-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G8Wtfisdl+n2Kl4HpSm9R4JWJmTDVbXvHXxgVmDaSse9mCpWwxKMznxn5L3Vtda8 pgfdxFyFaTuR4PpvECANXQ== 0000912057-99-007068.txt : 19991123 0000912057-99-007068.hdr.sgml : 19991123 ACCESSION NUMBER: 0000912057-99-007068 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILSHIRE REAL ESTATE INVESTMENT TRUST INC CENTRAL INDEX KEY: 0001048566 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 911851535 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23911 FILM NUMBER: 99762177 BUSINESS ADDRESS: STREET 1: 1301 S W 17TH STREET CITY: PORTLAND STATE: OR ZIP: 97201 BUSINESS PHONE: 5032235600 MAIL ADDRESS: STREET 1: 1301 S W 17TH STREET CITY: PORTLAND STATE: OR ZIP: 97201 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-23911 ------------------------ WILSHIRE REAL ESTATE INVESTMENT INC. (Exact name of registrant as specified in its charter) MARYLAND 52-2081138 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
1310 SW 17TH STREET PORTLAND, OR 97201 (Address of principal executive offices) (Zip Code) (503) 721-6500 (Registrant's telephone number, including area code) Wilshire Real Estate Investment Trust Inc. 1776 SW Madison Street Portland, OR 97205 (Former name and address of Registrant) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT OCTOBER 31, 1999 Common Stock, par value $0.0001 per share 11,500,000 shares
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WILSHIRE REAL ESTATE INVESTMENT INC. FORM 10-Q INDEX
PAGE NO. -------- PART I--FINANCIAL INFORMATION Item 1. Interim Financial Statements (Unaudited): Consolidated Statements of Financial Condition........ 3 Consolidated Statements of Operations................. 4 Consolidated Statements of Changes in Stockholders' Equity................................................. 5 Consolidated Statements of Cash Flows................. 6 Notes to Consolidated Financial Statements............ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk................................................. 30 PART II--OTHER INFORMATION Item 1. Legal Proceedings................................... 33 Item 2. Changes in Securities............................... 34 Item 3. Defaults Upon Senior Securities..................... 34 Item 4. Submission of Matters to a Vote of Security Holders..................................................... 34 Item 5. Other Information................................... 35 Item 6. Exhibits............................................ 35 Signatures.................................................. 36
2 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)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) ASSETS Cash and cash equivalents............................... $ 7,802 $ 4,782 Securities available for sale, at fair value............ 105,087 158,738 Loans held for sale, net................................ -- 44,006 Loans, net.............................................. 30,393 69,124 Discounted loans, net................................... 1,191 2,498 Investments in real estate, net......................... 69,424 85,005 Investment in WFSG (see Note 6)......................... 3,594 -- Notes receivable from WFSG (see Note 6)................. 10,977 -- Due from WFSG (see Note 6).............................. -- 12,352 Accrued interest receivable............................. 1,156 1,939 Prepaid servicing fees to WCC (see Note 6).............. 2,953 -- Other assets............................................ 1,887 2,673 -------- -------- Total assets........................................ $234,464 $381,117 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Short-term borrowings................................... $121,662 $225,566 Other borrowings........................................ 48,986 60,577 Accounts payable and accrued liabilities................ 7,120 6,233 Payable to Old WCC (see Notes 2 & 6).................... -- 11,698 Dividends payable....................................... 4,600 4,600 -------- -------- Total liabilities................................... 182,368 308,674 -------- -------- Commitments and Contingencies (see Note 7) Stockholders' Equity: Preferred stock, $.0001 par value; 25,000,000 shares authorized; no shares issued and outstanding.......... -- -- Common stock, $.0001 par value; 200,000,000 shares authorized; 11,500,000 shares issued and outstanding........................................... 166,981 166,981 Accumulated deficit..................................... (91,874) (64,093) Accumulated other comprehensive loss.................... (23,011) (30,445) -------- -------- Total stockholders' equity.......................... 52,096 72,443 -------- -------- Total liabilities and stockholders' equity.......... $234,464 $381,117 ======== ========
3 WILSHIRE REAL ESTATE INVESTMENT INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS SIX MONTHS SEPTEMBER 30, ENDED ENDED ------------------------- SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 ----------- ----------- ------------- ------------- Net Interest Income: Loans and discounted loans.............. $ 959 $ 4,167 $ 4,081 $ 5,491 Securities.............................. 3,291 7,152 12,025 10,758 Other investments....................... 555 326 2,063 486 ----------- ----------- ----------- ----------- Total interest income................. 4,805 11,645 18,169 16,735 Interest expense........................ 2,803 6,012 9,841 7,513 ----------- ----------- ----------- ----------- Net interest income before provision for losses.......................... 2,002 5,633 8,328 9,222 Provision for (recovery of) losses...... -- 3,000 (1,150) 3,000 ----------- ----------- ----------- ----------- Net interest income after provision for losses.......................... 2,002 2,633 9,478 6,222 ----------- ----------- ----------- ----------- Real Estate Operations: Operating income........................ 1,625 2,011 5,468 2,960 Operating expense....................... (35) (129) (158) (192) Interest expense........................ (1,043) (1,060) (3,579) (1,408) Provision for losses on real estate..... (325) -- (892) -- Gain on sale of real estate............. 708 -- 718 -- Depreciation............................ (333) (394) (1,102) (569) ----------- ----------- ----------- ----------- Net income from real estate operations.......................... 597 428 455 791 ----------- ----------- ----------- ----------- Other Operating Income (Loss): Gain (loss) on sale of securities....... 232 934 (697) 934 Gain (loss) on foreign currency translation........................... 35 -- (41) -- Other revenue........................... 53 -- 242 -- Provision for disputes with WFSG........ (4,077) -- (4,077) -- Market valuation losses and impairments........................... (6,339) (49,520) (28,527) (49,520) ----------- ----------- ----------- ----------- Total other operating loss.......... (10,096) (48,586) (33,100) (48,586) ----------- ----------- ----------- ----------- Operating Expenses: Management fees to WRSC................. 663 1,340 2,414 1,942 Servicing fees.......................... 127 204 175 252 Loan expenses........................... 31 193 36 278 Other................................... 854 1,618 1,789 1,793 ----------- ----------- ----------- ----------- Total operating expenses............ 1,675 3,355 4,414 4,265 ----------- ----------- ----------- ----------- Net loss before provision for income taxes................................... (9,172) (48,880) (27,581) (45,838) Provision for income taxes................ 200 -- 200 -- ----------- ----------- ----------- ----------- NET LOSS.................................. $ (9,372) $ (48,880) $ (27,781) $ (45,838) =========== =========== =========== =========== BASIC AND DILUTED LOSS PER SHARE.......... $ (0.82) $ (4.25) $ (2.42) $ (4.03) WEIGHTED AVERAGE SHARES OUTSTANDING....... 11,500,000 11,500,000 11,500,000 11,381,356
The accompanying notes are an integral part of these consolidated financial statements 4 WILSHIRE REAL ESTATE INVESTMENT INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED COMMON STOCK OTHER --------------------- ACCUMULATED COMPREHENSIVE SHARES AMOUNT DEFICIT LOSS TOTAL ---------- -------- ------------ -------------- -------- Initial capital.................................... -- $ 2 $ -- $ -- $ 2 Issuance of common stock........................... 11,500,000 166,979 -- -- 166,979 Comprehensive loss: Net loss......................................... -- -- (56,388) -- (56,388) Other comprehensive (loss) income: Foreign currency translation................... -- -- -- (7) (7) Unrealized holding losses on securities available for sale........................... -- -- -- (67,817) (67,817) Reclassification adjustment for losses on securities included in net loss.............. -- -- -- 37,379 37,379 -------- Total comprehensive loss........................... -- -- -- -- (86,833) Dividends declared................................. -- -- (7,705) -- (7,705) ---------- -------- -------- -------- -------- Balance at December 31, 1998....................... 11,500,000 166,981 (64,093) (30,445) 72,443 Comprehensive loss: Net loss (unaudited)............................. -- -- (27,781) -- (27,781) Other comprehensive (loss) income (unaudited): Unrealized holding losses on securities available for sale (unaudited)............... -- -- -- (11,512) (11,512) Reclassification adjustment for losses on securities included in net loss (unaudited).................................. -- -- -- 19,013 19,013 Foreign currency translation (unaudited)....... -- -- -- (67) (67) -------- Total comprehensive loss........................... -- -- -- -- (20,347) ---------- -------- -------- -------- -------- Balance at September 30, 1999 (unaudited).......... 11,500,000 $166,981 $(91,874) $(23,011) $ 52,096 ========== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements 5 WILSHIRE REAL ESTATE INVESTMENT INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS SIX MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 1999 1998 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (27,781) $ (45,838) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Provision for (recovery of) losses.................... (1,150) 3,000 Provision for losses on real estate owned............. 892 -- Depreciation.......................................... 1,102 569 Amortization of premiums and discounts, net........... (290) (336) Market valuation losses and impairments............... 28,527 49,520 Loss (gain) on sale of securities..................... 697 (934) Gain on sale of real estate........................... (718) -- Loss on foreign currency translation.................. 5 -- Change in: Due from WFSG....................................... 1,159 (325) Accrued interest receivable......................... 783 (4,809) Prepaid servicing fees to WCC....................... (2,953) -- Other assets........................................ (237) (2,934) Payable to Old WCC.................................. (11,698) -- Accounts payable and accrued liabilities............ 844 4,540 Other, net............................................ -- 400 --------- ----------- Net cash (used in) provided by operating activities... (10,818) 2,853 --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of securities available for sale................. (8,885) (365,918) Purchase of loans and discounted loans.................... -- (651,100) Repayments of securities available for sale............... 9,100 3,859 Proceeds from sale of securities available for sale....... 32,331 16,817 Loan originations......................................... (489) -- Proceeds on sale of loans................................. 48,366 -- Principal payments received on loans and discounted loans................................................... 39,764 6,338 Investments in real estate................................ (223) (81,256) Proceeds on sale of real estate........................... 14,019 -- Loan to WFSG.............................................. (5,000) -- Other..................................................... 247 28 --------- ----------- Net cash provided by (used in) investing activities... 129,230 (1,071,232) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings....................... 1,251 508,230 Proceeds from other borrowings............................ -- 60,940 Proceeds from securitized mortgage obligations............ -- 372,318 Repayments on short-term borrowings....................... (105,185) (32,879) Repayments on other borrowings............................ (11,454) (136) Dividend payments on common stock......................... -- (3,105) Proceeds from issuance of common stock, net of offering costs................................................... -- 166,979 --------- ----------- Net cash (used in) provided by financing activities... (115,388) 1,072,347 --------- ----------- Effect of exchange rate changes on cash..................... (4) -- --------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 3,020 3,968 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 4,782 2 CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 7,802 $ 3,970 ========= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-- Cash paid for interest................................ $ 9,475 $ 7,347 NON CASH INVESTING ACTIVITIES-- Investment in WFSG.................................... 12,289 -- NON CASH FINANCING ACTIVITIES-- Common stock dividends declared but not paid.......... -- 4,600 Additions to investment real estate acquired in settlement of loans.................................. 26 276
The accompanying notes are an integral part of these consolidated financial statements 6 WILSHIRE REAL ESTATE INVESTMENT INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED) NOTE 1--BASIS OF PRESENTATION The accompanying interim consolidated financial statements of Wilshire Real Estate Investment Inc. and Subsidiaries ("WREI" or the "Company") (previously Wilshire Real Estate Investment Trust Inc. and Subsidiaries) are unaudited and have been prepared in conformity with the requirements of Regulation S-X promulgated under the Securities Exchange Act of 1934 as amended (the "Exchange Act"), particularly Rule 10-01 thereof, which governs the presentation of interim financial statements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements. The accompanying interim consolidated financial statements should be read in conjunction with the Company's 1998 Annual Report on Form 10-K/A. A summary of the Company's significant accounting policies is set forth in Note 4 to the consolidated financial statements in the 1998 Annual Report on Form 10-K/A. In the Company's opinion, all adjustments, comprised of normal recurring accruals necessary for the fair presentation of the interim financial statements, have been included in the accompanying financial statements. Operating results for the three and nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Prior to April 6, 1998, the Company had substantially no operating activity and, therefore, comparative 1998 consolidated statements of operations are presented only for the three and six months ended September 30, 1998. Certain items in the previously reported consolidated financial statements were reclassified to conform to the September 30, 1999 presentation, none of which affect previously reported net loss. NOTE 2--ORGANIZATION AND RELATIONSHIPS The Company was originally incorporated as Wilshire Real Estate Investment Trust Inc. ("WREIT") in the State of Maryland on October 24, 1997. However, due to the benefit of significant net operating loss carryforwards and to avoid any risk of not qualifying as a real estate investment trust ("REIT"), the Company elected in September 1999 (with shareholder approval) not to be taxed as a REIT (see Note 3), and the Company's name was changed to Wilshire Real Estate Investment Inc. The Company was initially formed with a capital investment of $2 thousand. On April 6, 1998, the Company was capitalized with the sale of 11,500,000 shares of common stock, par value $.0001 per share, at a price of $16.00 per share (the "Offering"). Total net proceeds of the Offering after underwriting and offering expenses were $167.0 million. Until recently, the Company was a party to a management agreement with Wilshire Realty Services Corporation ("WRSC"), a wholly-owned subsidiary of Wilshire Financial Services Group Inc. ("WFSG"), under which WRSC advised the Company on various facets of its business and managed its day-to-day operations, subject to the supervision of the Company's Board of Directors. WFSG currently owns 992,587 7 WILSHIRE REAL ESTATE INVESTMENT INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED) NOTE 2--ORGANIZATION AND RELATIONSHIPS (CONTINUED) shares, or 8.6%, of the Company's outstanding common stock and has options to purchase an additional 1,135,000 shares (of which options on 57,500 shares were granted to officers of WRSC) at an exercise price of $16.00 per share. For its services, WRSC received a base management fee of 1% per annum of the first $1.0 billion of average invested assets, as defined in the agreement, 0.75% of the next $500 million of average invested assets and 0.50% of average invested assets above $1.5 billion, payable quarterly. In addition, WRSC could receive additional incentive compensation in an amount generally equal to 25% of the dollar amount by which funds from operations ("FFO"), as adjusted, exceeded an amount equal to the product of: (i) $16.00; and, (ii) the ten-year Treasury rate plus 5% per annum, multiplied by the weighted average number of shares of common stock outstanding during such period. Finally, WRSC was entitled to receive reimbursements of all due diligence costs and reasonable out-of-pocket expenses. For the three months and nine months ended September 30, 1999, the Company incurred approximately $663 and $2,414, respectively, of management fees. Management fees for the three months and six months ended September 30, 1998 were approximately $1,340 and $1,942. No incentive fees have been incurred under the management agreement. WFSG experienced financial difficulties in 1998 resulting in its bankruptcy restructuring. On March 3, 1999, WFSG submitted a prepackaged plan of reorganization as part of a Chapter 11 bankruptcy filing in the Federal Court of Wilmington, Delaware. On April 12, 1999, the WFSG restructuring plan was approved by the Bankruptcy Court, and on June 10, 1999, WFSG emerged from bankruptcy pursuant to the restructuring plan. See Note 6 for discussion of accounting matters related to this restructuring. Prior to WFSG's reorganization, Wilshire Credit Corporation ("Old WCC"), an affiliate of WFSG, provided loan and real property servicing to the Company. As part of the Restructuring Plan, the servicing operations conducted by Old WCC were transferred to WCC Inc. ("WCC"), a newly formed company controlled by WFSG. Relations between WFSG and the Company declined as the Company was not allowed to fully participate in the restructuring of WFSG and did not obtain any representation on WFSG's new board of directors despite a 14.4% ownership interest. On August 19, 1999, the Company was notified that WFSG had suspended its Chief Executive Officer, Andrew Wiederhorn, and its President, Lawrence Mendelsohn, from their duties as employees of WFSG and its subsidiaries and terminated their employment with WFSG and its subsidiaries purportedly for cause on September 3, 1999. Mr. Wiederhorn and Mr. Mendelsohn were also terminated as Chief Executive Officer and President of WRSC. The Company and its independent directors have long considered that Mr. Wiederhorn and Mr. Mendelsohn are key personnel on which the stability and future growth of the Company are dependent. As the principal architects of the development of both WFSG and the Company, Mr. Wiederhorn and Mr. Mendelsohn are familiar with the Company's strengths and weaknesses, have a firm understanding of the complex real estate and financial markets in which the Company operates, have longstanding relationships within the industry (and in particular with the Company's lenders) and are familiar with the Company's assets (including its portfolio of subordinated mortgage-backed securities) and its liabilities (including short-term repurchase agreements). Accordingly, the independent directors of the Company believe that the termination of Mr. Wiederhorn and Mr. Mendelsohn had a material, adverse effect on WRSC's ability to perform its obligations under the management agreement. 8 WILSHIRE REAL ESTATE INVESTMENT INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED) NOTE 2--ORGANIZATION AND RELATIONSHIPS (CONTINUED) During the third quarter of 1999, the Company decided to become internally managed, and this has resulted in disputes between the Company, on the one hand, and WRSC and WFSG on the other. Prior to this decision, the Company's business and investment affairs had been managed by WRSC pursuant to a management agreement, and the Company had received managerial and administrative services from WRSC thereunder. Accordingly, prior to this decision, the Company had no employees and instead relied on WRSC for management, facilities, reporting, and other services. WRSC itself is a shell company and has no employees. WFSG provided managerial and administrative services to WRSC to allow it to fulfil its obligations under the management agreement. On August 20, 1999, the Company filed a lawsuit against WFSG in the Circuit Court of the State of Oregon for Multnomah County. On August 23, 1999, the Company filed an amended Complaint in the lawsuit adding as additional defendants WRSC, WCC, a 50.01% subsidiary of WFSG, and Wilshire Management Leasing Company ("WML"), a wholly-owned subsidiary of WFSG alleging: (1) the termination of Wiederhorn and Mendelsohn made WFSG and WRSC unable and/or unwilling to provide management to the Company as required under the management agreement; (2) the inability of WFSG and WRSC to manage the Company's business affairs triggered application of a facilities sharing agreement dated February 19, 1999 between the Company, WFSG, WRSC, WCC, and WML (the "Facilities Sharing Agreement"); and (3) WFSG's refusal to allow Wiederhorn and Mendelsohn access to WFSG's facilities, personnel, and equipment for the Company's business violated the terms of the Facilities Sharing Agreement. Messrs. Wiederhorn and Mendelsohn have also brought suit against WFSG and its directors alleging wrongful termination and defamation. The Facilities Sharing Agreement had been entered into by the parties to provide for the orderly transition of the Company's management in the event the management agreement was no longer operative and the Company was to become internally, rather than externally, managed. Under the Facilities Sharing Agreement, WFSG, WRSC, and the other parties were required to provide to the Company, for a period of two years, the facilities, services, equipment, and personnel necessary for the Company to internally manage itself, in return for the payment by the Company of the pro-rata cost to provide facilities, services, equipment, and personnel. On September 22, 1999, WFSG and WRSC filed papers in the above litigation alleging various affirmative defenses and counterclaims, including allegations that the Facilities Sharing Agreement was not in effect and was unenforceable, and that the Company breached the management agreement, obligating the Company to pay a termination fee. On September 22, 1999, the Company sent a letter to WRSC reserving its rights with respect to prior declarations of default by WRSC, and providing formal notice of non-renewal and termination "for cause" of the management agreement. The letter outlined various breaches of the management agreement by WRSC, including: failing to provide competent management to the Company; failing to provide necessary services and facilities; and taking actions contrary to the interests of the Company. WRSC has disputed the characterization of the termination as one "for cause" and has claimed that under the management agreement it is entitled to a termination fee (a sum equal to the management fees paid to WRSC for the preceding twelve months) from the Company. Notwithstanding the foregoing, the Company has sought to discuss the parties' disagreements with a view to reaching an amicable arrangement for severing the relationships between WFSG and the Company. As a result of the Company's overtures, the Company and WFSG began discussions to resolve their differences in late September. There can be no assurance that 9 WILSHIRE REAL ESTATE INVESTMENT INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED) NOTE 2--ORGANIZATION AND RELATIONSHIPS (CONTINUED) these discussions will result in a resolution of these disagreements. In connection with this matter, the Company, without admission, recorded a provision for potential resolution of disputes with WFSG of $4.1 million as of September 30, 1999. As part of the Company's decision to become independently managed, the Company has entered into employment agreements with Andrew Wiederhorn, as Chairman and Chief Executive Officer; Lawrence Mendelsohn, as President; Chris Tassos, as Chief Financial Officer and Executive Vice President; Richard Brennan, as Executive Vice President; and Robert Rosen, as Executive Vice President. NOTE 3--INCOME TAXES Due to the significant net operating loss carryforwards of the Company and risks of not qualifying as a REIT, the Company reevaluated its original plan to elect to be taxed as a REIT. The Company's Board of Directors had been informed that potentially serious adverse tax consequences could result (including tax penalties) in the event that the Company elected to be a REIT but was unable to qualify as such under the Internal Revenue Code of 1986, as amended. As a result of these factors and the Company's significant net loss during the year ended December 31, 1998, the Company concluded that it was in the best interests of the Company and its shareholders not to elect REIT status, and included for vote at the annual shareholders' meeting a proposal to proceed in that manner. On September 10, 1999, the Company's shareholders voted not to elect REIT status and, as a result, the Company will be subject to corporate taxation. As of September 30, 1999, the Company had, for U.S. Federal tax purposes, a net operating loss carryforward in excess of $65 million, which expires in 2018. U.S. tax regulations impose limitations on the use of net operating loss carryforwards following certain changes in ownership. If such a change were to occur with respect to the Company, the limitation could significantly reduce the amount of benefits that would be available to offset future taxable income each year, starting with the year of ownership change. The Company has not recorded any tax assets for the future benefits of the net operating loss carryforwards. NOTE 4--SIGNIFICANT TRANSACTIONS In October 1999, the Company and Credit Suisse First Boston, the Company's largest lender, agreed to replace the existing monthly repurchase facility with a longer-term facility, for the continued financing of certain mortgage-backed securities and a $25 million commercial mortgage loan. The Company believes that this arrangement significantly reduces risk and reliance on short-term borrowings while still providing adequate amortization and collateral requirements for its lender. In July 1999, the Company sold a commercial warehouse in Salem, Oregon for net proceeds of approximately $7.4 million, and in August 1999, the Company sold a commercial warehouse in Eugene, Oregon for net proceeds of approximately $2.3 million. The gains on these sales of $0.2 million and $0.5 million, respectively, are reported in the consolidated statements of operations for the three and nine months ended September 30, 1999. Proceeds were used to repay $7.4 million of other borrowings. 10 WILSHIRE REAL ESTATE INVESTMENT INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED) NOTE 4--SIGNIFICANT TRANSACTIONS (CONTINUED) During the three months ended September 30, 1999, the Company sold mortgage-backed securities with a carrying value of $5.5 million. The cumulative gain on these sales of $0.2 million is reported in the consolidated statements of operations for the three and nine months ended September 30, 1999. Proceeds of $5.7 million were used to repay short-term borrowings. NOTE 5--MARKET VALUATION LOSSES AND IMPAIRMENTS The Company evaluates, on an ongoing basis, the carrying value of its securities portfolio, which is accounted for as available-for-sale. To the extent differences between the book basis of the securities and their current market values are deemed to be temporary in nature, such unrealized gains or losses are reflected directly in equity, as "other comprehensive income or loss." In calculating the extent to which declines in the value of available-for-sale securities are other than temporary, the Company analyzes actual performance of the securities and underlying collateral, including prepayment and default statistics, as well as expectations for such performance in the future. To the extent reasonable expectations for future performance are not likely to offset reductions in current market valuations, a write down is recorded in "Market Valuation Losses and Impairments." During the three and nine months ended September 30, 1999, market valuation losses and impairments of $6.3 million and $28.5 million, respectively, were recorded. An $8.7 million write down of the Company's interest in WFSG stock and $1.0 million of fees for advisory services in connection with its investment in WFSG stock (see Note 6) are included in the nine months ended September 30, 1999. The Company believes that the decline in value of its investment in WFSG stock is other than temporary, based on WFSG's operating results and other factors, and has written down such investment to the market price of $1.25 per share as of September 29, 1999. In addition, during such periods, $6.3 million and $18.0 million, respectively, of market valuation losses and impairments were recorded related to our portfolio of mortgage-backed securities primarily reflecting unprecedented prepayment rates on certain residual securities. During the three months ended September 30, 1999, the Company impaired its investment in Cityscape 1997-A, 1997-B, and 1997-C economic residual interests by $4.9 million. This charge primarily reflects the continuation of rapid prepayment on the loans underlying these securities despite an overall increase in the level of prevailing market mortgage rates. The remaining carrying value of all our economic residuals is $16.6 million at September 30, 1999. The Company also impaired its investment in Wilshire Consumer Obligation Structured Trust 1995-A by $1.4 million. This charge primarily reflects the potential impairment of two related loans secured by a commercial property that sustained considerable flooding. The loans represent approximately 30% of the remaining loan pool balance underlying the trust. The recording of this market valuation loss and impairment had the effect of transferring such amounts between components of equity (from "other comprehensive loss" to "accumulated deficit"), but had no net effect on net equity of the Company. See also the Consolidated Statements of Changes in Stockholders' Equity. NOTE 6--TRANSACTIONS WITH WFSG, ITS SUBSIDIARIES OR OLD WCC In January 1999, the Company entered into an agreement to provide WFSG with debtor-in-possession financing of up to $10.0 million (the "DIP Facility") as part of a compromise and settlement of a $17.0 million receivable due from WFSG. The DIP Facility bears interest at 12% and is secured by the 11 WILSHIRE REAL ESTATE INVESTMENT INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED) NOTE 6--TRANSACTIONS WITH WFSG, ITS SUBSIDIARIES OR OLD WCC (CONTINUED) stock of First Bank of Beverly Hills, FSB, WFSG's savings bank subsidiary. The DIP Facility matures on February 29, 2004 and repayment is made through fully amortizing principal and interest payments commencing on February 29, 2000. Prior to February 29, 2000, only interest payments are required. The Company loaned $5.0 million under the DIP Facility (which is included in "Notes receivable from WFSG" in the statements of financial condition) on March 3, 1999, but did not provide WFSG with the remaining half. Accordingly, under the agreement negotiated by the Company's Independent Directors with WFSG and its creditors, 50%, or approximately $8.5 million, of WFSG's obligation was treated PARI PASSU with the claims of WFSG's noteholders and converted, together with approximately $21.4 million (in principal plus accrued but unpaid interest) of WFSG's 13% Series B Notes held by WREI, to 2,874,791 shares of newly issued common stock of WFSG on June 10, 1999, the effective date of the Restructuring Plan. Additionally, on the effective date of the Restructuring Plan, the Company received approximately $8.5 million in principal amount ($6.0 million carrying value) of WFSG's 6% Convertible PIK Notes due 2006 (the "PIK Notes"), which is also included in "Notes receivable from WFSG" in the statements of financial condition, in exchange for the remaining 50% of the $17.0 million aforementioned receivable due from WFSG. The Company may elect to convert the PIK Notes into new common stock of WFSG upon receipt of a notice of redemption of the PIK Notes by WFSG. On June 30, 1999 the Company filed an H-(e)1 application with the Office of Thrift Supervision. The application requests OTS approval to be a material shareholder of a savings and loan holding company (WFSG). Currently, the Company is not obligated to obtain such approval under OTS regulations. The Company has filed such application; however, to protect itself from circumstances such as dilution or sales by other holders that would obligate the Company at a later date to obtain such OTS approval. In January 1999, the Company remitted $15 million to Old WCC, consisting of a payment of amounts owed by the Company to Old WCC of $11.8 million and the prepayment of $3.2 million of future servicing fees for a release of a guarantee by the Company of $35 million of Old WCC's indebtedness and of any and all claims against the Company relating thereto. The amortized balance of the prepaid servicing fee is included in the accompanying consolidated statement of financial condition as of September 30, 1999. However, the noteholders of WFSG claim that less than $3.2 million of future servicing fees were prepaid by the Company. The noteholders of WFSG claim that the amount owed to Old WCC was approximately $900,000 higher, thereby reducing the amount of the prepayment credit to $2.3 million. The Company believes that the $3.2 million figure is correct and is currently negotiating this issue with WFSG as part of an overall settlement between WFSG and the Company. NOTE 7--COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK The Company's Asset and Liability Committee is authorized to utilize a wide variety of off-balance sheet financial techniques to assist the Company in the management of interest rate risk. In hedging the interest rate and/or exchange rate exposure of a foreign currency denominated asset or liability, the Company may enter into hedge transactions to counter movements in the different currencies, as well as interest rates in those currencies. These hedges may be in the form of currency and interest rate swaps, options, and forwards, or combinations thereof. At September 30, 1999, the Company had no outstanding positions in these instruments. 12 WILSHIRE REAL ESTATE INVESTMENT INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1999 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED) NOTE 7--COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK (CONTINUED) With the exception of disputes with WFSG and WRSC discussed in Notes 2 and 6, the Company is involved in various legal proceedings occurring in the ordinary course of business which the Company believes will not have a material adverse effect on the financial condition or operations of the Company. NOTE 8--SUBSEQUENT EVENTS In October 1999, the Company acquired mortgage-backed securities from WFSG for approximately $20.9 million by assuming short-term borrowings of $18.5 million and a $2.4 million reduction in the carrying amount of the PIK Notes. The Company is currently in the process of marketing certain commercial properties for sale during the fourth quarter 1999, many of which are under contract for sale. Management expects net proceeds to approximate or exceed the carrying values of such properties. The net proceeds resulting from these transactions are expected to be used to reduce short-term and other borrowings. There can be no assurance, however, that the Company will sell such properties, that any outstanding sale contracts will close, or the Company will receive net proceeds in excess of their respective carrying values. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF WILSHIRE REAL ESTATE INVESTMENT INC. AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS FILING. REFERENCES IN THIS FILING TO "WILSHIRE REAL ESTATE INVESTMENT INC.," "WE," "OUR," AND "US" REFER TO WILSHIRE REAL ESTATE INVESTMENT INC. AND ITS SUBSIDIARIES UNLESS THE CONTEXT INDICATES OTHERWISE. GENERAL Wilshire Real Estate Investment Inc. ("WREI" or the "Company") (formerly known as Wilshire Real Estate Investment Trust Inc.) is a Nasdaq-listed corporation that was formed in October 1997 and commenced operations in April 1998 following the completion of our initial public offering. In response to adverse market conditions in the second half of 1998 and the resulting effect on our operations, we focused our efforts on stabilizing our existing asset base and greatly reduced acquisition activities during the nine months ended September 30, 1999. General market conditions and availability of financing for certain of our asset categories, especially subordinated mortgage-backed securities and mezzanine loans, continue to be uncertain. Our results of operations for the three and nine months ended September 30, 1999 reflect this continued difficult marketplace, which include further impairment write downs of mortgage-backed securities, the preponderance of which had previously been deducted from stockholders' equity, through "Accumulated other comprehensive loss." Notwithstanding this uncertainty, we expect gradually to resume acquisition activities, with an increased emphasis on investment in loans and related assets and a decreased emphasis on commercial operating properties. We believe that investments in loans provide higher yields and allow us to more efficiently leverage our existing capital, thereby providing us a higher return on equity. In addition, we believe there may be attractive opportunities for additional investments in Europe. We may also seek to invest in other companies that invest in real estate related assets, especially where the market capitalizations of such companies do not reflect the inherent values of the underlying assets or franchises. Nonetheless, we continue to make investment decisions on an opportunistic basis and will evaluate investment opportunities as they arise. RESTRUCTURING OF WFSG As a result of the market turmoil in the second half of 1998, Wilshire Financial Services Group Inc. ("WFSG"), the parent of Wilshire Realty Services Corporation ("WRSC"), submitted on March 3, 1999 a prepackaged plan of reorganization as part of a Chapter 11 bankruptcy filing in the Federal Court of Wilmington, Delaware. On April 12, 1999, the WFSG restructuring plan was approved by the Bankruptcy Court and on June 10, 1999, WFSG's bankruptcy reorganization was consummated. Through our independent directors, we were a party to the restructuring negotiations since we owned $20 million in principal amount of WFSG's 13% Series B Notes and had a $17.0 million unsecured receivable from WFSG, bearing interest at 13%. In January 1999, we entered into an agreement to provide WFSG with debtor-in-possession financing of up to $10.0 million (the "DIP Facility") as part of a compromise and settlement of the $17.0 million receivable due from WFSG. Under this compromise and settlement, if the Company funded the full amount of the DIP Facility, the Company would have received a new note for the full amount of the receivable, bearing interest at 6% per annum payable monthly in arrears. The DIP Facility bears interest at 12% and is secured by the stock of First Bank of Beverly Hills, FSB, WFSG's savings bank subsidiary. The DIP Facility matures on February 29, 2004 and repayment is made through fully amortizing principal and interest payments commencing on February 29, 2000. Prior to February 29, 2000, only interest payments are required. The business decision to provide the DIP Facility was based on the independent directors' desire to obtain the best possible treatment for the Company's holdings of WFSG's 13% Series B Notes and the account receivable due from WFSG and the fact that the 14 debtor-in-possession facility was fully secured by the stock of WFSG's bank subsidiary. We funded $5.0 million of the DIP Facility on March 3, 1999 but did not provide WFSG with the remaining half. Accordingly, under the agreement negotiated by the Company's independent directors with WFSG and its creditors, 50%, or approximately $8.5 million, of WFSG's obligation was treated pari passu with the claims of WFSG's noteholders and converted, together with approximately $21.4 million (in principal plus accrued but unpaid interest) of WFSG's 13% Series B Notes, to 2,874,791 shares of newly issued common stock of WFSG on June 10, 1999, the effective date of the restructuring plan. Additionally, on the effective date of the restructuring plan, we received approximately $8.5 million in principal amount of WFSG's 6% Convertible PIK Notes due 2006 (the "PIK Notes") in exchange for the remaining 50% of the $17.0 million intercompany receivable due from WFSG. We may elect to convert the PIK Notes into new common stock of WFSG upon receipt of a notice of redemption of the PIK Notes by WFSG. Following the completion of WFSG's restructuring plan, we held 2,874,791 shares, or approximately 14.4%, of common stock of WFSG. The following table sets forth the Company's investments in WFSG and subsidiaries as of December 31, 1998, which was prior to WFSG's bankruptcy filings, and as of September 30, 1999, which was following the completion of WFSG's bankruptcy. Following the completion of WFSG's restructuring plan on June 10, 1999, the $5 million loaned to WFSG under the DIP Facility no longer has priority over other creditors and will be treated like any other secured loan. THE COMPANY'S INVESTMENTS IN WFSG
PRE-BANKRUPTCY POST BANKRUPTCY TYPE OF INVESTMENT (AS OF 12/31/98) (AS OF 9/30/99) - ------------------ ---------------- --------------- WFSG's 13% Series B Notes................................... $9,933,000(1) $ -- Receivable From WFSG........................................ 17,000,000(2) -- PIK Notes................................................... -- 5,977,000(3) WFSG's Common Stock......................................... -- 3,594,000(4) DIP Facility................................................ -- 5,000,000 Prepaid Servicing Fees to WCC............................... -- 2,953,000 ------------ ----------- TOTAL....................................................... $ 26,933,000 $17,524,000 ============ ===========
- ------------------------ (1) Based on the value of the 13% Series B Notes as shown on the Company's financial statements as of December 31, 1998. The principal amount of the 13% Series B Notes held by the Company was $20 million. (2) Based on the face amount owed. (3) In October 1999, the Company acquired approximately $20.9 million of mortgage-backed securities from WFSG by assuming short-term borrowings of $18.5 million and a $2.4 million reduction in the carrying amount of the PIK Notes. (4) Based on $1.25 per share. WFSG's common stock currently trades on the OTC Bulletin Board and the closing price as of September 29, 1999 was $1.25 per share. INCOME TAX STATUS Due to the significant net operating loss carryforwards and risks of not qualifying as a real estate investment trust ("REIT"), we reevaluated our original plan to elect to be taxed as a REIT. Our Board of Directors had been informed that potentially serious adverse tax consequences could result (including tax penalties) in the event that we elected to be a REIT but were unable to qualify as such under the Internal Revenue Code of 1986, as amended. As a result of these factors and our significant net loss during the year 15 ended December 31, 1998, we concluded that it was in our best interests not to elect REIT status. On September 10, 1999, our shareholders voted not to elect REIT status. Since we elected not to be taxed as a REIT, we will be subject to corporate taxation. However, as of September 30, 1999 we had, for U.S. Federal tax purposes, a net operating loss carryforward in excess of $65 million, which expires in 2018. U.S. tax regulations impose limitations on the use of net operating loss carryforwards following certain changes in ownership. If such a change were to occur with respect to the Company, the limitation could significantly reduce the amount of benefits that would be available to offset future taxable income each year starting with the year of the ownership change. The Company has not recorded any tax assets for the future benefits of the net operating loss carryforwards. RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1999 NET LOSS. Our net loss for the nine months ended September 30, 1999 was $27.8 million, or $2.42 per share. The net loss is primarily attributable to market valuation losses and impairments of $28.5 million (of which $18.0 million is attributable to our portfolio of mortgage-backed securities, $8.7 million is attributable to our investment in WFSG stock, $1.0 million is attributable to fees for advisory services in connection with our investment in WFSG stock and $0.8 million is attributable to our holdings of WFSG 13% Notes due 2004, which were subsequently converted to newly issued common stock of WFSG), a provision for potential resolution of disputes with WFSG of $4.1 million, operating expenses and management fees of $4.4 million, partially offset by net interest income after recovery of losses of $9.5 million and income on real estate operations of $0.5 million. NET INTEREST INCOME. The following table sets forth information regarding the total amount of income from interest-earning assets and expense from interest-bearing liabilities and the resulting average yields and rates:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 -------------------------------- AVERAGE INTEREST ANNUALIZED BALANCE INCOME YIELD/RATE -------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios (1)....................................... $ 52,703 $ 4,081 10.2% Mortgage-backed securities available for sale............. 131,061 12,025 12.1 Other securities available for sale (2)................... 9,325 108 1.5 Due from WFSG............................................. 13,001 1,251 12.7 Notes receivable from WFSG................................ 4,190 382 12.0 Other investments......................................... 8,858 322 4.8 -------- ------- ---- Total interest-earning assets........................... 219,138 18,169 10.9 -------- ------- ---- Interest-Bearing Liabilities: Short-term and other borrowings........................... 166,933 9,841 7.8 -------- ------- ---- Total interest-bearing liabilities...................... 166,933 9,841 7.8 -------- ------- ---- Net interest income before provision for loan losses/spread (3)....................................... $ 8,328 3.1% ------- ---- Net interest margin (4)................................... 5.0% ----
- ------------------------ (1) In April 1999, we sold a loan secured by five luxury hotels in London, England, including the Savoy Hotel, the Connaught and Claridge's Hotel, with a carrying value of approximately $47.9 million. The net interest margin attributable to this loan, net of related swaps, was approximately 5.2% during the nine months ended September 30, 1999. 16 (2) Other securities available for sale consists of a U.S. Treasury Bill yielding approximately 4.7%, which was purchased in June 1999, and WFSG's 13% Series B Notes, which we held from January 1999 to June 10, 1999. On June 10, 1999, on WFSG's emergence from bankruptcy, WFSG's 13% Series B Notes due 2004 were converted to common stock of WFSG. Accordingly, we did not accrue interest income on these securities during the nine months ended September 30, 1999. (3) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. RECOVERY OF LOSSES. During the nine months ended September 30, 1999, we reversed a provision for losses of $3.9 million taken in prior periods for a loan held for sale. This loan, which was secured by five luxury hotels in London, England, including the Savoy Hotel, the Connaught and Claridge's Hotel, was sold on April 29, 1999 and resulted in this recovery. This provision reversal was partially offset by a provision for losses on loans of $0.1 million. In addition, during the nine months ended September 30, 1999 we recognized a net write down of $2.7 million in the carrying value of a $17.0 million note receivable from WFSG to reflect the estimated value of the common stock of WFSG to be received in exchange for a portion of the note (see also Note 6 to the interim consolidated financial statements). The write down is included in provision for losses in the consolidated statements of operations for the nine months ended September 30, 1999. REAL ESTATE OPERATIONS. Real estate operations represent activity from our investment in various office buildings, retail stores, and other commercial property located in Oregon, California and the United Kingdom. During the nine months ended September 30, 1999, we realized income of approximately $0.5 million on these properties. This income was attributable to rental income of $5.5 million, partially offset by interest expense of $3.6 million, depreciation expense of $1.1 million, gain on sale of real estate of $0.7 million, provision for losses on real estate of $0.9 million and operating expenses of $0.2 million. OTHER LOSS. Our other loss was approximately $33.1 million for the nine months ended September 30, 1999. This loss was primarily due to $28.5 million of market valuation losses and impairments, a provision for potential resolution of disputes with WFSG of $4.1 million, and a loss on sales of mortgage-backed securities of $0.7 million, partially offset by other revenue of $0.2 million. During the nine months ended September 30, 1999, we recorded $18.0 million of market valuation losses and impairments related to our portfolio of mortgage-backed securities available for sale, $8.7 million related to our investment in newly-issued WFSG stock, $1.0 million related to fees for advisory services in connection with our investment in WFSG stock and $0.8 million related to our holdings of WFSG's 13% Series B Notes prior to their conversion to newly-issued WFSG stock. These market valuation losses and impairments were deemed by the Company to be other than temporary in nature. In calculating the extent to which declines in the value of available-for-sale securities are other than temporary, the Company analyzes actual performance of the securities and underlying collateral, including prepayment and default statistics, as well as expectations for such performance in the future. To the extent reasonable expectations for future performance are not likely to offset reductions in current market valuations, a write down is recorded in "Market valuation losses and impairments." The decline in value and subsequent write down of mortgage-backed securities available for sale generally reflects unprecedentedly high prepayment rates on certain residual securities. During the three months ended September 30, 1999, the Company impaired its investment in Cityscape 1997-A, 1997-B, and 1997-C economic residual interests by $4.9 million. This charge primarily reflects the continuation of rapid prepayment on the loans underlying these securities despite an overall increase in the level of prevailing market mortgage rates. The remaining carrying value of all our economic residuals is $16.6 million at September 30, 1999. The Company also impaired its investment in Wilshire Consumer Obligation Structured Trust 1995-A by $1.4 million. This charge primarily reflects the potential impairment of two 17 related loans secured by a commercial property that sustained considerable flooding. The loans represent approximately 30% of the remaining loan pool balance underlying the trust. The Company believes that the decline in value of its investment in WFSG stock is other than temporary, based on WFSG's operating results and other factors, and has written down such investment to the market value of $1.25 per share as of September 29, 1999. Without admission, a provision for potential resolution of disputes with WFSG of $4.1 million was recorded in the three months ended September 30, 1999. The Company has sought to discuss the parties' disagreements with a view to reaching an amicable arrangement for severing the relationships between WFSG and the Company. As a result of the Company's overtures, the Company and WFSG began discussions to resolve their differences in late September. There can be no assurance that these discussions will result in a resolution of these disagreements. See Notes 2 and 6 to the consolidated financial statements and Part II, Item 1, Legal Proceedings. OPERATING EXPENSES. Management fees of $2.4 million for the nine months ended September 30, 1999 were comprised of the 1% (per annum) base management fee to WRSC for the period, as provided pursuant to our management agreement with WRSC. WRSC earned no incentive fee for this period. Other expenses were comprised of professional services, insurance premiums and other sundry expenses. During the nine months ended September 30, 1999, we recaptured loan service fees of approximately $0.1 million. The recapture of service fees resulted from a review of, and retroactive reduction in, certain property servicing fees charged to us by Old WCC. RESULTS OF OPERATIONS--SIX MONTHS ENDED SEPTEMBER 30, 1998 NET LOSS. Our net loss for the six months ended September 30, 1998 was $45.8 million, or $4.03 per share. The net loss was primarily attributable to $49.5 million of market valuation adjustments and a provision for loan losses of $3.0 million. NET INTEREST INCOME. The following tables set forth information regarding the total amount of income from interest-earning assets and expense from interest-bearing liabilities and the resultant average yields and rates:
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 -------------------------------- AVERAGE INTEREST ANNUALIZED BALANCE INCOME YIELD/RATE -------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios........................................... $ 92,585 $ 5,491 11.9% Mortgage-backed securities available for sale............. 205,444 9,723 9.5 Other securities available for sale....................... 19,700 1,035 10.5 Other investments......................................... 24,963 486 3.9 -------- ------- ---- Total interest-earning assets........................... 342,692 16,735 9.7 -------- ------- ---- Interest-Bearing Liabilities: Short-term and other borrowings........................... 231,328 7,513 6.5 -------- ------- ---- Total interest-bearing liabilities...................... $231,328 7,513 6.5 -------- ------- ---- Net interest income before provision for loan losses/spread (1)....................................... $ 9,222 3.2% ------- ---- Net interest margin (2)................................... 5.4% ----
- ------------------------ (1) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (2) Net interest margin represents net interest income divided by average interest-earning assets. 18 For the six months ended September 30, 1998, we provided $3.0 million for the allowance for loan losses. This provision is not reflected in net interest income/spread above. REAL ESTATE OPERATIONS. Such income represents income generated from our investment in various office buildings, retail stores, and other commercial property located in Oregon, California and the United Kingdom. During the six months ended September 30, 1998, operating income was comprised primarily of $3.0 million in gross rental and other income earned on such investments. Additionally, expenses incurred on real estate investments include $1.4 million of interest expense, $0.2 million of rental operations and $0.6 million of depreciation expense. OTHER LOSS. Our other loss was approximately $48.6 million for the six months ended September 30, 1998. The components of our net non-interest loss is comprised of the following: MARKET VALUATION LOSSES AND IMPAIRMENTS. During the six months ended September 30, 1998, we recorded $49.5 million of market valuation losses and impairments that were deemed by management to be other than temporary in nature and duration. During the week of October 12, 1998, we sold certain assets in response to adverse global market conditions. The carrying values of these assets were reduced by $32.6 million, and the reductions were recognized in the market valuation losses and impairments for the six months ended September 30, 1998. Additionally, a market valuation loss and impairment of $16.9 million relates to other than temporary impairment on other investment securities not sold. The following table sets forth information regarding the total amount of losses recognized in earnings from the market valuation losses and impairments. Valuation of the other than temporary losses were determined primarily through the subsequent sales of certain assets and by analyzing actual performance of the securities and underlying collateral, as well as expectations for such performance in the future for our securities available-for-sale that were retained.
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------ ASSETS TOTAL RETAINED SUBSEQUENTLY MARKET ASSETS SOLD ADJUSTMENT -------- ------------ ---------- (DOLLARS IN THOUSANDS) Loan portfolio.............................................. $ -- $16,499 $16,499 Mortgage-backed securities available for sale............... 9,646 16,096 25,742 Other securities available for sale......................... 7,279 -- 7,279 ------- ------- ------- Total....................................................... $16,925 $32,595 $49,520 ======= ======= =======
GAIN ON THE SALE OF SECURITIES. During the six months ended September 30, 1998, we sold to unrelated third parties mortgage-backed securities for approximately $16.8 million, resulting in gains of approximately $0.9 million. The carrying values of assets sold subsequent to September 30, 1998 have been reduced through market valuation losses and impairments for the six months ended September 30, 1998. OPERATING EXPENSES. Management fees of $1.9 million for the six months ended September 30, 1998, were comprised solely of the 1% (per annum) base management fee to WRSC as provided pursuant to our management agreement with WRSC. WRSC earned no incentive fee for this period. In addition to the management fee, we incurred loan service fees and expenses of $0.5 million during the six months ended September 30, 1998, which were paid by WRSC on behalf of us and for which WRSC was subsequently reimbursed by us. Other expenses were comprised of professional services, insurance premiums and other sundry expenses. 19 RESULTS OF OPERATIONS--QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998 NET LOSS. Our net loss for the quarter ended September 30, 1999 was $9.4 million, or $0.82 per share, compared with a loss of $48.9 million, or $4.25 per share, for the quarter ended September 30, 1998. The net loss for the 1999 period is attributable to market valuation losses and impairments on our portfolio of mortgage-backed securities of $6.3 million, other operating expenses of $1.7 million and a provision for potential resolution of disputes with WFSG of $4.1 million, partially offset by net interest income of $2.0 million and income from real estate operations of $0.6 million. Our net loss for the corresponding 1998 period was primarily due to market valuation losses and impairments as a result of the market turmoil which occurred in the second half of 1998. NET INTEREST INCOME. Our net interest income for the three months ended September 30, 1999 was $2.0 million, compared with $5.6 million for the three months ended September 30, 1998. The decrease is primarily attributable to a significantly smaller balance sheet resulting in decreases in interest income on securities and loans of $3.9 million and $3.2 million, respectively, partially offset by a decrease in interest expense of $3.2 million, reflecting our sales of mortgage-backed securities, real estate, and loans and paydowns of the related debt facilities. The following tables set forth information regarding the total amount of income from interest-earning assets and expense from interest-bearing liabilities and the resulting average yields and rates:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 -------------------------------- AVERAGE INTEREST ANNUALIZED BALANCE INCOME YIELD/RATE -------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios....................................... $ 31,591 $ 959 11.9% Mortgage-backed securities available for sale......... 100,609 3,291 12.8 Other securities available for sale (1)............... 8,958 108 4.7 Due from WFSG......................................... 5,917 185 12.2 Notes receivable from WFSG............................ 5,000 153 12.0 Other investments..................................... 8,056 109 5.3 -------- ------- ---- Total interest-earning assets..................... 160,131 4,805 11.7 -------- ------- ---- Interest-Bearing Liabilities: Short-term and other borrowings....................... 124,546 2,803 8.8 -------- ------- ---- Total interest-bearing liabilities................ 124,546 2,803 8.8 -------- ------- ---- Net interest income before provision for loan losses/spread (2)................................... $ 2,002 2.9% ------- ---- Net interest margin (3)............................... 4.9% ----
- ------------------------ (1) Other securities available for sale consist of a U.S. Treasury Bill yielding approximately 4.7%. (2) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average interest-earning assets. 20
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 -------------------------------- AVERAGE INTEREST ANNUALIZED BALANCE INCOME YIELD/RATE -------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios....................................... $151,632 $ 4,167 11.0% Mortgage-backed securities available for sale......... 274,093 6,575 9.6 Other securities available for sale................... 21,500 577 10.7 Other investments..................................... 23,486 326 5.6 -------- ------- ---- Total interest-earning assets..................... 470,711 11,645 9.9 -------- ------- ---- Interest-Bearing Liabilities: Short-term and other borrowings....................... 363,133 6,012 6.6 -------- ------- ---- Total interest-bearing liabilities................ 363,133 6,012 6.6 -------- ------- ---- Net interest income before provision for loan losses/spread (1)................................... $ 5,633 3.3% ------- ---- Net interest margin (2)............................... 4.8% ----
- ------------------------ (1) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (2) Net interest margin represents net interest income divided by average interest-earning assets. REAL ESTATE OPERATIONS. Such operations represent activity from our investment in various office buildings, retail stores, and other commercial property located in Oregon, California and the United Kingdom. During the three months ended September 30, 1999, we realized income from real estate operations of approximately $0.6 million, compared with income of $0.4 million for the three months ended September 30, 1998. This increase was primarily attributable to gain on sale of real estate of $0.7 million partially offset by provision for loss of $0.3 million. OTHER INCOME (LOSS). Our other loss was approximately $10.1 million for the three months ended September 30, 1999, compared with a loss of approximately $48.6 million for the three months ended September 30, 1998. The loss for the 1999 period was primarily due to a provision for potential resolution of disputes with WFSG of $4.1 million and market valuation losses and impairments on our portfolio of mortgage-backed securities of $6.3 million. The loss for the 1998 period was primarily due to market valuation losses and impairments of $49.5 million reflecting the adverse global market conditions experienced in the second half of 1998, partially offset by gains on sales of securities of $0.9 million. OPERATING EXPENSES. Our other operating expenses were approximately $1.7 million for the three months ended September 30, 1999, compared with approximately $3.4 million for the three months ended September 30, 1998. This decrease was primarily due to a decrease in management fees of $0.7 million, a decrease in investment due diligence costs of $0.5 million and a decrease in debt offering costs of $0.3 million. CHANGES IN FINANCIAL CONDITION GENERAL. Total assets decreased from approximately $381.1 million at December 31, 1998 to approximately $234.5 million at September 30, 1999. The decrease in total assets is primarily attributable to sales of $33.0 million of mortgage-backed securities available-for-sale, the sale of a loan held for sale with a carrying value of $44.0 million at December 31, 1998, and a reduction of $38.9 million in loans, net resulting primarily from the payoff of a loan with a carrying value of $38.6 million at December 31, 1998. Total liabilities decreased from approximately $308.7 million at December 31, 1998 to approximately $182.4 million at September 30, 1999 primarily as a result of a reduction in short-term borrowings related 21 to the repayment of borrowings used to finance such mortgage-backed securities and loans and the payment of an $11.7 million payable to Old WCC. Stockholders' equity decreased by approximately $20.3 million resulting primarily from the net loss of $27.8 million for the nine months ended September 30, 1999, partially offset by a reduction of $7.5 million in unrealized loss on available-for-sale securities. SECURITIES AVAILABLE FOR SALE. The balance of securities available for sale decreased from $158.7 million at December 31, 1998 to $105.1 million at September 30, 1999. This decrease was comprised of a decrease in mortgage-backed securities available for sale of $52.7 million and a decrease in other securities available for sale of $0.9 million. The decrease in mortgage-backed securities available for sale was primarily due to the sale of mortgage-backed securities with a carrying value of $33.0 million, the recognition of other than temporary impairment of approximately $18.0 million, and cash receipts in excess of income accrued of approximately $9.1 million due to high rates of prepayments on non-interest only securities, partially offset by a net decrease in the unrealized loss on available-for-sale securities of approximately $7.5 million from December 31, 1998 to September 30, 1999. The decrease in other securities available for sale resulted from the conversion of our WFSG 13% Series B Notes with a carrying value of approximately $9.9 million at December 31, 1998 into new common stock of WFSG, partially offset by the purchase of a U.S. Treasury Bill for approximately $8.9 million and discount accretion thereon of $0.1 million. We mark our securities portfolio to fair value at the end of each month based upon broker/dealer valuations, subject to an internal review process. With respect to many of our subordinate securities, valuations are typically available from either a single or a small group of broker/dealers. For those securities that are subject to repurchase or other financing arrangements with broker/dealers, we employ the valuation supplied by the financing broker even if, as is sometimes the case, we believe that the valuation represents less than fair value. The difference between our amortized cost of available for sale securities and current market values, which was $22.9 million at September 30, 1999, is included in "Accumulated Other Comprehensive Loss" in stockholders' equity. This amount, unlike "market valuation losses and impairments," represents a market value decline that we believe is temporary. If held to maturity, the anticipated cash flow on these securities based on current interest rates, rate of prepayment and the amount and severity of defaults would result in our receiving amounts in excess of the current market value and would allow us to recover our amortized cost plus our original expected return from the time of acquisition. Notwithstanding the foregoing, payments on mortgage-backed securities are subject to a number of market factors which can significantly affect the amount and rate of payments on mortgage-backed securities, including defaults on the underlying mortgage loans, the level of subordination of the mortgage-backed securities, changes in interest rates and the rate of prepayments on the underlying mortgage loans. To the extent that these factors change, the anticipated cash flow on our mortgage-backed securities may not be sufficient to cover our amortized cost or if we sell one of these mortgage-backed securities at market prices which are below its amortized cost, we will realize a loss in the amount of that portion of "Accumulated Other Comprehensive Loss" attributable to such mortgage-backed security. In calculating the extent to which declines in the value of available-for-sale securities are other than temporary, we analyze actual performance of the securities and underlying collateral, including prepayment and default statistics, as well as expectation for such performance in the future. To the extent reasonable expectations for future performance are not likely to offset reductions in current market valuations, a writedown is recorded in "Market valuation losses and impairments." 22 At September 30, 1999, we valued our securities available for sale portfolio and gross unrealized gains and losses thereon as follows:
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED COST (1) GAINS LOSSES FAIR VALUE ------------------ ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Mortgage-backed securities.................... $119,031 $755 $(23,692) $ 96,094 Other securities (2).......................... 8,993 -- -- 8,993 -------- ---- -------- -------- $128,024 $755 $(23,692) $105,087 ======== ==== ======== ========
(1) The amortized cost of the investment securities reflects the market valuation losses and impairments discussed above and in "Results of Operations". (2) U.S. Treasury Bill. LOAN PORTFOLIO. During the nine months ended September 30, 1999, our loan portfolio of non-discounted loans (including loans and loans held for sale) decreased by approximately $82.7 million due primarily to the sale of a loan held for sale (secured by five luxury hotels in London, England, including the Savoy Hotel, the Connaught and Claridge's Hotel) with a carrying value of approximately $44.0 million at December 31, 1998 and the payoff of a loan to Southern Pacific Funding Corporation (secured by certain mortgage-backed securities) with a carrying value of approximately $38.6 million. As we begin to return our focus to execution of our business plan, it is likely that our investment activities will focus more on the purchase of loans and related assets and less on investments in commercial operating properties. We remain optimistic about investment opportunities in Europe, as well as investments in other real estate related operating companies. Nonetheless, we continue to make investment decisions on an opportunistic basis and will evaluate investment opportunities as they arise. The following table sets forth certain information relating to the payment status of loans in the Company's loan portfolio at September 30, 1999:
UNPAID PRINCIPAL BALANCE CARRYING VALUE ---------------- -------------- (DOLLARS IN THOUSANDS) Current......................................... $30,778 $30,393 Past due less than 31 days...................... -- -- Past due 31 to 89 days.......................... -- -- ------- ------- $30,778 $30,393 ======= =======
We maintain an allowance for loan losses on non-discounted loans at a level that we consider adequate to provide for probable losses based upon an evaluation of known and inherent risks. DISCOUNTED LOAN PORTFOLIO. The balance of discounted loans declined from $2.5 million at December 31, 1998 to $1.2 million at September 30, 1999 primarily due to principal repayments of $1.0 million. During the nine months ended September 30, 1999, we did not purchase or sell any discounted loan assets. As noted above, we currently plan to increase our concentration of investment into loan related assets, including discounted loans when appropriate. 23 The following table sets forth certain information relating to the payment status of loans in our discounted loan portfolio at September 30, 1999:
UNPAID PRINCIPAL BALANCE CARRYING VALUE ---------------- -------------- (DOLLARS IN THOUSANDS) Current......................................... $1,198 $ 971 Past due less than 31 days...................... -- -- Past due 31 to 89 days.......................... -- -- Past due 90 days or greater..................... 2,959 220 ------ ------ $4,157 $1,191 ====== ======
We maintain an allowance for loan losses on discounted loans at a level that we consider adequate to provide for probable losses on discounted loans based upon an evaluation of known and inherent risks. No additional allowance for loan losses for discounted loans was provided for during the nine months ended September 30, 1999. INVESTMENTS IN REAL ESTATE. Investments in real estate decreased approximately $15.6 million from December 31, 1998 to September 30, 1999. This decrease was primarily due to sales of an industrial business park located in Tigard, Oregon for proceeds of approximately $4.1 million, a commercial warehouse in Salem, Oregon for proceeds of approximately $7.4 million, and a commercial warehouse in Eugene, Oregon for proceeds of approximately $2.3 million. In addition, we recognized approximately $1.1 million of depreciation expense related to operating properties and recorded a $0.9 million provision for real estate losses during the nine months ended September 30, 1999. We are currently in the process of marketing other commercial properties for sale during the fourth quarter of 1999 (many of which are under contract for sale) as we continue to reduce our level of investment in commercial real estate income properties. INVESTMENT IN WFSG, NOTES RECEIVABLE FROM WFSG, DUE FROM WFSG, PREPAID SERVICING FEES TO WCC, PAYABLE TO OLD WCC. As a result of the market turmoil in the second half of 1998, on March 3, 1999, Wilshire Financial Services Group Inc. ("WFSG"), the parent of our former manager, Wilshire Realty Services Corporation ("WRSC"), submitted a prepackage plan of reorganization as part of a Chapter 11 bankruptcy filing in the Federal Court of Wilmington, Delaware. On April 12, 1999, the WFSG restructuring plan was approved by the Bankruptcy Court and on June 10, 1999, WFSG's bankruptcy reorganization was consummated. Through our independent directors, we were a party to the restructuring negotiations since we owned $20 million of principal amount of WFSG's 13% Series B Notes and we had a $17.0 million unsecured receivable from WFSG, bearing interest at 13%. In January 1999, we entered into an agreement to provide WFSG with debtor-in-possession financing of up to $10.0 million (the "DIP Facility") as part of a compromise and settlement of the $17.0 million receivable due from WFSG. Under this compromise and settlement, if the Company funded the full amount of the DIP Facility, the Company would have received a new note for the full amount of the receivable, bearing interest at 6% per annum payable monthly in arrears. The DIP Facility bears interest at 12% and is secured by the stock of First Bank of Beverly Hills, FSB, WFSG's savings bank subsidiary. The DIP Facility matures on February 29, 2004 and repayment is made through fully amortizing principal and interest payments commencing on February 29, 2000. Prior to February 29, 2000, only interest payments are required. The business decision to provide the DIP Facility was based on the independent directors' desire to obtain the best possible treatment for the Company's holdings of WFSG's 13% Series B Notes and the account receivable due from WFSG and the fact that the debtor-in-possession facility was fully secured by the stock of WFSG's bank subsidiary. We funded $5.0 million of the DIP Facility on March 3, 1999 but did not provide WFSG with the remaining half. Accordingly, under the agreement negotiated by the Company's independent directors with WFSG and its 24 creditors, 50%, or approximately $8.5 million, of WFSG's obligation was treated PARI PASSU with the claims of WFSG's noteholders and converted, together with approximately $21.4 million (in principal plus accrued but unpaid interest) of WFSG's 13% Series B Notes, to 2,874,791 shares of newly issued common stock of WFSG on June 10, 1999, the effective date of the restructuring plan. Additionally, on the effective date of the restructuring plan, we received approximately $8.5 million in principal amount of WFSG's 6% Convertible PIK Notes due 2006 (the "PIK Notes") in exchange for the remaining 50% of the $17.0 million intercompany receivable due from WFSG. We may elect to convert the PIK Notes into new common stock of WFSG upon receipt of a notice of redemption of the PIK Notes by WFSG. Following the completion of WFSG's restructuring plan, we held 2,874,791 shares, or approximately 14.4%, of common stock of WFSG. In January 1999, the Company remitted $15 million to Old WCC, consisting of a payment of amounts owed by the Company to Old WCC of $11.8 million and the prepayment of $3.2 million of future servicing fees for a release of a guarantee by the Company of $35 million of Old WCC's indebtedness and of any and all claims against the Company relating thereto. The amortized balance of the prepaid servicing fee of approximately $3.0 million as of September 30, 1999 is included in Prepaid Servicing Fees to WCC in the accompanying consolidated statement of financial condition. However, the noteholders of WFSG claim that the amount owed to Old WCC was approximately $900,000 higher, thereby reducing the amount of the prepayment credit to $2.3 million. The Company believes that the $3.2 million figure is correct and is currently negotiating this issue with WFSG as part of an overall settlement of the disputes between WFSG and the Company. The following table sets forth the Company's investments in WFSG and subsidiaries as of December 31, 1998, which was prior to WFSG's bankruptcy filing, and as of September 30, 1999, which was after the completion of WFSG's bankruptcy reorganization. Following the completion of WFSG's restructuring plan on June 10, 1999, the $5 million loaned to WFSG under the DIP Facility no longer has priority over other creditors and will be treated like any other secured loan. THE COMPANY'S INVESTMENTS IN WFSG
PRE-BANKRUPTCY POST BANKRUPTCY TYPE OF INVESTMENT (AS OF 12/31/98) (AS OF 9/30/99) - ------------------ ---------------- --------------- WFSG's 13% Series B Notes................................... $9,933,000(1) $ -- Receivable From WFSG........................................ 17,000,000(2) -- WFSG's 6% Convertible PIK Notes............................. -- 5,977,000(3) WFSG's Common Stock......................................... -- 3,594,000(4) DIP Loan.................................................... -- 5,000,000 Prepaid Servicing Fees to WCC............................... -- 2,953,000 ------------ ----------- TOTAL....................................................... $ 26,933,000 $17,524,000 ============ ===========
- ------------------------ (1) Based on the value of the 13% Series B Notes as shown on the Company's financial statements as of December 31, 1998. The principal amount of the 13% Series B Notes held by the Company was $20 million. (2) Based on the face amount owed. (3) In October 1999, the Company acquired approximately $20.9 million of mortgage-backed securities from WFSG by assuming short-term borrowings of $18.5 million and a $2.4 million reduction in the carrying amount of the PIK Notes. (4) Based on $1.25 per share. WFSG's common stock currently trades on the OTC Bulletin Board and the closing price as of September 29, 1999 was $1.25 per share. 25 SHORT-TERM BORROWINGS. Short-term borrowings decreased by approximately $103.9 million during the nine months ended September 30, 1999 due to the repayment of borrowings related to a loan held for sale and mortgage-backed securities which were sold and a loan which paid off. The balances of the outstanding borrowings related to these loans were approximately $33.3 million and $20.0 million, respectively. The remaining decrease in short-term borrowings is primarily attributable to the repayment of short-term borrowings from sales proceeds and other payments on our mortgage-backed securities. On October 12, 1999, the Company and Credit Suisse First Boston, the Company's largest lender, agreed to replace the Company's short-term (monthly) repurchase facility with a longer-term repurchase facility for the financing of approximately $64.0 million of subordinate mortgage-backed securities and approximately $20 million for the financing of a $25 million commercial loan. The Company believes that this significantly reduces the Company's reliance on short-term borrowings. OTHER BORROWINGS. Other borrowings decreased approximately $11.6 million during the nine months ended September 30, 1999 due primarily to the repayment of borrowings related to the commercial properties which were sold during the reporting period. STOCKHOLDERS' EQUITY. Stockholders' equity decreased by approximately $20.3 million during the nine months ended September 30, 1999. This decrease was primarily due to a net loss of $27.8 million for the nine months ended September 30, 1999, partially offset by a $7.5 million decrease in unrealized holding losses on available for sale securities. This decrease in unrealized holding losses resulted from the recognition of other than temporary impairment in the value of our mortgage-backed securities portfolio of $19.0 million, partially offset by additional unrealized holding losses of $11.5 million. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund investments, engage in loan acquisition and lending activities, meet collateral calls and for other general business purposes. The primary sources of funds for liquidity during the nine months ended September 30, 1999 consisted of net cash provided by investing activities, including the cash repayments related to our mortgage-backed securities portfolio, a loan receivable which paid off in January 1999, a loan which was sold in April 1999, and sales of mortgage-backed securities in June 1999. The adverse market conditions, which negatively impacted us during the third and fourth quarters of 1998, began to stabilize during the nine months ended September 30, 1999, but remained somewhat uncertain. As of September 30, 1999, we had outstanding collateral calls as determined by one of our lenders, net of cash retained, of approximately $2.3 million, compared with collateral calls outstanding as of December 31, 1998 of $4.4 million. As of November 12, 1999, we have met all collateral calls and have no outstanding amounts owed to lenders for such collateral calls. On October 12, 1999, the Company and Credit Suisse First Boston, the Company's largest lender, agreed to replace the Company's short-term (monthly) repurchase facility with a longer-term repurchase facility for the financing of approximately $64 million of subordinate mortgage-backed securities and approximately $20 million facility for the financing of a $25 million commercial mortgage loan. The Company believes that this significantly reduces the Company's reliance on short-term borrowings and eliminated all remaining outstanding collateral calls. Our short-term borrowings and the availability of further borrowings are substantially affected by, among other things, changes in interest rates, changes in market spreads whereby the market value of the collateral securing such borrowings may decline substantially, or decreases in credit quality of underlying assets. In the event of declines in market value or credit quality, we may be required to provide additional collateral for, or repay a portion of outstanding balances of, our short-term, floating-rate borrowing facilities. For additional information with respect to our monthly mark-to-market of our securities available for sale portfolio, see "Changes in Financial Condition--Securities Available for Sale." 26 In addition, given the current relative lack of liquidity for below-investment grade securities and the possibility that Y2K concerns may adversely affect market liquidity, we are maintaining a relatively high degree of liquidity in the form of cash and treasury securities. Fluctuations in interest rates will continue to impact our net interest income to the extent our fixed rate assets are funded by variable rate debt or our variable rate assets reprice on a different schedule or in relation to a different index than any floating rate debt which in turn could impact potential returns to shareholders. See "Item 3--Quantitative and Qualitative Disclosures about Market Risk." At September 30, 1999, we had total consolidated secured indebtedness of $170.6 million, a reserve relating to the provision for the potential resolution of disputes with WFSG of $4.1 million, accrued interest payable of $1.0 million, accrued management fee of $0.7 million, a dividend payable of $4.6 million, as well as $1.4 million of other liabilities. The consolidated secured indebtedness consisted of (i) $82.4 million of repurchase agreements, (ii) lines of credit aggregating $39.2 million which are secured by loans and securities and (iii) $49.0 million outstanding of other borrowings maturing between 2000 and 2008 which are secured by real estate. We often finance acquisitions of mortgage-backed securities through uncommitted thirty-day repurchase agreements with major Wall Street investment banks. Loans are financed through short-term warehouse facilities or intermediate term loans. Warehouse agreements are secured lending arrangements. If the value of the assets securing the loan declines as determined by the lender, the lender may request that the amount of the loan be reduced by cash payments from the borrower or additional collateral be provided by the borrower (generally know as "collateral calls"). Accordingly, in an environment where lenders consistently mark down the value of the underlying assets, a borrower can become subject to collateral calls, which can have a significant impact on liquidity. Similarly, if interest rates increase significantly, the borrowing cost under the short-term warehouse agreement may also increase while the interest rate on the assets securing the loan may not increase at the same time or to the same degree. Real property acquisitions are financed with intermediate or long-term mortgages with banks and other financial institutions. Repurchase agreements are secured lending arrangements which involve the borrower selling an asset to a lender at a fixed price with the borrower having an obligation to repurchase the asset within a specified period (generally 30 days) at a higher price reflecting the interest cost of the loan. As with warehouse agreements, if the lender marks the asset lower, the lender may request that the amount of the loan be reduced by cash payments from the borrower or additional collateral be provided by the borrower (generally known as "collateral calls"). Mortgage-backed securities which are subject to repurchase agreements, as well as loans which secure other indebtedness, periodically are revalued by the lender, and a decline in the value that is recognized by the lender (whether or not the lender recognizes the full fair value of the security) may result in the lender requiring us to provide additional collateral to secure the indebtedness. As of September 30, 1999, the Company had approximately $105.7 million of indebtedness under the terms of which the lender could request additional collateral if the value of the underlying collateral declined. Although the Company believes that the likelihood of significant declines in asset values has decreased since the fourth quarter of 1998, the Company is seeking to maintain a larger cash position and more unencumbered assets to deal with future potential collateral calls. In addition, the Company is seeking to refinance some of this indebtedness with longer-term indebtedness which would not be subject to the same collateral calls. If we are unable to fund additional collateral requirements or to repay, renew or replace maturing indebtedness on terms reasonably satisfactory to us, we may be required to sell (on short notice) a portion of our assets, and could incur losses as a result. Furthermore, since from time to time there is extremely limited liquidity in the market for subordinate and residual interests in mortgage-related securities, there can be no assurance that we will be able to dispose of such securities promptly for fair value in such situations. 27 Based on our monthly interest and other expenses, monthly cash receipts and collateral calls through October 31, 1999, we believe that our existing sources of funds will be adequate for purposes of meeting our short-term liquidity needs. There can be no assurance that this will be the case, however. Material increases in interest expense from variable rate funding sources, collateral calls, or material decreases in monthly cash receipts, generally would negatively impact our liquidity. On the other hand, material decreases in interest expense from variable rate funding sources or in collateral calls generally would positively affect our liquidity. YEAR 2000 COMPLIANCE Many existing computer software programs and other technologically dependent systems use two digits to identify the year in date fields and, as such, could fail or create erroneous results by or at the Year 2000. We, WRSC and the companies that service our loan portfolio (our "Servicers") utilize a number of technologically dependent systems to operate, service mortgage loans and manage mortgage assets. WRSC, together with WCC Inc. (a subsidiary controlled by WFSG) and Wilshire Servicing Company U.K. Limited (a wholly-owned subsidiary of WFSG), who are our two Servicers, formed a committee to address Year 2000 issues (the "Committee") that reports directly to WFSG's executive committee. The Committee is headed by WFSG's Chief Information Officer and includes representatives from across departments within WRSC and our Servicers as well as our management. The Committee established and completed a project plan with respect to Year 2000 readiness. In the first phase of the project, the Committee conducted an inventory of all systems for WRSC and our Servicers, classifying each as either "critical" or "non-critical". For systems deemed "critical", the Committee developed detailed test plans and created separate Year 2000 test environments. After the testing phase, in which Year 2000 issues were identified, phases of resolution, retesting, implementation and certification were completed. WRSC and our Servicers began testing of all critical systems in 1997 and completed all necessary testing of such systems, including both systems supplied by outside vendors and internally developed systems, by the end of February 1999. In each case, issues which were identified were resolved. Changes which resulted from testing were coded, retested and implemented and moved into production. Following these phases, each department's executive management certified that their staff had tested critical code and deemed it adequate. In addition, for all critical systems supplied by outside vendors, the Committee obtained a written certification from the vendor that the applicable package is "Year 2000 compliant". With respect to non-critical systems supplied by outside vendors, the Committee has consulted substantially all of the vendors' Internet sites and has obtained copies of Year 2000 compliance certifications from those sites. All phases of the Committee's Year 2000 readiness project were completed by the end of April 1999. As a result, WRSC's management believes that the Company is Year 2000 compliant in all material respects. In addition to the information technology systems ("IT systems"), various "environmental systems" ("non-IT systems") used for the Company's business, including the telephone and security systems, incorporate technology that could be impaired by the Year 2000 date change. The Committee has received written certification that each significant non-IT system is Year 2000 compliant. Our operations were overseen by WRSC, and in accordance with the management agreement, all operating costs including costs related to the Year 2000 issue were covered in the management fee agreement. The financial impact of becoming Year 2000 compliant has not been and is not expected to be material to us or our results of operations. Aside from limited hardware costs, WRSC's parent company's primary expense related to Year 2000 compliance is allocation of existing staff. The Committee estimates the total cost related to Year 2000 compliance to be approximately $0.5 million, substantially all of which had been incurred by December 31, 1998. 28 Our most likely worst case Year 2000 scenario would be one in which our Servicers are unable to perform necessary loan servicing activities. To the extent the loan servicing system is not Year 2000 compliant, the ability to service loans would be in jeopardy. This, in turn, would limit the collections of payments on mortgage loans, which would, further, hinder the Company's ability to meet its own debt service and other cash requirements. Although WRSC and the Company do not believe that it is reasonably likely that the Year 2000 date change will cause such a scenario to occur, the Committee has developed a contingency plan with procedures for manual loan servicing, for up to a week, should the loan servicing system cease to be operational. The loan servicing system was developed internally, and WRSC has advised us that it believes that, in the event of an unexpected Year 2000 issue, the source of the issue could be isolated, and the issue could be corrected, rapidly by WRSC's existing staff without significant cost. Accordingly, we do not believe that such a failure of the loan servicing system would result in any material loss of revenue or have any other material impact on the Company. Based on the results of Committee's Year 2000 readiness project, we are confident that we, WRSC, and our Servicers have/or are appropriately addressing the Year 2000 issues. Critical IT systems supplied by outside vendors have undergone testing not only by WRSC and our Servicers, but by other customers of the vendors as well. WCC's loan servicing system is an internally developed system and therefore, information technology personnel are very familiar with the system and believe their efforts will have favorable results. The Company does not expect the disputes between WREI and WFSG to have a material effect on Y2K risk. The Company also owns mortgage-backed securities which are serviced by mortgage loan servicers other than WFSG entities. These mortgage loan servicers consist primarily of Norwest, General Electric Capital Mortgage Services, Residential Funding Corporation, and Bank of America. We have not done a Y2K analysis of these entities but understand that these entities have been reviewed extensively by their other customers, rating agencies, and in some cases, government regulatory agencies. 29 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, and equity prices. The primary market risk to which the Company is exposed is interest rate risk, which is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond the control of the Company. Changes in the general level of interest rates can affect the Company's net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with its interest-bearing liabilities, by affecting the spread between the Company's interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, the ability of the Company to acquire loans, the value of the Company's mortgage-backed securities and other interest-earning assets, and its ability to realize gains from the sale of such assets. It is the objective of the Company to attempt to control risks associated with interest rate movements. In general, the Company's strategy is to limit its exposure to earnings variations and variations in the value of assets and liabilities as interest rates change over time. The Company's asset and liability management strategy is formulated and monitored regularly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, including those attributable to hedging transactions, purchase and securitization activity, and maturities of investments and borrowings. The following table quantifies the potential changes in net interest income and net portfolio value, at September 30, 1999, should interest rates go up or down (shocked) by 100 to 400 basis points, assuming the yield curves of the rate shocks will be parallel to each other. Net portfolio value is calculated as the sum of the value of off-balance sheet instruments and the present value of cash in-flows generated from interest-earning assets net of cash out-flows in respect of interest-bearing liabilities. The cash flows associated with the loan portfolios and securities available for sale are calculated based on prepayment and default rates that vary by asset. Projected losses, as well as prepayments, are generated based upon the actual experience with the subject pool, as well as similar, more seasoned pools. To the extent available, loan characteristics such as loan-to-value ratio, interest rate, credit history and product types are used to produce the projected loss and prepayment assumptions that are included in the cash flow projections of the securities. Actual results could differ significantly from those estimated in the table.
PROJECTED PERCENT CHANGE IN - -------------------------------------------------------------------- CHANGE IN INTEREST RATES NET INTEREST INCOME NET PORTFOLIO VALUE - ------------------------ ------------------- ------------------- -400 Basis Points 35.6% 20.0% -300 Basis Points 26.7% 14.1% -200 Basis Points 17.8% 10.1% -100 Basis Points 8.9% 6.1% 0 Basis Points 0.0% 0.0% 100 Basis Points (8.9%) (2.0%) 200 Basis Points (17.8%) (6.0%) 300 Basis Points (26.7%) (10.0%) 400 Basis Points (35.6%) (13.8%)
Asset and liability management involves managing the timing and magnitude of the repricing of assets and liabilities. It is the objective of the Company to attempt to control risks associated with interest rate movements. In general, the Company's strategy is to match asset and liability balances within maturity categories to limit its exposure to earnings variations in the value of assets and liabilities as interest rates change over time. 30 The Company's Asset and Liability Committee is authorized to utilize a wide variety of off-balance sheet financial techniques to assist us in the management of interest rate risk. In hedging the interest rate and exchange rate exposure of a foreign currency denominated asset or liability, we may enter into hedge transactions to counter movements in the different currencies as well as interest rates in those currencies. No such techniques were in use as of September 30, 1999. Methods for evaluating interest rate risk include an analysis of the Company's interest rate sensitivity "gap", which is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Since different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. The following table sets forth the estimated maturity or repricing of the Company's interest-earning assets and interest-bearing liabilities at September 30, 1999.
AS OF SEPTEMBER 30, 1999 ------------------------------ (DOLLARS IN THOUSANDS) ONE WITHIN 4 TO 12 YEAR TO MORE THAN 3 MONTHS MONTHS 3 YEARS 3 YEARS TOTAL -------- -------- -------- --------- -------- INTEREST SENSITIVE ASSETS (1): Cash and cash equivalents.................. $ 7,802 $ -- $ -- $ -- $ 7,802 Securities available for sale (2).......... 8,993 -- -- 96,094 105,087 Loans(3)................................... 25,199 596 397 5,393 31,585 Notes receivable from WFSG................. -- -- -- 10,977 10,977 -------- -------- -------- -------- -------- Total rate sensitive assets................ $ 41,994 $ 596 $ 397 $112,464 $155,451 ======== ======== ======== ======== ======== INTEREST SENSITIVE LIABILITIES: Short-term borrowings: Reverse repurchase agreements............ $ 85,779 $ -- $ -- $ -- $ 85,779 Notes payable............................ 35,883 -- -- -- 35,883 Other borrowings........................... -- 1,082 -- 47,904 48,986 Dividends payable.......................... 4,600 -- -- -- 4,600 -------- -------- -------- -------- -------- Total rate sensitive liabilities........... $126,262 $ 1,082 $ -- $ 47,904 $175,248 ======== ======== ======== ======== ======== Interest rate sensitivity gap.............. $(84,268) $ (486) $ 397 $ 64,560 Cumulative interest rate sensitivity gap... $(84,268) $(84,754) $(84,357) $(19,797) Cumulative interest rate sensitivity gap As a percentage of total rate sensitive assets................................. (54%) (55%) (54%) (13%)
- ------------------------ (1) Real estate property holdings are not considered interest rate sensitive. At September 30, 1999 the Company had $69.4 million of real estate property holdings. (2) Includes U.S. Treasury Bill maturing in October 1999. (3) Discounted (non-performing) loans are assumed to be converted to cash at a constant rate over 18 months. In hedging the interest rate and exchange rate exposure of a foreign currency denominated asset or liability, the Company may enter into hedge transactions to counter movements in the different currencies as well as interest rates in those currencies. These hedges may be in the form of currency and interest rate swaps, options, and forwards, or combinations thereof. No such instruments were in use as of September 30, 1999. 31 FORWARD-LOOKING STATEMENTS CERTAIN STATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FORWARD- LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL) MAY BE IDENTIFIED BY REFERENCE TO A FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY," "WILL," "BELIEVE," "EXPECT," "ANTICIPATE," "CONTINUE," OR SIMILAR TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE RELATED TO THE ECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH THE COMPANY OPERATES, COMPETITIVE PRODUCTS AND PRICING, FISCAL AND MONETARY POLICIES OF THE U.S. GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES, ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK MANAGEMENT, ASSET/LIABILITY MANAGEMENT, YEAR 2000 COMPLIANCE ISSUES, THE FINANCIAL AND SECURITIES MARKETS AND UNLESS OTHERWISE REQUIRED BY LAW, THE AVAILABILITY OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY. THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS. 32 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Except as set forth below, the registrant is not a party to any other material legal proceedings. The Company recently decided to become internally managed, and this has resulted in disputes between the Company, on the one hand, and WRSC and WFSG on the other. Until recently, the Company's business and investment affairs have been managed by WRSC pursuant to a management agreement, and the Company has received managerial and administrative services from WRSC thereunder. Accordingly, during this period, the Company has had no employees and instead has relied on WRSC for management, facilities, reporting, and other services. WRSC itself is a shell company and has no employees. WFSG provided managerial and administrative services to WRSC to allow it to fulfil its obligations under the management agreement. WFSG has experienced financial difficulties resulting in its bankruptcy restructuring. On March 3, 1999, WFSG submitted a prepackaged plan of reorganization as part of a Chapter 11 bankruptcy filing in the Federal Court of Wilmington, Delaware. On April 12, 1999, the WFSG restructuring plan was approved by the Bankruptcy Court, and on June 10, 1999, WFSG emerged from bankruptcy pursuant to the restructuring plan. See Note 6 of Notes to Consolidated Financial Statements for discussion of accounting matters related to this restructuring. Prior to WFSG's reorganization, Wilshire Credit Corporation ("Old WCC"), an affiliate of WFSG, provided loan and real property servicing to the Company. As part of the Restructuring Plan, the servicing operations conducted by Old WCC were transferred to WCC Inc. ("WCC"), a newly formed company controlled by WFSG. Relations between WFSG and the Company declined as the Company was not allowed to fully participate in the restructuring of WFSG and did not obtain any representation on WFSG's new board of directors despite a 14.4% ownership interest. On August 19, 1999, the Company was notified that WFSG had suspended its Chief Executive Officer, Andrew Wiederhorn, and its President, Lawrence Mendelsohn, from their duties as employees of WFSG and its subsidiaries and terminated their employment with WFSG and its subsidiaries purportedly for cause on September 3, 1999. Mr. Wiederhorn and Mr. Mendelsohn were also terminated as Chief Executive Officer and President of WRSC. The Company and its independent directors have long considered that Mr. Wiederhorn and Mr. Mendelsohn are key personnel on which the stability and future growth of the Company are dependent. As the principal architects of the development of both WFSG and the Company, Mr. Wiederhorn and Mr. Mendelsohn are familiar with the Company's strengths and weaknesses, have a firm understanding of the complex real estate and financial markets in which the Company operates, have longstanding relationships within the industry (and in particular with the Company's lenders) and are familiar with the Company's assets (including its portfolio of subordinated mortgage-backed securities) and its liabilities (including short-term repurchase agreements). Accordingly, the independent directors of the Company believe that the termination of Mr. Wiederhorn and Mr. Mendelsohn had a material, adverse effect on WRSC's ability to perform its obligations under the management agreement. On August 20, 1999, the Company filed a lawsuit against WFSG in the Circuit Court of the State of Oregon for Multnomah County. On August 23, 1999, the Company filed an amended Complaint in the lawsuit adding as additional defendants WRSC, WCC, a 50.01% subsidiary of WFSG, and Wilshire Management Leasing Company ("WML"), a wholly-owned subsidiary of WFSG alleging: (1) the termination of Wiederhorn and Mendelsohn made WFSG and WRSC unable and/or unwilling to provide management to the Company as required under the Management Agreement; (2) the inability of WFSG and WRSC to manage the Company's business affairs triggered application of a facilities sharing agreement dated February 19, 1999 between the Company, WFSG, WRSC, WCC, and WML (the "Facilities Sharing Agreement"); and (3) WFSG's refusal to allow Wiederhorn and Mendelsohn access to WFSG's facilities, personnel, and equipment for the Company's business violated the terms of the 33 Facilities Sharing Agreement. Messrs. Wiederhorn and Mendelsohn have also brought suit against WFSG and its directors alleging wrongful termination and defamation. The Facilities Sharing Agreement had been entered into by the parties to provide for the orderly transition of the Company's management in the event the management agreement was no longer operative and the Company was to become internally, rather than externally, managed. Under the Facilities Sharing Agreement, WFSG, WRSC, and the other parties were required to provide to the Company, for a period of two years, the facilities, services, equipment, and personnel necessary for the Company to internally manage itself, in return for the payment by the Company of the pro-rata cost to provide facilities, services, equipment, and personnel. On September 22, 1999, WFSG and WRSC filed papers in the above litigation alleging various affirmative defenses and counterclaims, including allegations that the Facilities Sharing Agreement was not in effect and was unenforceable, and that the Company breached the management agreement, obligating the Company to pay a termination fee. On September 22, 1999, the Company sent a letter to WRSC reserving its rights with respect to prior declarations of default by WRSC, and providing formal notice of non-renewal and termination "for cause" of the management agreement. The letter outlined various breaches of the management agreement by WRSC, including: failing to provide competent management to the Company; failing to provide necessary services and facilities; and taking actions contrary to the interests of the Company. WRSC has disputed the characterization of the termination as one "for cause" and has claimed that under the management agreement it is entitled to a termination fee (a sum equal to the management fees paid to WRSC for the preceding twelve months) from the Company. Notwithstanding the foregoing, the Company has sought to discuss the parties' disagreements with a view to reaching an amicable arrangement for severing the relationships between WFSG and the Company. As a result of the Company's overtures, the Company and WFSG began discussions to resolve their differences in late September. There can be no assurance that these discussions will result in a resolution of these disagreements. In connection with this matter, the Company, without admission, recorded a provision for potential resolution of disputes with WFSG of $4.1 million as of September 30, 1999. As part of the Company's decision to become independently managed as described above, the Company has entered into employment agreements with Andrew Wiederhorn, as Chairman and Chief Executive Officer; Lawrence Mendelsohn, as President; Chris Tassos, as Chief Financial Officer and Executive Vice President; Richard Brennan, as Executive Vice President; and Robert Rosen, as Executive Vice President. ITEM 2. CHANGES IN SECURITIES. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On September 10, 1999, at the annual stockholders' meeting, the Company's shareholders voted 8,055,504 to 20,481, with 5,372 abstentions, not to elect Real Estate Investment Trust (REIT) status for the Company. The stockholders also ratified the appointment of Arthur Andersen LLP as the independent accountants for the fiscal year ending December 31, 1999, (with 10,050,890 shares voting for, 60,711 shares voting against, and 5,847 shares abstaining). On November 12, 1999, the Board of Directors of the Company appointed the firm of Ernst & Young LLP to replace Arthur Andersen LLP as the principal accountant to audit the Company's financial statements. Arthur Andersen LLP was replaced due to a potential conflict 34 of interest with the services it performs for Wilshire Realty Services Corporation ("WRSC"), the Company's former manager, and Wilshire Financial Services Group Inc. ("WFSG"), the parent of WRSC. The stockholders also voted to change the Company's name from Wilshire Real Estate Investment Trust Inc. to Wilshire Real Estate Investment Inc. (with 7,976,112 shares voting for, 25,961 voting against, and 5,772 shares abstaining). ITEM 5. OTHER INFORMATION. Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 3.1 Amended and Restated Articles of Incorporation 11 Statement re Computation of Per Share Earnings 27 Financial Data Schedule (b) Report on 8-K during and after the three months ended September 30, 1999: Report on Form 8-K dated August 19, 1999, reporting the Company's determination to become internally managed and its termination of its management agreement with Wilshire Realty Services Corporation. Report on Form 8-K dated November 15, 1999 reporting the replacement of Arthur Andersen LLP as the independent accountant and appointment of Ernst & Young LLP to serve in that capacity. 35 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. 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
Date: November 22, 1999 36 EX-3.1 2 EXHIBIT 3.1 Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF WILSHIRE REAL ESTATE INVESTMENT TRUST INC. (A Stock Corporation) Wilshire Real Estate Investment Trust Inc., a Maryland corporation having its principal office in the State of Maryland in Baltimore City, Maryland (hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland (the "SDAT") that: FIRST: The Charter of the Corporation is hereby amended and restated in its entirety as follows: I. The name of the corporation (which is hereinafter called the "Corporation") is: WILSHIRE REAL ESTATE INVESTMENT INC. II. The purpose for which this Corporation is formed is to transact any and all lawful act or activity for which corporations may be organized under the General Laws of the State of Maryland now or hereafter in force. III. The total number of shares of stock of all classes which the Corporation has authority to issue is 225,000,000 shares of capital stock (par value $.0001 per share), of which 200,000,000 shares are initially classified as "Common Stock" and 25,000,000 shares are initially classified "Preferred Stock." The aggregate par value of all authorized shares of stock having par value is $22,500. The Board of Directors may classify and reclassify any unissued shares of capital stock by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption of such shares of capital stock. No holder of any stock or any other securities of the Corporation, whether now or hereafter authorized, shall have any preemptive right to subscribe for or purchase any stock or any other securities of the Corporation, including, without limitation: (i) any shares of any class of the Corporation; (ii) any warrants, rights, or options to purchase any such shares; or (iii) any securities or obligations convertible into any such shares or into warrants, rights, or options to purchase any such shares. The Board of Directors is hereby empowered to authorize the issuance from time to time of shares of its stock of any class, whether now or hereafter authorized, or securities convertible into shares of its stock of any class or classes, whether now or hereafter authorized, for such consideration as may be deemed advisable by the Board of Directors and without any action by the stockholders. Also, the Preferred Stock may be issued from time to time by the Board of Directors of the Corporation, in such series and with such preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or other provisions as may be fixed by the Board of Directors without any action by the stockholders. IV. The present address of the principal office of the Corporation in this State is 11 East Chase Street, Suite 9E, Baltimore, Maryland 21202. V. The name and address of the resident agent of the Corporation in this State are CSC-Lawyers Incorporating Service Company, 11 East Chase Street, Suite 9E, Baltimore, Maryland 21202. Said resident agent is a Maryland corporation. 2 VI. A. The number of directors of the Corporation shall be five (5), which number may be increased or decreased pursuant to the Bylaws of the Corporation; provided that in no case shall the Board of Directors consist of less than three (3) or more than nine (9) members unless otherwise determined from time to time by resolution adopted by the affirmative vote of at least eighty percent (80%) of the members of the Board of Directors; provided further that in any case the number of directors of the Corporation shall never be less than the minimum number permitted by the General Laws of the State of Maryland now or hereafter in force. Any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of not less than two-thirds (2/3) of all the votes entitled to be cast by the outstanding shares of capital stock of the Corporation generally in the election of directors which are cast on the matter at any meeting of the stockholders called for that purpose, voting together for this purpose as a single class. A director need not be a stockholder. At each annual meeting of the stockholders, the stockholders shall elect directors to serve a one (1) year term and until successors are elected and qualify. B. The following Persons are the current directors of the Corporation, to serve until their successors are elected and qualified: Andrew Wiederhorn, Lawrence Mendelsohn, David Egelhoff, Jordan Schnitzer and Patrick Terrell. C. Notwithstanding anything herein to the contrary, at all times (except during a period not to exceed sixty (60) days following the death, resignation, incapacity, or removal from office of a director prior to expiration of the director's term of office), a majority of the Board of Directors shall be "Independent Directors." "Independent Director" shall mean a director who, within the last two years, has not (i) been employed by WFSG or any of its Affiliates, (ii) been an officer or director of WFSG or any of its Affiliates, (iii) or whose business or employer within the last two years has not performed services for WFSG or any of its Affiliates that annually exceeded the lesser of (a) the dollar amount provided in Item 404(a) of Regulation S-K or (b) 10% of the gross revenue of the entity that provided such services, or (iv) had any material business or professional relationship with WFSG or any of its Affiliates. "WFSG" shall mean Wilshire Financial Services Group Inc., a Delaware corporation. "Affiliate" shall mean (i) any person directly or indirectly owning, controlling, or holding, with power to vote ten percent or more of the outstanding voting securities of such other person, (ii) any person ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other person, (iii) any person directly or indirectly controlling, controlled by, or under common control with such other person, (iv) any executive officer, director, trustee or general partner of such other person, and (v) any legal entity for which such person acts as an executive officer, director, trustee or general partner. The term "person means" and includes any natural person, corporation, partnership, association, limited liability company or any other legal entity. An indirect relationship shall include circumstances in which a person's spouse, children, parents, 3 siblings or mothers-, fathers-, sisters- or brothers-in-law is or has been associated with a person. D. To the extent permitted by applicable law, and subject to such approval of the Independent Directors and such other conditions, if any, as may be required by any applicable law or other applicable rule or regulation, the Board of Directors may engage a manager to advise the Board of Directors and be responsible for directing the day-to-day affairs of the Corporation (a "Manager") pursuant to a written agreement (a "Management Agreement"). The approval of any Management Agreement and the renewal or termination thereof shall require the affirmative vote of a majority of the Independent Directors. E. A majority of the Independent Directors shall approve general guidelines ("Guidelines") for the Corporation's investments, borrowings and operations, and the Independent Directors shall conduct a quarterly review of all transactions engaged in by the Corporation. The Independent Directors shall approve any transactions with WFSG or any Affiliate of WFSG, in advance, to insure compliance with the Guidelines. F. Notwithstanding any other provisions of the Charter or the Bylaws of the Corporation (and notwithstanding that some lesser percentage may be specified by law, the Charter or the Bylaws of the Corporation), the provisions of this Article VI shall not be amended, altered, changed, or repealed, and no provision inconsistent with this Article VI shall be adopted, without the affirmative vote of at least eighty percent (80%) of the members of the Board of Directors and by the affirmative vote of not less than two-thirds (2/3) of all the votes entitled to be cast by the outstanding shares of capital stock of the Corporation generally in the election of directors which are cast on the matter at any meeting of the stockholders called for that purpose, voting together for this purpose as a single class. VII. A. The Corporation shall indemnify (A) its directors and officers, whether serving the Corporation or, at its request, any other entity, to the full extent required or permitted by the General Laws of the State of Maryland now or hereafter in force, including the advance of expenses under the procedures and to the full extent permitted by law and (B) other employees and agents to such extent as shall be authorized by the Board of Directors of the Corporation or the Corporation's Bylaws and be permitted by law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve, and amend from time to time such bylaws, resolutions, or contracts, implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment of the Charter of the Corporation or repeal of any of its provisions shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal. 4 B. To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted, no director or officer of this Corporation shall be personally liable to the Corporation or its stockholders for money damages. No amendment of the Charter of the Corporation or repeal of any of its provisions shall limit or eliminate the limitation on liability provided to directors and officers hereunder with respect to any act or omission occurring prior to such amendment or repeal. VIII. The Corporation shall not, without the affirmative vote of at least eighty percent (80%) of the members of the Board of Directors and the affirmative vote of a majority of shares present in person or represented by proxy and entitled to vote on the matter at any meeting of the stockholders called for that purpose at which a quorum is present, seek to elect to be taxed as a real estate investment trust ("REIT") under Section 856 under the Internal Revenue Code of 1986, as amended from time to time (the "Code"). However, in the event the Board of Directors and the stockholders should so vote, (i) it shall be the duty of the Board of Directors to ensure that the Corporation satisfies the requirements for qualification as a REIT under the Code, including, but not limited to, the ownership of its outstanding stock, the nature of its assets, the sources of its income, and the amount and timing of its distributions to its stockholders, and (ii) the Board of Directors shall take no action thereafter to disqualify the Corporation as a REIT or to otherwise revoke the Corporation's election to be taxed as a REIT without the affirmative vote of at least eighty percent (80%) of the members of the Board of Directors and the affirmative vote of a majority of shares present in person or represented by proxy and entitled to vote on the matter at any meeting of the stockholders called for that purpose at which a quorum is present. IX. A. Restrictions on Transfer. 1. Definitions. The following terms shall have the following meanings: "Beneficial Ownership" shall mean ownership of shares of Equity Stock by a Person who would be treated as an owner of such shares of Equity Stock either directly or indirectly through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have correlative meanings. "Beneficiary" shall mean, with respect to any Trust, one or more organizations described in each of Section 170(b)(1)(A) (other than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the Corporation as the beneficiary or beneficiaries of such Trust, in accordance with the provisions of Section (B)(1) of Article IX hereof. 5 "Board of Directors" shall mean the Board of Directors of the Corporation. "Closing Price" on any date shall mean the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market, or, if such system is no longer in use, the principal other automated quotations system that may then be in use or, if the shares of Equity Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares of Equity Stock selected by the Board of Directors. "Constructive Ownership" shall mean ownership of shares of Equity Stock by a Person who would be treated as an owner of such shares of Equity Stock either directly or indirectly through the application of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns," and "Constructively Owned" shall have correlative meanings. "Disqualified Person" means (A) the United States, any State or political subdivision thereof, any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, (B) any organization (other than a cooperative described in Section 521 of the Code) which is exempt from tax unless such organization is subject to the tax imposed by Section 511 of the Code, and (C) any organization described in Section 1381(a)(2)(c) of the Code. "Equity Stock" shall mean Preferred Stock and Common Stock of the Corporation. The term "Equity Stock" shall include all shares of Preferred Stock and Common Stock of the Corporation that are held as Shares-in-Trust in accordance with the provisions of Section (B) of Article IX hereof. "Market Price" on any date shall mean the average of the Closing Price for the five consecutive Trading Days ending on such date. "Non-Transfer Event" shall mean an event other than a purported Transfer that would cause any Person to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, including, but not limited to, the granting of any option or entering into any agreement for the sale, transfer, or other disposition of shares of Equity Stock or the sale, transfer, assignment, or other disposition of any securities or rights convertible into or exchangeable for shares of Equity Stock. "Operating Partnership" shall mean Wilshire Real Estate Partnership L.P., a Delaware limited partnership. "Operating Partnership Agreement" shall mean the agreement of limited partnership governing the Operating Partnership. 6 "Ownership Limit" shall mean the restriction on ownership (or deemed ownership by virtue of the attribution provisions of the Code) of more than 9.8% of the number of shares or value (whichever is more restrictive) of the outstanding Common Stock by any Person other than Wilshire Financial Services Group Inc., a Delaware corporation ("WFSG"), or twenty percent (20%) of the number of shares or value (whichever is more restrictive) of Common Stock by WFSG (provided that the Board of Directors has obtained representations and undertakings from WFSG in form and substance satisfactory to the Board of Directors in its sole discretion as it may deem necessary or advisable in order to determine that WFSG's Beneficial Ownership or Constructive Ownership will not impair the Corporation's status as a REIT and provided further that WFSG agrees that any actual or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Section (A)(2) of Article IX hereof) will result in the transfer of such Equity Stock to a Trustee in his capacity as trustee of a Trust in accordance with Section (A)(3) of Article IX hereof) or 9.8% of the number of shares or value (whichever is more restrictive) of the outstanding Preferred Stock (or such other number or value of Preferred Stock as the Board of Directors may determine in fixing the terms of the Preferred Stock). In determining the Ownership Limit, the number and value of Common Stock and/or Preferred Stock of the Corporation shall be determined by the Board in good faith, which determination shall be conclusive for all purposes hereof. "Permitted Transferee" shall mean any Person designated as a Permitted Transferee in accordance with the provisions of Section (B)(5) of Article IX hereof. "Person" shall mean an individual, corporation, limited liability company, partnership, estate, trust, a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company, or other entity and also includes a "group" as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "Prohibited Owner" shall mean, with respect to any purported Transfer or Non-Transfer Event, any Person who, but for the provisions of Section (A)(3) of Article IX hereof, would be the actual owner (within the meaning of Treasury Regulation Section 1.857-8(b)) of shares of Equity Stock. "Redemption Rights" shall mean the rights granted under the Operating Partnership Agreement to the limited partners to redeem, under certain circumstances, their limited partnership interests for shares of Common Stock (or cash at the option of the Corporation). "REIT Disqualification Meeting" shall mean an annual or special meeting of the stockholders of the Corporation at which a proposal to delete provisions of the Articles of Incorporation that require the Corporation to elect to be taxed as a REIT is approved by the 7 affirmative vote of not less than two-thirds (2/3) of all the votes entitled to be cast by the outstanding shares of the capital stock of the Corporation on the matter, voting together for this purpose as a single class. "Restriction Termination Date" shall mean (A) if the Corporation has elected not to be taxed as a REIT, the first day after at least 80% of the Board of Directors determines in writing that it is no longer in the best interests of the Corporation to retain the restrictions on transfer and ownership contained in Article IX; or (B) if the Corporation has elected to be taxed as a REIT, the first day after (i) at least 80% of the Board of Directors determines in writing that it is no longer in the best interests of the Corporation to retain the restrictions on transfer and ownership contained in Article IX and (ii) such restrictions are no longer required for the Corporation to qualify, or to continue to qualify, as a REIT. "Shares-in-Trust" shall mean any shares of Equity Stock designated Shares-in-Trust pursuant to Section (A)(3) of Article IX hereof. "Tax Benefits" shall mean the Corporation's net operating loss carryforwards, capital loss carryforwards and built-in losses. "Tenant" shall mean any Person (other than an individual) from whom the Corporation derives (or is deemed to derive for purposes of applying Section 856 of the Code to the Corporation), directly or indirectly, gross income. "Tenant Interest" shall mean an interest, expressed as a percentage, of the total combined voting power or total number of shares of all classes of stock of a Tenant that is a corporation, or an interest, expressed as a percentage, of the assets or net profits (within the meaning of Section 856(d)(2)(B) of the Code) of a Tenant that is not a corporation. "Trading Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. "Transfer" shall mean any sale, transfer, gift, assignment, devise, or other disposition of shares of Equity Stock, whether voluntary or involuntary, whether of record, constructively or beneficially, and whether by operation of law or otherwise. "Trust" shall mean any separate trust created pursuant to Section (A)(3) of Article IX hereof and administered in accordance with the terms of Section (B) of Article IX hereof, for the exclusive benefit of any Beneficiary. "Trustee" shall mean any Person or entity unaffiliated with both the Corporation and any Prohibited Owner, such Trustee to be designated by the Corporation to act as trustee of any Trust, or any successor trustee thereof. 8 2. Restriction on Transfers. a. Except as provided in Section (A)(7) of Article IX hereof, from the date of a REIT Disqualification Meeting and prior to the Restriction Termination Date, (i) no Person shall Beneficially Own or Constructively Own outstanding shares of Equity Stock in excess of the Ownership Limit and (ii) any Transfer that, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Equity Stock in excess of the Ownership Limit shall be void AB INITIO as to the Transfer of that number of shares of Equity Stock which would be otherwise Beneficially Owned or Constructively Owned by such Person in excess of the Ownership Limit, and the intended transferee shall acquire no rights in such excess shares of Equity Stock. b. Except as provided in Section (A)(7) of Article IX hereof, from the date of a REIT Disqualification Meeting and prior to the Restriction Termination Date, any Transfer that, if effective, would result in shares of Equity Stock being beneficially owned by fewer than 100 Persons (determined without reference to any rules of attribution) shall be void AB INITIO as to the Transfer of that number of shares which would be otherwise beneficially owned (determined without reference to any rules of attribution) by the transferee, and the intended transferee shall acquire no rights in such shares of Equity Stock. c. From the date of a REIT Disqualification Meeting and prior to the Restriction Termination Date, any Transfer of shares of Equity Stock that, if effective, would result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code shall be void AB INITIO as to the Transfer of that number of shares of Equity Stock which would cause the Corporation to be "closely held" within the meaning of Section 856(h) of the Code, and the intended transferee shall acquire no rights in such shares of Equity Stock. d. From the date of a REIT Disqualification Meeting and prior to the Restriction Termination Date, any Transfer of shares of Equity Stock that, if effective, would cause the Corporation to Constructively Own a Tenant Interest of ten percent (10%) or more shall be void AB INITIO as to the Transfer of that number of shares of Equity Stock which would cause the Corporation to Constructively Own a Tenant Interest of ten percent (10%) or more and the intended transferee shall acquire no rights in such excess shares of Equity Stock. e. From the date of a REIT Disqualification Meeting and prior to the Restriction Termination Date, any Transfer of shares of Equity Stock that, if effective, would result in shares of Equity Stock being Beneficially Owned by a Disqualified Person shall be void AB INITIO as to the Transfer of that number of shares which would be otherwise Beneficially Owned by the transferee, and the intended transferee shall acquire no rights in such shares of Equity Stock. f. It is expressly intended that the restrictions on ownership and Transfer described in this Section (A)(2) of Article IX shall apply to the Redemption Rights. 9 Notwithstanding any of the provisions of the Operating Partnership Agreement to the contrary, a partner of the Operating Partnership shall not be entitled to effect an exchange of an interest in the Operating Partnership for Common Stock if the Beneficial Ownership or Constructive Ownership of Common Stock would be prohibited under the provisions of this Article IX. 3. Transfer to Trust. a. If, notwithstanding the other provisions contained in this Section (A) of Article IX, at any time after a REIT Disqualification Meeting and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event such that any Person would either Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, then, (i) except as otherwise provided in Section (A)(7) of Article IX hereof, the purported transferee shall acquire no right or interest (or, in the case of a Non-Transfer Event, the actual owner (within the meaning of Treasury Regulation Section 1.857-8(b)) of the shares of Equity Stock Beneficially Owned or, Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease to own any right or interest) in such number of shares of Equity Stock which would cause such Beneficial Owner or Constructive Owner to Beneficially Own or Constructively Own shares of Equity Stock in excess of the Ownership Limit, (ii) such number of shares of Equity Stock in excess of the Ownership Limit (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section (B) of Article IX hereof, transferred automatically and by operation of law to a Trustee in his capacity as trustee of a Trust to be held in accordance with that Section (B) of Article IX, and (iii) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration in the name of the Trustee. Such transfer to a Trustee and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. b. If, notwithstanding the other provisions contained in this Section (A) of Article IX (after application of paragraph (a) above), at any time after a REIT Disqualification Meeting and prior to the Restriction Termination Date, there is a purported Transfer or Non-Transfer Event that, if effective, would (i) result in the shares of Equity Stock being Beneficially Owned by fewer than 100 Persons (determined without reference to any rules of attribution), (ii) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code, or (iii) cause the corporation to Constructively Own a Tenant Interest of ten percent (10%) or more, or (iv) result in the shares of Equity Stock being Beneficially Owned by a Disqualified Person, then (x) the purported transferee shall not acquire any right or interest (or, in the case of a Non-Transfer Event, the Person who, but for the provisions of this Section (A)(3), would be the actual owner (within the meaning of Treasury Regulation Section 1.857-8(b)) of the shares of Equity Stock with respect to which such Non-Transfer Event occurred, shall cease to own any right or interest) in such number of shares of Equity Stock, the ownership of which by such purported transferee or purported actual owner would (A) result in the shares of Equity Stock being beneficially owned by fewer 10 than 100 Persons (determined without reference to any rules of attribution), (B) result in the Corporation being "closely held" within the meaning of Section 856(h) of the Code, (C) cause the Corporation to Constructively Own a Tenant Interest of ten percent (10%) or more or (D) result in the shares of Equity Stock being Beneficially Owned by a Disqualified Person, (y) such number of shares of Equity Stock (rounded up to the nearest whole share) shall be designated Shares-in-Trust and, in accordance with the provisions of Section (B) of Article IX hereof, transferred automatically and by operation of law to a Trustee in his capacity as trustee of a Trust to be held in accordance with that Section (B) of Article IX, and (z) the Prohibited Owner shall submit such number of shares of Equity Stock to the Corporation for registration in the name of the Trustee. Such transfer to a Trustee in his capacity as trustee of a Trust and the designation of shares as Shares-in-Trust shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event, as the case may be. 4. Remedies for Breach. If the Corporation, or its designees, shall at any time determine in good faith that a Transfer or Non-Transfer Event has taken place that, if effective, would result in a violation of Section (A)(2) of Article IX hereof or that a Person intends to acquire or has attempted to acquire Beneficial Ownership or Constructive Ownership of any shares of Equity Stock in violation of Section (A)(2) of Article IX hereof, the Corporation shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or acquisition of Beneficial Ownership or Constructive Ownership, including, but not limited to, causing the Corporation to redeem shares of Equity Stock, refusing to give effect to such Transfer on the books of the Corporation or instituting proceedings to enjoin such Transfer or acquisition. 5. Notice of Restricted Transfer. Any Person who acquires or attempts to acquire Beneficial Ownership or Constructive Ownership of shares of Equity Stock in violation of Section (A)(2) of Article IX hereof, or any Person who owned shares of Equity Stock that were transferred to a Trustee in his capacity as trustee of a Trust pursuant to the provisions of Section (A)(3) of Article IX hereto, shall immediately give written notice to the Corporation of such event and shall provide to the Corporation such other information as the Corporation may request in order to determine the effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on the Corporation's status as a REIT. 6. Owners Required To Provide Information. From the date of a REIT Disqualification Meeting and prior to the Restriction Termination Date: a. Every Beneficial Owner or Constructive Owner of more than five percent (5%), or such lower percentages as required pursuant to regulations under the Code, of the outstanding shares of all classes of capital stock of the Corporation shall, within thirty (30) days after January 1 of each year, provide to the Corporation a written statement or affidavit stating the name and address of such Beneficial Owner or Constructive Owner, the number of shares of Equity Stock Beneficially Owned or Constructively Owned, and a description of how such shares are held. Each such Beneficial Owner or Constructive Owner shall provide to the 11 Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership or Constructive Ownership on the Corporation's status as a REIT and to ensure compliance with the restrictions on ownership set forth in this Article IX. b. Each Person (including the stockholder of record) who is holding shares of Equity Stock for a Beneficial Owner or Constructive Owner shall provide to the Corporation a written statement or affidavit stating such information as the Corporation may request in order to determine the Corporation's status as a REIT and to ensure compliance with the Ownership Limit. 7. Exceptions. a. The provisions of Section (A)(2) of Article IX hereof shall not apply to the acquisition of shares of Equity Stock by an underwriter that participates in a public offering of such shares or securities convertible into such shares for a period of ninety (90) days following the purchase by such underwriter of such shares provided that the restrictions contained in Section (A)(2) of Article IX hereof will not be violated following the distribution by such underwriter of such shares. b. The Board of Directors, in its sole discretion, may exempt a Person from the restrictions set forth in Section (A)(2) of this Article IX if: (i) the Board of Directors obtains such representations and undertakings from such Person as are deemed by the Board of Directors to be reasonably necessary to ascertain that no individual's Beneficial Ownership of shares of Equity Stock will violate the restrictions set forth in Section (A)(2) of this Article IX or that any such violation will not cause the Corporation to fail to qualify as a REIT under the Code, and such Person agrees that any actual or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Section (A)(2) of this Article IX) will result in the transfer of such Equity Stock to a Trustee in his capacity as trustee of a Trust in accordance with Section (A)(3) of this Article IX; or (ii) such Person does not own, and represents that it will not own, actually or Constructively, a Tenant Interest that would cause the Corporation to own, actually or Constructively, a Tenant Interest of more than 9.8%, the Corporation obtains such other representations and undertakings from such Person (or any other Person who could be treated as Constructively Owning the Equity Shares actually or Constructively Owned by such Person) as are deemed by the Board of Directors to be reasonably necessary to ascertain this fact and such Person agrees that any actual or attempted violation of such representations or undertakings will result in the transfer of such Equity Stock to a Trustee in his capacity as trustee of a Trust in accordance with 12 Section (A)(3) of this Article IX. Notwithstanding the foregoing, the inability of a Person to make the certification described in this paragraph shall not prevent the Board of Directors, in its sole discretion, from exempting such Person from the restrictions set forth in Section (A)(2) of this Article IX if the Board of Directors determines that the resulting application of Section 856(d)(2)(B) of the Code would affect the characterization of less than 0.5% of the gross income (as such term is used in Section 856(c)(2) of the Code) of the Corporation in any taxable year. c. Prior to granting any exception pursuant to Section (A)(7)(b)(i) or (ii) of this Article IX, the Board of Directors may require a ruling from the IRS, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Corporation's status as a REIT or otherwise would not affect the Corporation's status as a REIT. B. Shares-in-Trust. 1. Trust. Any shares of Equity Stock transferred to a Trustee in his capacity as trustee of a Trust and designated Shares-in-Trust pursuant to Section (A)(3) of Article IX hereof shall be held for the exclusive benefit of the Beneficiary. The Corporation shall name a Beneficiary (such that the shares of Equity Stock held in the Trust would not violate the restrictions set forth in Section (A)(2) of Article IX hereof) for each Trust within five (5) days after discovery of the existence thereof. Any transfer to a Trust, and subsequent designation of shares of Equity Stock as Shares-in-Trust, pursuant to Section (A)(3) of Article IX hereof shall be effective as of the close of business on the business day prior to the date of the Transfer or Non-Transfer Event that results in the transfer to the Trust. Shares-in-Trust shall remain issued and outstanding shares of Equity Stock of the Corporation and shall be entitled to the same rights and privileges on identical terms and conditions as are all other issued and outstanding shares of Equity Stock of the same class and series. When transferred to a Permitted Transferee in accordance with the provisions of Section (B)(5) of Article IX hereof, such Shares-in-Trust shall cease to be designated as Shares-in-Trust. 2. Dividend Rights. The Trust, as record holder of Shares-in-Trust, shall be entitled to receive all dividends and distributions as may be declared by the Board of Directors on such shares of Equity Stock and shall hold such dividends or distributions in trust for the benefit of the Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall be required to repay to the Trust the amount of any dividends or distributions received by it that (i) are attributable to any shares of Equity Stock designated Shares-in-Trust and (ii) the record date of which was on or after the date that such shares became Shares-in-Trust. The Corporation shall take all measures that it determines reasonably necessary to recover the amount of any such dividend or distribution paid to a Prohibited Owner, including, if necessary, withholding any portion of future dividends or distributions payable on shares of Equity Stock Beneficially Owned or Constructively Owned by the Person who, but for the 13 provisions of Section (A)(3) of Article IX hereof, would Constructively Own or Beneficially Own the Shares-in-Trust; and, as soon as reasonably practicable following the Corporation's receipt or withholding thereof, shall pay over to the Trust for the benefit of the Beneficiary the dividends so received or withheld, as the case may be. 3. Rights upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of, or any distribution of the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled to receive, ratably with each other holder of shares of Equity Stock of the same class or series, that portion of the assets of the Corporation which is available for distribution to the holders of such class and series of shares of Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts received upon such liquidation, dissolution, or winding up, or distribution; provided, however, that the Prohibited Owner shall not be entitled to receive amounts pursuant to this Section (B)(3) of Article IX in excess of, in the case of a purported Transfer in which the Prohibited Owner paid fair market value for shares of Equity Stock and which Transfer resulted in the transfer of the shares to the Trustee in his capacity as trustee of a Trust, the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock and, in the case of a Non-Transfer Event or Transfer in which the Prohibited Owner did not pay fair market value for such shares (E.G., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to a Trustee in his capacity as trustee of a Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer. Any remaining amount in such Trust shall be distributed to the Beneficiary. 4. Voting Rights. The Trustee shall be entitled to vote all Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity Stock prior to the discovery by the Corporation that the shares of Equity Stock are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be void AB INITIO with respect to such Shares-in-Trust and the Prohibited Owner shall be deemed to have given, as of the close of business on the business day prior to the date of the purported Transfer or Non-Transfer Event that results in the transfer to the Trust of shares of Equity Stock under Section (A)(3) of Article IX hereof, an irrevocable proxy to the Trustee to vote the Shares-in-Trust in the manner in which the Trustee, in its sole and absolute discretion, desires. 5. Designation of Permitted Transferee. The Trustee shall have the exclusive and absolute right to designate a Permitted Transferee of any or all Shares-in-Trust. In an orderly fashion so as not to materially adversely affect the Market Price of the Shares-in-Trust, the Trustee shall either sell the Shares-in-Trust using the facilities of a national stock exchange on which the class and series of such Shares-in-Trust are then actively traded, if any, or designate any Person as Permitted Transferee, provided, however, that (i) the Permitted Transferee so designated purchases for valuable consideration (whether in a public or private sale) the Shares-in-Trust and (ii) the Permitted Transferee so designated may acquire such Shares-in-Trust without such acquisition resulting in a transfer to a Trustee in his capacity as trustee of the Trust and the redesignation of such shares of Equity Stock so acquired as Shares- 14 in-Trust under Section (A)(3) of Article IX hereof. Upon the sale of Shares-in-Trust by the Trustee of a Permitted Transferee in accordance with the provisions of this Section (B)(5) of Article IX, the Trustee shall (i) if such sale was to a Permitted Transferee, cause to be transferred to the Permitted Transferee that number of Shares-in-Trust acquired by the Permitted Transferee, (ii) if such sale was to a Permitted Transferee, cause to be recorded on the books of the Corporation that the Permitted Transferee is the holder of record of such number of shares of Equity Stock, (iii) cause the Shares-in-Trust to be canceled, and (iv) distribute to the Beneficiary any and all amounts held with respect to the Shares-in-Trust after making that payment to the Prohibited Owner pursuant to Section (B)(6) of Article IX hereof. 6. Compensation to Record Holder of Shares of Equity Stock that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following discovery of the Shares-in-Trust and subsequent sale of such Shares-in-Trust in accordance with Section (B)(5) of Article IX hereof or following the acceptance of the offer to purchase such shares in accordance with Section (B)(7) of Article IX hereof) to receive from the Trustee following the sale or other disposition of such Shares-in-Trust the lesser of (i) in the case of (a) a purported Transfer in which the Prohibited Owner paid fair market value for shares of Equity Stock and which Transfer resulted in the transfer of the shares to the Trust, the price per share, if any, such Prohibited Owner paid for the shares of Equity Stock, or (b) a Non-Transfer Event or Transfer in which the Prohibited Owner did not pay fair market value for such shares (E.G., if the shares were received through a gift or devise) and which Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of shares to the Trust, the price per share equal to the Market Price on the date of such Non-Transfer Event or Transfer, and (ii) the price per share received by the Trustee from the sale or other disposition of such Shares-in-Trust in accordance with Section (B)(5) of Article IX hereof. Any amounts received by the Trustee in respect of such Shares-in-Trust and in excess of such amounts to be paid the Prohibited Owner pursuant to this Section (B)(6) shall be distributed to the Beneficiary in accordance with the provisions of Section (B)(5) of Article IX hereof. Each Beneficiary and Prohibited Owner waive any and all claims that the may have against the Trustee and the Trust arising out of the disposition of Shares-in-Trust, except for claims arising to or out of the gross negligence or willful misconduct of, or any failure to make payments in accordance with this Section (B), by such Trustee or the Corporation. 7. Purchase Right in Shares-in-Trust. Shares-in-Trust shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that created such Shares-in-Trust (or, in the case of devise, gift or Non-Transfer Event, the Market Price at the time of such devise, gift or Non-Transfer Event) and (ii) the Market Price on the date the Corporation or its designee accepts such offer. The Corporation shall have the right to accept such offer for a period of ninety (90) days after the later of (i) the date of the Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust and (ii) the date the Corporation determines in good faith that a Transfer or Non-Transfer Event resulting in Shares-in-Trust has occurred, if the 15 Corporation does not receive a notice of such Transfer or Non-Transfer Event pursuant to Section (A)(5) of Article IX hereof. C. Remedies Not Limited. Nothing contained in this Article IX shall limit the authority of the Board of Directors to take such other action to the extent permitted by law as it deems necessary or advisable to protect the Corporation and the interests of its stockholders by preserving the ability of the Corporation to elect to be taxed as a REIT or, once such election has been made, preserving the Corporation's status as a REIT or preserving the Tax Benefits. Without limiting the generality of the foregoing, the Board of Directors may, by adopting a written resolution, (i) extend the Restriction Termination Date, (ii) modify the Ownership Limit, or (iii) modify the definitions of any terms set forth in this Article IX; provided, however, that the Board of Directors shall not cause there to be such extension, change or modification unless it concludes in writing that such action is reasonably necessary or advisable to preserve the Corporation's status as a REIT or to preserve the Tax Benefits, or that the continuation of these restrictions is no longer reasonably necessary for the preservation of the Corporation's status as a REIT or the preservation of the Tax Benefits. Such written conclusion shall be filed with the Secretary of the Corporation and shall be mailed by the Secretary to all stockholders of this Corporation within 10 days after the date of any such conclusion. D. The Corporation and the members of the Board of Directors shall be fully protected in relying in good faith upon the information, opinions, reports or statements of the chief executive officer, the chief financial officer or the chief accounting officer of the Corporation or of the Corporation's legal counsel, independent auditors, transfer agent, investment bankers or other employees and agents in making the determinations and findings contemplated by this Article IX and the members of the Board of Directors shall not be responsible for any good faith errors made in connection therewith. E. Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Article IX, including any definition contained in Section (A)(1) of Article IX hereof, the Board of Directors shall have the power to determine the application of the provisions of this Article IX with respect to any situation based on the facts known to it. F. Legend. 1. Each certificate for shares of Equity Stock or securities convertible into Equity Stock shall bear the following legend: "The securities represented by this certificate are subject to restrictions on transfer and ownership for the purpose of the Corporation's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). No Person other than WFSG may (i) Beneficially Own 16 or Constructively Own in excess of 9.8% of the number of shares or value (whichever is more restrictive) of the outstanding Common Stock or 9.8% of the number of shares or value (whichever is more restrictive) of the outstanding Preferred Stock (or such other number or value of Preferred Stock as the Board may determine in fixing the terms of the Preferred Stock), (ii) Beneficially Own shares of Equity Stock that would result in the shares of Equity Stock being Beneficially Owned by fewer than 100 Persons (determined without reference to any rules of attribution), (iii) Beneficially Own shares of Equity Stock that would result in the Corporation being "closely held" under Section 856(h) of the Code, (iv) Constructively Own shares of Equity Stock that would cause the Corporation to Constructively Own a Tenant Interest of 10% or more or (v) Beneficially Owned shares of Equity Stock that would result in the shares of Equity Stock being Beneficially Owned by (A) the United States, any international organization, or any agency or instrumentality of any of the foregoing, (B) any organization (other than a cooperative described in Section 521 of the Code) which is exempt from tax unless such organization is subject to the tax imposed by Section 511 of the Code, and (C) any organization described in Section 1381(a)(2)(c) of the Code. Any Person who attempts to Beneficially Own or Constructively Own shares of Equity Stock in excess of the above limitations must immediately notify the Corporation in writing. Furthermore, upon the occurrence of certain events, attempted transfers in violation of the restrictions described above may be void AB INITIO. If the restrictions above are violated, the shares of Equity Stock represented hereby will be transferred automatically and by operation of law to a Trustee for the benefit of one or more Beneficiaries and shall be designated Shares-in-Trust and the Prohibited Owner shall acquire no rights or interest in such shares of Equity Stock. All capitalized terms in this legend have the meanings defined in the Corporation's Amended and Restated Articles of Incorporation, as the same may be further amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be sent without charge to each stockholder who so requests." 2. The restrictions on transfer and ownership contained in this Article IX, as amended or modified from time to time in accordance with the provisions hereof, shall be valid and binding on all holders of shares of Equity Stock or securities convertible into Equity Stock, regardless of whether the legend borne on the certificates representing such shares or 17 securities accurately reflects the restrictions on transfer and ownership as so amended or modified. G. Exchange of OP Units. So long as the Corporation remains the sole stockholder of the general partner of the Operating Partnership, the Board of Directors of the Corporation is hereby expressly vested with authority (subject to the restrictions on ownership, transfer and redemption set forth in this Article IX) to issue, and shall issue to the extent provided in the Operating Partnership Agreement, Common Stock in exchange for the units into which partnership interests of the Operating Partnership are divided (the "OP Units"), and as the same may be adjusted, as provided in the Partnership Agreement. H. Reservation of Shares. The Board of Directors is hereby required to reserve and authorize for issuance a sufficient number of authorized but unissued shares of Common Stock to permit the issuance of Common Stock in exchange for OP Units that may be exchanged for or converted into Common Stock as provided in the Operating Partnership Agreement. I. Severability. If any provision of this Article IX or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. J. Removal of Restrictions. The restrictions on transfer contained in this Article IX shall not be removed until the Restriction Termination Date. K. Notwithstanding any other provisions of the Charter or the Bylaws of the Corporation (and notwithstanding that some lesser percentage may be specified by law, the Charter or the Bylaws of the Corporation), the provisions of this Article IX shall not be amended, altered, changed, or repealed, and no provision inconsistent with this Article IX shall be adopted, without the affirmative vote of at least eighty percent (80%) of the members of the Board of Directors and by the affirmative vote of not less than two-thirds (2/3) of all the votes entitled to be cast by the outstanding shares of capital stock of the Corporation on the matter at any meeting of the stockholders called for that purpose, voting together for this purpose as a single class. X. A. The following provisions are hereby adopted for the purpose of defining, limiting, and regulating the powers of the Corporation and of the directors and stockholders: 1. The Board of Directors of the Corporation shall, consistent with applicable law, have power in its sole discretion to determine from time to time in accordance 18 with sound practice or other reasonable valuation methods what constitutes annual or other net profits, earnings, surplus, or net assets in excess of capital; to fix and vary from time to time the amount to be reserved as working capital, or determine that retained earnings or surplus shall remain in the hands of the Corporation; to set apart out of any funds of the Corporation such reserve or reserves in such amount or amounts and for such proper purpose or purposes as it shall determine and to abolish any such reserve or any part thereof; to distribute and pay distributions or dividends in stock, cash, or other securities or property, out of surplus or any other funds or amounts legally available therefor, as such times and to the stockholders of record on such dates as it may, from time to time, determine; and to determine whether and to what extent and at what times and places and under what conditions and regulations the books, accounts, and documents of the Corporation, or any of them, shall be open to the inspection of stockholders, except as otherwise provided by statute or by the Bylaws, and, except as so provided, no stockholder shall have any right to inspect any book, account, or document of the Corporation unless authorized so to do by resolution of the Board of Directors. 2. Notwithstanding any provision of law requiring the authorization of any action by a greater proportion than a majority of the total number of shares of all classes of capital stock or of the total number of shares of any class of capital stock, such action shall be valid and effective if authorized by the affirmative vote of the holders of a majority of the total number of shares of all classes outstanding and entitled to vote thereon, except as otherwise provided in the Charter. 3. Except as otherwise specifically set forth in Articles VI and IX, the Corporation reserves the right from time to time to make any amendments of its Charter which may now or hereafter be authorized by law, including any amendments changing the terms or contract rights, as expressly set forth in its Charter, of any of its outstanding stock by classification, reclassification, or otherwise. B. The enumeration and definition of particular powers of the Board of Directors included in the foregoing shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other Article of the Charter of the Corporation, or construed as or deemed by inference or otherwise in any manner to exclude or limit any powers conferred upon the Board of Directors under the General Laws of the State of Maryland now or hereafter in force. XI. The duration of the Corporation shall be perpetual. SECOND: This Amendment and Restatement does not increase the authorized capital stock of the Corporation. 19 THIRD: The foregoing Amendment and Restatement to the Charter has been advised by the Board of Directors and approved by the stockholders of the Corporation. IN WITNESS WHEREOF, Wilshire Real Estate Investment Trust Inc. has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary this ___ day of __________, 1999. WITNESS: WILSHIRE REAL ESTATE INVESTMENT TRUST INC. _____________________________ By:__________________________________(SEAL) Andrew Wiederhorn, Secretary Chris Tassos, Executive Vice President THE UNDERSIGNED, the Executive Vice President of Wilshire Real Estate Investment Trust Inc. (the "Corporation"), who executed on behalf of the Corporation the foregoing Amended and Restated Articles of Incorporation, of which this certificate is made a part, hereby acknowledges in the name and on behalf of said Corporation the foregoing Amended and Restated Articles of Incorporation to be the corporate act of said Corporation and hereby certifies that to the best of his knowledge, information and belief the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. Dated: _____________, 1999 By:___________________________________(SEAL) Chris Tassos, Executive Vice President 20 EX-11 3 EXHIBIT 11 EXHIBIT 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Three Months Three Months Nine Months Six Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 1999 1998 1999 1998 --------------- ---------------- ---------------- ---------------- Diluted net loss per share: Net loss to common shareholders $ (9,372,000) $ (48,880,000) $ (27,781,000) $ (45,838,000) Average number of shares outstanding 11,500,000 11,500,000 11,500,000 11,381,356 Net effect of dilutive stock options-based on treasury stock method N/A N/A N/A N/A --------------- ---------------- ---------------- ---------------- Total average shares 11,500,000 11,500,000 11,500,000 11,381,356 --------------- ---------------- ---------------- ---------------- --------------- ---------------- ---------------- ---------------- Diluted net loss per share $ (0.82) $ (4.25) $ (2.42) $ (4.03)
EX-27 4 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 7,802 0 0 0 105,087 105,087 105,087 30,393 3,016 234,464 0 121,662 11,720 48,986 0 0 166,981 (114,885) 234,464 4,081 12,025 2,063 18,169 0 9,841 8,328 (1,150) 0 37,059 (27,581) (27,581) 0 0 (27,781) (2.42) (2.42) 0 0 3,180 0 0 11,107 4,804 388 3,016 406 2,049 561
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