(1) of Article IX hereof, the Board of Directors shall have the power to
determine the application of the provisions of this Article IX with respect to
any situation based on the facts known to it.
F. Legend.
1. Each certificate for shares of Equity Stock or securities
convertible into Equity Stock shall bear the following legend:
"The securities represented by this certificate are
subject to restrictions on transfer and ownership for the
purpose of the Corporation's maintenance of its status as a
real estate investment trust under the Internal Revenue Code
of 1986, as amended (the "Code"). No Person other than WFSG
may (i) Beneficially Own
16
<PAGE>
or Constructively Own in excess of 9.8% of the number of
shares or value (whichever is more restrictive) of the
outstanding Common Stock or 9.8% of the number of shares or
value (whichever is more restrictive) of the outstanding
Preferred Stock (or such other number or value of Preferred
Stock as the Board may determine in fixing the terms of the
Preferred Stock), (ii) Beneficially Own shares of Equity
Stock that would result in the shares of Equity Stock being
Beneficially Owned by fewer than 100 Persons (determined
without reference to any rules of attribution), (iii)
Beneficially Own shares of Equity Stock that would result
in the Corporation being "closely held" under Section
856(h) of the Code, (iv) Constructively Own shares of
Equity Stock that would cause the Corporation to
Constructively Own a Tenant Interest of 10% or more or (v)
Beneficially Owned shares of Equity Stock that would result
in the shares of Equity Stock being Beneficially Owned by
(A) the United States, any international organization, or
any agency or instrumentality of any of the foregoing, (B)
any organization (other than a cooperative described in
Section 521 of the Code) which is exempt from tax unless
such organization is subject to the tax imposed by Section
511 of the Code, and (C) any organization described in
Section 1381(a)(2)(c) of the Code. Any Person who attempts
to Beneficially Own or Constructively Own shares of Equity
Stock in excess of the above limitations must immediately
notify the Corporation in writing. Furthermore, upon the
occurrence of certain events, attempted transfers in
violation of the restrictions described above may be void
AB INITIO. If the restrictions above are violated, the
shares of Equity Stock represented hereby will be
transferred automatically and by operation of law to a
Trustee for the benefit of one or more Beneficiaries and
shall be designated Shares-in-Trust and the Prohibited
Owner shall acquire no rights or interest in such shares of
Equity Stock. All capitalized terms in this legend have the
meanings defined in the Corporation's Amended and Restated
Articles of Incorporation, as the same may be further
amended from time to time, a copy of which, including the
restrictions on transfer and ownership, will be sent
without charge to each stockholder who so requests."
2. The restrictions on transfer and ownership contained in
this Article IX, as amended or modified from time to time in accordance with the
provisions hereof, shall be valid and binding on all holders of shares of Equity
Stock or securities convertible into Equity Stock, regardless of whether the
legend borne on the certificates representing such shares or
17
<PAGE>
securities accurately reflects the restrictions on transfer and ownership as
so amended or modified.
G. Exchange of OP Units. So long as the Corporation remains the sole
stockholder of the general partner of the Operating Partnership, the Board of
Directors of the Corporation is hereby expressly vested with authority (subject
to the restrictions on ownership, transfer and redemption set forth in this
Article IX) to issue, and shall issue to the extent provided in the Operating
Partnership Agreement, Common Stock in exchange for the units into which
partnership interests of the Operating Partnership are divided (the "OP Units"),
and as the same may be adjusted, as provided in the Partnership Agreement.
H. Reservation of Shares. The Board of Directors is hereby required to
reserve and authorize for issuance a sufficient number of authorized but
unissued shares of Common Stock to permit the issuance of Common Stock in
exchange for OP Units that may be exchanged for or converted into Common Stock
as provided in the Operating Partnership Agreement.
I. Severability. If any provision of this Article IX or any application
of any such provision is determined to be invalid by any federal or state court
having jurisdiction over the issues, the validity of the remaining provisions
shall not be affected and other applications of such provision shall be affected
only to the extent necessary to comply with the determination of such court.
J. Removal of Restrictions. The restrictions on transfer
contained in this Article IX shall not be removed until the Restriction
Termination Date.
K. Notwithstanding any other provisions of the Charter or the Bylaws of
the Corporation (and notwithstanding that some lesser percentage may be
specified by law, the Charter or the Bylaws of the Corporation), the provisions
of this Article IX shall not be amended, altered, changed, or repealed, and no
provision inconsistent with this Article IX shall be adopted, without the
affirmative vote of at least eighty percent (80%) of the members of the Board of
Directors and by the affirmative vote of not less than two-thirds (2/3) of all
the votes entitled to be cast by the outstanding shares of capital stock of the
Corporation on the matter at any meeting of the stockholders called for that
purpose, voting together for this purpose as a single class.
X.
A. The following provisions are hereby adopted for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors and stockholders:
1. The Board of Directors of the Corporation shall, consistent
with applicable law, have power in its sole discretion to determine from time to
time in accordance
18
<PAGE>
with sound practice or other reasonable valuation methods what constitutes
annual or other net profits, earnings, surplus, or net assets in excess of
capital; to fix and vary from time to time the amount to be reserved as
working capital, or determine that retained earnings or surplus shall remain
in the hands of the Corporation; to set apart out of any funds of the
Corporation such reserve or reserves in such amount or amounts and for such
proper purpose or purposes as it shall determine and to abolish any such
reserve or any part thereof; to distribute and pay distributions or dividends
in stock, cash, or other securities or property, out of surplus or any other
funds or amounts legally available therefor, as such times and to the
stockholders of record on such dates as it may, from time to time, determine;
and to determine whether and to what extent and at what times and places and
under what conditions and regulations the books, accounts, and documents of
the Corporation, or any of them, shall be open to the inspection of
stockholders, except as otherwise provided by statute or by the Bylaws, and,
except as so provided, no stockholder shall have any right to inspect any
book, account, or document of the Corporation unless authorized so to do by
resolution of the Board of Directors.
2. Notwithstanding any provision of law requiring the
authorization of any action by a greater proportion than a majority of the total
number of shares of all classes of capital stock or of the total number of
shares of any class of capital stock, such action shall be valid and effective
if authorized by the affirmative vote of the holders of a majority of the total
number of shares of all classes outstanding and entitled to vote thereon, except
as otherwise provided in the Charter.
3. Except as otherwise specifically set forth in Articles VI
and IX, the Corporation reserves the right from time to time to make any
amendments of its Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in its Charter, of any of its outstanding stock by classification,
reclassification, or otherwise.
B. The enumeration and definition of particular powers of the Board of
Directors included in the foregoing shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereafter in force.
XI.
The duration of the Corporation shall be perpetual.
SECOND: This Amendment and Restatement does not increase the
authorized capital stock of the Corporation.
19
<PAGE>
THIRD: The foregoing Amendment and Restatement to the Charter has
been advised by the Board of Directors and approved by the stockholders of
the Corporation.
IN WITNESS WHEREOF, Wilshire Real Estate Investment Trust Inc. has
caused these presents to be signed in its name and on its behalf by its
President and witnessed by its Secretary this ___ day of __________, 1999.
WITNESS: WILSHIRE REAL ESTATE INVESTMENT
TRUST INC.
_____________________________ By:__________________________________(SEAL)
Andrew Wiederhorn, Secretary Chris Tassos, Executive Vice President
THE UNDERSIGNED, the Executive Vice President of Wilshire Real Estate
Investment Trust Inc. (the "Corporation"), who executed on behalf of the
Corporation the foregoing Amended and Restated Articles of Incorporation, of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Amended and Restated Articles of
Incorporation to be the corporate act of said Corporation and hereby certifies
that to the best of his knowledge, information and belief the matters and facts
set forth therein with respect to the authorization and approval thereof are
true in all material respects under the penalties of perjury.
Dated: _____________, 1999 By:___________________________________(SEAL)
Chris Tassos, Executive Vice President
20
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Six Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Diluted net loss per share:
Net loss to common shareholders $ (9,372,000) $ (48,880,000) $ (27,781,000) $ (45,838,000)
Average number of shares outstanding 11,500,000 11,500,000 11,500,000 11,381,356
Net effect of dilutive stock options-based on
treasury stock method N/A N/A N/A N/A
--------------- ---------------- ---------------- ----------------
Total average shares 11,500,000 11,500,000 11,500,000 11,381,356
--------------- ---------------- ---------------- ----------------
--------------- ---------------- ---------------- ----------------
Diluted net loss per share $ (0.82) $ (4.25) $ (2.42) $ (4.03)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND STATEMENT OF EARNINGS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,802
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 105,087
<INVESTMENTS-CARRYING> 105,087
<INVESTMENTS-MARKET> 105,087
<LOANS> 30,393
<ALLOWANCE> 3,016
<TOTAL-ASSETS> 234,464
<DEPOSITS> 0
<SHORT-TERM> 121,662
<LIABILITIES-OTHER> 11,720
<LONG-TERM> 48,986
0
0
<COMMON> 166,981
<OTHER-SE> (114,885)
<TOTAL-LIABILITIES-AND-EQUITY> 234,464
<INTEREST-LOAN> 4,081
<INTEREST-INVEST> 12,025
<INTEREST-OTHER> 2,063
<INTEREST-TOTAL> 18,169
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 9,841
<INTEREST-INCOME-NET> 8,328
<LOAN-LOSSES> (1,150)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 37,059
<INCOME-PRETAX> (27,581)
<INCOME-PRE-EXTRAORDINARY> (27,581)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,781)
<EPS-BASIC> (2.42)
<EPS-DILUTED> (2.42)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 3,180
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,107
<CHARGE-OFFS> 4,804
<RECOVERIES> 388
<ALLOWANCE-CLOSE> 3,016
<ALLOWANCE-DOMESTIC> 406
<ALLOWANCE-FOREIGN> 2,049
<ALLOWANCE-UNALLOCATED> 561
</TABLE>
