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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 1)
Wilshire Real Estate Investment Trust Inc.
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(Name of Issuer)
Common Stock, par value $0.0001 per share
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(Title of Class of Securities)
971892104
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(CUSIP Number)
Value Partners, Ltd.
4514 Cole Avenue
Suite 808
Dallas, Texas 75205
Attn.: Timothy G. Ewing
(214) 522-2100
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(Name, Address, Telephone Number of Person Authorized to Receive Notices and
Communications)
February 26, 1999
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D, and is filing this
schedule because of Rule Sections 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g),
check the following box [x].
Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-7(b) for other
parties to whom copies are to be sent.
The information required on the remainder of this cover page shall not be deemed
to be filed for the purpose of Section 18 of the Securities Exchange Act of 1934
(the "Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
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CUSIP No. 971892104 13D
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1. NAMES OF REPORTING PERSON
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Value Partners, Ltd., 75-2291866
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2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ]
(b) [ ]
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3. SEC USE ONLY
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4. SOURCE OF FUNDS
WC
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5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEM 2(d) OR 2(e) [ ]
N/A
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6. CITIZENSHIP OR PLACE OF ORGANIZATION
Texas
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NUMBER OF SHARES BENEFICIALLY
OWNED BY EACH REPORTING
PERSON WITH
7. SOLE VOTING POWER
1,000,000
---------------------------------------------
8. SHARED VOTING POWER
0*
---------------------------------------------
9. SOLE DISPOSITIVE POWER
1,000,000
---------------------------------------------
10. SHARED DISPOSITIVE POWER
0*
---------------------------------------------
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11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,000,000*
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12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
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13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
8.7%
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14. TYPE OF REPORTING PERSON
PN
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CUSIP No. 971892104 13D
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*But see Item 5.
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1. NAMES OF REPORTING PERSON
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Ewing & Partners, 75-2741747
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2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ]
(b) [ ]
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3. SEC USE ONLY
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4. SOURCE OF FUNDS
N/A
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5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEM 2(d) OR 2(e) [ ]
N/A
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6. CITIZENSHIP OR PLACE OF ORGANIZATION
Texas
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NUMBER OF SHARES BENEFICIALLY
OWNED BY EACH REPORTING
PERSON WITH ---------------------------------------------
7. SOLE VOTING POWER
0
---------------------------------------------
8. SHARED VOTING POWER
1,000,000*
---------------------------------------------
9. SOLE DISPOSITIVE POWER
0
---------------------------------------------
10. SHARED DISPOSITIVE POWER
1,000,000*
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11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,000,000*
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12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES[ ]
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13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
8.7%*
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14. TYPE OF REPORTING PERSON*
PN
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CUSIP No. 971892104 13D
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*But See Item 5.
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1. NAMES OF REPORTING PERSON
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Timothy G. Ewing
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2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ]
(b) [ ]
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3. SEC USE ONLY
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4. SOURCE OF FUNDS
N/A
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5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED [ ]
PURSUANT TO ITEM 2(d) OR 2(e)
N/A
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6. CITIZENSHIP OR PLACE OF ORGANIZATION
United States of America
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NUMBER OF SHARES BENEFICIALLY
OWNED BY EACH REPORTING
PERSON WITH -------------------------------------------
7. SOLE VOTING POWER
0
-------------------------------------------
8. SHARED VOTING POWER
1,000,000*
-------------------------------------------
9. SOLE DISPOSITIVE POWER
0
-------------------------------------------
10. SHARED DISPOSITIVE POWER
1,000,000*
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11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,000,000*
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12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES[ ]
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13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
8.7%*
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14. TYPE OF REPORTING PERSON
IN
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Amendment No. 1
Value Partners, Ltd. ("Value Partners") hereby amends its Schedule 13D
relating to the shares of common stock, par value $0.0001 per share (the
"Common Stock"), of Wilshire Real Estate Investment Trust Inc. (the "Company").
The following Items are hereby supplemented in the manner indicated.
Item 2. Identity and Background
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(a)-(b) Value Partners, Ltd. ("Value Partners") is a Texas limited
partnership. Ewing & Partners, a Texas general partnership, is the general
partner of Value Partners. Timothy G. Ewing and Ewing Asset Management, Inc.,
a Texas limited liability company ("EAM"), are the general partners of Ewing
& Partners, and Mr. Ewing is the managing general partner of Ewing & Partners.
EAM is controlled by Mr. Ewing. The principal place of business for Value
Partners, Ewing & Partners, EAM and Mr. Ewing is 4514 Cole Avenue, Suite 808,
Dallas, Texas 75205.
Value Partners, Ewing & Partners and Mr. Ewing are sometimes hereinafter
referred to as the "Reporting Persons."
Item 4. Purpose of Transaction
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The shares of Common Stock purchased by Value Partners have been
acquired for investment purposes. Value Partners may make additional
purchases of Common Stock either in the open market or in private trans-
actions depending on its evaluation of the Company's business, financial
condition, prospects, the market for the Common Stock, other opportunities
available to Value Partners, general market and economic conditions and other
future developments. Depending on the same factors, Value Partners may decide
to sell all or part of its investment in the Common Stock, although it has no
current intention to do so.
As previously reported, although Value Partners' purchases of Common Stock
have been made for investment, as a result of recent losses reported by the
Company, Value Partners intends to evaluate means of enhancing the value of
its and other shareholders' investment in the Common Stock of the Company,
including without limitation the appropriateness of (i) changes in the board of
directors or management of the Company; (ii) the composition of the assets of
the Company; (iii) the investment policies and practices of the Company; (iv)
the Company's status as a real estate investment trust under the Internal
Revenue Code of 1986, as amended; (v) the status of Wilshire Realty Services
Corporation, a wholly-owned subsidiary of Wilshire Financial Services Group
Inc. ("WFSG"), as manager of the Company; (vi) consummated and proposed trans-
actions between the Company and WFSG, whether pursuant to WFSG's proposed
reorganization or otherwise; and (vii) a merger or other change in control
involving the Company.
In connection with the foregoing evaluation, which is ongoing, on February
26, 1999,Value Partners sent a letter to the current and former directors of
the Company which expressed concerns
1
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regarding, among other things, (i) past transactions between the Company and
WFSG and its affiliates and (ii) proposed transactions between the Company
and WFSG and its affiliates as part of a proposed pre-packaged filing by WFSG
under Chapter 11 of the U.S. Bankruptcy Code, as described in a Solicitation and
Disclosure Statement of WFSG, dated February 1, 1999. In its letter to current
and former directors of the Company, a copy of which is filed as an exhibit to
this amended Schedule 13D and is hereby incorporated herein by reference, Value
Partners requested that the Company should re-open negotiations immediately
with WFSG in order to address the damage already inflicted on the Company by
the referenced transactions and in order to mitigate the effects on the Company
of the proposed reorganization of WFSG. Among other things, Value Partners
requested that (i) the terms of a $10.0 million debtor-in-possession loan
facility proposed to be provided by the Company (through a subsidiary) to WFSG
be revised to provide for repayment by WFSG immediately upon the effective date
of its bankruptcy reorganization; (ii) the proposed terms for settlement of a
$17.7 million unsecured loan previously made by the Company to WFSG be revised
to provide for cash payments at a market interest rate for similar unsecured
debt; (ii) Andrew A. Wiederhorn and Lawrence A. Mendelsohn, directors and
executive officers of the Company and directors, executive officers and
controlling stockholders of WFSG, immediately resign from the Board of
Directors of the Company because of their fundamental and irreconcilable
conflicts of interest, to be replaced by independent directors acceptable to
the shareholders of the Company; and (iv) the Board of Directors of the Company
retain independent counsel to (x) review the Management Agreement between the
Company and Wilshire Realty Services Corporation, a subsidiary of WFSG, to
determine whether a basis exists for termination thereof for cause and (y)
investigate and advise the Board of Directors as to any possible claims which
the Company may have against WFSG, its corporate affiliates and their respective
directors and officers for breach of their duties and obligations to the
Company, and pending completion of such investigation, Value Partners requested
that the Company not give any releases to WFSG, its corporate affiliates or any
of their respective directors or officers. Should the Board of Directors of
the Company fail to address the foregoing issues immediately, Value Partners
intends to pursue all legal remedies available to it.
Other than as set forth above, none of the Reporting Persons has any
specific plans or proposals which relate to or would result in: (a) the
acquisition by any person of additional securities of the Company, or the
disposition of securities of the Company; (b) an extraordinary corporate trans-
action, such as a merger, reorganization or liquidation, involving the Company
or any of its subsidiaries; (c) a sale or transfer of a material amount of
assets of the Company or any of its subsidiaries; (d) any change in the present
board of directors or management of the Company, including any plans or
proposals to change the number or term of directors or to fill any existing
vacancies on the board; (e) any material change in the present capitalization or
dividend policy of the Company; (f) any other material change in the Company's
business or corporate structure; (g) changes in the Company's charter, bylaws
or instruments corresponding thereto or other actions which may impede the
acquisition of control of the Company by any person; (h) causing a class of
securities of the Company to be delisted from a national securities exchange or
to cease to be authorized to be quoted in an interdealer quotation system of a
registered national securities association; (i) a class of equity securities
of the Company becoming eligible for termination of registration pursuant to
Section 12(g)(4) of the Act; or (j) any action similar to any of those
enumerated above.
2
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Item 7. Material to Be Filed as Exhibits
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The following documents are filed as exhibits to this Schedule 13D:
Exhibit 1 Second Amended and Restated Agreement of Limited Partnership
of Value Partners, dated as of January 1, 1998.(1)
Exhibit 2 Amended and Restated Management Agreement between Ewing &
Partners and Value Partners (included as Exhibit A to
Exhibit 1 to this Schedule 13D).(1)
Exhibit 3 Amended and Restated Agreement of General Partnership of
Ewing & Partners, dated as of January 1, 1998.(2)
Exhibit 4 Joint Filing Agreement, dated as of February 8, 1998, among
Value Partners, Ewing & Partners and Mr. Ewing.(1)
Exhibit 5 Letter, dated February 26, 1999, from Value Partners to
current and former directors of the Company.
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(1) Incorporated by reference to the initial filing on Schedule 13D to which
this Amendment relates.
(2) Incorporated by reference to Amendment No. 9 to the Schedule 13D filed on
January 8, 1998 by Value Partners, Ewing & Partners and Mr. Ewing with
respect to their interests in Allstate Financial Corporation.
3
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, each of
the undersigned certifies that the information set forth in this statement is
true, complete and correct.
VALUE PARTNERS, LTD.
By: EWING & PARTNERS, its General Partner
March 1, 1999 By: /s/ Timothy G. Ewing
--------------------------------
Timothy G. Ewing,
Managing Partner
EWING & PARTNERS
March 1, 1999 By: /s/ Timothy G. Ewing
---------------------------------
Timothy G. Ewing,
Managing Partner
March 1, 1999 By: /s/ Timothy G. Ewing
---------------------------------
Timothy G. Ewing
4
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<PAGE>
EXHIBIT 5
February 26, 1999
VIA FEDERAL EXPRESS
Lawrence A. Mendelsohn Jordan D. Schnitzer
Wilshire Real Estate Investment Trust, Inc. Jordan Schnitzer Properties
1776 SW Madison Street 1121 S.W. Salmon Street
Portland, Oregon 97205 Portland, Oregon 97205
David C. Egelhoff Andrew A. Wiederhorn
Macadam Forbes, Inc. Wilshire Real Estate Investment
1800 S.W. 1st Street Trust, Inc.
Suite 100 1776 SW Madison Street
Portland, Oregon 97201 Portland, Oregon 97205
John C. Condas Patrick Terrell
Jackson, DeMarco & Peckenpaugh c/o Wilshire Real Estate Investment
Four Park Plaza, 16th Floor Trust, Inc.
Irvine, California 92714 1776 SW Madison Street
Portland, Oregon 97205
Steven Kapiloff
Winthrop, Stimson, Putnam & Roberts
695 East Main Street
Post Office 6760
Stamford, Connecticut 06904
Gentlemen:
As you know, Value Partners, Ltd. ("Value Partners") is the owner of one
million shares of issued and outstanding common stock of Wilshire Real Estate
Investment Trust, Inc. ("WREI"). We have recently received certain solicitation
materials of Wilshire Financial Services Group, Inc. ("WFSG") in connection with
its proposed pre-packaged Chapter 11 plan of reorganization (the
"Solicitation"). The Solicitation describes both past transactions between WREI
and WFSG and current negotiations and proposed transactions between WREI and
WFSG as part of an anticipated Chapter 11 filing for WFSG.
<PAGE>
February 26, 1999
Page 2
This letter is directed to each of you as a current or former director of
WREI in order to place you on notice of Value Partners' claims and objections to
matters raised in the Solicitation, as well as to certain aspects of the Board's
overall stewardship of WREI.
Background
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In the short time since WREI's initial public offering, WREI's financial
situation has deteriorated dramatically. Specifically, in merely the first
two quarters of WREI's operations ending September 30, 1998, shareholders'
equity declined from approximately $146.8 million to $100.4 million, or by over
$46 million. Value Partners suspects that WREI has incurred additional
substantial losses during its quarter ending December 31, 1998, thereby reducing
shareholders' equity to perhaps a level below $75 million. While some of this
decline is attributable to losses incurred during the liquidation of significant
assets in the fall of 1998 to meet margin calls, a troubling percentage of
WREI's true liquidity crisis and decline in shareholders' equity to date has
been triggered by questionable loan transactions in the third quarter of 1998
between WREI, WFSG and Wilshire Credit Corporation ("WCC"), an entity controlled
by Messrs. Weiderhorn and Mendelsohn. In addition, WREI recently agreed to
loan $5 million to WFSG with actual knowledge that WFSG anticipated filing a
Chapter 11 Petition. WREI also has negotiated debtor in possession ("DIP")
financing to WFSG on terms which WFSG has stated in the Solicitation are
unavailable from any other source. "This compromise and settlement was only
reached after the Company [WFSG] had approached several well known debtor in
possession lenders, all of whom declined to provide such financing on
comparable terms." (Solicitation p. 4.) "The Company [WFSG] is unaware of
any other potential source of DIP financing other than the DIP Facility."
(Solicitation p. 15.)
The following transactions in particular require an explanation by each of
you as a member of the Board of Directors of WREI:
1. Loans Between WREI and WFSG.
During the quarter ending September 30, 1998, a wholly owned subsidiary of
WFSG (WMFC 1997-1) loaned WREI $15.6 million secured by operating real estate
of WREI. During that same quarter, WREI loaned WFSG $17.7 million on an
unsecured basis. In addition, WREI borrowed $17.4 million on an unsecured basis
from WCC. This raises a simple question. Why would a Board of Directors,
acting with the best interests of WREI in mind, permit WREI to borrow money on
a secured basis, and loan money to that same lender's parent on an unsecured
basis? It is reasonable to assume that had WREI refused to loan WFSG $17.7
million, WREI would not have had to borrow from and repay to WCC $17.4 million.
<PAGE>
February 26, 1999
Page 3
While the substance of the above transactions is questionable, the
structure is also troubling. Because a different WFSG affiliated entity (or
WCC) was a party to each of these three loan transactions, it appears WFSG acted
from the outset to create indebtedness for WREI which WREI could not eliminate
or minimize through set offs against loans to WFSG or its affiliates. Because
of WFSG's present financial condition, WREI's $17.7 million loan to WFSG remains
outstanding and is to be seriously compromised or converted to equity at a sub-
stantial loss to WREI. Meanwhile, WREI must repay its loans from WCC and WFSG
which totaled $33 million (or perhaps has already paid these in part with pro-
ceeds of a recovery from Southern Pacific). A decision to put at risk in excess
of 10% of WREI's original shareholder value in a single unsecured loan to WFSG
in this manner is indefensible.(1)
2. Debtor in Possession Financing.
In the Solicitation, WFSG disclosed that it proposes to borrow an
additional $10 million from WREI (through WREI's subsidiary, Wilshire Real
Estate Partnership, L.P. ("WREP")) to fund certain needs in a Chapter 11 bank-
ruptcy of WFSG. This proposed loan includes the following features:
a. Interest Rate 12%
b. Maturity-this loan does not mature until February 29, 2004, to
be repaid through principal and interest payments commencing on
February 29, 2000. Prior to February 29, 2000, interest only
will be payable on the facility. Hence, a company with severe
liquidity problems is loaning $10 million, or approximately fif-
teen percent (15%) of what we project will be its remaining
shareholders' equity, to a company about to enter the uncertain
future of Chapter 11. The loan will not be repaid in full until
2004 and is secured by stock in a bank subject to significant
regulatory action by the Office of Thrift Supervision ("OTS")
as of January 1999.
c. Commitment Fee-WFSG is not paying a commitment fee to WREI/WREP.
d. Security-The proposed DIP loan is to be secured by common stock
of First Bank of Beverly Hills, FSB ("First Bank") and its parent
(a direct subsidiary of WFSG), subject to existing liens.
According to the Solicitation, prior to October, 1998, First Bank
was under a cease and desist order by the OTS; and again on
January 7, 1999, the OTS issued a new cease and desist order with
respect to transactions with affiliates. The Solicitation fur-
ther states that the OTS could re-evaluate WFSG's ownership of
First Bank or place First Bank in conservatorship or receiver-
ship. The most recent OTS enforcement action is very telling, as
it appears to have arisen as a result of affiliated
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1 The Solicitation also states that WREI holds approximately $20 million prin-
cipal amount of Series B notes of WFSG. Value Partners would like an
explanation as to how much was paid for these securities, when such sum was paid
and to whom.
<PAGE>
February 26, 1999
Page 4
transactions between First Bank and various entities controlled
by Mr. Wiederhorn and Mr. Mendelsohn, transactions perhaps
similar to the affiliated transactions between WREI, WFSG, and
WFSG's other related parties.
e. Pre-Bankruptcy Interim Loan-$5 million of the proceeds of the
DIP loan are to be used to repay a disclosed $5 million interim
loan made in January 1999 by WREP to WFSG, (through Wilshire
Acquisition Corporation ("WAC"), a subsidiary of WFSG), which
loan was presumably approved by each of you. This pre-petition
loan is allegedly secured by a priority lien on First Bank common
stock.
f. Pre-bankruptcy Unsecured Debt- As set forth above, WREI and WREP
loaned WFSG $17.7 million on an unsecured basis. In the event
WREI enters into this DIP loan, this debt will be restructured
from a 13% loan due upon thirty (30) days notice to a 6% Payment
in Kind ("PIK") note due 2006. In the event that the DIP loan is
not made, this debt will be converted to equity equal to between
37% and 42% of the debt's original value (according to the
Solicitation). Accordingly, it appears that a questionable
unsecured loan which never should have been made can now be
"salvaged" (if a 7 year 6% PIK note can be considered a
reasonably equivalent asset) only by WREI's loaning an additional
$10 million on a post-petition basis to a distressed company.
g. Lack of Liquidity WREI apparently lacks the ability to make
this loan unless it can liquidate certain assets. This issue is
discussed in more detail below.
3. Pre-Bankruptcy Interim Loan.
In January 1999, WREP agreed to loan to WFSG (through WAC) the sum of $5
million, which is referenced above. This loan is secured by a priority lien on
First Bank stock. The following features on this interim loan were set forth in
the solicitation material:
a. In the event the DIP loan is not made by WREP, this interim loan
will not be paid immediately and collateral pledged to secure
repayment will be subordinated to a new DIP lender, if any. "The
Interim Facility is guaranteed by the Company [WFSG] and is
secured by a first priority pledge of all of the stock of First
Bank; provided, however, if WFSG obtains one or more commitments
from other lenders meeting certain conditions and WREP declines
to make a comparable lien WREP agrees to subordinate its security
interest in the shares of First Bank to those of such other
lenders up to a maximum amount of such indebtedness.
" (Solicitation p. 132.) Under such circumstances, the interim
facility will mature February 29, 2004, with fully
<PAGE>
February 26, 1999
Page 5
amortizing principal and interest payments commencing February
29, 2000. This loan will further be subject to modification in
WFSG's bankruptcy proceeding. In addition, to the extent WSFG
has preference or fraudulent transfer claims against WREI (none
of which are described in the Solicitation), there is a real
concern as to whether such claims can be asserted as a defense
against payment of the interim facility.
b. Given the liquidity problems of WREP, the DIP facility can be
funded only in the event WREP liquidates certain of its assets.
"The funding of the DIP Facility is subject to a number of
conditions, including WREP having sufficient available funds to
make disbursements under the DIP Facility, the restructuring of
one of WREP's outstanding borrowings, and the sale by WREP of a
large loan in its portfolio. There can be no assurance that the
DIP Facility will be funded." (Solicitation p. 133.) Absent such
an asset liquidation and restructuring (which it appears WREI is
undertaking to meet WFSG's needs and not its own), the DIP loan
cannot be made and $5 million in liquidity is gone. In the event
it can liquidate this asset, the DIP loan will be made and $10
million in liquidity has disappeared.
c. In the Solicitation, WFSG notes that the proposed DIP facility was
offered to a number of institutions, all of whom refused to enter
into such an agreement on terms similar to this DIP facility.
This suggests that while the opportunity is favorable to WFSG, it
is unfavorable to WREP.
d. As is set forth above, should WREI be unable to make the DIP loan,
the interim loan is to be repaid over five years. Further, its
security interest in the common stock of the First Bank is to be
subordinated to a new DIP lender, if any. In short, you author-
ized a $5 million interim loan which can be repaid immediately
only in the event that WREI successfully liquidates much needed
assets in order to make a $10 million DIP loan on terms no
experienced DIP lender would authorize. This is not in WREI's
best interests.
4. Non-Payment of Dividend.
On September 17, 1998, WREI announced a dividend of $0.40 per share, pay-
able on October 27, 1998. On October 26, 1998, WREI announced that it had
lost between $40 and $50 million on investments and was delaying for ninety (90)
days the $0.40 per share dividend. On November 23, 1998, WREI announced that
its decision to postpone the payment of the $0.40 per share dividend was ". . .
to increase short-term liquidity. . .," but reiterated its intention to pay the
postponed $0.40 per share dividend on January 27, 1999. However, on December
30, 1998, WREI announced that ". . . its Board of Directors has authorized the
repurchase of up to one million shares of the
<PAGE>
February 26, 1999
Page 6
Company's common stock . . ." and that ". . . it will further postpone its pre-
vious announced third quarter dividend to increase short-term liquidity."
To date, WREI has not paid its previously declared $0.40 per share
dividend. Rather, WREI diverted limited available cash to a $5 million interim
loan to WFSG that may not be repaid in full until the year 2004.
The Solicitation suggests that the Board of Directors of WREI has breached
its duties to WREI and its shareholders by entering into highly questionable
transactions which put at risk a significant portion of the shareholders' equity
of WREI and have seriously impaired WREI's future liquidity. These public dis-
closures support the conclusion that this Board is failing to exercise
independent judgment in negotiations with WFSG. Given that Mr. Wiederhorn and
Mr. Mendelsohn are the chairman/chief executive officer and the president,
respectively, of both WREI and WFSG, each of you should have exercised
heightened scrutiny of these transactions.
5. Management Agreement and Servicing Agreement.
WREI and WREP entered into a Management Agreement with Wilshire Realty
Services Corporation. ("WRSC"), a subsidiary of WFSG. In addition, WREI
entered into a loan servicing agreement with WCC, which is owned by Mr. Wieder-
horn and Mr. Mendelsohn. According to the Solicitation, WCC is to become a
subsidiary of WFSG. Given the impending Chapter 11 proceeding of WFSG and the
questionable transactions between WFSG and WREI, there is not a good reason
why WREI and WREP should continue the Management and Service Agreements with
WFSG and its wholly owned subsidiaries. This is particularly true given that
WFSG has done such a poor job of managing WREI thus far.
Summary
-------
As members of the Board of Directors of WREI, you owed and continue to owe
a duty to take actions in the best interest of WREI's shareholders. Subsequent
to the public offering and while under your stewardship, WREI entered into a
number of transactions with WFSG (or subsidiaries) and WCC which require
immediate explanation, not only as to their substance, but also in some cases
as to a structure seemingly established for the benefit of WFSG or WCC, to the
detriment of WREI. While the loans between WREI, WFSG and WCC appear to involve
a similar exchange of value in and out of WREI, the net effect is that WREI
owed WFSG and WCC approximately $33 million, of which debts $15.6 million owed
to WFSG is secured, and none of which could not be offset against a $17.7
million unsecured loan that WREI made to WFSG. To make matters worse, you are
in the process of squandering an opportunity to minimize the impact of the un-
even treatment accorded WREI in 1998 and 1999 by WFSG through the negotiation of
interim and DIP financing with WFSG. Rather than strengthen WREI's position,
you have actually weakened WREI's financial condition by placing at risk $10
million in liquidity. In effect, you, as a Board, have allowed WFSG to use WREI
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February 26, 1999
Page 7
in a way that parallels WFSG's use of First Bank, which use has precipitated
recent regulatory prohibitions.
In order to address the severe damage already inflicted on WREI, and in
order to mitigate the effects of the proposed reorganization of WFSG in its
anticipated Chapter 11 filing, WREI should re-open negotiations immediately
with WFSG to obtain, at least, the following in exchange for the proposed DIP
facility:
1. The terms of the DIP financing should be revised to provide for repay-
ment of any outstanding balance of the DIP facility immediately upon the
effective date of WFSG's bankruptcy reorganization, assuming the Board can
demonstrate that it is in fact prudent for WREI to undertake the DIP facility;
2. The proposed terms for settlement of the $17.7 million loan to WFSG
should be revised to provide for cash payments at a normal market interest rate
for similar unsecured debt. This loan is clearly impaired notwithstanding
WFSG's self serving categorization of the loan as unimpaired in its reorgan-
ization plan. WREI should assert its rights accordingly;
3. Messrs. Weiderhorn and Mendelsohn should immediately resign from the
Board of Directors of WREI and be replaced with two independent directors accept
- -able to the shareholders. Messrs. Weiderhorn and Mendelsohn's conflicts are
fundamental and irreconcilable; and
4. The Board should retain independent counsel to (i) review the Manage-
ment Agreement with WRSC and WFSG to determine whether a basis exists for the
termination of that contract for cause and (ii) investigate, and advise the
Board as to, any possible claims that WREI or WREP may have against WFSG,
WRSC, WCC and WAC, and their officers and directors, for breach of their duties
and obligations to WREI or WREP. In the interim, WREI should not give any
releases to WFSG, its affiliates or any of its officers or directors.
Absent adequate resolution of these above issues, WREI should not provide
the DIP facility and should object to any proposed plan to reorganize WFSG.
Should the Board fail to address these issues immediately, Value Partners
intends to pursue all legal remedies available to it.2
I would like to arrange a meeting with you at once to learn how you intend
to resolve these issues in a manner that serves the best interests of WREI and
its shareholders. I look forward to hearing from you as soon as possible.
- ---------------
2 This letter is not intended to be an exhaustive analysis of all issues, and
there are other issues that exist, including, but not limited to, WREI's failure
to qualify as a REIT for federal tax purposes.
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February 26, 1999
Page 8
Sincerely yours,
VALUE PARTNERS, LTD.
By: Ewing & Partners, Its General Partner
/s/ Timothy G. Ewing
-------------------------
Timothy G. Ewing
Managing Partner
cc: Jack R. Bird, Esq.- Bergman, Yonks, Stein & Bird, L.L.P.
Anthony J. Trenga, Esq.- Miller & Chevalier
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