<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 MARCH 31, 2000
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 (I.R.S. Employer
of Identification No.)
incorporation or organization)
</TABLE>
1631 SW COLUMBIA STREET
PORTLAND, OR 97201
(Address of principal executive offices) (Zip Code)
(503) 721-6500
(Registrant's telephone number, including area code)
1310 SW 17(TH) STREET
PORTLAND, OR 97201
(Former Address)
------------------------
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>
<CAPTION>
CLASS OUTSTANDING AT APRIL 30, 2000
- ----------------------------------------- -----------------------------
<S> <C>
Common Stock, par value $0.0001 per share 10,507,313 shares
</TABLE>
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<PAGE>
\
WILSHIRE REAL ESTATE INVESTMENT INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Consolidated Statements of Financial Condition.............. 3
Consolidated Statements of Operations....................... 4
Consolidated Statement 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................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 17
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities and Use of Proceeds................... 22
Item 3. Defaults Upon Senior Securities............................. 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signatures.......................................................................... 23
</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>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 5,594 $ 5,862
Securities available for sale, at fair value.............. 96,230 104,572
Loans, net................................................ 30,121 31,634
Investments in real estate held for sale, net............. 55,211 63,225
Investments in WFSG and affiliates, net (see Note 6)...... 8,282 9,918
Accrued interest receivable............................... 1,068 1,108
Other assets.............................................. 2,053 2,209
-------- --------
Total assets............................................ $198,559 $218,528
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowings..................................... $ 81,761 $ 96,815
Long-term borrowings (see Note 6)......................... 57,988 64,412
Accounts payable and accrued liabilities.................. 2,640 2,339
Dividends payable......................................... 4,090 4,090
-------- --------
Total liabilities....................................... 146,479 167,656
-------- --------
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 10,507,313
shares outstanding...................................... 166,981 166,981
Treasury stock; 992,687 common shares, at cost............ (2,171) (2,171)
Accumulated deficit....................................... (88,375) (90,915)
Accumulated other comprehensive loss...................... (24,355) (23,023)
-------- --------
Total stockholders' equity.............................. 52,080 50,872
-------- --------
Total liabilities and stockholders' equity.............. $198,559 $218,528
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net Interest Income:
Loans..................................................... $ 1,104 $ 1,928
Securities................................................ 3,336 4,428
Other investments......................................... 80 728
----------- -----------
Total interest income................................... 4,520 7,084
Interest expense.......................................... 2,296 3,693
----------- -----------
Net interest income before provision for loan losses.... 2,224 3,391
Recovery of loan losses................................... -- (1,150)
----------- -----------
Net interest income after recovery of loan losses....... 2,224 4,541
----------- -----------
Real Estate Operations:
Operating income.......................................... 1,364 1,954
Operating expense......................................... (232) (55)
Interest expense.......................................... (812) (1,302)
Provision for losses on real estate....................... -- (264)
Gain on sale of real estate............................... 997 10
Depreciation.............................................. (292) (394)
----------- -----------
Total real estate operations............................ 1,025 (51)
----------- -----------
Other Operating Income (Loss):
Gain on sale of securities................................ 3,326 --
Loss on foreign currency translation...................... (18) (48)
Market valuation losses and impairments................... (1,791) (1,195)
----------- -----------
Total other operating income (loss)..................... 1,517 (1,243)
----------- -----------
Operating Expenses:
Compensation and employee benefits........................ 1,306 --
Management fees........................................... -- 920
Professional fees......................................... 333 448
Other..................................................... 487 112
----------- -----------
Total operating expenses................................ 2,126 1,480
----------- -----------
Net income before provision for income taxes................ 2,640 1,767
Provision for income taxes.................................. 100 --
----------- -----------
Net Income.................................................. $ 2,540 $ 1,767
=========== ===========
Basic and Diluted Net Income Per Share...................... $ 0.24 $ 0.15
Weighted Average Shares Outstanding......................... 10,507,313 11,500,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
--------------------- ------------------- ACCUMULATED ACCUMULATED OTHER
SHARES (1) AMOUNT SHARES AMOUNT DEFICIT COMPREHENSIVE LOSS TOTAL
---------- -------- -------- -------- ----------- ------------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999.................. 10,507,313 $166,981 992,687 $(2,171) $(90,915) $(23,023) $50,872
Comprehensive income:
Net income............ -- -- -- -- 2,540 -- 2,540
Other comprehensive
loss:
Foreign currency
translation....... -- -- -- -- -- (78) (78)
Unrealized holding
losses on
securities
available for
sale.............. -- -- -- -- -- (1,076) (1,076)
Reclassification
adjustment for net
gains on
securities
included in net
income............ -- -- -- -- -- (178) (178)
-------
Total comprehensive
income................ 1,208
---------- -------- ------- ------- -------- -------- -------
Balance at March 31,
2000.................. 10,507,313 $166,981 992,687 $(2,171) $(88,375) $(24,355) $52,080
========== ======== ======= ======= ======== ======== =======
</TABLE>
- ------------------------
(1) Issued and outstanding.
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>
QUARTER ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,540 $ 1,767
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation............................................ 318 394
Amortization of premiums and accretion of discounts,
net................................................... (143) --
Recovery of loan losses................................. -- (1,150)
Provision for losses on real estate..................... -- 264
Market valuation losses and impairments................. 1,791 1,195
Loss on foreign currency translation.................... 14 --
Gain on sale of securities available for sale........... (3,326) --
Gain on sale of real estate............................. (997) (10)
Change in:
Investments in WFSG and affiliates, net............... 19 (18,453)
Accrued interest receivable........................... 40 407
Other assets.......................................... (29) (1,215)
Accounts payable and accrued liabilities.............. 324 (3,051)
-------- --------
Net cash provided by (used in) operating activities....... 551 (19,852)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments of securities available for sale............... 1,006 3,997
Proceeds from sale of securities available for sale....... 9,234 --
Purchase of loans and discounted loans.................... (101) (218)
Principal repayments on loans and discounted loans........ 1,748 38,646
Proceeds from sale of real estate......................... 8,334 4,056
Investments in real estate................................ -- (47)
-------- --------
Net cash provided by investing activities................. 20,221 46,434
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings....................... -- 406
Repayments on short-term borrowings....................... (15,054) (26,730)
Repayments on other borrowings............................ (6,123) (3,676)
-------- --------
Net cash used in financing activities..................... (21,177) (30,000)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 137 --
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (268) (3,418)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 5,862 4,782
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 5,594 $ 1,364
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 3,412 $ 4,191
Cash paid for taxes....................................... $ -- $ --
</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
(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") (formerly
known as 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 1999 Annual Report on Form 10-K. A summary of the Company's
significant accounting policies is set forth in Note 3 to the consolidated
financial statements in the 1999 Annual Report on Form 10-K.
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 consolidated financial
statements. Operating results for the quarter ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Certain items in the previously reported consolidated financial statements
were reclassified to conform to the March 31, 2000 presentation, none of which
affect previously reported results of operations.
NOTE 2--ORGANIZATION
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 tax 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, and the Company's name was changed to Wilshire Real Estate
Investment Inc. 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.
NOTE 3--INCOME TAXES
As of March 31, 2000, the Company had, for U.S. Federal tax purposes, a net
operating loss carryforward of approximately $95 million, which begins to expire
in 2018. Tax regulations impose limitations on the use of loss carryforwards
following certain changes in ownership. If such a change were to occur with
respect to the Company, the limitation could significantly reduce the amount of
benefits that would be available to offset future taxable income each year,
starting with the year of ownership change. To reduce the potential impact of
such ownership changes, the Company established a Shareholder Rights Plan dated
as of December 23, 1999 and effective January 3, 2000. The Company has not
recorded any
7
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 3--INCOME TAXES (CONTINUED)
deferred tax assets for the future benefits of the net operating loss
carryforwards. Although the Company has a net operating loss carryforward, the
Company recorded a provision for taxes of $0.1 million for alternative minimum
taxes for the quarter ended March 31, 2000.
NOTE 4--SIGNIFICANT TRANSACTIONS
During the quarter ended March 31, 2000, the Company sold mortgage-backed
securities with a carrying value of $5.9 million. The gain on these sales of
$3.3 million is reported in the consolidated statements of operations for the
quarter ended March 31, 2000. Proceeds of $9.2 million were used to repay
borrowings.
The Company also sold office properties located in Portland, Oregon with a
carrying value of $7.3 million. The gain on this transaction of $1 million is
reported in the consolidated statement of operations for the quarter ended
March 31, 2000. Proceeds of $5.9 million were used to repay borrowings.
In March 2000, affiliates of Wilshire Financial Services Group ("WFSG")
transferred the servicing of the Company's assets outside of the United States
to an unrelated third party.
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 declines in current market valuations, a write-down is
recorded in "Market Valuation Losses and Impairments" in the consolidated
statement of operations.
During the quarters ended March 31, 2000 and 1999, market valuation losses
and impairments of $1.8 million and $1.2 million, respectively, were recorded.
During such periods, $1.8 million and $0.4 million, respectively, of market
valuation losses and impairments were recorded related to the portfolio of
mortgage-backed securities primarily reflecting higher than anticipated
delinquencies and losses in underlying loans to certain securities. During the
quarter ended March 31, 1999, the Company also impaired its investment in WFSG
13% Notes due 2004 by $0.8 million. The recording of 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 the equity of the Company.
NOTE 6--ONGOING DISPUTES WITH WFSG AND ITS AFFILIATES
The Company is engaged in litigation with WFSG relating to the termination
of the contractual and other relationships which formerly existed between the
companies. Prior to September 1999, the Company's business affairs and
day-to-day operations had been managed by a wholly-owned subsidiary of WFSG. The
Company and WFSG had the same senior management team, though the Company had a
significantly different shareholder base and the majority of its directors were
independent. In addition, the Company and WFSG had other significant contractual
relationships relating to the servicing of real estate
8
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 6--ONGOING DISPUTES WITH WFSG AND ITS AFFILIATES (CONTINUED)
related assets and also had certain cross shareholdings. The Company has sought
to amicably resolve its differences with WFSG and has been unable to resolve
certain areas of dispute. The Company alleges: (1) the termination of
Messrs. Wiederhorn and Mendelsohn made WFSG and its affiliates unable and/or
unwilling to provide management to the Company as required under the management
agreement; (2) the inability of WFSG and its affiliates to manage the Company's
business affairs triggered application of a facilities sharing agreement dated
February 19, 1999 between the Company and WFSG and its affiliates (the
"Facilities Sharing Agreement"); and (3) WFSG's refusal to allow
Messrs. Wiederhorn and Mendelsohn access to WFSG's facilities, personnel, and
equipment for the Company's business violated the terms of the Facilities
Sharing Agreement. WFSG alleges the Company breached the management agreement
and is claiming damages for alleged non-payment of quarterly management fees of
$0.7 million and damages under a termination fee in a range of $3.5 million to
$4.0 million. At March 31, 2000, the Company had a reserve for potential
resolution of disputes with WFSG of $2.1 million.
The following table sets forth the balances of the Company's net
transactions with WFSG and its affiliates as of March 31, 2000 and December 31,
1999.
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Investments in WFSG and Affiliates, net:
WFSG Common Stock............................ $ 2,336,000 (1) $ 3,953,000
DIP Facility................................. 4,835,000 (2) 5,000,000 (2)
Other Notes Receivable from WFSG............. 275,000 275,000
Prepaid Service Fees to WCC.................. 2,957,000 2,974,000
Reserve for Disputes with WFSG............... (2,121,000) (2,284,000)
----------- -----------
$ 8,282,000 $ 9,918,000
=========== ===========
Long-term Borrowings........................... $ -- $ 2,569,000 (3)
=========== ===========
</TABLE>
- ------------------------
(1) Based on $0.8125 per share. WFSG's common stock currently trades on the OTC
Bulletin Board and the closing price as of March 31, 2000 was $0.8125 per
share. At March 31, 2000, the Company included $1.3 million of unrealized
losses in "Accumulated Other Comprehensive Loss" in stockholders' equity.
(2) The DIP Facility no longer has priority over other creditors and will be
treated like any other secured loan.
(3) Investments in real estate were pledged against these loans. During the
quarter ended March 31, 2000, the Company repaid these loans in full.
For the quarter ended March 31, 2000, the net effect on net income of the
various transactions between the Company and WFSG and its affiliates was
$0.1 million.
The Company currently owns approximately 14.4% of WFSG's common stock and is
determining what course of action maximizes the value of its investment. As a
result, the Company may sell all or part of its shares of WFSG, retain its
current position, or subject to applicable regulations, increase its ownership
stake substantially.
9
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
NOTE 7--COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK
The Company is authorized to utilize a wide variety of off-balance sheet
financial techniques to assist 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 March 31, 2000, the
Company had no outstanding positions in these instruments.
With the exception of disputes with WFSG and its affiliates discussed in
Note 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 its interim consolidated financial condition or operations.
NOTE 8--SUBSEQUENT EVENTS
Subsequent to March 31, 2000, the Company agreed to resecuritize
approximately $20.5 million of its mortgage-backed securities portfolio and
expects the transaction to settle in the second quarter of 2000. The Company
believes resecuritizing these mortgage-backed securities will enable the Company
to replace short-term debt with non-recourse, long-term, fixed-rate debt that
better matches the amortization characteristics and cash flows of the underlying
mortgage-backed securities.
In April 2000, an affiliate of WFSG transferred the servicing of the
Company's loan and real estate portfolios in the United States to the Company.
The WFSG affiliate continues to service the loans underlying certain of the
Company's mortgage-backed securities.
10
<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.
We continue to focus our efforts on stabilizing our existing asset and
liability base. 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 quarter ended March 31, 2000, while profitable, reflect this
continued difficult marketplace and include further impairment write-downs of
certain mortgage-backed securities.
RESULTS OF OPERATIONS--QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED
MARCH 31, 1999
NET INCOME. Our net income for the quarter ended March 31, 2000 was
$2.5 million, or $0.24 per share, compared with income of $1.8 million, or $0.15
per share, for the quarter ended March 31, 1999. The net income for the 2000
period is attributable to net interest income of $2.2 million, gain on sale of
securities of $3.3 million and income from real estate operations of
$1.0 million, partially offset by market valuation losses and impairments on our
portfolio of mortgage-backed securities of $1.8 million and other operating
expenses of $2.1 million. Our net income for the corresponding 1999 period was
primarily due to the recovery of a $1.2 million loan loss provision.
NET INTEREST INCOME. Our net interest income for the quarter ended
March 31, 2000 was $2.2 million, compared with $3.4 million for the quarter
ended March 31, 1999. The decrease is primarily attributable to a significantly
smaller balance sheet (reflecting our sales of mortgage-backed securities and
loans and paydowns of the related debt facilities), resulting in decreases in
interest income on securities, loans and other investments of $1.1 million,
$0.8 million and $0.6 million, respectively, partially offset by a decrease in
interest expense of $1.4 million. The following tables set forth information
regarding the total
11
<PAGE>
amount of income from interest-earning assets and expense from interest-bearing
liabilities and the resulting average yields and rates:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31, 2000
-----------------------------------------
AVERAGE INTEREST ANNUALIZED
BALANCE INCOME (EXPENSE) YIELD/RATE
--------- ---------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-Earning Assets:
Loan portfolios........................................ $ 35,935 $ 1,104 12.3%
Mortgage-backed securities available for sale.......... 98,081 3,336 13.6
Other investments...................................... 6,319 80 5.1
-------- ------- ----
Total interest-earning assets...................... 140,334 4,520 12.9
-------- ------- ----
Interest-Bearing Liabilities:
Short-term and other borrowings (3).................... 106,738 (2,296) 8.6
-------- ------- ----
Total interest-bearing liabilities................. 106,738 (2,296) 8.6
-------- ------- ----
Net interest income before provision for loan
losses/spread (1).................................... $ 2,224 4.3%
======= ====
Net interest margin (2)................................ 6.3%
====
</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.
(3) Excludes borrowings related to investments in real estate.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31, 1999
-----------------------------------------
AVERAGE INTEREST ANNUALIZED
BALANCE INCOME (EXPENSE) YIELD/RATE
--------- ---------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-Earning Assets:
Loan portfolios........................................ $ 86,627 $ 1,928 9.0%
Mortgage-backed securities available for sale.......... 147,738 4,428 12.2
Other investments...................................... 30,412 728 9.6
-------- ------- ----
Total interest-earning assets...................... 264,777 7,084 10.9
-------- ------- ----
Interest-Bearing Liabilities:
Short-term borrowings (3).............................. 207,559 (3,693) 7.2
-------- ------- ----
Total interest-bearing liabilities................. 207,559 (3,693) 7.2
-------- ------- ----
Net interest income before provision for loan
losses/spread (1).................................... $ 3,391 3.7%
======= ====
Net interest margin (2)................................ 5.1%
====
</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.
(3) Excludes borrowings related to investments in real estate.
12
<PAGE>
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
quarter ended March 31, 2000, we realized income from real estate operations of
approximately $1.0 million, compared with a net loss of $0.1 million for the
quarter ended March 31, 1999. This increase was primarily attributable to a gain
of $1.0 million on the sale of office properties located in Portland, Oregon.
OPERATING EXPENSES. Our other operating expenses were approximately
$2.1 million for the quarter ended March 31, 2000, compared with approximately
$1.5 million for the quarter ended March 31, 1999. This increase was primarily
attributable to an increase in compensation and employee benefits of
$1.3 million and $0.4 million of other expenses from becoming internally managed
during the fourth quarter of 1999. This increase was offset by a decrease in
management fees of $0.9 million and professional fees of $0.1 million.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets decreased from approximately $218.5 million at
December 31, 1999 to approximately $198.6 million at March 31, 2000. The
decrease in total assets is primarily attributable to the sale of $5.9 million
of mortgage-backed securities available-for-sale and the sale of commercial real
estate with a carrying value of $7.3 million. Total liabilities decreased from
approximately $167.7 million at December 31, 1999 to approximately
$146.5 million at March 31, 2000 primarily as a result of the repayment of
borrowings used to finance mortgage-backed securities and loans. Stockholders'
equity increased by approximately $1.2 million resulting primarily from net
income of $2.5 million for the quarter ended March 31, 2000, partially offset by
an increase of $1.3 million in unrealized losses on available-for-sale
securities and our investment in WFSG common stock.
SECURITIES AVAILABLE FOR SALE. The balance of mortgage-backed securities
available for sale decreased from $104.6 million at December 31, 1999 to
$96.2 million at March 31, 2000. The decrease was primarily due to the sale of
securities with a carrying value of $5.9 million, the recognition of other than
temporary impairment of approximately $1.8 million and cash receipts in excess
of income accrued of approximately $1.0 million, partially offset by a net
decrease in the unrealized loss on available-for-sale securities of
approximately $0.3 million for the quarter ended March 31, 2000.
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.
The difference between our amortized cost of mortgage-backed securities
available for sale and current market values, which was $22.9 million at
March 31, 2000, 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
13
<PAGE>
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 the expectation for such performance in the
future. To the extent reasonable expectations for future performance are not
likely to offset declines in current market valuations, a write-down is recorded
in "Market Valuation Losses and Impairments" in the consolidated statement of
operations.
At March 31, 2000, securities available for sale were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST (1) GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities.......................... $119,094 $3,981 $(26,845) $96,230
======== ====== ======== =======
</TABLE>
- ------------------------
(1) The amortized cost of the securities reflects the market valuation losses
and impairments discussed above and excludes accrued interest of
$1.1 million.
LOAN PORTFOLIO. During the quarter ended March 31, 2000, our loan portfolio
decreased by approximately $1.5 million due primarily to principal payments
received from borrowers.
INVESTMENTS IN REAL ESTATE. Investments in real estate decreased
approximately $8.0 million from December 31, 1999 to March 31, 2000. This
decrease was primarily due to the sale of commercial properties located in
Portland, Oregon for proceeds of approximately $8.3 million.
We are currently in the process of marketing certain other commercial
properties for sale during the rest of the year as we continue to reduce our
level of investment in commercial real estate income properties.
SHORT-TERM BORROWINGS. Short-term borrowings decreased by approximately
$15.1 million during the quarter ended March 31, 2000. The decrease in
short-term borrowings is primarily attributable to the repayment from sales
proceeds of, and other payments on, our mortgage-backed securities.
LONG-TERM BORROWINGS. Long-term borrowings decreased approximately
$6.4 million during the quarter ended March 31, 2000 due primarily to repayments
related to the commercial properties and mortgage-backed securities which were
sold during the reporting period.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by approximately
$1.2 million during the quarter ended March 31, 2000. This increase was
primarily due to net income of $2.5 million, partially offset by a $1.3 million
increase in unrealized losses on securities. This increase in unrealized losses
resulted from the recognition of additional unrealized holding losses of
$1.4 million on our mortgage-backed securities portfolio and an increase in
unrealized losses on our WFSG stock of $1.6 million, partially offset by
recognition of other than temporary declines in value of our mortgage-backed
securities portfolio of $1.8 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 quarter ended March 31, 2000 consisted of net cash provided
by investing activities, including the cash repayments related to our
mortgage-backed securities portfolio, sales of mortgage-backed securities and
sales of investments in real estate.
14
<PAGE>
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."
The adverse market conditions, which negatively impacted us during the third
and fourth quarters of 1998, began to stabilize during 1999, but remain
uncertain. As of March 31, 2000, we had no outstanding collateral calls.
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 March 31, 2000, we had total consolidated secured indebtedness of
$139.7 million, accrued interest payable of $0.9 million, a dividend payable of
$4.1 million, as well as $1.7 million of other liabilities. The consolidated
secured indebtedness consisted of (i) $97.1 million of repurchase agreements,
(ii) lines of credit aggregating $3.5 million which are secured by loans and
(iii) $39.1 million outstanding of other borrowings maturing between 2000 and
2008 which are secured by real estate.
Loans are financed through short-term or intermediate-term financing
facilities. If the value of the assets securing the loan declines as determined
by the lender, the lender may request that the amount of the loan be reduced by
cash payments from the borrower or additional collateral be provided by the
borrower (generally known as "collateral calls"). Accordingly, in an environment
where lenders consistently mark down the value of the underlying assets, a
borrower can become subject to collateral calls, which can have a significant
impact on liquidity. Similarly, if interest rates increase significantly, the
borrowing cost under the financing facility may also increase while the interest
rate on the assets securing the loan may not increase at the same time or to the
same degree. Real property acquisitions are financed with intermediate or
long-term mortgages with banks and other financial institutions.
We generally finance acquisitions of mortgage-backed securities through
committed and uncommitted thirty-day repurchase agreements with major Wall
Street investment banks. Repurchase agreements are secured lending arrangements
which involve the borrower selling an asset to a lender at a fixed price with
the borrower having an obligation to repurchase the asset within a specified
period (generally 30 days) at a higher price reflecting the interest cost of the
loan. If the lender marks the asset lower, the lender may request that the
amount of the loan be reduced by cash payments from the borrower or additional
collateral be provided by the borrower (generally known as "collateral calls").
Mortgage-backed securities which are subject to repurchase agreements, as well
as loans which secure other indebtedness, periodically are revalued by the
lender, and a decline in the value that is recognized by the lender (whether or
not the lender recognizes the full fair value of the security) may result in the
lender requiring us to provide additional collateral to secure the indebtedness.
As of March 31, 2000, the Company had approximately $100.2 million of
indebtedness under the terms of which the lender could request additional
collateral if the value of the underlying collateral declined (including
financing facilities for both mortgage-backed securities and loans). Although
the Company believes that the likelihood of significant declines in asset values
has decreased since the third quarter of 1998, the Company is seeking to
maintain a larger cash position and more unencumbered assets to deal with any
future potential collateral calls. 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.
15
<PAGE>
If we are unable to fund additional collateral requirements or to repay,
renew or replace maturing indebtedness on terms reasonably satisfactory to us,
we may be required to sell (potentially on short notice) a portion of our
assets, and could incur losses as a result. Furthermore, since from time to time
there is extremely limited liquidity in the market for subordinated and residual
interests in mortgage-related securities, there can be no assurance that we will
be able to dispose of such securities promptly for fair value in such
situations.
Based on our monthly interest and other expenses, monthly cash receipts and
collateral calls through April 30, 2000, 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 or 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 collateral calls, or an
increase in market value of our mark-to-market financial assets, generally would
positively affect our liquidity.
YEAR 2000 COMPLIANCE
The Company and its service providers utilize a number of technologically
dependent systems to operate, service mortgage loans and manage mortgage and
other related assets. 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. Management closely monitored the Company's operations subsequent to
January 1, 2000 in relation to the Year 2000 matter and continues to monitor
such operations. The Company's information systems were operational with no
apparent adverse impact arising as a result of or associated with the Year 2000
matter. Additionally, the Company is not aware of, and has not experienced, any
Year 2000 issues at its key service providers, vendors, mortgage securities
servicers, and other third parties. Management considers the risk of any
residual potential Year 2000 matter failures to be minimal.
16
<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 our
exposure to earnings variations and variations in the value of assets and
liabilities as interest rates change over time. Our asset and liability
management strategy is formulated and monitored regularly to review, among other
things, the sensitivity of our assets and liabilities to interest rate changes,
the book and market values of assets and liabilities, unrealized gains and
losses, including those attributable to hedging transactions, purchase and
securitization activity, and maturities of investments and borrowings.
The following tables quantify the potential changes in net interest income
and net portfolio value as of March 31, 2000 should interest rates go up or down
(shocked) by 100 to 400 basis points, assuming the yield curves of the rate
shocks will be parallel to each other and instantaneous. Net portfolio value is
calculated as the sum of the value of off-balance sheet instruments and the
present value of cash in-flows generated from interest-earning assets net of
cash out-flows in respect of interest-bearing liabilities. The cash flows
associated with the loan portfolios and securities available for sale are
calculated based on prepayment and default rates that vary by asset but not by
changes in interest rates. Projected losses, as well as prepayments, are
generated based upon the actual experience with the subject pool, as well as
similar, more seasoned pools. To the extent available, loan characteristics such
as loan-to-value ratio, interest rate, credit history and product types are used
to produce the projected loss and prepayment assumptions that are included in
the cash flow projections of the securities. The following tables apply the U.S.
Treasury yield curve generally for assets and LIBOR for repurchase agreement
liabilities and assume a uniform change in both rates. The tables assume that
changes in interest rates occur instantaneously. The tables also reflect that
the Company has a significant exposure to LIBOR rates since its repurchase
17
<PAGE>
agreement borrowings are generally based on LIBOR rates. Actual results could
differ significantly from those estimated in the tables.
<TABLE>
<CAPTION>
PROJECTED PERCENT CHANGE IN
- ------------------------------------------------------------------------
CHANGE IN INTEREST RATES (1) NET INTEREST INCOME NET PORTFOLIO VALUE
- ---------------------------- ------------------- -------------------
<S> <C> <C>
-400 Basis Points 34.5% 18.2%
-300 Basis Points 25.9% 13.4%
-200 Basis Points 17.3% 8.8%
-100 Basis Points 8.6% 4.3%
0 Basis Points -- --
100 Basis Points (8.6)% (4.2)%
200 Basis Points (17.3)% (8.2)%
300 Basis Points (25.9)% (12.1)%
400 Basis Points (34.5)% (15.9)%
</TABLE>
- ------------------------
(1) Assumes that uniform changes occur instantaneously in both the yield on
10-year U.S. Treasury notes and the interest rate applicable to U.S. dollar
deposits in the London interbank market.
<TABLE>
<CAPTION>
CHANGE IN MONTHLY CHANGE IN
CHANGE IN INTEREST RATES (1) NET INTEREST INCOME NET PORTFOLIO VALUE
- ---------------------------- ------------------- -------------------
<S> <C> <C>
-400 Basis Points $ 249,064 $ 9,454,901
-300 Basis Points $ 186,798 $ 6,986,480
-200 Basis Points $ 124,532 $ 4,585,114
-100 Basis Points $ 62,266 $ 2,255,293
0 Basis Points -- --
100 Basis Points $ (62,266) $(2,179,042)
200 Basis Points $(124,532) $(4,281,146)
300 Basis Points $(186,798) $(6,306,467)
400 Basis Points $(249,064) $(8,255,828)
</TABLE>
- ------------------------
(1) Assumes that uniform changes occur instantaneously in both the yield on
10-year U.S. Treasury note and the interest rate applicable to U.S. dollar
deposits in the London interbank market.
18
<PAGE>
The following table sets forth information as to the type of funding used to
finance the Company's assets as of March 31, 2000. As indicated in the table, a
large percentage of the Company's fixed rate assets are financed by floating
rate liabilities and the Company's variable rate assets are generally funded by
variable rate liabilities which use the same index.
ASSETS AND LIABILITIES
AS OF MARCH 31, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BASIS AMOUNT COUPON TYPE LIABILITY TYPE
------------ ----------- --------- --------
<S> <C> <C> <C> <C>
INTEREST-BEARING ASSETS
Fixed Assets, Financed Floating.................. $101,351 Fixed $ 81,761 LIBOR
Investments in WFSG and affiliates............... 5,110 Fixed -- None
Floating Assets, Financed Floating............... 25,000 LIBOR 18,791 LIBOR
-------- --------
Sub-total.................................... 131,461 100,552
OTHER ASSETS
Investments in Real Estate....................... 55,211 N/A 39,197 Fixed
Cash and Cash Equivalents........................ 5,594 N/A -- None
Investments in WFSG and affiliates............... 3,172 N/A -- None
Other............................................ 3,121 N/A -- None
-------- --------
Sub-total.................................... 67,098 39,197
LIABILITY ONLY
Dividends........................................ -- 4,090 Fixed
Accounts Payable and Accrued Liabilities......... -- 2,640 None
-------- --------
Sub-total.................................... -- 6,730
-------- --------
Grand Total.................................. $198,559 $146,479
======== ========
</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. Asset and
liability management can utilize a wide variety of off-balance sheet financial
techniques to assist it in the management of interest rate risk. For example, in
hedging the interest rate and exchange rate exposure of a foreign currency
denominated asset or liability, we may enter into hedge transactions to counter
movements in the different currencies as well as interest rates in those
currencies. These hedges may be in the form of currency and interest rate swaps,
options, and forwards, or combinations thereof. No such techniques were in use
as of March 31, 2000.
Methods for evaluating interest rate risk include an analysis of the
Company's interest rate sensitivity "gap," which is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities. A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Since different
types of assets and liabilities with the same or similar maturities may react
differently to changes in overall market rates or conditions, changes in
interest rates may affect net interest income positively or negatively even if
an institution were perfectly matched in each maturity category.
19
<PAGE>
The following tables set forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at March 31,
2000 (dollars in thousands):
<TABLE>
<CAPTION>
WITHIN 4 TO 12 ONE 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................. $ 5,594 $ -- $ -- $ -- $ 5,594
Securities available for sale............. -- -- -- 96,230 96,230
Loans(2).................................. 25,128 384 876 3,733 30,121
Investments in WFSG and affiliates........ 252 1,077 2,532 1,249 5,110
-------- -------- -------- -------- --------
Total rate-sensitive assets............... $ 30,974 $ 1,461 $ 3,408 $101,212 $137,055
======== ======== ======== ======== ========
INTEREST-SENSITIVE LIABILITIES:
Borrowings on loans and securities........ $100,552 $ -- $ -- $ -- $100,552
Borrowings on real estate................. -- 1,073 -- 38,125 39,198
Dividends payable......................... -- 4,090 -- -- 4,090
-------- -------- -------- -------- --------
Total rate-sensitive liabilities.......... $100,552 $ 5,163 $ -- $ 38,125 $143,840
======== ======== ======== ======== ========
Interest rate sensitivity gap............. (69,578) (3,702) 3,408 63,087
Cumulative interest rate sensitivity
gap..................................... (69,578) (73,280) (69,872) (6,785)
Cumulative interest rate sensitivity gap
as a percentage of total rate-sensitive
assets.................................. (51)% (53)% (51)% (5)%
</TABLE>
- ------------------------
(1) Real estate property holdings are not considered interest rate sensitive.
(2) Amortizing fixed rate loans are assumed to prepay at a Constant Prepayment
Rate ("CPR") of 10%.
20
<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, THE FINANCIAL AND SECURITIES MARKETS
AND THE AVAILABILITY OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY,
COMPETITIVE PRODUCTS AND PRICING, THE REAL ESTATE MARKET, FISCAL AND MONETARY
POLICIES OF THE U.S. GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES,
ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK MANAGEMENT,
YEAR 2000 AND ASSET/LIABILITY MANAGEMENT. EXCEPT AS MAY BE REQUIRED BY LAW, THE
COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO
PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BE MADE TO ANY
FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
21
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The registrant is not a party to any other material legal proceedings, except as
follows:
The Company is engaged in litigation with WFSG relating to the termination
of the contractual and other relationships which formerly existed between the
companies. Prior to September 1999, the Company's business affairs and
day-to-day operations had been managed by a wholly-owned subsidiary of WFSG. The
Company and WFSG had the same senior management team, though the Company had a
significantly different shareholder base and the majority of its directors were
independent. In addition, the Company and WFSG had other significant contractual
relationships relating to the servicing of real estate related assets and also
had certain cross shareholdings. The Company has sought to amicably resolve its
differences with WFSG and has been unable to resolve certain areas of dispute.
The Company alleges: (1) the termination of Messrs. Wiederhorn and Mendelsohn
made WFSG and its affiliates unable and/or unwilling to provide management to
the Company as required under the management agreement; (2) the inability of
WFSG and its affiliates to manage the Company's business affairs triggered
application of a facilities sharing agreement dated February 19, 1999 between
the Company and WFSG and its affiliates (the "Facilities Sharing Agreement");
and (3) WFSG's refusal to allow Messrs. Wiederhorn and Mendelsohn access to
WFSG's facilities, personnel, and equipment for the Company's business violated
the terms of the Facilities Sharing Agreement. WFSG alleges the Company breached
the management agreement and is claiming damages for alleged non-payment of
quarterly management fees of $0.7 million and damages under a termination fee in
a range of $3.5 million to $4.0 million.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
22
<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: May 11, 2000
23
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Quarter Ended
March 31,
-------------------------
2000 1999
----------- -----------
Diluted net income per share:
Net income to common shareholders $ 2,540,000 $ 1,767,000
Average number of shares outstanding 10,507,313 11,500,000
Net effect of dilutive stock options-based on
treasury stock method N/A N/A
----------- -----------
Total average shares 10,507,313 11,500,000
=========== ===========
Diluted net income per share $ 0.24 $ 0.15
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF MARCH 31, 2000 AND STATEMENT OF EARNINGS FOR THE
QUARTER ENDED MARCH 31, 200 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,594
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 96,230
<INVESTMENTS-CARRYING> 96,230
<INVESTMENTS-MARKET> 96,230
<LOANS> 30,121
<ALLOWANCE> 586
<TOTAL-ASSETS> 198,559
<DEPOSITS> 0
<SHORT-TERM> 81,761
<LIABILITIES-OTHER> 6,730
<LONG-TERM> 57,988
0
0
<COMMON> 166,981
<OTHER-SE> (114,901)
<TOTAL-LIABILITIES-AND-EQUITY> 198,559
<INTEREST-LOAN> 1,104
<INTEREST-INVEST> 3,336
<INTEREST-OTHER> 80
<INTEREST-TOTAL> 4,520
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 2,296
<INTEREST-INCOME-NET> 2,224
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 3,326
<EXPENSE-OTHER> 2,126
<INCOME-PRETAX> 2,640
<INCOME-PRE-EXTRAORDINARY> 2,640
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,540
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
