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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
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 (I.R.S. Employer
of 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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
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 |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the closing price as quoted on NASDAQ
on February 29, 2000 was $21,960,991.
As of February 29, 2000, 10,507,313 shares, not including options to
purchase 2,096,000 shares of Wilshire Real Estate Investment Inc.'s common stock
and 992,687 treasury shares, par value $0.0001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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WILSHIRE REAL ESTATE INVESTMENT INC.
FORM 10-K
INDEX
PART I
Item 1. Business..........................................................1
Item 2. Properties.......................................................20
Item 3. Legal Proceedings................................................20
Item 4. Submission of Matters to a Vote of Security Holders..............20
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters..............................................21
Item 6. Selected Financial Data..........................................22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................24
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.......31
Item 8. Financial Statements and Supplementary Data......................34
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..............................35
PART III
Item 10. Directors and Executive Officers of the Registrant...............36
Item 11. Executive Compensation...........................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management...42
Item 13. Certain Relationships and Related Transactions...................43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.........................................................45
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE
FILINGS BY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS
(SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL) MAY BE IDENTIFIED BY REFERENCE
TO A FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY,
SUCH AS "MAY," "WILL," "BELIEVE," "EXPECT," "ANTICIPATE," "CONTINUE," OR SIMILAR
TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING
STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
RELATED TO THE ECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH
THE COMPANY OPERATES, THE FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY
OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND
PRICING, THE REAL ESTATE MARKET, FISCAL AND MONETARY POLICIES OF THE U.S.
GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES, ACQUISITIONS AND THE
INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK MANAGEMENT, YEAR 2000 AND
ASSET/LIABILITY MANAGEMENT. EXCEPT AS MAY BE REQUIRED BY LAW, THE COMPANY DOES
NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE
THE RESULTS OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS
TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
PART I
ITEM 1. BUSINESS
General
Wilshire Real Estate Investment Inc. ("WREI" or the "Company") is a
Nasdaq-listed company which invests primarily in the following types of assets:
o mortgage-backed securities,
o non-discounted and discounted mortgage loans,
o real estate, and
o other real estate related investments.
The Company was originally incorporated as Wilshire Real Estate Investment
Trust Inc. in the State of Maryland on October 24, 1997. However, in order to
benefit from potential tax benefits related to significant net operating loss
carryforwards and to avoid any risk of not qualifying as a real estate
investment trust ("REIT"), the Company, with the approval of its shareholders,
elected in September 1999 not to be taxed as a REIT, and the Company's name was
changed to Wilshire Real Estate Investment Inc.
During the third quarter of 1999, the Company decided to become internally
managed and retained senior executives and other employees to implement this
decision. Prior to this decision and subject to the supervision of the Company's
Board of Directors, the Company's business affairs and day-to-day operations had
been managed by Wilshire Realty Services Corporation ("WRSC"), a wholly-owned
subsidiary of Wilshire Financial Services Group Inc. ("WFSG"), pursuant to a
management agreement (the "Management Agreement"). The decision to become
internally managed and cease to utilize the services of WRSC has resulted in
disputes between the Company, on the one hand, and WFSG and certain of its
affiliates, on the other.
Background
Beginning in August 1998, and more significantly during the fourth quarter
of 1998, we were significantly and adversely affected by the dramatic movement
of liquidity towards less-risky assets (e.g., U.S. Treasury instruments) and
away from higher risk assets. In particular, the markets for mortgage-backed
securities and pools of mortgage loans experienced significant declines as Wall
Street investment banks marked these assets down - including illiquid and
infrequently traded subordinated mortgage-backed securities - to their view of
the market price and lenders became unwilling to lend against low-rated or
unrated mortgage-backed securities and many pools of mortgage loans. These
factors resulted in a dramatic reduction in market valuations for our
mortgage-backed securities and mortgage loans, as well as a reduction in the
availability of borrowings for those assets, and the Company was forced to
liquidate holdings at reduced prices, resulting in significant losses in 1998.
1
In response to the adverse market conditions in the second half of 1998
and the resulting effect on our operations, we focused our efforts in 1999 on
stabilizing our existing asset base and greatly reduced acquisition activities
during the year ended December 31, 1999. General market conditions and
availability of financing for certain of our asset categories, especially
subordinated mortgage-backed securities and mezzanine loans, continued to be
uncertain in 1999. Our results of operations for the year ended December 31,
1999 reflect this continued difficult marketplace including further impairment
write-downs of mortgage-backed securities, a significant portion of which had
previously been deducted from stockholders' equity through "Accumulated other
comprehensive loss."
Notwithstanding the uncertainty in 1999, we expect to gradually resume
acquisition activities in 2000 with an increased emphasis on investment in
mortgage-backed securities, 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. We continue
to make investment decisions on an opportunistic basis and will evaluate
investment opportunities as they arise or are developed.
Business Strategy
Our main objectives are to realize current returns and capital gains
through investments in real estate assets or companies that invest in real
estate related assets. The key elements of our strategy are:
Focus on Specific Return Objectives by Asset Class
Mortgage-Backed Securities. Our investment emphasis is on subordinated
mortgage-backed securities that provide consistent, recurring current income and
that we believe may appreciate in value due to the prepayment and default
experience of the underlying collateral.
Non-discounted Loans. With respect to non-discounted loans, our investment
emphasis is on non-discounted loans that provide current income. These loans may
be commercial or residential and either first, second, or mezzanine position
mortgages.
Discounted Loans. We seek to identify and acquire discounted loans that
will meet our risk-adjusted return objectives over an 18 to 24 month period.
During this period, we typically either restructure the terms of the loans or
exercise our rights to acquire control of the underlying properties. We also
seek to invest in certain discounted loans that provide current cash income.
Real Estate. Our investment emphasis with respect to real estate is on
investment properties that provide consistent, recurring current income and
where effective property management can lead to appreciation in value.
In addition to direct acquisitions of these investments, we may 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 their underlying assets.
Maintain a Diversified Portfolio of Real Estate Related Assets
We seek diversification by investing in different forms of real estate
related assets and types of underlying properties. We also diversify by
investing in different geographic locations. We believe that by diversifying our
form of real estate investments, types of underlying properties and the
geographic base of our investments, we reduce the risks presented by various
phases of real estate cycles and by factors that affect only particular
geographic areas or products.
Resecuritize Mortgage-Backed Securities
We may, from time to time, pool a portion of our portfolio of
mortgage-backed securities and issue new mortgage-backed securities derived from
these pools. By structuring this kind of a resecuritization, we believe that we
may be able to realize any appreciation in the value of the resecuritized
mortgage-backed securities. We usually finance our acquisition of
mortgage-backed securities with short-term floating-rate debt. Resecuritizing
these mortgage-backed securities will enable us to replace this short-term debt
with non-recourse long-term fixed-rate debt that better matches the amortization
characteristics and cash flows of the underlying mortgage-backed securities.
2
Ongoing Disputes with WFSG and WRSC
The Company is engaged in an ongoing dispute with WFSG relating to the
termination of the extensive contractual and other relationships which formerly
existed between the companies. Prior to September 1999, the Company's business
affairs and day-to-day operations had been managed by WRSC, a wholly-owned
subsidiary of WFSG, and the Company and WFSG had the same senior management
team, though the Company had a significantly different shareholder base and the
majority of its directors were independent. In addition, the Company and WFSG
had other significant contractual relationships relating to the servicing of
real estate-related assets (including loans and mortgage-backed securities) and
also had certain cross shareholdings. Relations between the Company and WFSG
declined during WFSG's bankruptcy restructuring in 1999 primarily as a result of
the Company's concerns over WFSG's abilities to perform its obligations and the
exclusion of the Company from the restructuring process and decisions about
WFSG's strategic direction. Relations deteriorated further when the Company was
notified that WFSG had terminated its Chief Executive Officer, Andrew
Wiederhorn, and its President, Lawrence Mendelsohn, from their duties as
employees of WFSG and its subsidiaries. Concerns about WFSG's ability to perform
its obligations, the termination of Messrs. Wiederhorn and Mendelsohn,
uncertainties about new management and concerns over WFSG's strategic direction
led the Company and its independent directors to reassess its relationship with
WFSG and ultimately to the decision to become internally managed and not rely on
WFSG for the provision of services. As part of the Company's decision to become
independently managed, the Company 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 Chief Investment Officer and Executive Vice
President; and Robert Rosen, as Executive Vice President. Each of these
individuals was previously a senior executive at WFSG.
The decision to become internally managed and cease to utilize the
services of WFSG and its affiliates has resulted in disputes between the Company
and WFSG, which disputes are currently the subject of litigation in Portland,
Oregon. 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 Corporation ("WML"), a wholly-owned subsidiary of WFSG alleging: (1) the
termination of Messrs. 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 Messrs. Wiederhorn and
Mendelsohn access to WFSG's facilities, personnel, and equipment for the
Company's business violated the terms of the Facilities Sharing Agreement. 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. In connection with this matter, the Company, without
admission, recorded a reserve for potential resolution of disputes with WFSG of
$4.1 million at September 30, 1999.
The Company, on behalf of itself and all of its subsidiaries and
affiliates, Andrew A. Wiederhorn, and Lawrence A. Mendelsohn, entered into a
partial settlement agreement dated as of December 10, 1999 with WFSG, on behalf
of all of its subsidiaries and affiliates, other than First Bank of Beverly
Hills, F.S.B. (the "Partial Settlement Agreement"). Under the terms of the
Partial Settlement Agreement, the Company repurchased 992,687 shares of its
common stock (the "Shares"), representing approximately 8.7% of shares
outstanding, in a non-cash transaction from WFSG. The Shares, as well as
1,112,500 of options and cumulative dividends payable on the Shares, were
received in exchange for a reduction in the amount of a pay-in-kind ("PIK") note
owed by WFSG to the Company. The Shares and options represented WFSG's entire
ownership interest in the Company.
3
On February 18, 2000, after the Company received permission from the court
to do so, the Company filed a Second Amended Complaint which added claims
against WFSG and its affiliated companies as follows: claims for declaratory
relief that WFSG is entitled to no termination fee under the Management
Agreement; seeking an accounting from WCC regarding the use of funds from
lockbox accounts used to service assets which the Company owns or in which the
Company has a beneficial interest; declaring the Company's entitlement to use
prepaid service fees for the servicing of assets serviced under pooling and
servicing agreements; and declaring WFSG to be in default of its
Debtor-in-Possession ("DIP") loan agreement with the Company and declaring that
the balance of $5.0 million is immediately due and payable. On March 2, 2000,
WFSG filed an answer disputing each of the counterclaims added by the Second
Amended Complaint, and realleging the counterclaims included in WFSG's original
answer and counterclaim. Considerable discovery remains to be completed, and it
is thus not possible to predict the outcome of the case. The case is scheduled
for trial in October 2000. The Company intends to pursue its claims against WFSG
and to defend the counterclaims filed by WFSG against the Company vigorously. At
December 31, 1999, the balance of the reserve for potential resolution of
disputes with WFSG was $2.3 million.
The Company currently owns approximately 14.4% of WFSG's common stock and
is determining what course of action maximizes the value of its investment. As a
result, the Company may sell all or part of its shares of WFSG, retain its
current position, or subject to applicable regulations, increase its ownership
stake substantially.
Servicing Arrangements
Prior to the disputes with WFSG, we entered into loan servicing agreements
with Wilshire Credit Corporation ("WCC"), an affiliate of WFSG, and Wilshire
Servicing Company U.K. Limited, a wholly-owned subsidiary of WFSG (the "European
Servicer" and with WCC, the "Servicers"). Under these servicing agreements, the
Servicers provided loan and real property management services to us, including
billing, portfolio administration and collection services. In return, we agreed
to pay each of the Servicers a fee at market rates for servicing our investments
and to reimburse them for certain out-of-pocket costs. We prepaid $3.2 million
of future service fees as part of the WFSG and WCC restructuring, although WFSG
had disputed this amount in the past (as well as servicing eligibility for
application of the credit), suggesting that it was $2.3 million. At December 31,
1999, the prepaid service fee balance to WCC was reduced to $3.0 million.
WCC (through its predecessor) was formed in 1987 to engage in the loan and
lease servicing business. WCC was adversely affected by the decrease in assets
owned by its customers as a result of the market volatility since the fourth
quarter of 1998 and sought to restructure its indebtedness. This process was
undertaken in connection with the WFSG restructuring pursuant to which WCC's
servicing operation was transferred to a company controlled by WFSG. WCC
successfully completed its restructuring on June 10, 1999.
In March 2000, we terminated the servicing relationship in the United
Kingdom with the European Servicer and transferred this servicing to an
unaffiliated third party. We also terminated all loan and real property
servicing in the United States with WCC, reserving our rights to do so with
respect to certain mortgage-backed securities.
Regulatory
As a result of the Company's material ownership in a savings and loan
holding company (WFSG), the then overlap in certain officers and directors
between the two entities and other related factors, the Office of Thrift
Supervision ("OTS") required the Company to file a change in control application
(Form H(e)-1) with the OTS. The H(e)-1 Application was filed in June 1999 and
remains on file with the OTS in a suspended status. The OTS placed various
restrictions on the Company pending favorable action on the H(e)-1 Application,
including prohibitions against acquiring any additional shares of WFSG. The
Company believes that subsequent events, including the elimination of the
overlap in officers and directors, have eliminated the position taken by the
OTS, thereby mooting the need for the filing of the application and the related
interim restrictions. Following discussions with the OTS, the Company is
currently in the process of filing a request with the OTS that would confirm
that the H(e)-1 Application need not be pursued (whereupon it would be
withdrawn) and that the interim restrictions no longer apply.
Investments
We seek to invest directly or indirectly in real estate related assets
that provide us with an appropriate risk-adjusted rate of return, current income
and the opportunity for capital gains. We maintain a flexible approach with
respect to the nature of our investments, seeking to take advantage of
opportunities as they arise or are developed.
4
We have set forth below information regarding our principal categories of
investment on December 31, 1999 and 1998.
December 31, 1999 December 31, 1998
---------------------- ----------------------
Carrying Value % Carrying Value %
-------------- ----- -------------- -----
(Dollars in thousands)
Mortgage-Backed Securities (1) $104,572 47.4% $148,805 39.0%
Loans: (2)
U.S. Commercial (3) ......... 29,839 13.5 69,124 18.1
International (4) ........... 620 0.3 44,006 11.6
-------- ----- -------- -----
Total Non-Discounted Loans 30,459 13.8 113,130 29.7
Discounted Loans:(2)
U.S. Commercial ............. 1,175 0.5 1,794 0.5
International ............... -- -- 704 0.2
-------- ----- -------- -----
Total Discounted Loans .... 1,175 0.5 2,498 0.7
Investment Properties: (5)
U.S. Commercial ............. 40,679 18.4 61,566 16.1
International ............... 22,546 10.2 23,439 6.2
-------- ----- -------- -----
Total Investment Properties 63,225 28.6 85,005 22.3
Other Investments (6) ......... -- -- 9,933 2.6
Cash and Cash Equivalents ..... 5,862 2.7 4,782 1.3
Other Assets (7) .............. 15,519 7.0 16,964 4.4
-------- ----- -------- -----
Total Assets ................ $220,812 100.0% $381,117 100.0%
======== ===== ======== =====
- ----------------
(1) More than 90% of our mortgage-backed securities are secured by residential
mortgage loans.
(2) More than 90% of our discounted and non-discounted loans are secured by
commercial or multi-family properties or have been extended to real estate
holding companies, which own commercial or multi-family properties.
(3) Subsequent to December 31, 1998, one loan with a carrying value of $38.6
million as of December 31, 1998 was paid off.
(4) Subsequent to December 31, 1998, one loan with a carrying amount of $44
million as of December 31, 1998 was sold to increase liquidity.
(5) More than 90% of our investment properties are commercial or multi-family
properties and also include real estate owned and are net of development
costs and escrow deposits.
(6) Other investments consist of approximately $20.0 million principal amount
of WFSG's 13% Series B Notes due 2004, which were carried at a book value
of approximately $9.9 million as of December 31, 1998. This investment was
converted to equity as part of WFSG's restructuring and now appears as
part of other assets.
(7) At December 31, 1999, other assets consist primarily of $4.0 million of
investment in WFSG common stock, $3.0 million in prepaid service fees to
WCC, $5.3 million of notes receivable from WFSG, $1.1 million of accrued
interest and $2.1 million of miscellaneous other assets. At December 31,
1998, other assets consisted primarily of $12.5 million due from
affiliates (an $18.4 million receivable net of a $5.9 million market
valuation loss and impairment), $1.9 million of accrued interest
receivable and $2.6 million of miscellaneous other assets.
The following sections provide additional detail of specific investments
as of December 31, 1999 and related discussion of strategic investment goals.
Mortgage-Backed Securities
Mortgage-backed securities are interests in pools of mortgages that have
been securitized and are usually issued in multiple classes ranging in credit
seniority. We focus on the subordinated classes, which we believe offer higher
risk-adjusted returns. We seek to invest in subordinated mortgage-backed
securities that provide consistent, recurring current income and that we believe
may appreciate in value due to the prepayment and default experience of the
underlying collateral. On December 31, 1999, more than 90% of our
mortgage-backed securities were backed by pools of residential mortgage loans
and were subordinated in right of payment to more senior interests in those
pools. On December 31, 1999, our portfolio of mortgage-backed securities
consisted of 90 classes of mortgage-backed securities representing interests in
64 securitizations from 24 different issuers. Subordinated mortgage-backed
securities are generally the non-investment-grade classes of mortgage-backed
securities that provide credit enhancement to more senior classes of such
securities by having a lower payment priority in the cash flow from the
underlying mortgage loans and absorbing any losses on the underlying mortgage
loans prior to the senior classes. On "senior/subordinate" transactions, each
subordinated class has a principal face amount equal to the subordination level
required for the classes, if any, which are senior to the respective
subordinated class and the subordination level required at the respective rating
(i.e., BBB, BB, B, UR).
On April 6, 1998, we acquired approximately $95.0 million of
mortgage-backed securities in connection with our initial public offering and
the remainder were acquired from time to time during the remainder of 1998 and
1999. Our mortgage-backed securities consist of securities backed by loans that
were originated and are being serviced by unaffiliated non-governmental third
parties and
5
securities backed by loans that were previously held in the portfolio of WFSG or
its affiliates and for which WFSG or one of its affiliates is continuing to act
as servicer.
At December 31, 1999 and 1998, we valued our securities available for sale
portfolio and gross unrealized gains and losses thereon as follows:
Gross Gross
Amortized Unrealized Unrealized
December 31, 1999 Cost(1) Gains(1) Losses(1) Fair Value
- ------------------------------------ ----------- ------------ ----------- ----------
(Dollars in thousands)
Mortgage-backed securities.......... $ 127,799 $ 3,487 $ 26,714 $ 104,572
=========== ============ =========== ==========
Gross Gross
Amortized Unrealized Unrealized
December 31, 1998 Cost(1) Gains(1) Losses(1) Fair Value
- ------------------------------------ ----------- ------------ ----------- ----------
(Dollars in thousands)
Mortgage-backed securities.......... $ 179,243 $ 98 $ 30,536 $ 148,805
Other securities (2)................ 9,933 - - 9,933
------------- -------------- ------------- ------------
$ 189,176 $ 98 $ 30,536 $ 158,738
=========== ============ =========== ==========
- ----------
(1) The amortized cost of our securities is net of the market valuation losses
and impairments discussed in "Results of Operations". The unrealized gains
and losses represent market value declines that, unlike "market value loss
and impairment," the Company believes are temporary.
(2) These securities consist primarily of certain publicly issued debt
securities of WFSG. Pursuant to the restructuring of WFSG, these
securities were converted into equity in WFSG. At December 31, 1998, the
valuation of these securities was based on our ratable post-conversion
share of the projected restructured equity of WFSG.
The following table presents our mortgage-backed securities portfolio, by
rating category, as of December 31, 1999.
Ratings of Mortgage-Backed Securities
Net Book
Rating Category (1) Value
------------------- -----
AAA/Aaa1 to A-/A3......................................... $ -
BBB+/Baa1 to BBB-/Baa3.................................... 14,956
BB+/Ba1 to BB-/Ba3........................................ 38,835
B+/B1 to B-/B3............................................ 11,540
CCC+/Caa1 to CCC-/Caa3.................................... -
Unrated................................................... 39,241
---------
Total................................................ $ 104,572
=========
- --------------------
(1) Based on the most recent rating by one or more of the principal
independent rating agencies which rate mortgage-backed securities:
Standard & Poor's Corporation, Moody's Investors Service, Duff & Phelps or
Fitch Investor Services, Inc.
The two following tables set forth information, as of December 31, 1999,
regarding our mortgage-backed securities.
The following table sets forth the credit rating designated by the rating
agency for each securitization transaction. Classes designated "A" have a
superior claim on payment to those rated "B", which are superior to those rated
"C." Additionally, multiple letters have a superior claim to designations with
fewer letters. Thus, for example, "BBB" is superior to "BB," which in turn is
superior to "B." The lower class designations in any securitization will receive
interest payments subsequent to senior classes and will experience losses prior
to any senior class. The lowest potential class designation is not rated ("NR")
which, if included in a securitization, will generally receive interest last and
experience losses first. IO securities receive the excess interest remaining
after the interest payments have been made on all senior classes of bonds based
on their respective principal balances. There is no principal associated with IO
securities and they are considered liquidated when the particular class they are
contractually tied to is paid down to zero. In excess of 90% of the mortgage
loans underlying the Company's mortgage-backed securities are residential
mortgage loans which generally may be prepaid at any time without penalty.
6
Mortgage-Backed Securities
(as of December 31, 1999)
Class Company Investment
-------------------------------------------------------------------
Class
Balance at
Rating Issue Collateral Initial Class December 31, Percentage Company's Book
Issue Name Class (1) Date Type Balance 1999 of Class Basis (2) Yield (5)
- ------------------------------------------------------------------------------------------------------------------------------------
BAMS 98-1 B4 B 5/25/98 Residential $ 515,029 $ 491,004 100.0% $ 389,135 11.75%
BAMS 98-1 B5 NR 5/25/98 Residential 686,706 654,674 100.0% 225,477 18.00%
BAMS 98-2 1B5 NR 6/25/98 Residential 495,151 487,159 100.0% 147,046 18.00%
BAMS 98-2 2B5 NR 6/25/98 Residential 205,711 192,568 100.0% 79,913 18.00%
BSMSI 96-6 B3 BBB 1/25/97 Residential 5,427,000 5,078,180 50.0% 2,572,499 9.00%
BSMSI 96-6 B4 BB 1/25/97 Residential 4,824,000 4,680,616 69.5% 2,471,198 11.00%
BSMSI 97-7 4B5 B 1/25/98 Residential 108,493 99,537 100.0% 88,846 11.75%
BSMSI 97-7 4B6 NR 1/25/98 Residential 86,795 79,630 100.0% 24,623 18.00%
BSMSI 97-7 5B5 B 1/25/98 Residential 143,515 140,287 100.0% 120,173 11.75%
BSMSI 97-7 5B6 NR 1/25/98 Residential 107,637 105,216 100.0% 35,435 18.00%
BSMSI 98-5 B5 B 5/25/98 Residential 139,900 122,021 100.0% 113,188 11.75%
BSMSI 98-5 B6 NR 5/25/98 Residential 140,000 122,109 100.0% 33,385 18.00%
CHASE 94-H B5 B 6/25/94 Residential 250,000 225,755 100.0% 189,440 11.75%
CMC 98-1 2B5 B 4/25/98 Residential 132,500 122,890 100.0% 106,218 11.75%
CMC 98-1 2B6 NR 4/25/98 Residential 132,506 122,896 100.0% 39,415 18.00%
CMC 98-1 3B5 B 4/25/98 Residential 134,300 131,255 100.0% 111,398 11.75%
CMC 98-1 3B6 NR 4/25/98 Residential 134,386 131,339 100.0% 44,786 18.00%
CMC 98-1 B5 B 4/25/98 Residential 831,844 816,985 100.0% 582,930 11.75%
CMC 98-1 B6 NR 4/25/98 Residential 1,039,805 1,021,232 100.0% 288,091 18.00%
CMSI 98-4 B5 NR 7/25/98 Residential 761,918 750,181 100.0% 218,560 15.00%
CMSI 98-6 B5 NR 8/25/98 Residential 910,697 897,670 100.0% 271,019 15.00%
CWMBS 97-8 B5 NR 12/25/97 Residential 1,050,885 1,029,167 100.0% 333,079 15.00%
CWMBS 98-10 B5 NR 6/25/98 Residential 1,126,037 1,081,198 100.0% 350,121 18.00%
CWMBS 98-11 B5 NR 7/25/98 Residential 1,005,059 918,223 100.0% 294,496 15.00%
CWMBS 98-12/ALT98-4 B5 NR 7/25/98 Residential 1,524,293 1,455,643 100.0% 390,191 15.00%
CWMBS 98-14 B5 NR 8/25/98 Residential 450,649 397,188 100.0% 134,712 15.00%
GECMS 98-11.1 B5 NR 7/25/98 Residential 1,553,574 1,530,239 100.0% 432,978 15.00%
GECMS 98-11.2 B5 NR 7/25/98 Residential 747,933 736,740 100.0% 185,286 8.00%
GECMS 98-11.3 B5 NR 7/25/98 Residential 174,570 163,890 100.0% 62,636 15.00%
GECMS 98-5 B5 NR 4/25/98 Residential 1,331,723 1,304,393 100.0% 382,734 18.00%
GECMS 98-8 1B5 NR 5/25/98 Residential 1,502,644 1,477,484 100.0% 437,966 18.00%
GECMS 98-8A 2B5 NR 5/25/98 Residential 614,867 604,813 100.0% 175,826 18.00%
7
Class Company Investment
-------------------------------------------------------------------
Class
Balance at
Rating Issue Collateral Initial Class December 31, Percentage Company's Book
Issue Name Class (1) Date Type Balance 1999 of Class Basis (2) Yield (5)
- ------------------------------------------------------------------------------------------------------------------------------------
GECMS 98-9 B5 NR 6/25/98 Residential 2,255,131 2,218,751 100.0% 660,578 18.00%
MRFC 98-2 B6 NR 6/25/98 Residential 1,573,224 1,539,900 100.0% 394,426 11.75%
NASCOR 98-12 B6 NR 6/25/98 Residential 2,001,786 1,970,256 100.0% 588,691 18.00%
NASCOR 98-14 B6 NR 6/25/98 Residential 501,186 468,307 100.0% 201,864 18.00%
NASCOR 98-17 B6 NR 8/25/98 Residential 1,627,003 1,604,209 100.0% 503,934 15.00%
NASCOR 98-21 B5 NR 8/25/98 Residential 625,638 616,943 100.0% 180,003 15.00%
NASCOR 98-4 A 1B5 NR 2/25/98 Residential 560,474 549,179 100.0% 148,006 18.00%
NASCOR 98-4 B 2B5 NR 2/25/98 Residential 824,299 809,133 100.0% 238,039 18.00%
NASCOR 98-5 B5 NR 3/25/98 Residential 750,451 737,324 100.0% 207,991 18.00%
NISTAR 98-1 B5 NR 6/25/98 Residential 949,799 929,255 100.0% 264,686 18.00%
OCWEN 98R1 B3 BBB 4/25/98 Residential 19,789,401 19,243,787 100.0% 17,345,363 8.25%
RFMSI 98-S12 B3 NR 6/25/98 Residential 2,997,804 2,790,041 100.0% 842,519 15.00%
RFMSI 98-S13 B3 NR 7/25/98 Residential 3,649,250 3,594,409 100.0% 1,044,409 15.00%
RFMSI 98-S3 B3 NR 3/25/98 Residential 3,322,188 3,258,844 100.0% 924,613 15.00%
RFMSI 98-S7 B3 NR 4/25/98 Residential 383,458 355,967 100.0% 135,781 18.00%
BSMSI 98-1A B6 NR 3//25/98 Residential 1,953,230 1,947,735 100.0% 298,452 18.00%
BSMSI 97-7A B6 NR 1/25/98 Residential 1,383,301 1,379,562 100.0% 235,952 18.00%
INMC 94 L B3 BBB 7/25/94 Residential 2,809,045 2,793,437 100.0% 976,402 14.00%
GECMS 94-20 B5 NR 6/25/94 Residential 114,186 111,392 100.0% 19,038 18.00%
MRFC 98-2 B5 B 6/25/98 Residential 1,048,814 1,026,598 100.0% 511,047 16.00%
NASCOR 97-3 B4 B 3/25/97 Residential 194,916 194,343 100.0% 100,423 16.00%
NASCOR 1997-3 B5 NR 3/25/97 Residential 225,014 224,334 100.0% 51,591 18.00%
RFMSI 1997-S16 B3 NR 11/25/97 Residential 472,632 466,823 100.0% 81,874 18.00%
SAMI 98-8B B5 B 7/25/98 Residential 725,141 723,214 100.0% 358,613 16.00%
SAMI 98-8B 3B5 B 7/25/98 Residential 276,075 272,861 100.0% 170,852 16.00%
SAMI 98-8B 3B6 NR 7/25/98 Residential 344,756 340,742 100.0% 50,403 18.00%
SAMI 98-8C 4B5 B 7/25/98 Residential 396,550 395,580 100.0% 187,416 16.00%
SAMI 98-8C 4B6 NR 7/25/98 Residential 596,873 595,413 100.0% 91,199 18.00%
PSEC 93-3 B3 B 7/25/93 Residential 1,022,504 998,785 100.0% 705,529 16.00%
BAMS 98-4 1B4 B 8/25/98 Residential 923,915 919,806 100.0% 434,513 16.00%
BAMS 98-4 1B5 NR 8/25/98 Residential 923,903 919,804 100.0% 132,274 18.00%
CWHL 98-15 B5 NR 9/25/98 Residential 1,339,477 1,333,593 100.0% 179,592 18.00%
MFAST 97-1 B2 BB 12/1/97 Residential 10,840,000 10,840,000 100.0% 3,695,429 12.00%
PSWHI 97-4 B2 BB 1/20/98 Residential 7,800,000 7,800,000 100.0% 2,375,014 12.00%
GECMS 98-12 1B5 NR 8/25/98 Residential 1,187,001 1,185,925 100.0% 230,724 18.00%
GECMS 98-13 B5 NR 9/25/98 Residential 2,671,794 2,669,388 100.0% 526,125 18.00%
8
Class Company Investment
-------------------------------------------------------------------
Class
Balance at
Rating Issue Collateral Initial Class December 31, Percentage Company's Book
Issue Name Class (1) Date Type Balance 1999 of Class Basis (2) Yield (5)
- ------------------------------------------------------------------------------------------------------------------------------------
GECMS 98-14 B5 NR 10/25/98 Residential 1,559,912 1,558,506 100.0% 307,174 18.00%
GECMS 98-15 B5 NR 10/25/98 Residential 1,412,293 1,411,056 100.0% 278,140 18.00%
RFMSI 97-S14 B2 B 11/25/97 Residential 1,386,448 1,385,181 100.0% 909,495 13.00%
RFMSI 97-20 B2 B 1/25/98 Residential 1,726,484 1,724,931 100.0% 1,045,330 13.00%
CITYH 97-A R NR 3/25/97 Residential 79,606,424 31,197,200 100.0% 3,512,292 10.50%
CITYH 97-B R1 NR 4/25/97 Residential 197,547,812 80,700,059 100.0% 5,102,692 10.50%
CITYH 97-C R1 NR 7/25/97 Residential 102,450,075 47,771,036 100.0% 1,552,972 10.50%
CITYH 97-C R2 NR 7/25/97 Residential 97,549,924 29,453,541 100.0% 3,623,946 10.50%
WIFC 96-3 (3) B1 BB 1/25/97 Residential 6,261,438 2,921,896 100.0% 5,514,439 8.00%
WIFC 96-3 (3) B2 B 1/25/97 Residential 4,870,004 2,272,741 100.0% 3,347,666 11.00%
WIFC 96-3 (3) B3 NR 1/25/97 Residential 12,522,867 5,222,723 100.0% 3,960,930 15.00%
WIFC 97-WFC1 (3) B1 BB 10/25/97 Residential 9,908,014 9,241,651 100.0% 8,852,359 8.00%
WIFC 97-WFC1 (3) B2 B 10/25/97 Residential 1,834,817 1,711,416 100.0% 1,202,991 11.00%
WIFC 97-WFC1 (3) B3 NR 10/25/97 Residential 4,403,561 3,724,660 100.0% 1,325,693 15.00%
WIFC 98-WFC2 (3) B1 BB 7/25/98 Residential 20,099,697 19,706,406 100.0% 18,231,464 8.00%
WIFC 98-WFC2 (3) B2 B 7/25/98 Residential 3,215,951 3,153,024 100.0% 2,539,914 11.00%
WIMLT 98-3 (3) C NR 10/5/98 Residential 177,729,958 92,021,463 100.0% 4,433,105 11.00%
WIMLT 98-3 (3) B1 BB 10/5/98 Residential 1,778,958 1,778,958 100.0% 1,751,835 9.00%
WCOST 95-A (3) B NR 3/25/95 Consumer 16,637,758 12,379,540 50.0% 3,617,990 9.50%
Manufactured
WMHT 95-A (3) B NR 7/25/95 Housing 5,006,883 5,006,883 100.0% 4,215,497 9.00%
WMF 95-MA1 (3) (4) ADJ NR 8/25/95 Home Equity 5,299,965 7,040,049 89.7% 4,962,015 9.50%
WMF 95-MF1 (3) (4) FIX NR 8/25/95 Home Equity 2,050,292 2,807,818 88.7% 2,098,659 9.50%
----------------------------- -------------
TOTAL $ 862,209,881 $ 469,188,560 $ 128,812,763
============================= =============
- ----------
(1) NR means the security is not rated.
(2) Based on the value reflected in the Company's financial statements as of
December 31, 1999, which is the post-impairment basis (purchase price less
amortization and impairment thereof) of the mortgage-backed securities
(since future income or loss on mortgage-backed securities is a function
of such post-impairment basis) plus accrued interest of $1,013,472.
(3) Securities backed by loans that were previously held in the portfolio of
WFSG or its affiliates and for which WFSG or one of its affiliates is
continuing to act as servicer.
(4) Includes prepaid senior class principal due to application of excess
interest to senior class principal, thereby increasing subordinate class
balance.
(5) Book yield represents the effective yield expected on the security based
upon the Company's original basis.
9
Constant Prepayment Rate for the
Indicated Period (1) Delinquency (1)(4)
----------------------------------------------------------------------------
1 3 6 12
Issue Name Month Months Months Months 30-59 Days 60-89 Days 90+ Days Foreclosure (1)
- ----------------------------------------------------------------------------------------------------------------------------------
BAMS 98-1 13 8 8 N/A $ - $ - $ - $ -
BAMS 98-1 13 8 8 N/A - - - -
BAMS 98-2 17 11 10 16 - - - -
BAMS 98-2 17 11 10 16 - - - -
BSMSI 96-6 25 24 27 25 6,926,286 2,398,563 1,739,974 3,332,108
BSMSI 96-6 25 24 27 25 6,926,286 2,398,563 1,739,974 3,332,108
BSMSI 97-7 14 N/A 12 N/A 6,871,080 177,957 1,527,326 664,714
BSMSI 97-7 14 N/A 12 N/A 6,871,080 177,957 1,527,326 664,714
BSMSI 97-7 33 N/A 15 N/A 6,871,080 177,957 1,527,326 664,714
BSMSI 97-7 33 N/A 15 N/A 6,871,080 177,957 1,527,326 664,714
BSMSI 98-5 14 12 15 20 197,741 - 170,138
-
BSMSI 98-5 14 12 15 20 197,741 - 170,138
-
CHASE 94-H 15 10 8 21 - - 271,442
-
CMC 98-1 7 7 10 18 2,864,166 - 231,732 232,865
CMC 98-1 7 7 10 18 2,864,166 - 231,732 232,865
CMC 98-1 7 7 10 18 2,864,166 - 231,732 232,865
CMC 98-1 7 7 10 18 2,864,166 - 231,732 232,865
CMC 98-1 7 7 10 18 2,864,166 - 231,732 232,865
CMC 98-1 7 7 10 18 2,864,166 - 231,732 232,865
CMSI 98-4 3 2 5 13 520,960 - - -
CMSI 98-6 8 5 6 13 1,913,261 - - -
CWMBS 97-8 4 6 10 26 908,000 - 433,477 -
CWMBS 98-10 3 8 10 18 2,064,619 - 744,709 -
CWMBS 98-11 7 9 10 17 3,468,605 532,174 55,781 158,070
CWMBS 98-12/ALT98-4 6 9 12 13 5,051,796 796,402 599,865 738,253
CWMBS 98-14 3 5 5 11 1,048,162 - - -
GECMS 98-11.1 6 6 7 12 2,117,642 234,271 - 615,583
GECMS 98-11.2 6 6 7 12 591,637 - 495,223 220,815
GECMS 98-11.3 6 6 7 12 418,186 - - -
GECMS 98-5 6 9 11 19 3,104,830 - - -
Real Estate Cumulative
Issue Name Owned (1) Bankruptcy (1)(2) Losses (1)
- -----------------------------------------------------------------------
BAMS 98-1 $ - $ - -
BAMS 98-1 - - -
BAMS 98-2 - 519,035 -
BAMS 98-2 - 519,035 -
BSMSI 96-6 1,205,825 2,087,700 703,237
BSMSI 96-6 1,205,825 2,087,700 703,237
BSMSI 97-7 - - 37,395
BSMSI 97-7 - - 37,395
BSMSI 97-7 - - 37,395
BSMSI 97-7 - - 37,395
BSMSI 98-5 - - -
BSMSI 98-5 - - -
CHASE 94-H - - -
CMC 98-1 - - -
CMC 98-1 - - -
CMC 98-1 - - -
CMC 98-1 - - -
CMC 98-1 - - -
CMC 98-1 - - -
CMSI 98-4 - - -
CMSI 98-6 - - -
CWMBS 97-8 - - -
CWMBS 98-10 - - 27,322
CWMBS 98-11 - - 72,591
CWMBS 98-12/ALT98-4 - - 47,133
CWMBS 98-14 - - 28,001
GECMS 98-11.1 - - -
GECMS 98-11.2 - - -
GECMS 98-11.3 - - -
GECMS 98-5 - - -
10
Constant Prepayment Rate for the
Indicated Period (1) Delinquency (1)(4)
--------------------------------------------------------------------------------------------------------
1 3 6 12
Issue Name Month Months Months Months 30-59 Days 60-89 Days 90+ Days
- ------------------------------------------------------------------------------------------------------------------------------------
GECMS 98-8 5 6 7 14 1,197,957 153,125 -
GECMS 98-8A 5 6 7 14 - - -
GECMS 98-9 4 6 7 12 2,586,054 - 233,412
MRFC 98-2 5 8 10 21 - - 257,016
NASCOR 98-12 9 7 9 12 4,558,706 180,710 1,108,019
NASCOR 98-14 8 9 7 11 - - -
NASCOR 98-17 5 5 6 9 3,245,149 275,826 440,458
NASCOR 98-21 2 7 7 10 204,619 - -
NASCOR 98-4 A 6 7 7 19 2,184,546 318,793 895,022
NASCOR 98-4 B 6 7 7 19 2,184,546 318,793 895,022
NASCOR 98-5 1 3 7 17 891,879 784,720 293,155
NISTAR 98-1 7 9 13 19 62,139 491,456 61,252
OCWEN 98R1 15 16 16 N/A 19,758,669 10,125,426 13,640,829
RFMSI 98-S12 10 0 6 15 7,050,286 555,396 363,603
RFMSI 98-S13 7 1 6 14 7,223,468 820,509 549,606
RFMSI 98-S3 10 1 6 19 9,047,207 2,375,201 824,843
RFMSI 98-S7 5 1 7 13 432,800 93,679 -
BSMSI 98-1A 8 7 8 15 3,797,482 1,003,140 -
N/A
BSMSI 97-7A 20 15 N/A 6,871,080 177,957 1,527,326
INMC 94 L 15 16 17 26 1,131,378 219,393 558,884
GECMS 94-20 1 3 7 8 - - 153,712
MRFC 98-2 5 8 10 21 - - 257,016
NASCOR 97-3 6 11 17 22 500,821 - -
NASCOR 1997-3 6 11 17 22 500,821 - -
RFMSI 1997-S16 9 1 10 20 1,096,505 - -
SAMI 98-8B 12 10 12 N/A 3,554,332 746,254 1,222,524
SAMI 98-8B 12 10 12 N/A 3,554,332 746,254 1,222,524
SAMI 98-8B 12 10 12 N/A 3,554,332 746,254 1,222,524
SAMI 98-8C 12 10 12 N/A 3,554,332 746,254 1,222,524
SAMI 98-8C 12 10 12 N/A 3,554,332 746,254 1,222,524
PSEC 93-3 5 15 14 32 231,855 - 222,525
BAMS 98-4 13 11 10 16 267,173 - -
BAMS 98-4 13 11 10 16 267,173 - -
CWHL 98-15 8 6 6 11 3,045,158 106,085 423,999
MFAST 97-1 22 21 22 21 5,642,739 1,772,217 4,069,447
PSWHI 97-4 23 20 21 21 3,594,803 1,589,514 2,898,012
Real Estate Cumulative
Issue Name Foreclosure (1) Owned (1) Bankruptcy (1)(2) Losses (1)
- --------------------------------------------------------------------------------------------------
GECMS 98-8 - - - -
GECMS 98-8A - - - -
GECMS 98-9 257,950 - - -
MRFC 98-2 - - - -
NASCOR 98-12 - - 233,194 6,504
NASCOR 98-14 - - - -
NASCOR 98-17 - - 206,805 3,330
NASCOR 98-21 - - 100,000 2,720
NASCOR 98-4 A - - 669,970 7,491
NASCOR 98-4 B - - 669,970 7,491
NASCOR 98-5 745,888 - - 866
NISTAR 98-1 269,425 - 54,852 5,303
OCWEN 98R1 34,291,110 17,268,760 32,662,638 26,528,855
RFMSI 98-S12 830,354 516,253 - N/A
RFMSI 98-S13 287,362 - - N/A
RFMSI 98-S3 1,346,667 - - N/A
RFMSI 98-S7 - - - N/A
BSMSI 98-1A - - - -
BSMSI 97-7A 664,714 - - 37,395
INMC 94 L 1,336,757 - - 1,122,561
GECMS 94-20 - - - -
MRFC 98-2 - - - -
NASCOR 97-3 - - - 69,416
NASCOR 1997-3 - - - 69,416
RFMSI 1997-S16 - - - N/A
SAMI 98-8B 599,234 - 372,508 -
SAMI 98-8B 599,234 - 372,508 -
SAMI 98-8B 599,234 - 372,508 -
SAMI 98-8C 599,234 - 372,508 -
SAMI 98-8C 599,234 - 372,508 -
PSEC 93-3 - - - -
BAMS 98-4 - - - -
BAMS 98-4 - - - -
CWHL 98-15 472,829 - - -
MFAST 97-1 - - 4,222,923 1,062,741
PSWHI 97-4 - - - 13,898,828
11
Constant Prepayment Rate for the
Indicated Period (1) Delinquency (1)(4)
---------------------------------------------------------------------------------------------------------
1 3 6 12
Issue Name Month Months Months Months 30-59 Days 60-89 Days 90+ Days
- ---------------------------------------------------------------------------- -------------------------------------------------------
GECMS 98-12 8 7 8 13 1,904,026 - 120,477
GECMS 98-13 5 6 7 10 3,058,047 - 514,389
GECMS 98-14 4 5 7 9 3,267,801 - 508,915
GECMS 98-15 10 8 8 10 3,291,022 - 257,966
RFMSI 97-S14 11 1 9 30 2,323,951 - 628,342
RFMSI 97-20 14 0 7 24 5,541,589 660,356 209,409
CITYH 97-A (5) 42 36 32 31 2,048,755 716,102 7,262,925
CITYH 97-B (5) 42 31 29 30 4,711,969 1,773,937 17,188,678
CITYH 97-C (R-1)(5) 44 37 36 35 1,355,021 793,270 13,662,400
CITYH 97-C (R-2)(5) 44 37 36 35 1,355,021 793,270 13,662,400
WIFC 96-3 (B-1)(3) 23 22 21 24 2,803,944 2,026,830 5,763,012
WIFC 96-3 (B-2)(3) 23 22 21 24 2,803,944 2,026,830 5,763,012
WIFC 96-3 (B-3)(3) 23 22 21 24 2,803,944 2,026,830 5,763,012
WIFC 97-WFC1 (B-1)(3) 16 17 19 21 1,800,806 920,681 2,851,292
WIFC 97-WFC1 (B-2)(3) 16 17 19 21 1,800,806 920,681 2,851,292
WIFC 97-WFC1 (B-3)(3) 16 17 19 21 1,800,806 920,681 2,851,292
WIFC 98-WFC2 (B-1)(3) 20 18 18 19 3,786,600 2,202,839 5,824,812
WIFC 98-WFC2 (B-2)(3) 20 18 18 19 3,786,600 2,202,839 5,824,812
WIMLT 98-3 (C)(3) 20 23 31 40 876,573 821,331 2,420,063
WIMLT 98-3 (B-1)(3) 20 23 31 40 876,573 821,331 2,420,063
WCOST 95-A (3) 10 12 11 10 1,207 76,152 5,195,074
WMHT 95-A (3) 26 26 29 29 239,020 143,200 391,845
WMF 95-MA1 (3) 27 28 29 29 487,509 196,201 1,718,984
WMF 95-MF1 (3) 27 28 29 29 487,509 196,201 1,718,984
Real Estate Cumulative
Issue Name Foreclosure (1) Owned (1) Bankruptcy (1)(2) Losses (1)
- ---------------------------------------------------------------------------------------------------
GECMS 98-12 274,540 - - -
GECMS 98-13 495,391 - - -
GECMS 98-14 - - - -
GECMS 98-15 - - - -
RFMSI 97-S14 - - - N/A
RFMSI 97-20 535,613 759,764 - N/A
CITYH 97-A (5) 3,588,301 894,494 1,512,203 2,111,427
CITYH 97-B (5) 8,158,907 5,283,393 4,311,328 8,016,144
CITYH 97-C (R-1)(5) 8,465,760 3,886,369 4,603,106 5,832,688
CITYH 97-C (R-2)(5) 8,465,760 3,886,369 4,603,106 5,832,688
WIFC 96-3 (B-1)(3) 3,095,579 1,342,204 - 1,814,371
WIFC 96-3 (B-2)(3) 3,095,579 1,342,204 - 1,814,371
WIFC 96-3 (B-3)(3) 3,095,579 1,342,204 - 1,814,371
WIFC 97-WFC1 (B-1)(3) 1,354,857 606,248 - 424,857
WIFC 97-WFC1 (B-2)(3) 1,354,857 606,248 - 424,857
WIFC 97-WFC1 (B-3)(3) 1,354,857 606,248 - 424,857
WIFC 98-WFC2 (B-1)(3) 3,886,842 815,783 - 1,956,588
WIFC 98-WFC2 (B-2)(3) 3,886,842 815,783 - 1,956,588
WIMLT 98-3 (C)(3) 3,810,354 571,222 - 199,129
WIMLT 98-3 (B-1)(3) 3,810,354 571,222 - 199,129
WCOST 95-A (3) - - - 47,218
WMHT 95-A (3) - - - 61,391
WMF 95-MA1 (3) 865,893 218,080 - 430,316
WMF 95-MF1 (3) 865,893 218,080 - 430,316
- --------------
N/A Information is not available.
(1) Data provided by trustees or servicers for the securities or other
third-party sources. Delinquency data does not incorporate payment
recency. For example, if a loan is 90 days delinquent at a point in time,
and from that point on makes each regular monthly payment, that loan would
be current on a recency basis, but not on a contractual delinquency basis.
Because of this, for certain pools, delinquency rates may imply higher
expected defaults than may actually occur.
(2) Based on loans made to borrowers which were in bankruptcy as of December
31, 1999.
(3) Securities backed by loans that were previously held in the portfolio of
WFSG or its affiliates and for which WFSG or one of its affiliates is
continuing to act as servicer.
(4) Delinquency amounts do not include Foreclosure, Real Estate Owned, or
Bankruptcy amounts included elsewhere in this table.
(5) Delinquency amounts include Foreclosure, Real Estate Owned, and Bankruptcy
amounts.
12
Non-Discounted Loans
We consider non-discounted loans to be performing and sub-performing loans
that are available for purchase at prices that more closely approximate their
unpaid principal balances. Non-discounted loans include:
Non-discounted Commercial Loans. Performing loans secured by commercial
and multi-family properties located in the United States and the United
Kingdom.
Non-discounted Single-family Residential Loans. Non-discounted loans to
individuals who do not qualify for traditional "Agency A" credit because
their credit histories, debt to income ratios or other factors do not meet
the standard lending criteria established by federal agencies such as the
FNMA and FHLMC. These loans are generally secured by first mortgages on
single-family residences located in the United States.
We seek to identify and acquire non-discounted loans that provide current
cash income and still meet our requirements with respect to risk-adjusted rates
of return. Our investment emphasis with respect to non-discounted loans is on
current income and appreciation as a result of favorable default experience. At
December 31, 1999, non-discounted loans had an aggregate book value of $30.5
million and are primarily secured by mortgages or deeds of trust on commercial
or multi-family real property. At December 31, 1999, approximately $29.9 million
or 98% of our non-discounted loans were secured by real properties located in
the United States ("U.S. Non-Discounted Commercial Loans") and $0.6 million were
secured by real properties located in the United Kingdom ("International
Non-Discounted Loans").
U.S. Non-Discounted Commercial Loans
U.S. Non-Discounted Commercial Loans were originated by various unrelated
parties under different underwriting criteria at different times and were
acquired at various times. At December 31, 1999, our U.S. Non-Discounted Loans
were secured by a variety of commercial properties. Most of our U.S.
Non-Discounted Commercial Loans were secured by first priority liens and were
current as to their monthly payments.
Set forth below is a brief description of the principal U.S.
Non-Discounted Commercial Loans in our loan portfolio at December 31, 1999.
Starrett-Lehigh, 601 West 26th Street. This is a $25 million investment in
mezzanine debt secured by the Starrett-Lehigh building in the Chelsea district
of New York City. The building was acquired in 1996 with $100 million of senior
debt, $52.5 million of subordinated debt and $26 million in reserves for capital
expenditures and interest. The mezzanine loan pays interest at a rate of Libor
plus 4.75%, with principal due on the maturity date in August 2001. The
loan-to-value ratio on an as-is basis at the time of acquisition was 98%;
however, since completion of the planned improvements, the current estimated LTV
is approximately 60%. The building is a two million square foot, nineteen-story
warehouse/showroom type building in the Chelsea section of Manhattan.
NW Cornell & Miller. This was a first lien mortgage loan for the
construction of a private school located in Portland, Oregon. The original
construction loan of $4,878,300 rolled into a first lien, ten-year, fixed-rate
loan at 9%, due April 1, 2009. The loan pays interest only for the first year
with the interest capitalized onto the note, amortizes over a 29-year term, and
has a balloon payment of $4.8 million due at end of the 10th year. The principal
balance of the note at December 31, 1999 was $5.2 million.
Discounted Loans
Our discounted loans consist of mortgage loans that are in default or for
which default is likely or imminent or for which the borrower is currently
making monthly payments in accordance with a forbearance plan. These loans
generally are purchased at a discount to both the unpaid principal amount of the
loan and the estimated value of the underlying property. Hence, we refer to
these mortgage loans as discounted loans throughout this document. Furthermore,
we refer to discounted loans that are secured by commercial or multi-family real
properties in the United States as "U.S. Discounted Commercial Loans." We refer
to discounted loans that are secured by residential, commercial or multi-family
real properties outside the United States as "International Discounted Loans."
At December 31, 1999, the Company had approximately $1.2 million of U.S.
Discounted Loans and no International Discounted Loans. Discounted Loans were
originated by various unrelated parties under different underwriting criteria at
different times and were acquired at various times.
We seek to identify and acquire discounted loans that will meet our
risk-adjusted return objectives over an 18 to 24 month period. During this
period, we typically either restructure the terms of the loans or exercise our
rights to acquire control of the underlying property.
13
With respect to discounted loans, we generally seek to cause the owners of the
properties to take steps to improve the cash flow on the property and bring the
loan current or to foreclose on the property and implement our own plan to
improve cash flow. We also seek to diversify our investments in discounted loans
and other real estate investments geographically in order to reduce our exposure
to the real estate cycle in any one geographical area.
The book value recorded on our financial statements generally reflects the
purchase price paid by us for such loan. We generally expect to recover the
excess of the estimated value of the property over the purchase price. We do not
accrue interest or recognize income on such loans until we receive cash in
respect of such loans.
At December 31, 1999, our discounted loans were secured by a variety of
commercial properties. Subsequent to year-end, substantially all of the
discounted loans paid off at net book value.
DIP Loan
In conjunction with WFSG's restructuring in 1999, the Company funded a
debtor-in-possession loan ("DIP") to WFSG of $5.0 million. The DIP loan bears
interest at 12% and is secured by the stock of First Bank of Beverly Hills,
F.S.B., WFSG's savings bank subsidiary, and its holding company, Wilshire
Acquisitions Corporation. The DIP loan 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 were required. In February 2000, the Company declared WFSG to be in
default of the loan agreement with the Company and declared the balance
immediately due and payable. WFSG disputes that they are in default of the loan
agreement. For further discussion, see Item 1. Business.
Real Estate
We invest in commercial and multi-family real properties located in the
United States and the United Kingdom.
14
The following table sets forth information regarding the majority of our
investments in real estate at December 31, 1999.
Approximate
Net Percentage Leased
Name of Year Built/ Leaseable at December 31, No. of Annualized
Date Acquired Property Location Renovated Sq. Ft. 1999 Leases Rent(1)
- ------------- -------- -------- --------- ------- ---- ------ ----------
4/8/98 Madison Street Portland, OR 1961 15,000 100% 2 $ 247,983
4/6/98 Taylor Street Portland, OR 1960 28,000 100% 4 323,487
4/27/98 Columbia Street Portland, OR N/A 12,999 100% 2 207,984
4/21/98 G.I. Joe's Gresham, OR 1987 55,888 100% 1 447,108
4/21/98 G.I. Joe's(3) Wilsonville, OR 1978 170,398 100% 1 759,780
4/21/98 G.I. Joe's Salem, OR 1981/98 96,933 100% 1 642,036
4/21/98 G.I. Joe's Tualatin, OR 1985/1985 55,100 100% 1 661,200
4/21/98 G.I. Joe's Milwaukee, OR 1972/1989 66,545 100% 1 465,816
4/6/98 Eugene Warehouse Eugene, OR Unknown 84,912 100% 1 281,288
11/18/98 Buena Vista Irwindale, CA N/A 654,734 N/A N/A N/A
Business Park
7/7/98 Jefferson Street Portland, OR N/A 10,000 88% 2 89,760
4/21/98 G.I. Joe's - Wilsonville, OR N/A 474,804 N/A N/A N/A
Excess Land
6/30/98 Warner Estates United Kingdom Various 227,977 98% 75 2,448,926
Weighted
Average Rent
Per Square
Date Acquired Foot Occupied Net Book Value
- ------------- ------------- --------------
4/8/98 16.53 $ 1,790,000
4/6/98 11.55 2,537,000
4/27/98 16.00 1,608,000
4/21/98 8.00 27,312,000(2)
4/21/98 4.46 27,312,000(2)
4/21/98 6.62 27,312,000(2)
4/21/98 12.00 27,312,000(2)
4/21/98 7.00 27,312,000(2)
4/6/98 3.31 2,445,000
11/18/98 N/A 3,239,000
7/7/98 10.20 1,379,000
4/21/98 N/A 27,312,000(2)
6/30/98 10.96 22,546,000
- ---------------------
N/A Not applicable
(1) Annualized rent for the current period represents the base fixed rental
scheduled to be paid by the tenants under the terms of the related lease
agreement, which amount generally does not include payments on account for
real estate taxes, operating expenses, and utility charges. We believe
that annualized rent is helpful to investors as a measure of the revenues
we could expect to receive from our leases. However, we cannot assure you
that scheduled lease revenues will equal the actual lease revenues we
received in the past.
(2) Includes all G.I. Joe's properties owned by us.
(3) This property was built in three phases.
Phase 1 B Distribution Warehouse-built in 1978. It contains 104,497 sq. ft.
with 4,044 sq.ft. of interior two story finished area.
Phase 2 B Corporate Office-built in 1983. It is a single story structure
containing 24,392 sq. ft.
Phase 3 B An addition to the warehouse built in 1968. It contains 4,159 sq. ft.
Set forth below is a brief description of each of the properties set forth in
the above table:
1776 SW Madison Street ("Madison Building"). This three-story, brick
office building is located 16 blocks from downtown Portland and is adjacent to
the light-rail transit line. The building, which is currently leased to WFSG and
its affiliates, serves as WFSG's corporate headquarters. This property, which
was upgraded and remodeled in 1996, was originally constructed in 1961. The
lease with WFSG expires in December 2001 and the rent is competitive for the
Portland, Oregon marketplace. Subsequent to December 31, 1999,the Company sold
this building (with other Portland properties noted below) at a gain of
approximately $1 million.
1705 SW Taylor Street. The Taylor Street Buildings consist of two
office/industrial buildings located 16 blocks from downtown Portland. Currently
the properties are occupied by WFSG and its affiliates, under leases which
expire in December 2001 on competitive terms in the Portland, Oregon
marketplace. The Company sold these buildings after year-end (see Madison
Building above).
1631 SW Columbia Street ("Columbia Buildings"). This office building is
located 16 blocks from downtown Portland and is adjacent to the light-rail
transit line. The building is currently leased to WFSG and its affiliates. This
property, which was upgraded and remodeled in 1998, was originally constructed
in 1961. The lease with WFSG expires in April 2003 and the rent is competitive
for the Portland, Oregon marketplace. The Company sold this property after year
- -end (see Madison Building above). The Company has agreed to assume WFSG's lease
(with the new, unaffiliated owner of this building) prior to or on July 1, 2000
and occupy this building as the Company's corporate headquarters.
15
G.I. Joe's. The G.I. Joe's properties are comprised of five (5) retail
buildings and G.I. Joe's Headquarters Office Complex/Warehouse/Distribution
Center, totaling approximately 445,000 square feet. The retail buildings are
located in Salem (two buildings adjacent to each other), Milwaukee, Tualatin,
and Gresham, all major cities in the State of Oregon. The
Office/Warehouse/Distribution Center is located in Wilsonville, Oregon. All of
the buildings are leased to G.I. Joe's on competitive market rents under fifteen
year leases ending in April 2013. G.I. Joe's subleases 29,952 square feet in
Salem to Office Depot, Inc. The land at the Gresham location is under a 50-year
ground lease (expiration in year 2037) with five (5) 10-year options between
G.I. Joe's and Gresham RPR Associates, an unaffiliated entity. Adjacent to the
Office/Warehouse/Distribution Center is a 10.90-acre tract available for future
development by the Company.
90005 Prairie Road ("Eugene Warehouse"). This building is located on 4.5
acres with access to Interstate Route 5 via Belt Line Road and to the
Eugene-Springfield metropolitan and Gateway areas. The property is served by an
on-site rail spur and the property is within the West Eugene enterprise zone.
This property has one tenant (which is not affiliated with the Company) under a
lease which expires in November 2000.
1701 SW Jefferson Street. This office building is located 16 blocks from
downtown Portland and is adjacent to the light-rail transit line. The building
was leased to Tommy Luke Flowers, Inc. ("Tommy Luke"). This property was
originally constructed in 1960. The Company sold this property after year-end
(see Madison Building above).
Buena Vista Business Park, 2400 Block of Bateman Avenue, Irwindale,
California. This property was acquired on November 18,1998 and consists of 11
level finished industrial zoned lots ranging from 34,925 to 154,943 square feet
and totally 654,794 square feet or 15.032 acres. The parcels are fully improved
with all the major off-sites in place, i.e., paved-streets, streetlights, curbs,
gutters and utilities. Irwindale is located at the center of the San Gabriel
Valley which is located between the inland empire region and downtown Los
Angeles. This site has access to Interstate Route 210 and Interstate Route 605.
Warner Estates. At December 31, 1999, we maintained a (pound)14.541
million ($22.5 million) investment in International Commercial Properties which
consisted of 21 properties in the Midlands and Southeast of England. There is
approximately 228,000 square feet of rentable space in the portfolio and the
properties are virtually 100% leased to 75 tenants, with most leases maturing in
five to seven years. Leases provide for upward-only rental increases, which
require tenants to pay the higher of their current rent or the market rates when
rates are reviewed. With a well-diversified portfolio of tenants located in a
variety of UK locations, this portfolio generates current income and is
insulated from fluctuating property rental levels.
Lease Expirations. The following table sets forth a summary schedule of
the lease expirations for the commercial properties (other than the foreclosed
properties) for leases in place as of December 31, 1999, assuming that none of
the tenants exercise renewal options or termination rights, if any, at or prior
to the scheduled expirations.
Percentage of Percentage
Square Aggregate Average Base Rent Aggregate
Number of Footage of Portfolio Annualized Base per Square Foot of Portfolio
Year of Lease Leases Expiring Leased Rent of Expiring Expiring Annualized
Expiration (1) Expiring Leases Square Feet Leases (2) Leases (3) Base Rent
----------------------------------------------------------------------------- -----------------------------------
2000........ 10 102,759 12.6% $ 470,202 $ 4.58 7.2%
2001........ 7 22,285 2.7 332,273 14.91 5.1
2002........ 11 81,567 10.0 906,138 11.11 13.8
2003........ 6 20,418 2.5 289,292 14.17 4.4
2004........ 8 30,156 3.7 330,513 10.96 5.0
2005........ 1 2,138 .3 23,435 10.96 .4
2006........ 3 8,995 1.1 98,588 10.96 1.5
2007........ 3 4,881 .6 53,496 10.96 .8
Thereafter.. 26 544,818 66.5 4,071,431 7.47 61.8
------------------------- ---------------------------------- -----------------------------------
75 818,017 100.0% $ 6,575,368 $ 8.04 100.0%
========================= ================================== ===================================
- -------------------
(1) Lease year is on a calendar year basis.
(2) Annualized base rent is calculated based on the amount of schedule rent in
the expiring year.
(3) Annualized base rent per square foot is calculated using the annualized
base rent divided by a weighted average square footage.
16
Mortgage Indebtedness. Our general strategy is to leverage our investments
by incurring borrowings secured by such investments. Set forth below is
information regarding our mortgage indebtedness relating to U.S. Commercial
Properties as of December 31, 1999.
Principal Maturity Annual
Property Amount Interest Rate Date Amortization Payments
-------- ------ ------------- ---- ------------ --------
Madison Street (1) $ 888,000 9.10% 11/1/06 25 Years $ 93,760
Madison Street B Second Lien (1) 618,000 10.00 10/1/08 25 Years 68,153
Taylor Street (1) 1,143,000 9.10 11/1/06 25 Years 120,817
Taylor Street B Second Lien (1) 1,027,000 10.00 10/1/08 25 Years 113,406
Eugene Warehouse 1,076,000 10.63 1/1/01 30 Years 133,080
Jefferson Street (1) 924,000 10.00 10/1/08 25 Years 101,956
Columbia Street (1) 1,243,000 10.00 10/1/08 25 Years 141,212
GI Joe's (2) 20,540,000 7.61 5/11/23 25 Years 1,897,756
Warner Estates (3) 18,033,000 8.20 1/25/19 20 Years 1,480,580
- ---------------
(1) The properties were sold in January 2000 and all related debt was paid off
at that time.
(2) The G.I Joe's loan has an anticipated prepayment date of May 11, 2008. If
the loan is not repaid by this date, the interest rate will increase to a
new rate as specified in the loan agreement, which will be at least two
percentage points higher. This loan has a balloon payment of $16,507,832.
(3) U.S. dollar equivalents. The loan is denominated in pounds sterling and is
interest only with a balloon payment at maturity.
Many of the mortgage loans obtained by us to finance our real estate
investments do not fully amortize over their terms and instead require
substantial balloon payments on their maturity dates. Because the principal
balance of such mortgage loans does not fully amortize over the term of the
mortgage loan, such mortgage loans may be more difficult for us to repay at
maturity than mortgage loans whose principal balance is fully amortized over the
term of the mortgage loan. Our ability to pay the balloon amount due at maturity
of such mortgage loans will depend on our ability to obtain adequate refinancing
or funds from other sources to repay such mortgage loans.
Significant Properties
Set forth below is additional information with respect to G.I. Joe's,
which is deemed "significant" under the requirements of the Securities and
Exchange Commission.
Depreciation. The basis, net of accumulated depreciation, of G.I. Joe's
aggregated approximately $27.3 million as of December 31, 1999. The real
property associated with G.I. Joe's (other than land) generally will be
depreciated for federal income tax purposes over 39 years using the
straight-line method. For financial reporting purposes, G.I. Joe's is recorded
at its historical cost and has been depreciated using the straight-line method
over its estimated useful life, which is estimated to be 35 years.
Real Estate Taxes. The 1999 annual real estate taxes paid on G.I. Joe's
were approximately $273,000. Of this amount, only $13,000 (for excess land) is
an obligation of the Company as G.I. Joe's, Inc. is responsible for property
taxes on the leased real estate according to the terms of the leases.
Occupancy. At December 31, 1999, all six (6) properties were leased to
G.I. Joe's under five (5) separate leases. The tenant is engaged in the
retailing of sporting goods and automotive products. The tenant owned and
occupied five of the six locations (except the 29,952 square feet building in
Salem) at the time we purchased the buildings. Accordingly, there is no prior
occupancy data since the current tenant owned and occupied the properties before
our acquisition. According to the terms of the lease, G.I. Joe's is required to
pay certain reserves on a monthly basis for 10 years, commencing with the
beginning of the leases. G.I. Joe's is current in the payment of these reserves.
Lease Expirations. At December 31, 1999, G.I. Joe's leases all the
buildings under five (5) separate leases which all expire in April 2013. G.I.
Joe's has two (2) five-year options upon lease expiration. The average rental
rate is $6.70 per square foot (total annual rent of $2,975,940) for the first
five years, on a triple net basis. The rental rate will be adjusted every five
years based on the Consumer Price Index.
17
Funding Sources
In order to maximize the return on our investments, we generally fund
acquisitions with third-party debt financing so that our invested capital
represents a limited percentage of the purchase price. The principal sources for
funding loans and mortgage-backed securities are repurchase agreements with
major investment banks. Repurchase agreements are secured lending arrangements
which involve the borrower selling an asset to a lender at a fixed price with
the borrower having an obligation to repurchase the asset within a specified
period (generally 30 days) at a higher price reflecting the interest cost of the
loan. If the value of the underlying asset declines as determined by the lender,
the lender may request that the amount of the loan be reduced by cash payments
from the borrower or additional collateral be provided by the borrower
(generally known as "collateral calls"). Funding for real property assets
generally are longer-term traditional mortgage financing with banks and other
financial institutions. We closely monitor rates and terms of competing sources
of funds on a regular basis and generally utilize the source which is the most
cost effective. Following the substantial market volatility in the third and
fourth quarters of 1998 and significant declines in valuations for
mortgage-backed securities, the availability of financing for purchases of
mortgage-backed securities has generally declined and is generally on less
favorable terms. In addition, we are seeking to obtain longer term financing for
a portion of our assets to decrease the risk of forced asset sales to meet
collateral calls.
The following table sets forth information relating to our borrowings and
other interest-bearing obligations at December 31, 1999 and 1998.
December 31,
------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Short-term borrowings.............................. $ 96,815 $ 225,566
Other borrowings................................... 64,412 60,577
----------- -----------
Total..................................... $ 161,227 $ 286,143
=========== ===========
The following table sets forth certain information related to the
Company's short-term borrowings. During the reported period, short-term
borrowings were comprised of warehouse lines, repurchase agreements and other
short-term facilities. Averages are determined by utilizing month-end balances.
At or for the Year Ended
December 31,
------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Average amount outstanding during the period...................... $ 155,473 $ 254,945
Maximum month-end balance outstanding during the period........... $ 203,742 $ 475,351
Weighted average rate:
During the period............................................ 8.2% 7.2%
At end of period............................................. 8.9% 7.6%
Asset Quality
We are exposed to certain credit risks related to the value of the
collateral that secures our loans and the ability of borrowers to repay their
loans. We closely monitor our loans and foreclosed real estate for potential
problems on a periodic basis and report to the Board of Directors at regularly
scheduled monthly meetings. Each loan or foreclosed property is reviewed at
least once a month and problem loans or properties are monitored at least
weekly.
Non-Performing Loans. It is our policy to establish an allowance for
uncollectible interest on loans that are over 90 days past due or sooner when
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. Upon such a determination, those loans are placed on
non-accrual status and deemed to be non-performing. When a loan is placed on
non-accrual status, previously accrued but unpaid interest is reversed by a
charge to interest income.
18
Foreclosed Real Estate. We carry our holdings of foreclosed real estate at
the lower of cost or fair value. Foreclosed real estate is periodically
reevaluated to determine that it is being carried at the lower of cost or fair
value less estimated costs to sell. Holding and maintenance costs related to
properties are recorded as expenses in the period incurred. Deficiencies
resulting from valuation adjustments to foreclosed real estate subsequent to
acquisition are recognized as a valuation allowance. Subsequent increases
related to the valuation of real estate owned are reflected as a reduction in
the valuation allowance, but not below zero. In other words, the book basis of
foreclosed real estate (net of valuation reserves provided after the date of
foreclosure) cannot exceed the book basis of the real estate at the date of
foreclosure, except to the extent of capital improvements. Increases and
decreases in the valuation allowance are charged or credited to income,
respectively.
Allowances for Loan Losses. We maintain an allowance for loan losses at a
level believed adequate to absorb estimated losses in the loan portfolios. The
allowance is increased by provisions for loan losses charged against operations,
recoveries of previously charged off credits, and allocations of discounts on
purchased loans, and is decreased by charge-offs. Loans are charged off when
they are deemed to be uncollectible.
When we increase the allowance for loan losses related to loans other than
discounted loans, we record a corresponding increase to the provision for loan
losses in the statement of operations. For discounted loans, increases to the
allowance for loan losses are recorded shortly after each acquisition of a pool
by allocating a portion of the purchase discount deemed to be associated with
measurable credit risk. The allocation is based on the analyses of specific
valuation allowances discussed above. Amounts allocated to the allowance for
loan losses from purchase discounts do not increase the provision for loan
losses recorded in the statement of operations; rather they decrease the amounts
of the purchase discounts that are accreted into the interest income over the
lives of the loans. If, after the initial allocation of the purchase discount to
the allowance for loan losses, we subsequently identify the need for additional
allowances against discounted loans, the additional allowances are established
through charges to the provision for loan losses.
The following table sets forth the activity in the allowance for loan
losses during the periods indicated.
Year Ended December 31,
----------------------------
1999 1998
----------- -----------
(Dollars in thousands)
Balance, beginning of period............. $ 11,108 $ -
Allocation of purchased loan discount:
at acquisition........................ 7,416
at disposition........................ (1,312)
Charge offs.............................. (7,364) (901)
Recoveries............................... 386 -
(Recapture) provision for loan losses.... (1,150) 5,905
----------- -----------
Balance, end of period................... $ 2,980 $ 11,108
=========== ===========
During the year ended December 31, 1999, the Company reversed a provision
for losses of $3.9 million taken in prior periods for a loan held for sale. The
loan was secured by commercial properties in the United Kingdom with a carrying
value of approximately $47.9 million. This valuation allowance had been
established in 1998 based upon WRSC's estimate at that time of the ultimate
recoverability of the asset. This provision reversal was partially offset by a
provision for losses on loans of $0.1 million. In addition, 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.
Total provision for losses for the year ended December 31, 1998 was $11.8
million, which included a $5.9 million valuation adjustment of an unsecured
$18.4 million receivable from WFSG, in addition to the $5.9 million of loan loss
provision included in the schedule above. The receivable from WFSG, net of this
valuation adjustment, is included in due from WFSG in the consolidated statement
of financial condition as of December 31, 1998.
19
The table below sets forth the delinquency status of our non-discounted
loans at the dates indicated.
December 31, 1999 December 31, 1998
------------------------ ---------------------------
Percent Percent
Balance of Portfolio Balance of Portfolio
------- ------------ ------- ------------
(Dollars in thousands)
Period of Delinquency
31-60 days $ 154 .5% $ -- -%
61-90 days -- -- 514 .4
91 days or more (1)(2) 507 1.6 39,316(3) 32.9
------- ---- ------- -----
Total loans delinquent $ 661 2.1% $39,830 33.3%
======= ==== ======= =====
- ---------------
(1) All loans delinquent over 90 days were on nonaccrual status.
(2) We classify loans as discounted or non-discounted on a pool basis. Each
pool is designated as discounted or non-discounted based on whether the
pool consists primarily of discounted or non-discounted loans at the time
of acquisition. For example, a pool of non-discounted loans may contain
non-performing loans at the time of acquisition as long as the
non-performing loans were not the primary component of the pool at the
time. As a result, the Company does not believe that this information is a
meaningful indicator of the delinquency experience on its non-discounted
loans.
(3) The December 31, 1998 balance includes one loan for $38,560 to a party in
Oregon. Subsequent to December 31, 1998, this loan was paid off.
Computer Systems and Other Equipment
The Company and its service providers utilize a number of technologically
dependent systems to operate, service mortgage loans and manage mortgage and
other related assets. Many existing computer software programs and other
technologically dependent systems use two digits to identify the year in date
fields and, as such, could fail or create erroneous results by or at the Year
2000. Management closely monitored the Company's operations subsequent to
January 1, 2000 in relation to the Year 2000 matter and continues to monitor
such operations. The Company's information systems are operational with no
apparent adverse impact arising as a result of or associated with the Year 2000
matter. Additionally, the Company is not aware of, and has not experienced, any
Year 2000 issues at its key service providers, vendors, mortgage securities
servicers and other third parties. Management considers the risk of any residual
potential Year 2000 matter failures to be minimal.
ITEM 2. PROPERTIES
OFFICES
The Company's corporate headquarters are located in Portland, Oregon,
where the Company subleases approximately 2,000 square feet of office space from
WFSG on a month-to-month basis. The Company has agreed to assume WFSG's lease
(with an unrelated third party) on or before July 1, 2000 for the space
currently occupied by the Company and an adjacent building consisting of
approximately an additional 10,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
With the exception of disputes with WFSG and its affiliates discussed in
"Item 1. Business," 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders on September 10, 1999, the
Company's shareholders voted not to elect REIT status and to change the
Company's name to Wilshire Real Estate Investment Inc.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT"S COMMON EQUITY AND RELATED STOCKHOLDER MATTER
Effective April 6, 1998, our common stock, par value $0.0001 per share
(the "Common Stock") became quoted on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") under the symbol "WREI." The
initial public offering price was $16.00 per share. The approximate number of
record holders of our Common Stock at February 29, 2000 was 14. Prior to April
6, 1998, there was no public market for the Company's Common Stock.
The following table sets forth the high and low sales prices for the
Common Stock as quoted on the NASDAQ for the periods indicated.
1999 High Low
------------------------------------------ ------------------ ---------------------
First quarter $ 4 $ 2-29/32
Second quarter $ 4-1/2 $ 3-5/16
Third quarter $ 3-7/8 $ 2-9/16
Fourth quarter $ 3-1/16 $ 2-1/8
1998 High Low
------------------------------------------ ------------------ ---------------------
Second quarter (from April 6) $ 17-7/16 $ 16
Third quarter $ 17-3/8 $ 9-7/8
Fourth quarter $ 10-3/8 $ 2-1/16
The following table sets forth the amount of cash dividends declared on
the common stock during the periods indicated.
Cash Dividends
1999 Per Share
-------------------------------------- --------------
Entire year None
Cash Dividends
1998 Per Share
-------------------------------------- --------------
Second quarter (from April 6) $ 0.27
Third quarter 0.40(1)
Fourth quarter -
- ----------
(1) The Company has delayed the expected payment date of a $0.40 cash dividend
payable on October 27, 1998 to shareholders of record at September 30,
1998. The Company will pay interest, at the rate of 4% per annum, on the
amount due calculated from the previously announced payment date through
the date of the actual payment.
The Company currently intends to retain its earnings to support its future
growth strategy and does not anticipate declaring and paying any new dividends
on its common stock in the foreseeable future. The Company anticipates paying
the previously declared dividend to shareholders of record at September 30,
1998, subject to the financial condition, results of operations and capital
requirements of the Company as well as other factors deemed relevant by the
Board of Directors.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical, financial and
operating data on a consolidated basis at December 31, 1999 and 1998 and for the
years then ended. The information contained in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and our historical consolidated financial
statements, including the notes thereto, included elsewhere in this report.
Year Ended December 31,
-------------------------------
1999 1998 (1)
------------ ------------
(Dollars in thousands, except share data)
Statement of Operations Data:
Net Interest Income:
Loans, loans held for sale and discounted loans ...... $ 6,740 $ 10,838
Securities ........................................... 15,342 15,709
Other investments .................................... 604 1,145
------------ ------------
Total interest income ............................. 22,686 27,692
Interest expense ..................................... 12,897 13,608
------------ ------------
Net interest income before provision for
estimated losses .................................. 9,789 14,084
(Recapture) provision for loan losses ................ (1,150) 11,842
------------ ------------
Net interest income after (recapture) provision for
estimated losses .................................. 10,939 2,242
Real Estate Operations:
Operating income ..................................... 7,148 4,939
Operating expense .................................... (205) (345)
Interest expense ..................................... (4,546) (2,853)
Gain on sale of real estate .......................... 1,042 --
Provision for losses ................................. (892) --
Depreciation ......................................... (1,102) (963)
------------ ------------
Total real estate operations ...................... 1,445 778
Other Operating (Loss) Income:
Market valuation losses and impairments .............. (30,029) (54,822)
Provision for disputes with WFSG ..................... (4,077) --
Gain on sale of securities ........................... 1,326 943
Gain on sale of loans ................................ -- 1,320
Gain (loss) on foreign currency ...................... (66) 23
Other income ......................................... 246 --
------------ ------------
Total other operating loss ........................ (32,600) (52,536)
Operating Expenses:
Compensation and employee benefits ................... 1,353 --
Management fees ...................................... 2,404 3,179
Professional fees .................................... 1,250 1,220
Servicing fees ....................................... 256 691
Loan expenses ........................................ 49 500
Other ................................................ 1,119 1,282
------------ ------------
Total operating expenses .......................... 6,431 6,872
------------ ------------
Net Loss ................................................. $ (26,647) $ (56,388)
============ ============
Per Share Data:
Net Loss ................................................. $ (2.33) $ (4.94)
Dividends ................................................ $ -- $ 0.67
Weighted average shares outstanding ...................... 11,442,921 11,421,933
22
Year Ended December 31,
-------------------------------
1999 1998 (1)
------------ ------------
(Dollars in thousands, except share data)
Cash Flow Data:
Net cash (used in) provided by operating activities ..... $ (12,215) $ 4,484
Net cash provided by (used in) investing activities ...... $ 138,283 $ (447,921)
Net cash (used in) provided by financing activities ...... $ (124,969) $ 448,219
Other Data:
Depreciation ............................................. $ 1,102 $ 963
EBITDA(2) ................................................ $ (8,301) $ (38,964)
Ratio of EBITDA to interest expense ...................... (0.48) (2.37)
Ratio of earnings to fixed charges ....................... (1.07) (2.43)
December 31,
-------------------------------
1999 1998
------------ ------------
Balance Sheet Data:
Total assets ............................................. $ 220,812 $ 381,117
Cash and cash equivalents ................................ $ 5,862 $ 4,782
Securities available for sale, at fair value ............. $ 104,572 $ 158,738
Loans, net ............................................... $ 30,459 $ 69,124
Loans held for sale, net ................................. $ -- $ 44,006
Discounted loans, net .................................... $ 1,175 $ 2,498
Investments in real estate, net .......................... $ 63,225 $ 85,005
Investment in WFSG, at fair value ........................ $ 3,953 $ --
Notes receivable from WFSG ............................... $ 5,275 $ --
Prepaid service fees to WCC .............................. $ 2,974 $ --
Due from WFSG ............................................ $ -- $ 12,352
Short-term borrowings .................................... $ 96,815 $ 225,566
Other borrowings ......................................... $ 64,412 $ 60,577
Due to WCC ............................................... $ -- $ 11,698
Total stockholders' equity ............................... $ 50,872 $ 72,443
Ratio of total assets to stockholders' equity ............ 4.34 5.26
- -------------
(1) We commenced operations on April 6, 1998; therefore, the information
presented only reflects actual operations for the abbreviated nine-month
period ended December 31, 1998.
(2) EBITDA means net income plus interest expense plus taxes and depreciation
plus (or minus) amortization of premiums and discounts, net.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto.
GENERAL
Wilshire Real Estate Investment Inc. ("WREI" or the "Company") is a
Nasdaq-listed company which invests primarily in the following types of assets:
o mortgage-backed securities,
o discounted and non-discounted mortgage loans,
o real estate, and
o other real estate related investments.
We were incorporated on October 24, 1997 and commenced operations on April 6,
1998 following the completion of our initial public offering of approximately
$167.0 million.
In 1999, in response to adverse market conditions and the resulting effect
on our operations, we focused our efforts on stabilizing our existing asset base
and greatly reduced acquisition activities. 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 year ended December 31, 1999
reflect this continued difficult marketplace, which include further impairment
write-downs of mortgage-backed securities, a significant portion of which had
previously been deducted from stockholders' equity through "Accumulated other
comprehensive loss." At December 31, 1999, the Company had reduced its assets to
approximately $220.8 million and its equity was $50.9 million.
Notwithstanding this uncertainty, we expect to gradually resume
acquisition activities with an increased emphasis on investment in
mortgage-backed securities, 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 for
a given risk tolerance, thereby providing us a higher risk-adjusted 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 or are developed.
Total market valuation losses and impairments recorded in earnings for the
year ended December 31, 1999 and 1998 were $30.0 million and $54.8 million,
respectively.
In an effort to increase liquidity and meet current obligations, we have
delayed the expected payment date of a $0.40 per share cash dividend (or $4.1
million in the aggregate) originally payable on October 27, 1998 to shareholders
of record at September 30, 1998. The Company will pay interest, at the rate of
4% per annum, on the amount due calculated from October 27, 1998 through the
date of the actual payment.
INCOME TAX STATUS
In order to take advantage of the significant potential tax benefits
related to net operating loss carryforwards and to avoid the risk 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, 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 December 31, 1999, we had, for U.S. Federal
tax purposes, a net operating loss carryforward of approximately $95 million,
which begins to expire 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.
To reduce the potential impact of such ownership changes,
24
the Company established a Shareholder Rights Plan dated as of December 23, 1999
and effective January 3, 2000. The Company has not recorded any tax assets with
respect to the future benefits of the net operating loss carryforwards.
RESULTS OF OPERATIONS - 1999 Compared to 1998
NET LOSS. Our net loss for the year ended December 31, 1999 amounted to
$26.6 million, or $2.33 per share, compared to $56.4 million, or $4.94 per
share, for the year ended December 31, 1998. The 1999 net loss is primarily
attributable to $30.0 million of market valuation losses and impairments
compared to $54.8 million of market valuation losses and impairment and $11.8
million of provision for loan losses for 1998.
NET INTEREST INCOME. The following tables set forth information regarding
the total amount of income from interest-earning assets and expenses from
interest-bearing liabilities and the resultant average yields and rates:
For the Year Ended December 31, 1999
------------------------------------
Average Interest
Balance Income Yield/Rate
-------- -------- ----------
(Dollars in thousands)
Interest-Earning Assets:
Loan portfolios ............................. $ 68,937 $ 6,740 9.8%
Mortgage-backed securities available for sale 122,164 15,342 12.6
Other investments ........................... 13,206 604 4.6
-------- -------- ----
Total interest-earning assets .......... $204,307 $ 22,686 11.1%
======== ======== ====
Interest-Bearing Liabilities:
Short-term borrowings ....................... $155,473 $ 12,688 8.2%
Other borrowings ............................ 2,903 209 7.2
-------- -------- ----
Total interest-bearing liabilities ..... $158,376 $ 12,897 8.1%
======== ======== ====
Net interest income before provision
for loan losses/spread (1)................. $ 9,789 3.0%
Net interest margin (2) 4.8%
- ----------
(1) Net interest spread represents the unweighted difference between the
average yield 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.
25
For the Year Ended December 31, 1998
-------------------------------------
Average Interest Annualized
Balance Income Yield/Rate (1)
-------- -------- --------------
(Dollars in thousands)
Interest-Earning Assets:
Loan portfolios ............................. $121,295 $ 10,838 12.1%
Mortgage-backed securities available for sale 195,112 14,674 10.2
Other securities available for sale ......... 15,617 1,035 9.0
Due from affiliates ......................... 6,281 604 13.0
Other investments ........................... 17,316 541 4.2
-------- -------- ----
Total interest-earning assets ........... $355,621 $ 27,692 10.5%
======== ======== ====
Interest-Bearing Liabilities:
Short-term borrowings ....................... $254,945 $ 13,608 7.2%
-------- -------- ----
Total interest-bearing liabilities ...... $254,945 $ 13,608 7.2%
======== ======== ====
Net interest income before provision
for loan losses/spread (2)................. $ 14,084 3.3%
Net interest margin (3) ................... 5.4%
- ----------
(1) Although the Company was in existence for all of 1998, operations were
commenced on April 6, 1998 at the time of the initial public offering.
Therefore, rates and yields for the year ended December 31, 1998 are
annualized to reflect the Company's period of operations from April 6,
1998 to December 31, 1998.
(2) Net interest spread represents the unweighted difference between the
average yield 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 and is annualized based on the period of
operations from April 6 to December 31, 1998.
For the year ended December 31, 1999, the Company recovered $1.1 million
of the allowance for loan losses compared to a provision of $11.8 million for
1998. These amounts are not reflected in the net interest income/spread above.
Prepayments, delinquencies and defaults affect the net spread of the
Company, primarily through their impact on mortgage loans that underlie the
securities in the Company's mortgage-backed securities portfolio. For principal
and interest subordinated mortgage-backed securities, which the Company
generally purchases at a discount to principal amount, increased prepayments
recapture such purchase discount sooner and therefore increase spread. Fewer
prepayments would have the opposite effect, reducing spread. For interest only
securities("IOs") and residuals, prepayment increases generally reduce spread
since these securities derive their value from interest payments on loans that
are outstanding. IOs have no principal face amount other than a notional balance
and therefore are quite responsive to changes in prepayment. Residuals have both
a principal face amount and often a credit related IO component. Increased
prepayment often reduces spread except to the extent that such prepayment is
related to a recovery on a defaulted loan. The impact on spread, however,
depends upon the degree to which prepayment is less than or exceeds the
Company's assumptions for prepayment at its time of purchase.
The Company buys mortgage-backed securities based on prepayment,
delinquency and default assumptions. Delinquency itself has little effect on
spread from the Company's mortgage-backed securities portfolio since the loan
servicers for each security generally advance both principal and interest
payments and, therefore, the Company generally receives payments on such loans
on a timely basis. More important is the loss severity on defaulted loans.
Generally, the larger the loss severity is, the greater the reduction in spread
will be. However, the Company's spread is only negatively impacted to the extent
the principal face amount of defaults and the cumulative loss severity exceeds
or is expected to exceed the Company's assumptions at its time of purchase or as
subsequently adjusted through a permanent impairment determination.
(RECAPTURE) PROVISION FOR LOAN LOSSES. During the year ended December 31,
1999, we reversed a provision for losses of $3.9 million taken in prior periods
for a loan held for sale. The loan was secured by commercial properties in the
United Kingdom ("UK") with a carrying value of approximately $47.9 million. This
valuation allowance had been established in 1998 based upon management's
estimate at that time of the ultimate recoverability of the asset. This
provision reversal was partially offset by a provision for losses on loans of
$0.1 million. In addition, we recognized a net write-down of $2.7 million in the
carrying value of a $17.0 million
26
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.
Total provision for losses for the year ended December 31, 1998 was $11.8
million, which included a $5.9 million valuation adjustment of an unsecured
$18.4 million receivable from WFSG and $5.9 million of loan loss provisions
(including the provision for the UK loan noted above). The receivable from WFSG,
net of this valuation adjustment, is included in due from WFSG in the
consolidated statement of financial condition as of December 31, 1998.
REAL ESTATE OPERATIONS. During the years ended December 31, 1999 and 1998,
real estate operating income was comprised primarily of $7.1 million and $4.9
million, respectively, in gross rental and other income earned on such
investments. Such revenue represents income generated from the Company's
investment in various office buildings, retail stores, and other commercial
property located in Oregon, California and the United Kingdom. Expenses incurred
on such real estate investments include $4.5 million (1999) and $2.9 million
(1998) of interest expense, $0.2 million (1999) and $0.3 million (1998) of
rental operating expense and $1.1 million (1999) and $1.0 million (1998) of
depreciation expense.
OTHER LOSS. Our other loss was approximately $32.6 million and $52.5
million for the years ended December 31, 1999 and 1998, respectively. The
components of the Company's net non-interest loss is comprised of the following:
Market Valuation Losses and Impairments. The term "Market Valuation Losses
and Impairments" as used herein refers to impairment losses recognized primarily
on our mortgage-backed securities and loan portfolios, as a result of the
international economic and financial turmoil which severely affected the market
for the Company's principal investments beginning in the third quarter of 1998.
Total market valuation losses and impairments for the year ended December 31,
1999 were $30.0 million. This amount includes $19.6 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 $0.7 million related to our holdings of WFSG's 13%
Series B Notes prior to their conversion to newly-issued WFSG stock.
Total market valuation losses and impairments for the year ended December
31, 1998 were $54.8 million. Of this amount, $49.5 million was recognized during
the third quarter to reflect losses on loans and securities that were (i)
ultimately sold in the fourth quarter to meet collateral calls or to provide
liquidity; or (ii) not sold but were deemed to be other than temporarily
impaired, resulting from faster than expected loan prepayments or other factors.
During the fourth quarter of 1998, an additional $5.3 million of market
valuation losses and impairments was recorded to reflect additional other than
temporary impairment on certain securities and other assets which have not been
sold.
Of the total $54.8 million recognized during 1998, $32.2 million relates
to assets sold during the fourth quarter and $22.4 million relates to assets not
sold. Included in the $22.4 million related to assets not sold is $11.3 million
related to our investment in WFSG's 13% Series B Notes due 2004, which was
converted to newly issued common stock of WFSG following its restructuring. This
loss reflected the write-down of this asset to the estimated value of our
proportionate share of the equity in the restructured WFSG.
Provision for disputes with WFSG. As discussed in ITEM 1. BUSINESS, the
Company decided to become internally managed in the third quarter of 1999 and
this has resulted in disputes between the Company, on the one hand, and WFSG and
certain of its affiliates on the other. In connection with these disputes, the
Company, without admission, recorded a reserve for potential resolution of
disputes with WFSG and its affiliates of $4.1 million at September 30, 1999.
Following a partial settlement of disputes with WFSG, the remaining reserve for
potential resolution of disputes with WFSG and its affiliates was $2.3 million
at December 31, 1999.
Gain on the Sale of Securities. During the years ended December 31, 1999
and 1998, we sold mortgage-backed securities to unrelated third parties for
approximately $46.6 million and $133.3 million, respectively, resulting in gains
of approximately $1.3 million and $0.9 million, respectively.
OPERATING EXPENSES. Management fees of $2.4 million and $3.2 million for
the year ended December 31, 1999 and 1998, respectively, were comprised solely
of the 1% (per annum) base management fee paid to WRSC (as provided pursuant to
the Management Agreement between WRSC and the Company). WRSC earned no incentive
fee for these periods.
In addition to the management fee, we incurred loan service fees of $0.2
million and $0.7 million during the years ended December 31, 1999 and 1998,
respectively, which were paid to WFSG or an affiliate of WFSG. The service fee
structure is dependent on the assets being serviced, but in general, service
fees related to discounted loans are based on a percentage of cash received and
service fees related to non-discounted loans are based on a percentage of unpaid
principal balance. We prepaid $3.2 million of future service fees as part of the
WFSG and WCC restructuring, although WFSG disputed this amount in the past (as
well as servicing eligibility for application of the credit), suggesting that
the original amount was $2.3 million. At December 31, 1999, the balance of the
unused prepaid
27
service fees were reduced to $3.0 million. (See Item 1. Business.) We also
incurred $0.1 million (1999) and $0.5 million (1998) of loan related expenses
which were reimbursed to the servicer for actual out of pocket servicing costs.
Other expenses were comprised of professional services, insurance premiums and
other sundry expenses.
RESULTS OF OPERATIONS - QUARTER ENDED DECEMBER 31, 1999 COMPARED TO
QUARTER ENDED DECEMBER 31, 1998.
Our net income for the quarter ended December 31, 1999 was $1.1 million,
or $0.10 per share, compared with a loss of $10.6 million, or $0.92 per share,
for the quarter ended December 31, 1998. Net income for 1999 was primarily
attributable to net interest income of $1.5 million, income from real estate
operations of $1.0 million, other operating income of $0.5 million offset by
operating expenses of $2.0 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.
The following table highlights the results of the quarter:
Quarter Ended December 31,
-------------------------
1999 1998
-------- --------
Interest income ................................ $ 4,517 $ 10,957
Interest expense ............................... (3,056) (6,095)
Provision for loan losses ...................... -- (8,842)
-------- --------
Net interest income (loss) after provision
for loan losses .............................. 1,461 (3,980)
Real estate operations, net .................... 1,000 (13)
Other operating income (loss) .................. 490 (3,950)
Operating expenses ............................. (2,017) (2,607)
-------- --------
Income (loss) before income taxes ............ 934 (10,550)
Income tax (benefit) ........................... (200) --
-------- --------
Net income (loss) .............................. $ 1,134 $(10,550)
======== ========
Earnings (loss) per share:
Basic ........................................ $ 0.10 $ (0.92)
Diluted ...................................... $ 0.10 $ (0.92)
CHANGES IN FINANCIAL CONDITION
During 1999, total assets decreased to $220.8 million from $381.1 million
at December 31, 1998. This decrease was primarily comprised of the net sales or
repayment of the following assets: $54.2 million of securities available for
sale, $21.8 million of investments in real estate and $84.0 million of loans,
discounted loans and loans held for sale. Total liabilities decreased to $170.0
million during the period, primarily as a result of a decrease of $124.9 million
in short-term and other borrowings associated with sales of mortgage-backed
securities, loans, discounted loans, and investments in real estate.
SECURITIES AVAILABLE FOR SALE. At December 31, 1999, securities available
for sale include mortgage-backed securities with an aggregate market value of
$104.6 million, net of realized and unrealized losses, compared to $158.7
million at December 31, 1998. This decrease of $54.1 million is primarily due to
the sale of $45.3 million of securities, net principal payments received of
$20.4 million and the permanent impairment of securities totaling $19.6 million
which was partially offset by the purchase of $24.0 million of securities during
the fourth quarter of 1999 and a decrease in unrealized losses of $7.2 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. For
those securities that do not have an available market quotation, we request
market values and underlying assumptions from the various broker/dealers that
underwrote the securities, are currently financing the securities, or have had
prior experience with the type of securities. Because our subordinated
securities may not be readily marketable, as trading activity may be infrequent,
the market value is typically available from only a small group of
broker/dealers, and in many cases, only one broker/dealer. As of each reporting
period, we evaluate whether and to what extent any unrealized loss is to be
recognized as other than temporary.
LOAN PORTFOLIO. During the year ended December 31, 1999, we reduced our
loan portfolio to approximately $30.4 million from $113.1 million at December
31, 1998. This decrease of $82.7 million is primarily due to the sale of a $47.9
million loan secured by commercial properties in the United Kingdom and the
$38.6 million payoff of a loan to a party in Oregon.
28
At December 31, 1999, approximately $0.5 million of our non-discounted
loan portfolio was 91 days or more delinquent, which represented 1.6% of the
portfolio.
We maintain an allowance for loan losses at a level that the Company
considers adequate to provide for probable losses based upon an evaluation of
known and inherent risks. During the year ended December 31, 1999, we recaptured
approximately $1.1 million, net of allowances for loan losses.
DISCOUNTED LOAN PORTFOLIO. The carrying value of discounted loans (and not
unpaid principal balance) was approximately $1.2 million at December 31, 1999,
and they were serviced by WFSG or an affiliate of WFSG.
At December 31, 1999, approximately $3.8 million (unpaid principal
balance) of our discounted loan portfolio was 91 days or more delinquent, which
represented 92.7% of the entire portfolio. Subsequent to December 31, 1999, a
discounted loan with an unpaid principal balance of $1.2 million was paid off in
full.
We maintain an allowance for loan losses at a level that the Company
considers adequate to provide for probable losses based upon an evaluation of
known and inherent risks. During the year ended December 31, 1999, no provisions
for loan losses had been provided for discounted loans.
INVESTMENTS IN REAL ESTATE. Investments in real estate decreased
approximately $21.8 million during the year ended December 31, 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, a
commercial warehouse in Eugene, Oregon for proceeds of approximately $2.3
million and a commercial warehouse and land in Valencia, California for proceeds
of approximately $6.0 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.
We are currently in the process of marketing certain other commercial
properties for sale as we continue to reduce our level of investment in
commercial real estate income properties to increase liquidity for working
capital and reinvestment opportunities. All of the real estate investments are
held for sale (effective with the decision to sell all properties on October 1,
1999).
SHORT-TERM BORROWINGS. Short-term borrowings decreased to approximately
$96.8 million during the year ended December 31, 1999, resulting primarily from
the sale of subordinated mortgage-backed securities. Interest rates on
borrowings under these facilities are generally based on 30-day London Interbank
Offer Rate ("LIBOR") rates, plus a spread. Repurchase agreements are secured
lending arrangements which involve the borrower selling an asset to a lender at
a fixed price with the borrower having an obligation to repurchase the asset
within a specified period (generally 30 days) at a higher price reflecting the
interest cost of the loan. If the value of the underlying asset declines or 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"). Accordingly,
in an environment where lenders consistently mark down the value of the
underlying assets, a borrower can become subject to significant collateral
calls. If the borrower does not have sufficient cash to meet the collateral call
or additional unencumbered assets to pledge, it may be forced to sell assets to
repay the loan. If the Company experiences further downward marks to market of
its assets subject to repurchase agreements, it could experience cash collateral
calls, thereby reducing liquidity, or be forced to sell further assets, which
could result in losses.
OTHER BORROWINGS. At December 31, 1999, we had $64.4 million of other
borrowings. Of this amount, $45.5 million financed real estate investments of
$59.6 million and $18.9 million financed a loan with an unpaid principal balance
of $25 million. Other borrowings had a weighted average interest rate of 8.04%.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased to $50.9 million
during the year ended December 31, 1999. The net decrease in stockholders'
equity during this period was primarily attributable to a net operating loss of
$26.6 million offset by a decrease in accumulated other comprehensive loss of
$7.4 million. In addition, the Company entered into a partial settlement
agreement with WFSG in December 1999 which included the repurchase of 992,687
shares of the Company's common stock which reduced stockholders' equity by $2.2
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 year ended December 31, 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, sales of mortgage-backed
securities in June 1999 and sales of investments in real estate.
29
The adverse market conditions, which negatively impacted us during the
third and fourth quarters of 1998, began to stabilize during 1999, but remained
uncertain. As of December 31, 1999, we had no outstanding collateral calls,
compared with collateral calls outstanding as of December 31, 1998 of $4.4
million.
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 subordinated mortgage-backed securities and
approximately $20 million facility for the financing of a $25 million commercial
loan. The $64 million facility matures in October 2000 and becomes increasingly
expensive over time. The $25 million facility finances the Starrett-Lehigh loan
and matures on August 11, 2001, unless the Starrett-Lehigh loan is extended, in
which case this facility will mature on August 11, 2002. The Company believes
that this reduces the Company's reliance on short-term borrowings and eliminated
all then-outstanding collateral calls. At December 31, 1999, the Company had
outstanding financing arrangements with this lender of $57.1 million for
subordinated mortgage-backed securities and $18.9 million for loans. These
facilities require that cash received from the underlying collateral pay down
the related debt.
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."
In addition, given the current relative lack of liquidity for
below-investment-grade securities, we intend to maintain a relatively high
degree of liquidity.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK."
At December 31, 1999, we had total consolidated secured indebtedness of
$161.2 million, a reserve relating to the provision for the potential resolution
of disputes with WFSG of $2.3 million, accrued interest payable of $1.1 million,
a dividend payable of $4.1 million, as well as $1.2 million of other
liabilities. The consolidated secured indebtedness consisted of (i) $86.9
million of repurchase agreements, (ii) lines of credit aggregating $9.9 million
which are secured by loans and securities and (iii) $64.4 million outstanding of
other borrowings maturing between 2000 and 2008 which are secured by real estate
and loans.
Loans are financed through short-term or intermediate-term financing
facilities. If the value of the assets securing the loan declines as determined
by the lender, the lender may request that the amount of the loan be reduced by
cash payments from the borrower or additional collateral be provided by the
borrower (generally known as "collateral calls"). Accordingly, in an environment
where lenders consistently mark down the value of the underlying assets, a
borrower can become subject to collateral calls, which can have a significant
impact on liquidity. Similarly, if interest rates increase significantly, the
borrowing cost under the financing facility may also increase while the interest
rate on the assets securing the loan may not increase at the same time or to the
same degree. Real property acquisitions are financed with intermediate or
long-term mortgages with banks and other financial institutions.
We generally finance acquisitions of mortgage-backed securities through
committed and uncommitted thirty-day repurchase agreements with major Wall
Street investment banks. Repurchase agreements are secured lending arrangements
which involve the borrower selling an asset to a lender at a fixed price with
the borrower having an obligation to repurchase the asset within a specified
period (generally 30 days) at a higher price reflecting the interest cost of the
loan. If the lender marks the asset lower, the lender may request that the
amount of the loan be reduced by cash payments from the borrower or additional
collateral be provided by the borrower (generally known as "collateral calls").
Mortgage-backed securities which are subject to repurchase agreements, as well
as loans which secure other indebtedness, periodically are revalued by the
lender, and a decline in the value that is recognized by the lender (whether or
not the lender recognizes the full fair value of the security) may result in the
lender requiring us to provide additional collateral to secure the indebtedness.
As of December 31, 1999, the Company had approximately $109.2 million of
indebtedness under the terms of which the lender could request additional
collateral if the value of the underlying collateral declined (including
financing facilities for both mortgage-backed securities and loans). Although
the Company believes that the likelihood of significant declines in asset values
has decreased since the third quarter of 1998, the Company is seeking to
maintain a larger cash position and more unencumbered assets to deal with any
future potential collateral calls. In addition, the Company is seeking to
refinance some of this indebtedness with longer-term indebtedness which would
not be subject to the same collateral calls.
30
If we are unable to fund additional collateral requirements or to repay,
renew or replace maturing indebtedness on terms reasonably satisfactory to us,
we may be required to sell (potentially on short notice) a portion of our
assets, and could incur losses as a result. Furthermore, since from time to time
there is extremely limited liquidity in the market for subordinated and residual
interests in mortgage-related securities, there can be no assurance that we will
be able to dispose of such securities promptly for fair value in such
situations.
Based on our monthly interest and other expenses, monthly cash receipts
and collateral calls through February 29, 2000, we believe that our existing
sources of funds will be adequate for purposes of meeting our short-term
liquidity needs. There can be no assurance that this will be the case, however.
Material increases in interest expense from variable-rate funding sources,
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, in collateral calls or an
increase in market value of our mark-to-market financial assets generally would
positively affect our liquidity.
OTHER - YEAR 2000 COMPLIANCE
The Company and its service providers utilize a number of technologically
dependent systems to operate, service mortgage loans and manage mortgage and
other related assets. Many existing computer software programs and other
technologically dependent systems use two digits to identify the year in date
fields and, as such, could fail or create erroneous results by or at the Year
2000. Management closely monitored the Company's operations subsequent to
January 1, 2000 in relation to the Year 2000 matter and continues to monitor
such operations. The Company's information systems were operational with no
apparent adverse impact arising as a result of or associated with the Year 2000
matter. Additionally, the Company is not aware of, and has not experienced, any
Year 2000 issues at its key service providers, vendors, mortgage securities
servicers, and other third parties. Management considers the risk of any
residual potential Year 2000 matter failures to be minimal.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices, and equity prices. The
primary market risk to which the Company is exposed is interest rate risk, which
is highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations, and
other factors beyond the control of the Company. Changes in the general level of
interest rates can affect the Company's net interest income, which is the
difference between the interest income earned on interest-earning assets and the
interest expense incurred in connection with its interest-bearing liabilities,
by affecting the spread between the Company's interest-earning assets and
interest-bearing liabilities. Changes in the level of interest rates also can
affect, among other things, the ability of the Company to acquire loans, the
value of the Company's mortgage-backed securities and other interest-earning
assets, and its ability to realize gains from the sale of such assets.
It is the objective of the Company to attempt to control risks associated
with interest rate movements. In general, the Company's strategy is to limit our
exposure to earnings variations and variations in the value of assets and
liabilities as interest rates change over time. Our asset and liability
management strategy is formulated and monitored regularly to review, among other
things, the sensitivity of our assets and liabilities to interest rate changes,
the book and market values of assets and liabilities, unrealized gains and
losses, including those attributable to hedging transactions, purchase and
securitization activity, and maturities of investments and borrowings.
31
The following tables quantify the potential changes in net interest income
and net portfolio value as of December 31, 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 and instantaneous. Net portfolio value is
calculated as the sum of the value of off-balance sheet instruments and the
present value of cash in-flows generated from interest-earning assets net of
cash out-flows in respect of interest-bearing liabilities. The cash flows
associated with the loan portfolios and securities available for sale are
calculated based on prepayment and default rates that vary by asset but not by
changes in interest rates. Projected losses, as well as prepayments, are
generated based upon the actual experience with the subject pool, as well as
similar, more seasoned pools. To the extent available, loan characteristics such
as loan-to-value ratio, interest rate, credit history and product types are used
to produce the projected loss and prepayment assumptions that are included in
the cash flow projections of the securities. The following tables apply the U.S.
Treasury yield curve generally for assets and LIBOR for repurchase agreement
liabilities and assume a uniform change in both rates. The tables assume that
changes in interest rates occur instantaneously. The tables also reflect that
the Company has a significant exposure to LIBOR rates since its short-term
repurchase agreement borrowings are generally based on LIBOR rates. Actual
results could differ significantly from those estimated in the tables.
Projected Percent Change In
- -------------------------------------------------------------------------------
Change in Interest Rates (1) Net Interest Income Net Portfolio Value
- ---------------------------- ------------------- -------------------
-400 Basis Points 35.0% 13.2%
-300 Basis Points 26.3% 10.1%
-200 Basis Points 17.5% 6.9%
-100 Basis Points 8.8% 3.5%
0 Basis Points 0.0% 0.0%
100 Basis Points -8.8% -3.5%
200 Basis Points -17.5% -7.0%
300 Basis Points -26.3% -10.5%
400 Basis Points - 35.0% -14.0%
- ----------------
(1) Assumes that uniform changes occur instantaneously in both the yield on
10-year U.S. Treasury notes and the interest rate applicable to U.S.
dollar deposits in the London interbank market.
Change in Monthly Change in
Change in Interest Rates (1) Net Interest Income Net Portfolio Value
- ---------------------------- ------------------- -------------------
-400 Basis Points $ 276,850 $ 6,735,354
-300 Basis Points $ 207,638 $ 5,177,820
-200 Basis Points $ 138,425 $ 3,510,083
-100 Basis Points $ 69,213 $ 1,770,399
0 Basis Points - -
100 Basis Points $ (69,213) $ (1,796,530)
200 Basis Points $ (138,425) $ (3,592,758)
300 Basis Points $ (207,638) $ (5,370,329)
400 Basis Points $ (276,850) $ (7,128,251)
- ---------------
(1) Assumes that uniform changes occur instantaneously in both the yield on
10-year U.S. Treasury note and the interest rate applicable to U.S. dollar
deposits in the London interbank market.
32
The following table sets forth information as to the type of funding used
to finance the Company's assets as of December 31, 1999. As indicated in the
table, a large percentage of the Company's fixed rate assets are financed by
floating rate liabilities and the Company's variable rate assets are generally
funded by variable rate liabilities which use the same index.
Assets and Liabilities
As of December 31, 1999
(Dollars in Thousands)
Interest-Bearing Assets Basis Amount Coupon Type Liability Type
- ----------------------- ------------ ----------- --------- ----
Fixed Assets, Financed Floating $ 110,175 Fixed $ 90,374 LIBOR
Fixed Assets, No Financing 5,275 Fixed - None
Floating Assets, Financed Floating 25,000 LIBOR 18,920 LIBOR
Floating Assets, No Financing 1,031 COFI - None
----------- -----------
Sub-total 141,481 109,294
Other Assets
Investments in Real Estate 63,225 N/A 51,933 Fixed
Cash and Cash Equivalents 5,862 N/A - None
Investment in WFSG 3,953 N/A - None
Other 6,291 N/A - None
----------- -----------
Sub-total 79,331 51,933
Liability Only
Dividends - 4,090 Fixed
Accounts Payable and Accrued
Liabilities - 4,623 None
----------- -----------
Sub-total - 8,713
- ----------------------------------------------------------------------------------------------------------
Grand Total $ 220,812 $ 169,940
==========================================================================================================
Asset and liability management involves managing the timing and magnitude
of the repricing of assets and liabilities. It is the objective of the Company
to attempt to control risks associated with interest rate movements. Asset and
liability management can utilize a wide variety of off-balance sheet financial
techniques to assist it in the management of interest rate risk. For example, in
hedging the interest rate and exchange rate exposure of a foreign currency
denominated asset or liability, we may enter into hedge transactions to counter
movements in the different currencies as well as interest rates in those
currencies. These hedges may be in the form of currency and interest rate swaps,
options, and forwards, or combinations thereof. No such techniques were in use
as of December 31, 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.
33
The following tables set forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at December
31, 1999.
As of December 31, 1999
(Dollars in thousands)
Within 4 to 12 One Year to More than
3 Months Months 3 Years 3 Years TOTAL
--------- --------- --------- --------- ---------
Interest-sensitive assets(1):
Cash and cash equivalents $ 5,862 $ -- $ -- $ -- $ 5,862
Securities available for sale -- -- -- 104,572 104,572
Loans(2) 25,026 119 248 6,241 31,634
DIP loan 165 777 2,457 1,601 5,000
Note receivable - WFSG -- 275 -- -- 275
--------- --------- --------- --------- ---------
Total rate-sensitive assets $ 31,053 $ 1,171 $ 2,705 $ 112,414 $ 147,343
========= ========= ========= ========= =========
Interest-sensitive liabilities :
Repurchase agreements $ 109,294 $ -- $ -- $ -- $ 109,294
Notes payable 6,442 -- -- -- 6,442
Borrowing on real estate -- 1,076 -- 44,415 45,491
Dividends payable -- 4,090 -- -- 4,090
--------- --------- --------- --------- ---------
Total rate-sensitive liabilities $ 115,736 $ 5,166 $ -- $ 44,415 $ 165,317
========= ========= ========= ========= =========
Interest rate sensitivity gap (84,683) (3,995) 2,705 67,999
Cumulative interest rate sensitivity gap (84,683) (88,678) (85,973) (17,974)
Cumulative interest rate sensitivity gap as
a percentage of total rate-sensitive
assets -57% -60% -58% -12%
- ----------------
(1) Real estate property holdings are not considered interest rate sensitive.
(2) Amortizing fixed rate loans are assumed to prepay at a Constant Prepayment
Rate ("CPR") of 10%.
At December 31, 1998, we were a party to a swap contract in connection
with our investment in a commercial mortgage loan secured by real property in
the United Kingdom ("UK"). The swap contract, which covered the approximate
five-year term of the asset and related financing, was intended to hedge the
interest rate basis and currency exposure between UK Libor (the lending rate)
and US Libor (the borrowing rate) payments, as well as the principal (notional)
amount of the loan which, as of December 31, 1998, was $49.7 million. Under the
terms of the agreement, the settlement was in U.S. dollars. The loan and the
related swap were disposed of subsequent to December 31, 1998.
At December 31, 1998, we were also party to a swap in connection with our
investment in real estate in the UK. The notional amount is GBP 11,224,000 in
which we convert floating rate financing to a fixed rate of interest. Subsequent
to December 31, 1998, the terms of this swap were incorporated into the
refinancing of the related asset, and the Company was released as a party to the
swap.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of Part IV of this Report.
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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 of interest with the services it performs
for WFSG and its affiliates.
The Company recently decided to become internally managed and this has
resulted in disputes between the Company, on the one hand, and WFSG and certain
of its affiliates on the other. The Company's business and investment affairs
had been managed by WRSC pursuant to the Management Agreement and the Company
had received managerial and administrative services from WRSC thereunder.
The report of Arthur Andersen LLP on the financial statements of the
Company for the 1998 year (the Company was formed on October 24, 1997, commenced
operations on April 6, 1998 and was audited for the one year ended December 31,
1998) did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope or accounting principles,
except that, in its report dated March 19, 1999, Arthur Andersen LLP included a
matter-of-emphasis paragraph stating "As discussed in Note 1, Wilshire Realty
Services Corporation, a wholly owned subsidiary of Wilshire Financial Services
Group Inc. ("WFSG"), is the manager of the Company. Furthermore, Wilshire Credit
Corporation ("WCC"), an affiliate of WFSG, provides loan servicing and real
property management services to the Company. On March 3, 1999, WFSG filed a
voluntary prepackaged petition for relief under Chapter 11 of the U.S.
Bankruptcy Code. The WFSG plan of reorganization includes the transfer of
servicing operations conducted by WCC to a newly formed subsidiary of WFSG. As
discussed in Note 2, the Company has also entered into several transactions with
these affiliated entities." However, the report of Arthur Andersen LLP for 1998,
dated March 19, 1999 and included in this Form 10-K, does not include the
matter-of-emphasis paragraph. During the period from the Company's inception,
October 24, 1997, through November 12, 1999 there were no disagreements with
Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report on the financial statements of the Company.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information about our executive officers and
directors as of February 29, 2000. The business address of each executive
officer and director is the address of the Company, 1310 SW 17th Street,
Portland, OR 97201, and each executive officer and director is a United States
citizen.
Andrew A. Wiederhorn, age 34, has been the Chairman of the Board of
Directors and Chief Executive Officer of the Company since its formation. Mr.
Wiederhorn also serves as Treasurer and Secretary. Until August 1999, Mr.
Wiederhorn was also the Chairman of the Board of Directors, Chief Executive
Officer, Secretary, Treasurer and a director for both WRSC and WFSG. In 1987,
Mr. Wiederhorn founded WCC and served as the Chief Executive Officer of WCC and
certain of its affiliates until August 1999. Mr. Wiederhorn received his B.S.
degree in Business Administration from the University of Southern California.
Lawrence A. Mendelsohn, age 38, has been a director and the President of
the Company since its formation. Until August 1999, Mr. Mendelsohn was also the
President of WFSG and WCC. From January 1992 until February 1993, Mr. Mendelsohn
was Vice President, Principal and Head of Capital Markets for Emerging Markets
at Bankers Trust New York Corporation/BT Securities Corporation. From August
1987 until January 1992, Mr. Mendelsohn was the Vice President, Senior Options
Principal and Head of Proprietary Trading for Equities, Equity Options and
Distressed Debt at J.P. Morgan and Co./J.P. Morgan Securities. Mr. Mendelsohn
received an A.B. degree in Economics from the University of Chicago, an M.A.
degree in International Politics from the University of Texas, an M.S. degree in
Business Research from the University of Southern California and a Ph.D./ABD in
Finance from the University of Southern California.
David C. Egelhoff, age 51, has been a director of the Company since its
formation. Mr. Egelhoff has been President of Macadam Forbes, Inc., a commercial
real estate brokerage company headquartered in Portland, Oregon since 1981. Mr.
Egelhoff is a licensed real estate broker who has extensive brokerage
experience, including transactions with REITs. He is a member of the Oregon and
National Board of Realtors and the Builders and Owners Management Association.
Mr. Egelhoff received a degree in Finance and Marketing from the University of
Wisconsin-Madison in 1971.
Jordan D. Schnitzer, age 48, has been a director since March 27, 1998. Mr.
Schnitzer has been President of Jordan Schnitzer Properties, an owner and
developer of commercial and residential properties in Oregon, Washington and
California, since 1976. Mr. Schnitzer is also President of Harsch Investment
Properties, LLC, which owns and operates a portfolio of 25 properties in seven
western U.S. states. Mr. Schnitzer received his undergraduate degree in
Literature from the University of Oregon in 1973 and his J.D. from the
Northwestern School of Law of Lewis and Clark College in 1976.
Patrick Terrell, age 45, became a director of the Company on December 28,
1998. Mr. Terrell founded Leading Technology Company in 1986 and worked as the
Chief Executive Officer until he sold the company in 1992. Mr. Terrell was also
founder and Chief Executive Officer of Byte Shops Computer Stores, which he
founded in 1976 and sold to Pacific Telesis in 1985. Mr. Terrell currently
serves on the boards of B. S. Medical, United Soil Recycling, Microware, Inc.
and Lakeside Associates. Mr. Terrell attended Oregon State University prior to
forming Byte Shops computer stores in 1976.
Chris Tassos, age 42, has been Executive Vice President and Chief
Financial Officer of the Company since its formation. Until October 1999, Mr.
Tassos was Executive Vice President and Chief Financial Officer of WFSG and
Executive Vice President of WCC. From August 1995 until June 1997, he was Senior
Vice President of WCC. From March 1992 until February 1995, he was the Chief
Financial Officer and/or Senior Vice President of Finance of Long Beach Mortgage
Company (formerly Long Beach Bank). Mr. Tassos received a B.A. degree from
California State University, Fullerton. From July 1979 until April 1984 and May
1985 until September 1990, Mr. Tassos was an auditor for Deloitte & Touche LLP.
Richard P. Brennan, age 43, is Executive Vice President, Chief Investment
Officer. From March 1999 until October 1999, Mr. Brennan was Executive Vice
President, Chief Investment Officer of WFSG. Mr. Brennan was Managing Director,
Head of European Loan, Distressed Asset Trading, and Real Estate Investments for
Donaldson, Lufkin and Jenrette, Inc. from March 1998 to February 1999. From
February 1994 to March 1998, Mr. Brennan was Managing Director, Head of European
Loans and Distressed Asset Trading for Merrill Lynch & Co.
Robert G. Rosen, age 33, is Executive Vice President of the Company. From
November 1997 until October 1999, Mr. Rosen was Senior Vice President, Asset
Securitization and Capital Markets for WFSG. Mr. Rosen was the Vice President of
Securitization at BTM Capital Corp., a wholly-owned subsidiary of the Bank of
Tokyo-Mitsubishi, Ltd. from March 1997 until October 1997. From
36
January 1995 until March 1997, Mr. Rosen was a Director of Black Diamond
Advisors, Inc., a firm specializing in securitization and capital markets needs
of finance companies. From January 1994 to January 1995, Mr. Rosen was with
Kidder Peabody and Co. in the Asset-Backed Securitization Group.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires a company's
directors and executive officers, and beneficial owners of more than 10% of the
common stock of such company, to file with the Securities and Exchange
Commission initial reports of ownership and periodic reports of changes in
ownership of the company's securities. Based solely on a review of Forms 3, 4
and 5 and amendments thereto furnished to us for the year ended December 31,
1999, none of the company's directors, officers, or beneficial owners of more
than 10% of the Company's Common Stock failed to timely furnish reports on Forms
3, 4 or 5.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Directors
Each member of the Board of Directors who is not an officer or employee of
the Company is paid a fee of $1,000 per meeting for each Board of Directors'
meeting and $100 per hour for each committee meeting not held on a regularly
scheduled meeting date attended by such member, either in person or
telephonically. Officers and employees of the Company who also serve as
directors do not receive any retainer or additional fees for serving as a
directors. Under our Incentive Stock Option Plan, on the last trading day of
each calendar quarter, we automatically grant to each director who is not also
an employee of the Company or a subsidiary of the Company an option to purchase
the number of shares of Common Stock equal to $5,000 divided by the fair market
value per share of the Common Stock on the date of grant (i.e. its closing price
as listed on the NASDAQ on such date). In addition, each director who is not
also an employee of the Company or a subsidiary of the Company is eligible for
annual grants of options. In 1999, the Company issued options to purchase
468,000 shares of Common Stock to the directors.
Summary Compensation Table
The following table sets forth the total compensation paid or accrued by
the Company for services rendered during the year ended December 31, 1999 to the
Chief Executive Officer of the Company, and to each of the four other most
highly compensated executive officers of the Company whose total cash
compensation for the year ended December 31, 1999 exceeded $100,000 (the "Named
Executive Officers").
Long-Term
Actual Compensation Compensation
-------------------------------------------- -----------------------
Securities Underlying
Name and Principal Position Year Salary ($) Bonus ($) (1) Options/SARs (#)
- -------------------------------------- -------- ------------- ----------------- -----------------------
Andrew A. Wiederhorn
Chairman, Chief Executive
Officer, Secretary and Treasurer 1999 $ 84,091 -- 630,000
Lawrence A. Mendelsohn
President 1999 $ 77,083 -- 350,000
Robert G. Rosen
Executive Vice President, Capital
Markets 1999 $ 46,627 $ 310,909 210,000
Richard P. Brennan
Executive Vice President and Chief
Investment Officer 1999 $ 46,627 $ 122,462 210,000
Chris Tassos
Executive Vice President and
Chief Financial Officer 1999 $ 46,627 $ 92,424 120,000
- ----------
(1) Bonuses are shown net of a $555,000 reimbursement from WFSG to the Company
under a settlement agreement.
37
During the year ended December 31, 1998 and until their employment with
the Company, the executive officers of the Company did not receive any
compensation from the Company for their services. To the extent such officers
were also officers of WFSG, they were compensated by WFSG for their services.
WFSG is the parent company of WRSC, which received certain fees from the Company
for management services it provided the Company under a management agreement.
Following the Company's decision to become internally managed, the Company
entered into the employment agreements with its executive officers described
above. See Item 1. - BUSINESS.
Option/SAR Grants in Last Fiscal Year
The following table provides information concerning stock options granted
by the Company during the year ended December 31, 1999 to each of the Named
Executive Officers.
Potential
% of Total Realizable Value
Options/SARs at Assumed Annual Rates
Number of Granted to of Stock Price
Securities Employee in Exercise Appreciation for Option
Underlying Year Ended or Term (1)
Options/SARs December 31, Base Price Expiration ------------------------
Name Granted (#) 1999 ($/sh) Date 5% 10%
- ------------------------------ --------------- --------------- ------------ -------------- ----------- ----------
Andrew A. Wiederhorn 630,000 39.9% $4.53 2009 $ 353,000 $2,253,000
Lawrence A. Mendelsohn 350,000 22.2% $4.53 2009 $ 196,000 $1,251,000
Robert G. Rosen 210,000 13.3% $4.53 2009 $ 118,000 $ 751,000
Richard P. Brennan 210,000 13.3% $4.53 2009 $ 118,000 $ 751,000
Chris Tassos 120,000 7.6% $4.53 2009 $ 67,000 $ 429,000
- ----------
(1) These amounts represent hypothetical gains that could be achieved for the
options if they are exercised at the end of their terms. The assumed 5%
and 10% rates of stock price appreciation are mandated by rules of the
Securities and Exchange Commission. They do not represent the Company's
estimate or projection of future prices of the Common Stock.
Employment and Other Arrangements
The Company has entered into substantially similar employment agreements
with Andrew A. Wiederhorn (as Chief Executive Officer), Lawrence A. Mendelsohn
(as President), Chris Tassos (as Chief Financial Officer), Richard P. Brennan
(as Chief Investment Officer), and Robert G. Rosen (as Executive Vice President)
(each individually, an "Executive" and collectively, the "Executives"). Each
agreement provides for an initial three-year term which is automatically
renewable for successive two-year terms (the "Employment Term") unless either
party gives written notice to the other at least ninety days prior to the
expiration of the then Employment Term.
The agreements provide for an annual base salary of $300,000 for Mr.
Wiederhorn, $275,000 for Mr. Mendelsohn, and $250,000 for Mr. Tassos, Mr.
Brennan, and Mr. Rosen (which may be increased, but not decreased, by the
Compensation Committee of the Board of Directors) and an annual bonus for each.
The bonus payable is based upon the Company's return on equity for which
purposes equity is increased by the amount of unrealized losses shown under the
heading "other comprehensive income or loss" during the bonus year. If the
Company's return on equity determined on a post bonus basis is 15% or more, the
Executives will be entitled to share in a bonus pool equal to 20% of after-tax
income (prior to subtracting the amount of the bonus pool). If the Company's
return on equity is between 5% and 15%, the bonus pool will equal 10% of such
after-tax income. If the return on equity determined on a post-bonus basis is
less than 5%, the bonus formula results in no bonus to the Executives except for
a discretionary bonus approved by the Compensation Committee of the Board of
Directors. The agreements also provide that a portion of the anticipated annual
bonus may be advanced to the executive on a quarterly basis; provided, however,
that if the anticipated annual bonus declines in future quarters, such executive
may need to repay all or a portion of any such advance.
The agreements also provide that the Executives may participate in the
Company's Incentive Stock Option Plan.
The agreements also provide that during the Employment Term and
thereafter, the Company will indemnify the Executives to the fullest extent
permitted by law, in connection with any claim against the Executive as a result
of the Executive serving as an officer or director of the Company or in any
capacity at the request of the Company in or with regard to any other entity,
employee benefit plan or enterprise. Following the Executives' termination of
employment, the Company will continue to cover the Executives even if the
Executives have ceased to serve in such capacity.
38
The agreements may be terminated at any time by the Executive for Good
Reason or with or without Good Reason during the Change in Control Protection
Period (if a Change in Control occurs) or by the Company with or without Cause
(as each capitalized term is defined in the agreement).
If termination is the result of Executive's death, the Company will pay to
the Executive's spouse (or his estate), an amount equal to (i) any earned but
not yet paid compensation, (ii) a pro-rated bonus, (iii) any other amounts or
benefits due under then applicable employee benefit plans of the Company (in
accordance with such plan, policy or practice), (iv) payment on a monthly basis
of 6 months of base salary to Executive's spouse or dependents and (v) continued
medical coverage for the Executive's spouse and dependents for up to one year.
In addition, the Executive will receive accelerated full vesting under all
outstanding equity-based and long-term incentive plans. If Executive's
employment is terminated by reason of disability, the Executive will be entitled
to receive payments and benefits to which his representatives would be entitled
in the event of his termination by reason of death, provided that the payment of
base salary will be reduced by any long-term disability payments under any
policy maintained by the Company.
The Agreements also provide for the Company to make a recourse loan to
each Executive up to $50,000 annually for the purchase of the Company's stock by
such Executive. The loans bear interest at the prime rate. Interest is not paid
in cash but payable in kind on an annual basis (i.e., compounded annually). Upon
termination, the loan becomes due and payable six months after the date of
termination. At December 31, 1999, the Company had outstanding loans of $198,000
to the Executives.
Compensation Committee Report on Executive Compensation
The Compensation Committee report below shall not be deemed incorporated
by reference by any general statement incorporating by reference this Annual
Report on Form 10-K into any filing under the Securities Act of 1933, as amended
(the "Securities Act") or under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), except to the extent the Company specifically incorporates
this information by reference, and shall not otherwise be deemed filed under the
Securities Act or Exchange Act. The Compensation Committee of the Board of
Directors of the Company (the "Committee") is made up exclusively of
non-employee directors. The Committee administers the executive compensation
programs of the Company. All actions of the Committee pertaining to executive
compensation are submitted to the Board of Directors for approval.
The Company's executive compensation program is designed to attract,
retain, and motivate high caliber executives and to focus the interests of the
executives on objectives that enhance stockholder value. These goals are
attained by emphasizing "pay for performance" by having a portion of the
executive's compensation dependent upon business results and by providing equity
interests in the Company. The principal elements of the Company's executive
compensation program are base salary, bonus, and stock options. In addition, the
Company recognizes individual contributions as well as overall business results,
using a discretionary bonus program.
Base Salary
Base salaries for the Company's executives are intended to reflect the
scope of each executives' responsibilities, the success of the Company, and
contributions of each executive to that success. Executive salaries are adjusted
gradually over time and only as necessary to meet this objective. Increases in
base salary may be moderated by other considerations, such as geographic or
market data, industry trends or internal fairness within the Company.
The base salaries for Andrew A. Wiederhorn, Lawrence A. Mendelsohn, Chris
Tassos, Richard P. Brennan, and Robert G. Rosen for 1999 are set forth in their
respective employment agreements, which are described under "Employment and
Other Arrangements."
Bonuses
Annual bonuses were paid by the Company in 1999. The amount of the annual
discretionary and other bonuses paid by the Company was determined by the
Committee in conjunction with settlement discussions with WFSG.
Stock Option Plan
At its initial public offering in April 1998, the Company adopted an
Incentive Stock Option Plan (the "Stock Plan"). The purpose of the Stock Plan is
to enable the Company to attract, retain and motivate key employees and
directors by providing them with equity participation in the Company.
Accordingly, the Stock Plan permits the Company to grant stock options,
restricted stock and stock appreciation rights (collectively "Awards") to
employees, directors, consultants, and vendors of the Company and subsidiaries
of the Company. The Board of Directors has delegated administration of the Stock
Plan to the Committee.
39
Under the Stock Plan, the Committee may grant stock options with an
exercise price not less than the fair market value of the shares covered by the
option on the date the option is granted. The Committee may also grant Awards of
restricted shares of Common Stock. Each restricted stock Award would specify the
number of shares of Common Stock to be issued to the recipient, the date of
issuance, any consideration for such shares and the restrictions imposed on the
shares (including the conditions of release or lapse of such restrictions). The
Committee may also grant Awards of stock appreciation rights. A stock
appreciation right entitles the holder to receive from the Company, in cash or
Common Stock, at the time of exercise, the excess of the fair market value at
the date of exercise of a share of Common Stock over a specified price fixed by
the Committee in the Award, multiplied by the number of shares as to which the
right is being exercised. The specified price fixed by the Committee will not be
less than the fair market value of shares of Common Stock at the date the stock
appreciation right was granted.
In 1999, the Company issued options for a total of 1,580,000 shares of
Common Stock to executive officers and employees.
Policy of Deductibility of Compensation
Section 162(m) of the Internal Revenue Code limits the Company's tax
deduction to $1 million for compensation paid to the Named Executive Officers,
unless certain requirements are met. One of these requirements is that
compensation over $1 million must be performance based. The Committee intends to
continue to use performance-based compensation, which should minimize the effect
of these regulations. However, the Committee strongly believes that its primary
responsibility is to provide a compensation program that will attract, retain
and reward the executive talent necessary to maximize the return to
stockholders, and that the loss of a tax deduction may be necessary in some
circumstances. Base salary does not qualify as performance-based compensation
under IRS regulations.
CEO Compensation and President Compensation
Andrew A. Wiederhorn was appointed the Company's Chief Executive Officer
and Lawrence A. Mendelsohn was appointed its President at its formation. The
base salary for each of these officers for 1999 was determined by the Committee
and is set forth in their employment agreements.
COMPENSATION COMMITTEE
Andrew A. Wiederhorn
Lawrence A. Mendelsohn
David C. Egelhoff
Patrick Terrell
40
PERFORMANCE GRAPH
The Performance Graph shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act or under the Exchange Act, except to
the extent the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under the Securities Act or the Exchange
Act.
The following Performance Graph covers the period beginning April 6, 1998
when our Common Stock was first traded on the NASDAQ Stock Market through
December 31, 1999. The graph compares the shareholder return on the Company's
Common Stock to the Standard & Poor's 500 Stock Index ("S&P 500") and a peer
group of companies ("PGI").
[THE FOLLOWING TABLE WAS PRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
[OBJECT OMITTED]
1998 Measurement Period (1)(2)
--------------------------------------------------------
April 6, December 31, December 31,
1998 1998 1999
--------------- -------------- -----------------
Company $ 100.00 $ 18.56 $ 12.88
PGI(3) $ 100.00 $ 46.81 $ 31.19
S&P 500 $ 100.00 $ 109.62 $ 131.02
- ----------
(1) Assumes all distributions to stockholders are reinvested on the payment
dates.
(2) Assumes $100 invested on April 6, 1998 in our Common Stock, the S&P 500
Index and the PGI.
(3) The companies included in the PGI are Anthracite Capital, Amresco Capital
Trust Inc., Resource America Inc., Dynex Capital Inc., Hanover Capital
Mortgage Holdings, Novastar Financial Inc. and Capital Trust.
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows as of February 29, 2000 the beneficial ownership
of common stock with respect to (i) each person who was known by the Company to
own beneficially more than 5% of the outstanding shares of the Company's common
stock, (ii) each director and nominee for director, (iii) each executive officer
named below, and (iv) directors and executive officers as a group.
Amount and Nature
of Beneficial Percent of
Name and Address of Beneficial Owner (1) Ownership (2) Class
- ------------------------------------------------------------------------------ -------------------- --------------
Andrew A. Wiederhorn............................................... 821,636(3) 7.8
Lawrence A. Mendelsohn............................................. 508,338(4) 4.8
Donald Berchtold................................................... 10,814(5) *
Richard P. Brennan................................................. 75,000 *
Robert L. Moir..................................................... 0 *
Robert G. Rosen.................................................... 26,333(6) *
Robert A. Sprouse III.............................................. 0 *
R. Scott Stevenson................................................. 100 *
Chris Tassos....................................................... 15,860(7) *
David C. Egelhoff.................................................. 17,300(8) *
Jordan D. Schnitzer................................................ 498,640(8) 4.9
Patrick Terrell.................................................... 305,500(9) 2.9
Friedman, Billings, Ramsey Group, Inc.............................. 779,484(10) 6.7
Strome Investment Management L.P................................... 992,000(11) 8.6
Clarence B. Coleman and Joan F. Coleman............................ 637,189(12) 5.5
All executive officers and directors as a group (9 persons)........ 1,982,417(13) 18.8
(1) The address for each stockholder, other than Friedman, Billings, Ramsey
Group, Inc., Strome Investment Management, L.P., and Clarence B. Coleman
and Joan F. Coleman is c/o Wilshire Real Estate Investment Inc., 1310 SW
17th Street, Portland, OR 97201. The address for Friedman, Billings,
Ramsey Group, Inc. is 1001 19th Street North, Arlington, VA 22209-1710.
The address for Strome Investment Management, L.P. is 100 Wilshire Blvd.,
15th Floor, Santa Monica, CA 90401. The address for Clarence B. Coleman
and Joan F. Coleman is 5530 Fernhoff Road, Oakland, CA 94619.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of Common Stock subject to
options or warrants exercisable within 60 days of February 28, 1999 are
deemed outstanding for computing the percentage beneficially owned by the
person or group holding such options or warrants, but are not deemed
outstanding for computing the percentage of any other person. Except as
noted, each shareholder has sole voting power and sole investment power
with respect to all shares beneficial owned by such shareholder.
(3) Includes 603,001 shares of Common Stock held by Mr. Wiederhorn's spouse,
38,636 shares of Common Stock held by Mr. Wiederhorn's minor children, and
100,000 shares of Common Stock held by a partnership controlled by Mr.
Wiederhorn's spouse.
(4) Includes 109,736 shares of Common Stock held by Mr. Mendelsohn's spouse
and 293,602 shares of Common Stock held by two limited liability companies
controlled by Mr. Mendelsohn's spouse and 80,000 shares of Common Stock
held by a limited partnership controlled by Mr. Mendelsohn and his spouse.
(5) Includes 7,454 shares held by Mr. Berchtold's minor children.
(6) Includes 3,333 shares of Common Stock issuable upon the exercise of
outstanding options.
(7) Includes 12,500 shares of Common Stock issuable upon the exercise of
outstanding options.
(8) Includes 6,500 shares of Common Stock issuable upon the exercise of
outstanding options.
(9) Includes 5,500 shares of Common Stock issuable on the exercise of
outstanding options and 50,000 shares held by Mr. Terrell's spouse.
(10) Based upon information obtained from a Schedule 13G filed with the
Securities and Exchange Commission on or about February 14, 2000.
(11) Based upon information obtained from a Schedule 13D filed with the
Securities and Exchange Commission on or about January 28, 2000. The
Schedule 13D was filed on behalf of (i) Strome Partners, L.P. , (ii)
Strome Offshore Limited , (iii) Strome Hedgecap Fund, L.P. , (iv) Strome
Hedgecap Limited, (v) Strome Investment Management, L.P. , (vi) SSCO, Inc.
("SSCO"), and (vii) Mark Strome, a settler and trustee of the Mark E.
Strome Living Trust, dated 1/16/97, as the controlling shareholder of
SSCO.
(12) Based upon information obtained from a Schedule 13D filed with the
Securities and Exchange Commission on or about August 26, 1999.
(13) Includes 34,333 shares of Common Stock issuable upon the exercise of
outstanding options.
* Less than one percent.
42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Background
Prior to September 1999, the Company and WFSG had the same senior
management team, though the Company had a different shareholder base and the
majority of its directors were independent, and the Company's business affairs
and day-to-day operations were managed by WRSC, a wholly-owned subsidiary of
WFSG, pursuant to a management agreement ("Management Agreement"). After
September 1999, the Company's independent directors decided that the Company
should be internally managed and the Company and WFSG ceased to have the same
senior executives and no longer had any common directors. In addition, the
Company is currently engaged in an ongoing dispute with WFSG relating to the
termination of the contractual and other relationships which existed between the
companies prior to September 1999. Accordingly, the Company no longer views WFSG
and its subsidiaries as affiliated parties.
Relationships Prior to September 1999
Prior to September 1999, we had a number of contractual relationships with
WFSG and its affiliates. The Company's business affairs and day-to-day
operations were managed by a subsidiary of WFSG, pursuant to a management
agreement and the Company had entered into loan servicing agreements with
Wilshire Credit Corporation ("WCC"), an affiliate of WFSG, and Wilshire
Servicing Company U.K. Limited, a wholly-owned subsidiary of WFSG (collectively,
the "Servicers"). Under these servicing agreements, the Servicers provided loan
and real property management services to us, including billing, portfolio
administration and collection services. In return, we agreed to pay each of the
Servicers a fee at market rates for servicing our investments and to reimburse
them for certain out-of-pocket costs. During 1999, servicing fees and
reimbursement for expenses totaled $256,000 and $49,000, respectively and
management fees under the Management Agreement totaled $2,404,000. We prepaid
$3.2 million of future service fees as part of the WFSG and WCC restructuring
described below, although WFSG had disputed this amount in the past (as well as
servicing eligibility for application of the credit), suggesting that the
original amount was $2.3 million.
Conflicts relating to WFSG's Restructuring
A conflict of interest also arose out of our status as a creditor of WFSG
in connection with its debt restructuring. In addition to holding certain of
WFSG's publicly traded notes, we had an outstanding receivable of approximately
$17.0 million from WFSG, which bore interest at 13% per annum. WFSG incurred
significant losses as a result of adverse market conditions in 1998 and on March
3, 1999 filed a prepackaged plan of reorganization (the "Restructuring Plan")
with the U.S. Bankruptcy Court for the District of Delaware as part of a
voluntary bankruptcy filing under Chapter 11 of the U.S. Bankruptcy Code. Prior
to the solicitation of WFSG's Restructuring Plan, the unofficial noteholders
committee of WFSG (which did not include the Company) negotiated a compromise
and settlement of the Company's claim against WFSG in respect of the $17.0
million receivable. The Company was represented by its independent directors in
connection with the compromise and settlement negotiations. Under this
compromise and settlement, if the Company funded the full amount of the
debtor-in-possession facility described below, 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 and treated the same as the other holders of WFSG's
13% Series B Notes. The business decision to provide the debtor-in-possession
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 had priority as a matter of law and was fully secured by the stock of
WFSG's banking subsidiary, First Bank of Beverly Hills, F.S.B. Without funding
of the debtor-in-possession facility, it is unlikely that the Company would have
received as favorable treatment for its investments. The new note would bear
interest at 6%, and therefore, the carrying value of the receivable was reduced
by $5.9 million at December 31, 1998 to reflect the reduction in interest rate.
The Restructuring Plan was approved by the court on April 12, 1999 and, on
June 10, 1999, WFSG emerged from bankruptcy pursuant to the Restructuring Plan.
As part of the Plan, during the quarter ended March 31, 1999, the Company agreed
to provide WFSG with debtor-in-possession financing pursuant to which the
Company agreed to lend up to $10.0 million (the "DIP Facility"). The DIP
Facility bears interest at a rate of 12% per annum 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 Company
loaned $5.0 million under the DIP Facility on March 3, 1999 and did not provide
WFSG with the remaining balance. 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, the Company acquired 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 owed by WFSG to the Company.
43
In connection with the restructuring of WCC's debt, we paid $15 million to
WCC in January 1999, consisting of a payment of amounts owed by the Company to
WCC of $11.8 million and the prepayment of $3.2 million of future service fees
for a release of a guarantee by the Company of $35 million of WCC's indebtedness
and of any and all claims against us by the guaranteed party. At that time, we
had approximately $3.2 million of prepaid future service fees with WCC. However,
this figure (as well as servicing eligibility for application of the credit) had
been disputed by WFSG in the past, which claimed that the amount owed to WCC was
approximately $900,000 higher thereby reducing the amount of the prepayment
credit to $2.3 million.
Relations Following September 1999
As noted above, the Company is engaged in an ongoing dispute with WFSG
relating to the termination of the extensive contractual and other relationships
which formerly existed between the companies. The decision to become internally
managed and cease to utilize the services of WFSG and its affiliates has
resulted in disputes between the Company and WFSG, which include disputes over
the termination of the Management Agreement, the applicability of a facilities
sharing agreement and other matters.
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 1999. In connection with this matter, the Company,
without admission, recorded a reserve for potential resolution of disputes with
WFSG of $4.1 million at September 30, 1999. Subsequently, the Company entered
into a partial settlement agreement dated as of December 10, 1999 with WFSG,
pursuant to which the Company repurchased 992,687 shares of its common stock
(the "Shares"), representing approximately 8.7% of shares outstanding, in a
non-cash transaction from WFSG. The Shares, as well as 1,112,500 of options and
cumulative dividends payable on the Shares, were received in exchange for a
reduction in value of a PIK note owed by WFSG to the Company. The Shares and
options represented WFSG's entire ownership interest in the Company.
In October 1999, the Company also purchased from WFSG approximately $20.9
million of mortgage-backed securities from WFSG as part of these settlement
discussions.
In March 2000, we terminated the servicing relationship in the United
Kingdom with the European Servicer and transferred this servicing to an
unaffiliated third party. We also terminated all loan and real property
servicing in the United States with WCC, reserving our rights to do so with
respect to certain mortgage-backed securities.
On February 18, 2000, after the Company received permission from the court
to do so, the Company filed a Second Amended Complaint which added claims
against WFSG and its affiliated companies as follows: claims for declaratory
relief that WFSG is entitled to no termination fee under the Management
Agreement; seeking an accounting from WCC regarding the use of funds from
lockbox accounts used to service assets which the Company owns or in which the
Company has a beneficial interest; declaring the Company's entitlement to use
prepaid service fees for the servicing of assets serviced under pooling and
servicing agreements; and declaring WFSG to be in default of its
Debtor-in-Possession ("DIP") loan agreement with the Company and declaring that
the balance of $5.0 million is immediately due and payable. On March 2, 2000,
WFSG filed an answer disputing each of the counterclaims added by the Second
Amended Complaint, and realleging the counterclaims included in WFSG's original
answer and counterclaim. Considerable discovery remains to be completed, and it
is thus not possible to predict the outcome of the case. The case is scheduled
for trial in October 2000. The Company intends to pursue its claims against WFSG
and to defend the counterclaims filed by WFSG against the Company vigorously. At
December 31, 1999, the balance of the reserve for potential resolution of
disputes with WFSG was $2.3 million.
44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements
Consolidated Statements of Financial Condition at December 31, 1999
and 1998
Consolidated Statements of Operations for the Years Ended December
31, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999 and 1998
Consolidated Statements of Cash Flow for the Years Ended December
31, 1999 and 1998
All financial statement schedules of the Company are omitted because
they are not required or are not applicable.
(b) Reports on Form 8-K filed during the fourth quarter of the period
covered by this report:
(i) Current Report on Form 8-K filed November 15, 1999;
(ii) Current Report on Form 8-K filed December 17, 1999; and
(iii) Current Report on Form 8-K filed December 23, 1999.
(c) Exhibits
See Exhibit Index immediately following the signature pages.
45
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors - Ernst & Young LLP.......................... F-2
Report of Independent Public Accountants - Arthur Andersen LLP.............. F-3
Consolidated Financial Statements:
Consolidated Statements of Financial Condition at December 31, 1999
and 1998.................................................................. F-4
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998............................................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999 and 1998................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998............................................................. F-7
Notes to Consolidated Financial Statements.................................. F-8
F-1
REPORT OF INDEPENDENT AUDITORS - ERNST & YOUNG LLP
To the Board of Directors and Stockholders of Wilshire Real Estate Investment
Inc.
We have audited the accompanying consolidated statement of financial
condition of Wilshire Real Estate Investment Inc. and Subsidiaries (the
"Company") as of December 31, 1999, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wilshire
Real Estate Investment Inc. and Subsidiaries as of December 31, 1999, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Los Angeles, California
February 11, 2000
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Wilshire Real Estate Investment
Inc.
We have audited the accompanying consolidated statement of financial
condition of Wilshire Real Estate Investment Inc. and Subsidiaries (the
"Company") as of December 31, 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wilshire Real Estate
Investment Inc. and Subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Los Angeles, California
March 19, 1999
F-3
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
December 31,
----------------------
1999 1998
--------- ---------
Assets
Cash and cash equivalents $ 5,862 $ 4,782
Securities available for sale, at fair value 104,572 158,738
Loans held for sale, net -- 44,006
Loans, net 30,459 69,124
Discounted loans, net 1,175 2,498
Investments in real estate held for sale, net 63,225 85,005
Investment in WFSG, at fair value 3,953 --
Notes receivable from WFSG 5,275 --
Due from WFSG -- 12,352
Accrued interest receivable 1,108 1,939
Prepaid service fees to WCC 2,974 --
Other assets 2,209 2,673
--------- ---------
Total assets $ 220,812 $ 381,117
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Short-term borrowings $ 96,815 $ 225,566
Other borrowings 64,412 60,577
Accounts payable and accrued liabilities 4,623 6,233
Due to WCC -- 11,698
Dividends payable 4,090 4,600
--------- ---------
Total liabilities 169,940 308,674
--------- ---------
Commitments and contingencies (Note 12)
Stockholders' Equity:
Preferred stock, $.0001 par value; 25,000,000 shares authorized; no shares
issued and outstanding -- --
Common stock, $.0001 par value; 200,000,000 shares authorized;
11,500,000 shares issued; and 10,507,313 and 11,500,000
shares outstanding in 1999 and 1998, respectively 166,981 166,981
Treasury stock; 992,687 common shares, at cost (2,171) --
Accumulated deficit (90,915) (64,093)
Accumulated other comprehensive loss (23,023) (30,445)
--------- ---------
Total stockholders' equity 50,872 72,443
--------- ---------
Total liabilities and stockholders' equity $ 220,812 $ 381,117
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
Year Ended December 31,
----------------------
1999 1998
--------- ---------
Net Interest Income:
Loans held for sale, loans and discounted loans $ 6,740 $ 10,838
Securities 15,342 15,709
Other investments 604 1,145
--------- ---------
Total interest income 22,686 27,692
Interest expense 12,897 13,608
--------- ---------
Net interest income before provision for loan losses 9,789 14,084
(Recapture) provision for loan losses (1,150) 11,842
--------- ---------
Net interest income after provision for loan losses 10,939 2,242
Real Estate Operations:
Operating income 7,148 4,939
Operating expense (205) (345)
Interest expense (4,546) (2,853)
Gain on sale of real estate 1,042 --
Provision for losses (892) --
Depreciation (1,102) (963)
--------- ---------
Total real estate operations 1,445 778
Other Operating (Loss) Income:
Market valuation losses and impairments (30,029) (54,822)
Provision for disputes with WFSG (Note 2) (4,077) --
Gain on sale of securities 1,326 943
Gain on sale of loans -- 1,320
Gain (loss) on foreign currency translation (66) 23
Other income 246 --
--------- ---------
Total other operating loss (32,600) (52,536)
Operating Expenses:
Compensation and employee benefits 1,353 --
Management fees 2,404 3,179
Professional fees 1,250 1,220
Servicing fees 256 691
Loan expenses 49 500
Other 1,119 1,282
--------- ---------
Total operating expenses 6,431 6,872
--------- ---------
NET LOSS $ (26,647) $ (56,388)
========= =========
BASIC AND DILUTED NET LOSS PER SHARE $ (2.33) $ (4.94)
WEIGHTED AVERAGE SHARES OUTSTANDING 11,442,921 11,421,933
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Common Stock Treasury Stock Accumulated Other
--------------------------------------------------- Accumulated Comprehensive
Shares (1) Amount 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:
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 -- -- -- -- (26,647) -- (26,647)
Other comprehensive loss:
Foreign currency translation -- -- -- -- -- (148) (148)
Unrealized holding losses on
securities available for sale -- -- -- -- -- (12,015) (12,015)
Reclassification adjustment for
losses on securities included in
net loss -- -- -- -- -- 19,585 19,585
--------
Total comprehensive loss (19,225)
Treasury stock acquired (Note 2) (992,687) -- 992,687 (2,171) -- -- (2,171)
Recourse loans to officers to
acquire stock -- -- -- -- (198) -- (198)
Discount on dividend purchase -- -- -- -- 23 -- 23
--------------------------------------------------------------------------------------------
Balance at December 31, 1999 10,507,313 $ 166,981 992,687 $ (2,171) $ (90,915) $ (23,023) $ 50,872
============================================================================================
- ----------
(1) Issued and outstanding.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
-----------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (26,647) $ (56,388)
Adjustments to reconcile net loss to net cash (used in)
provided by (used in) operating activities:
Depreciation 1,102 963
Amortization of premiums and accretion of discounts, net (377) (1,322)
(Recapture) provision for loan losses (1,150) 11,842
Provision for losses on real estate 892 --
Market valuation losses and impairments 30,029 54,822
Loss on foreign currency translation 24 --
Gain on sale of securities (1,326) (943)
Gain on sale of loans -- (1,320)
Gain on sale of real estate (1,042) --
Change in:
Receivables from WFSG and its affiliates, net (9,344) (6,591)
Provision for claims with WFSG 2,284 --
Accrued interest receivable 792 (1,939)
Prepaid service fees to WCC (2,974) --
Other assets (559) (2,673)
Accounts payable and accrued liabilities (3,919) 8,033
--------- ---------
Net cash (used in) provided by operating activities (12,215) 4,484
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale (30,420) (365,919)
Repayments of securities available for sale 19,588 5,517
Proceeds from sale of securities available for sale 46,585 133,327
Purchase of loans and discounted loans (663) (672,919)
Principal repayments on loans and discounted loans 39,802 21,907
Proceeds from sale of real estate 20,131 --
Proceeds from sale of loans 48,366 515,386
Investments in real estate (223) (85,648)
DIP loan advanced to WFSG (5,000) --
Other 117 428
--------- ---------
Net cash provided by (used in) investing activities 138,283 (447,921)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 22,301 529,851
Repayments on short-term borrowings (132,162) (306,085)
Proceeds from securitized mortgage obligations -- 372,318
Repayment of securitized mortgage obligations -- (372,318)
Proceeds from other borrowings -- 60,940
Repayments on other borrowings (14,622) (363)
Dividend payments on common stock (486) (3,105)
Proceeds from issuance of common stock -- 166,981
--------- ---------
Net cash (used in) provided by financing activities (124,969) 448,219
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (19) --
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,080 4,782
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,782 --
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,862 $ 4,782
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 19,589 $ 12,655
Cash paid for taxes $ -- $ --
NONCASH FINANCING AND INVESTING ACTIVITIES:
Investment in WFSG $ 3,104 $ --
Purchase of treasury stock and securities available for
sale $ (4,591) $ --
Common stock dividend declared but not paid $ -- $ 4,600
Additions to investment in real estate acquired in
settlement of loans $ -- $ 348
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 1 - ORGANIZATION AND RELATIONSHIPS
The Company was originally incorporated as Wilshire Real Estate Investment
Trust Inc. in the State of Maryland on October 24, 1997. However, in order to
benefit from significant net operating loss carryforwards and to avoid any risk
of not qualifying as a real estate investment trust ("REIT"), the Company, with
the approval of its shareholders, elected in September 1999 not to be taxed as a
REIT, 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.
During the third quarter of 1999, the Company decided to become internally
managed and retained senior executives and other employees to implement this
decision. Prior to this decision and subject to the supervision of the Company's
Board of Directors, the Company's business affairs and day-to-day operations had
been managed by Wilshire Realty Services Corporation ("WRSC"), a wholly-owned
subsidiary of Wilshire Financial Services Group Inc. ("WFSG"), pursuant to a
management agreement (the "Management Agreement"). The decision to become
internally managed and cease to utilize the services of WRSC has resulted in
disputes between the Company, on the one hand, and WFSG and certain of its
affiliates on the other (see Note 2).
NOTE 2 - RELATIONSHIP WITH WFSG AND ITS AFFILIATES
The Company is engaged in an ongoing dispute with WFSG relating to the
termination of the contractual and other relationships which formerly existed
between the companies. Prior to September 1999, the Company's business affairs
and day-to-day operations had been managed by WRSC, a wholly-owned subsidiary of
WFSG, and the Company and WFSG had the same senior management team, though the
Company had a significantly different shareholder base and the majority of its
directors were independent. In addition, the Company and WFSG had other
significant contractual relationships relating to the servicing of real estate
related assets and also had certain cross shareholdings. Relations between the
Company and WFSG declined during WFSG's bankruptcy restructuring in 1999
primarily as a result of the Company's concerns over WFSG's abilities to perform
its obligations and the exclusion of the Company from the restructuring process
and decisions about WFSG's strategic direction. Relations deteriorated further
when the Company was notified that WFSG had terminated its Chief Executive
Officer, Andrew Wiederhorn, and its President, Lawrence Mendelsohn, from their
duties as employees of WFSG and its subsidiaries. Concerns about WFSG's
abilities to perform its obligations, the termination of Wiederhorn and
Mendelsohn, uncertainties about new management and concerns over WFSG's
strategic direction led the Company and its independent directors to reassess
its relationship with WFSG and ultimately to the decision to become internally
managed and not rely on WFSG for the provision of services.
The Company, on behalf of itself and all of its subsidiaries and
affiliates, Andrew A. Wiederhorn, and Lawrence A. Mendelsohn, entered into a
partial settlement agreement dated as of December 10, 1999 with WFSG, on behalf
of all of its subsidiaries and affiliates, other than First Bank of Beverly
Hills, F.S.B. (the "Partial Settlement Agreement"). Under the terms of the
Partial Settlement Agreement, the Company repurchased 992,687 shares of its
common stock (the "Shares"), representing approximately 8.6% of shares
outstanding, in a non-cash transaction from WFSG. The Shares, as well as
1,112,500 of options (see Note 13) and cumulative dividends payable on the
Shares, were received in exchange for a reduction in the amount of a pay-in-kind
("PIK") note owed by WFSG to the Company in the amount of $5.8 million. The
Shares and options represented WFSG's entire ownership interest in the Company.
Though negotiations are still continuing, the Company and WFSG have been
unable as of February 11, 2000 to resolve the remaining matters in dispute and
there is an increased likelihood that the parties will need to litigate to
resolve the remaining matters in dispute, which include WFSG's claim that it is
entitled to a termination fee under the Management Agreement. Following a
partial settlement of disputes with WFSG, the balance of the reserve for
potential resolution of disputes with WFSG was $2.3 million at December 31,
1999.
Transactions with WFSG and its Affiliates
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 June 10, 1999, WFSG's bankruptcy reorganization was consummated.
F-8
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Through its independent directors, the Company was a party to some of the
restructuring negotiations since the Company 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, 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 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, and its holding company, Wilshire Acquisitions Corporation. 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
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, the Company 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
receivable due from WFSG. Following the completion of WFSG's restructuring plan,
the Company held 2,874,791 shares, or approximately 14.4%, of common stock of
WFSG.
In the first quarter of 1999, the Company remitted $15 million to WCC.
This payment relieved the Company of its payable to WCC (approximately $11.8
million) and its guarantee of certain WCC indebtedness. The difference between
the $15 million payment and the payable balance of approximately $3.2 million
represents an undiscounted prepayment of future service fees to be charged by
WCC to the Company, although WFSG had disputed this amount in the past (as well
as servicing eligibility for application of the credit), suggesting that the
original amount was $2.3 million (unaudited). At December 31, 1999, the balance
of the unused prepaid service fees was reduced to $3.0 million.
The following table sets forth the Company's transactions with WFSG and
its affiliates as of December 31, 1998 and 1999.
The Company's Transactions With WFSG and Its Affiliates
December 31,
---------------------------------
1998 1999
------------ ------------
Type of Investment
WFSG's 13% Series B Notes ............ $ 9,933,000(1) $ --
Due from WFSG ........................ 12,352,000 --
Due to WCC ........................... (11,698,000)
Other Borrowings ..................... (13,076,000)(3) (2,569,000)(3)
PIK Notes ............................ -- --(2)
WFSG Common Stock .................... -- 3,953,000(4)
DIP Facility ......................... -- 5,000,000(5)
Other Notes Receivable from WFSG ..... -- 275,000(2)
Prepaid Service Fees to WCC .......... -- 2,974,000
- ----------
(1) Based on the value of the 13% Series B Notes as shown in the Company's
consolidated financial statements as of December 31, 1998. The principal
amount of the 13% Series B Notes held by the Company was $20 million.
(2) In October 1999, the Company acquired approximately $20,9 million of
mortgage-backed securities from WFSG by assuming short-term borrowing of
$18.5 million and a $2.4 million reduction in the carrying amount of the
PIK Notes. In December 1999, the Company entered into a partial settlement
agreement with WFSG which included the repurchase of 992,687 shares of the
Company's common stock. As a result of these non-cash settlements, the
balance of the PIK Notes were paid off and a new note for $275,000 was
created.
(3) Investments in real estate were pledged against these loans. Subsequent to
December 31, 1999, the Company repaid these loans in full.
(4) Based on $1.375 per share. WFSG's common stock currently trades on the OTC
Bulletin Board and the closing price as of December 31, 199 was $1.375 per
share.
(5) The DIP Facility no longer has priority over other creditors and will be
treated like any other secured loan.
F-9
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
The effect of the various transactions between the Company and WFSG and
its affiliates are summarized below for the years ended December 31:
1999 1998
-------- --------
Interest income (1) ................................ $ 1,887 $ 1,639
Interest expense ................................... -- 344
-------- --------
1,887 1,295
Provision for loan losses .......................... 2,699 5,937
-------- --------
(812) (4,642)
Real estate operations, net (2) .................... 46 (33)
Other operating income:
Market valuation losses and impairments ...... (10,443) (11,346)
Provision for disputes with WFSG ............. (4,077) --
-------- --------
(15,286) (16,021)
Operating expenses ................................. 2,260 3,870
-------- --------
$(17,546) $(19,891)
======== ========
- ----------
(1) Does not include interest income on MBS securities resulting from
securitizations by WFSG or its affiliates.
(2) Does not include rental income paid by third parties on properties
partially financed by WFSG or its affiliates.
Servicing Arrangements
Prior to the disputes with WFSG, the Company entered into loan servicing
agreements with Wilshire Credit Corporation ("WCC"), an affiliate of WFSG, and
Wilshire Servicing Company U.K. Limited, a wholly-owned subsidiary of WFSG (the
"European Servicer" and with WCC, the "Servicers"). Under these servicing
agreements, the Servicers provided loan and real property management services to
the Company, including billing, portfolio administration and collection
services. In return, the Company agreed to pay each of the Servicers a fee at
market rates for servicing the Company's investments and to reimburse them for
certain out-of-pocket costs.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The operations of the Company consist primarily of
the acquisition of pools of performing, sub-performing and non-performing
residential and commercial mortgage loans, as well as commercial real estate and
mortgage-backed securities. The Company's primary sources of revenue are from
loans, mortgage-backed securities and real estate.
The Company was incorporated in the State of Maryland on October 24, 1997.
Prior to April 6, 1998, the Company had substantially no operating activity.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Wilshire Real Estate Investment Inc. and its
four subsidiaries, including Wilshire Real Estate Partnership L.P. ("WREP"),
Wilshire Real Estate Partnership 1998-1 LLC, Wilshire REIT 1998-1 and WREP
Islands Limited. Intercompany accounts have been eliminated in consolidation.
Use of Estimates in the Preparation of the Consolidated Financial
Statements-The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. Significant
estimates include valuation allowances for loans and real estate owned, the
determination of fair values of certain financial instruments for which there is
no active market, the allocation of basis between assets sold and retained, the
evaluation of other than temporary market value declines, and the selection of
yields utilized to recognize interest income on certain mortgage-backed
securities. Estimates and assumptions also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents - For purposes of reporting the consolidated
financial condition and cash flows, cash and cash equivalents include cash and
due from banks, federal funds sold and securities with original maturities of 90
days or less.
F-10
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Securities Available For Sale - Securities available for sale include
mortgage-backed securities and other securities that are designated as assets
available for sale because the Company does not intend to hold them to maturity.
Securities available for sale are carried at estimated fair values with the net
unrealized gains or losses reported in accumulated other comprehensive loss,
which is included as a separate component in stockholders' equity. The Company
records its securities portfolio at estimated fair value at the end of each
month based upon available broker/dealer valuations, subject to an internal
review process. For those securities that do not have an available market
quotation, the Company requests market values and underlying assumptions from
the various broker/dealers that underwrote the securities, are currently
financing the securities, or have had prior experience with the securities. As
of each reporting period, the Company evaluates whether and to what extent any
decline in the estimated fair values is to be recognized in earnings as other
than temporary. Other than temporary declines in the carrying value of
securities, if any, are charged to earnings and the basis of each security is
adjusted, accordingly. At disposition, the realized net gain or loss is included
in earnings on a specific identification basis. The amortization of premiums and
accretion of discounts are computed using the interest method after considering
actual and estimated prepayment rates, if applicable. Actual prepayment
experience and the yields are reviewed at least quarterly. The Company considers
securities available for sale to be impaired if the Company is unable to
demonstrate the ability to hold such asset until a temporary decline in the
market value reverses or the anticipated cash flows on such asset are not
expected to exceed the Company's amortized basis in such asset. The Company
currently believes that it has a reasonable expectation to recover its amortized
basis in securities available for sale based on its post-impairment basis in
these securities.
Loans Held for Sale, Loans, Discounted Loans and Allowance for Loan Losses
- - The Company acquires performing loan portfolios for prices generally at par or
at a premium or discount to the principal face amount (i.e., unpaid principal
balance plus accrued interest) and re-performing and sub-performing loan
portfolios for prices generally at or below their principal amount.
Non-performing loans are generally acquired at discounts to the principal face
amount. Purchased sub-performing and non-performing loans are generally
classified as discounted loans in the consolidated statement of financial
condition. Loans that have been identified as likely to be sold are classified
as loans held for sale in the consolidated statement of financial condition.
Loans other than discounted loans and loans held for sale are classified as
loans.
Discounted loans are presented in the consolidated statement of financial
condition net of unaccreted discounts and allowance for loan losses established
for those loans. Unaccreted discounts represent the portion of the difference
between the purchase price and the principal face amount on specific loans that
is available for accretion to interest income. The allowance for loan losses
includes valuation allowances for estimated losses against the principal face
amount that are established at acquisition and for subsequent valuation
adjustments that are provided for through current period earnings and are based
on discounted future cash flows or the fair value of the underlying real estate
collateral for collateral dependent loans. If total cash received on a pool of
loans exceeds original estimates, excess specific valuation allowances are
recorded as additional discount accretion on the cost-recovery method. The
allocated specific valuation allowances are included in the allowance for loan
losses. Where appropriate, discounts are accreted into interest income on a cash
basis.
Loans, other than discounted loans, are presented in the consolidated
statement of financial condition in substantially the same manner as discounted
loans. Interest income is recognized on an accrual basis. Deferred fees and
costs and premiums are recognized in interest income over the life of the loan
using a method that approximates the interest method.
Certain loans and discounted loans are designated as held for sale and are
presented at the lower of cost or fair value. If fair value is less than cost, a
valuation allowance is recorded through a charge to earnings to reduce the
carrying value to fair value.
The Company evaluates loans for impairment. Commercial and multi-family
real estate loans are considered to be impaired, for financial reporting
purposes, when it is probable that the Company will be unable to collect all
principal or interest due, according to the contractual terms of the loan
agreement. Specific valuation allowances are established either at acquisition
or through provisions for loan losses, as described above, for impaired loans
based on the fair value of the underlying collateral.
All specific valuation allowances established for pools of loans and
discounted loans are recorded in the allowance for loan losses. The allowance
for each pool is decreased by the amount of loans charged off and is increased
by the provision for estimated losses on loans and recoveries of previously
charged-off loans. The allowance for each pool is maintained at a level believed
adequate by management to absorb probable losses. Management's determination of
the adequacy of the allowance is based on an evaluation of the portfolio,
previous loan loss experience, current economic conditions, volume, growth and
composition of the portfolio and other relevant factors. Actual losses may
differ from management's estimates.
F-11
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
It is the Company's policy to establish an allowance for uncollectible
interest on performing loans that are past due more than 90 days or sooner when,
in the judgment of management, the probability of collection of interest is
deemed to be insufficient to warrant further accrual. Upon such a determination,
those loans are placed on non-accrual status and deemed to be non-performing.
When a loan is placed on non-accrual status, previously accrued but unpaid
interest is reversed by a charge to interest income.
Investments In Real Estate - Real estate purchased directly is originally
recorded at the purchase price. Real estate acquired in settlement of loans is
originally recorded at fair value less estimated costs to sell. Any excess of
net loan cost basis over the fair value less estimated selling costs of real
estate acquired through foreclosure is charged to the allowance for loan losses.
Any subsequent operating expenses or income, reductions in estimated fair
values, as well as gains or losses on disposition of such properties, are
recorded in current operations. Effective October 1, 1999, the Company holds its
investments in real estate as held-for-sale. Depreciation on investments in real
estate is computed using the straight-line method over the estimated useful
lives of the assets as follows.
Buildings and improvements.......... 35 years
Tenant improvements................. Lesser of lease term or useful life
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized and amortized over their
expected useful lives. Fees and costs incurred in the successful negotiation of
leases are deferred and amortized on a straight-line basis over the terms of the
respective leases. Rental revenue is reported on a straight-line basis over the
terms of the respective leases.
Income Taxes-The Company files its income tax returns with the relevant
tax authorities in the United States on a consolidated basis. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided when it is not probable that
some portion or all of the deferred tax assets will be realized.
Net Loss Per Share-Basic EPS excludes dilution and is computed by dividing
the net loss available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company.
During the years ended December 31, 1999 and 1998, however, the Company
experienced a net loss, which resulted in common stock equivalents having an
anti-dilutive effect on earnings per share. Weighted average shares outstanding
is therefore equivalent for basic and diluted net loss per share.
Comprehensive Income-In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires companies to report all changes in equity
during a period, except those relating to investment by owners and distributions
to owners, in a financial statement for the period in which they are recognized.
The Company has chosen to disclose comprehensive loss, which encompasses net
loss, unrealized holding losses on available for sale securities during the
year, realized gain/losses on available for sale securities, and currency
translation adjustments, on the face of the accompanying consolidated statements
of stockholders' equity.
Reclassification-Certain items in the consolidated financial statements
for 1998 were reclassified to conform to the 1999 presentation.
NOTE 4 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
consolidated statement of financial condition as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gain or loss to be offset with the related results
F-12
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
on the hedged item in the consolidated statement of operations, and requires
that a company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. Management expects that the Company
will adopt SFAS No. 133 (as amended by SFAS No. 137) on January 1, 2001.
Management has not yet quantified the impact of adopting SFAS No. 133 on its
consolidated financial statements and has not determined the method of its
adoption of SFAS No. 133.
NOTE 5 - SECURITIES AVAILABLE FOR SALE
At December 31, 1999 and 1998, securities available for sale were as
follows:
Gross Gross
Amortized Unrealized Unrealized
December 31, 1999 Cost (1) Gains Losses Fair Value
- -------------------------------- -------- -------- -------- --------
Mortgage-backed securities ..... $127,799 $ 3,487 $ 26,714 $104,572
Other securities ............... -- -- -- --
-------- -------- -------- --------
$127,799 $ 3,487 $ 26,714 $104,572
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized
December 31, 1999 Cost (1) Gains Losses Fair Value
- -------------------------------- -------- -------- -------- --------
Mortgage-backed securities ..... $179,243 $ 98 $ 30,536 $148,805
Other securities ............... 9,933 -- -- 9,933
-------- -------- -------- --------
$189,176 $ 98 $ 30,536 $158,738
======== ======== ======== ========
- ----------
(1) The amortized cost of the securities reflects impairment adjustments
deemed to be other than temporary. The total amount of impairment
write-downs of $19.6 million and $22.4 million has been included in market
valuation losses and impairments in the accompanying consolidated
statements of operations for the years ended December 31, 1999 and 1998,
respectively.
The Company expects to receive payments on securities over periods that
are considerably shorter than the contractual maturities of the securities,
which range from 6 to 30 years due to prepayments. At December 31, 1999, the net
unrealized loss on available-for-sale mortgage-backed securities totaled
approximately $23.2 million. In the opinion of management, these losses
represent temporary declines in the fair values of such securities. These
unrealized gains and losses are reflected in "Accumulated other comprehensive
loss" in stockholders' equity. Should management's estimates of the temporary
nature of these market value declines change in the future to other than
temporary, such changes would be reflected as losses in the Company's
consolidated statement of operations.
At December 31, 1998, other securities available for sale consisted of $20
million (face value) of 13% WFSG Series B Notes due in 2004 with a carrying
value of $9.9 million, net of an impairment write down of $11.3 million, which
is included in market valuation losses and impairments described above. WFSG and
the unofficial committee of noteholders, representing a majority of the
noteholders, agreed to a restructuring of WFSG whereby the noteholders
(including holders of WFSG's 13% Series B Notes) exchanged their notes for newly
issued common stock in WFSG. Management's valuation of these note holdings of
$9.9 million as of December 31, 1998 was based on the Company's ratable portion
of WFSG's estimated contemplated reorganization equity.
At December 31, 1999, substantially all securities available for sale were
pledged to secure short-term borrowings and lines of credit (see Note 8).
F-13
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 6 - LOANS HELD FOR SALE, LOANS, AND DISCOUNTED LOANS
The Company's loans are comprised of loans held for sale, loans, and
discounted loans. Following is a summary of each loan category by type at
December 31, 1999 and 1998:
Discounted
December 31, 1999 Loans Loans
- ----------------- ----- -----
Unpaid principal balance of real estate loans:
Over four residential units ....................... $ -- $ 349
Commercial ........................................ 30,843 3,781
------- -------
Total loans secured by real estate ................ 30,843 4,130
Less:
Allowance for loan losses ......................... 343 2,637
Discount on purchased loans and deferred fees ..... 41 318
------- -------
$30,459 $ 1,175
======= =======
Loans Held Discounted
December 31, 1998 for Sale Loans Loans
- ----------------- -------- ----- -----
Unpaid principal balance of real estate loans:
One to four residential units .............. $ -- $ 411 $ --
Over four residential units ................ -- -- 337
Commercial ................................. 49,725 30,236 7,346
------- ------- -------
Total loans secured by real estate ......... 49,725 30,647 7,683
Other (1) ....................................... -- 39,316 --
Less:
Allowance for loan losses .................. 5,594 773 4,741
Discount on purchased loan and deferred fees 125 66 444
------- ------- -------
$44,006 $69,124 $ 2,498
======= ======= =======
- ----------
(1) Includes $38.6 million of securities under agreement to repurchase. On
October 1, 1998, the counterparty filed a petition for reorganization
under Chapter 11 in the United States Bankruptcy Court for the District of
Oregon. On November 20, 1998, the counterparty and the Company reached an
agreement in which the repurchase agreement was converted into a loan.
Subsequent to December 31, 1998, the Company sold its interest in this
loan and recovered its carrying value. At December 31, 1998 these assets
were pledged to secure short-term borrowings (see Note 8).
As of December 31, 1999 and 1998, the unpaid principal balances of loans
with adjustable rates of interest were $26.1 million and $76.2 million,
respectively, and loans with fixed rates of interest were $8.8 million and $51.2
million, respectively, before allowances and discounts. Adjustable-rate loans
are generally indexed to U.S. Treasury Bills, the FHLB's Eleventh District Cost
of Funds Index, LIBOR or Prime and are subject to limitations on the timing and
extent of adjustment. Most loans adjust within six months of changes in the
index.
At December 31, 1999 and 1998, loans with an unpaid principal balance of
approximately $5.2 million and $4.9 million, respectively, were pledged to
secure credit line borrowings included in short-term borrowings. Additionally,
other loans of $25 million and $114.0 million, respectively, were pledged to
secure repurchase agreements.
F-14
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Activity in the allowance for loan losses is summarized as follows:
Year Ended December 31,
-----------------------
1999 1998
-------- --------
Balance, beginning of period ..................... $ 11,108 $ --
Allocation of purchased loan discounts:
At acquisition .............................. -- 7,416
At disposition .............................. -- (1,312)
Charge offs (1999-WFSG related, Note 2) .......... (7,364) (901)
Recoveries ....................................... 386 --
(Recapture) provision for loan losses ............ (1,150) 5,905
-------- --------
Balance, end of period ........................... $ 2,980 $ 11,108
======== ========
During the year ended December 31, 1999, the Company reversed a provision
for losses of $3.9 million taken in prior periods for a loan held for sale. The
loan was secured by commercial properties in the United Kingdom with a carrying
value of approximately $47.9 million. This valuation allowance had been
established in 1998 based upon management's estimate at that time of the
ultimate recoverability of the asset. This provision reversal was partially
offset by a provision for losses on loans of $0.1 million. In addition, the
Company 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 received in exchange for a portion of the note.
During the year ended December 31, 1998, the Company recorded a provision
for losses of $11.8 million, of which $5.9 million related to assets classified
in loans, loans held for sale or discounted loans. The remaining $5.9 million of
provision for losses is not included in the allowance for loan losses activity
above, but rather, is attributable to a valuation adjustment recorded on a note
receivable from WFSG, and is included in due from WFSG as of December 31, 1998.
At December 31, 1999, the Company had no impaired loans (other than
discounted loans). At December 31, 1998, the Company had impaired loans (other
than discounted loans) with a net carrying value of approximately $39.3 million.
Substantially all of the balance at December 31, 1998 was accounted for by a
single loan, which was paid off subsequent to December 31, 1998 at the
approximate carrying value.
The above amounts do not include impaired discounted loans. Management has
determined that generally all discounted loans meet the criteria for impairment
and evaluates the carrying values of these loans based on the portfolio
approach, rather than a loan-by-loan basis.
Management estimates are utilized to determine the adequacy of the
allowance for loan losses. Estimates are also involved in determining the
ultimate recoverability of purchased loans and, consequently, the pricing of
purchased loans. These estimates are inherently uncertain and depend on the
outcome of future events. Although management believes the level of the
allowance is adequate to absorb losses probable in the loan portfolio, rising
interest rates, various other economic factors and regulatory requirements may
result in increasing levels of losses. Those losses will be recognized if and
when these events occur.
F-15
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 7 - INVESTMENTS IN REAL ESTATE
At December 31, 1999 and 1998, the Company's investments in real estate
were comprised of the following:
December 31,
-----------------------
1999 1998
-------- --------
Commercial and multi-family real estate:
Land ............................................. $ 18,355 $ 26,338
Building and improvements ........................ 46,349 58,856
Less: Accumulated depreciation ................... (1,848) (963)
-------- --------
62,856 84,231
Other real estate owned, net ..................... 369 774
-------- --------
$ 63,225 $ 85,005
======== ========
At December 31, 1999 approximately $40.7 million or 64.3% of the
investments in commercial and multi-family real estate were located in the
United States and the remainder of commercial or multi-family properties were
located in the United Kingdom.
Investments in real estate are recorded at cost less accumulated
depreciation, which, in the opinion of management, is less than the net
realizable value of the properties on an individual basis. The Company reviews
its investments in real estate for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Effective October 1, 1999, the Company holds its investments in real estate as
held for sale at lower of cost or market value.
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1999 and 1998 include repurchase
agreements, line of credit borrowings and other short-term borrowings. Proceeds
from the various credit facilities are used primarily for the acquisition of
mortgage-backed securities and loan pools. Following is information about
short-term borrowings:
December 31,
---------------------------
1999 1998
------------ -----------
Average balance during the period............... $ 155,473 $ 254,945
Highest amount outstanding during the period.... $ 203,742 $ 475,351
Average interest rate - during the period....... 8.2% 7.2%
Average interest rate - end of period........... 8.9% 7.6%
In certain instances, repurchase agreement lenders on mortgage-backed
securities have withheld principal and/or interest payments on such assets in
order to reduce outstanding, unpaid margin calls. At December 31, 1999, there
were no outstanding unpaid collateral calls. At December 31, 1998, there were
approximately $4.0 million of outstanding collateral calls, based on the
dealer's market valuation of the underlying collateral, net of withheld
principal and interest payments.
NOTE 9 - OTHER BORROWINGS
At December 31, 1999, the Company had $64.4 million of other borrowings
with a weighted average interest rate of 8.04%. Investments in real estate with
a carrying amount of $59.6 million and a loan with an unpaid principal balance
of $25 million were pledged as collateral against these loans. Included in other
borrowings is $2.6 million of mortgage borrowings payable to WFMC 1997-1, a
wholly-owned subsidiary of WFSG. Maturities of these borrowings range from 2000
to 2008.
At December 31, 1998, the Company had $60.6 million of other borrowings
with a weighted average interest rate of 8.52%. At December 31, 1998,
investments in real estate with a carrying amount of $81.0 million were pledged
as collateral against these loans. Included in other borrowings is $13.1 million
of mortgage borrowings payable to WFMC 1997-1, a wholly-owned subsidiary of
WFSG.
F-16
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
At December 31, 1999, the contractual repayment terms of other borrowings
for each of next five years and the total thereafter is as follows:
Other
Year Borrowings
---- ----------
2000 $ 2,101
2001 2,152
2002 2,195
2003 2,237
2004 2,286
Thereafter 53,441
$ 64,412
The Company is subject to various covenants in the agreements evidencing
its indebtedness, including the maintenance of specified amounts of capital. At
December 31, 1999, management believes the Company was in compliance with all
obligations under the agreements evidencing its indebtedness, as defined in the
applicable agreements.
NOTE 10 - DIVIDENDS PAYABLE
On October 26, 1998, the Company revised the expected payment date of a
$0.40 per share cash dividend payable on October 27, 1998 to shareholders of
record on September 30, 1998 to January 27, 1999. On December 30, 1998, the
Company announced that the status of the dividend payment would be reviewed in
approximately three months from that date. At present, the Company has not made
the dividend payment. The Company will pay interest, at the rate of 4% per
annum, on the amount due calculated from the previously announced payment date
through the date of the actual payment.
In December 1999, the Company purchased the dividend rights to
approximately $0.1 million at a 20% discount from a shareholder and $0.4 million
from WFSG (see Note 2).
NOTE 11 - INCOME TAXES
The Company originally was formed with a view of qualifying as a REIT
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
However, to qualify as a REIT, the Company must first make an affirmative
election to be taxed as a REIT when the Company files its federal income tax
return.
Due to the significant potential tax benefits from 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. 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 December 31, 1999, the Company had, for U.S. Federal tax purposes, a
net operating loss carryforward of approximately $95 million, which begins to
expire in 2018. U.S. tax regulations impose limitations on the use of loss
carryforwards following certain changes in ownership. If such a change were to
occur with respect to the Company, the limitation could significantly reduce the
amount of benefits that would be available to offset future taxable income each
year, starting with the year of ownership change. To reduce the potential impact
of such ownership changes, the Company established a Shareholder Rights Plan
dated as of December 23, 1999 and effective January 3, 2000. The Company has not
recorded any tax assets for the future benefits of the net operating loss
carryforwards.
F-17
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
A reconciliation, stated as a percentage of pretax loss, of the U.S.
federal statutory rate to the effective tax rate on the loss from continuing
operations is as follows:
Year Ended December 31,
-----------------------
1999 1998
------ ------
U.S. federal statutory rate ...................... (35.0)% (34.0)%
State taxes, net of federal benefit .............. (6.9) (6.9)
Valuation allowance .............................. 41.9 40.6
Other ............................................ -- 0.3
------ ------
Effective tax rate ............................... - % - %
====== ======
The tax effects of temporary differences and carryforwards resulting in
deferred income taxes are as follows:
December 31,
------------------------
1999 1998
-------- --------
Loss carryforwards ....................... $ 44,675 $ 21,773
Unrealized holding losses on
available for sale securities .......... 8,774 12,205
Other .................................... 3,842 1,754
-------- --------
Subtotal .......................... 57,291 $ 35,732
-------- --------
Deferred Tax Liabilities:
Tax mark to market adjustment ............ (8,774) (12,205)
Other .................................... -- (412)
-------- --------
Subtotal .......................... (8,774) (12,617)
-------- --------
Valuation allowance ............................ (48,517) (23,115)
-------- --------
Net deferred tax asset ......................... $ -- $ --
======== ========
Given the lack of sufficient earnings history, the Company does not
believe the recognition of a deferred tax asset is appropriate at this time.
NOTE 12 - COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK
The Company may utilize a wide variety of off-balance sheet financial
techniques to assist them 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 December 31, 1998, the Company was a party to a swap contract in
connection with its investment in a commercial mortgage loan secured by real
property in the United Kingdom ("UK"). The swap contract, which covered the
approximate five year term of the asset and related financing, was intended to
hedge the interest rate basis and currency exposure between UK LIBOR (the
lending rate) and US LIBOR (the borrowing rate) payments, as well as the
principal (notional) amount of the loan which, as of December 31, 1998, was
$49.7 million. Under the terms of the agreement, the settlement was in U.S.
dollars. During the year ended December 31, 1998, the Company received $937,651
and paid GBP789,082 under the terms of the swap. The loan and the related swap
were disposed of subsequent to December 31, 1998.
The Company was also party to a five-year swap with a notional amount of
GBP11,224,000 in connection with its investment in real estate in the UK.
Subsequent to December 31, 1998, the terms of the swap were incorporated into
the refinancing of the related asset, and the Company was released as a party to
the swap.
F-18
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
At December 31, 1999, the Company had no outstanding off-balance-sheet
positions.
During 1999, the Company engaged a financial advisor to evaluate whether
to retain, enhance or dispose of the Company's ownership interest in WFSG. A
$1.3 million retainer fee was paid during 1999 and is included in the Company's
1999 consolidated statement of operations. Additionally, if certain conditions
are met prior to the expiration date of the arrangement in June 2000, an
additional fee of $1.2 million will be due.
With the exception of disputes with WFSG and its affiliates discussed in
Note 2, 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 consolidated financial condition or operations of the
Company.
NOTE 13 - STOCK OPTIONS AND RIGHTS
The Company adopted a non-qualified stock option plan ("the Option Plan")
which provides for options to purchase shares of the Company's common stock. The
maximum number of shares of common stock that may be issued pursuant to options
granted under the Option Plan is 3,500,000 shares.
In 1998, the Company granted options to WRSC and its independent directors
under the Option Plan, representing the right to acquire 1,150,000 shares of
common stock. Of these initial grants, 1,135,000 were granted to WRSC and 5,000
were granted to each of the Company's three independent directors. The initial
grants of options under the Option Plan to WRSC vest at a rate of 25% per year
for each of the first four anniversaries following the closing of the Initial
Public Offering ("Offering"), and expire on the tenth anniversary of the
Offering. The initial grants to the Independent Directors vest immediately and
expire ten years from the date of grant. In the future, newly elected directors
will receive 5,000 options on the day they join the Board at an exercise price
equivalent to the closing price on that day. In addition, on the last day of
each calendar quarter, each Independent Director will receive, on the last day
of each quarter, an automatic non-statutory option grant to purchase 1,500
shares of common stock at 110% of the fair market value on that day. Automatic
grants will vest one third on each of the first three anniversaries of the grant
date and expire on the tenth anniversary of the grant date.
In conjunction with the partial settlement agreement with WFSG and certain
of its affiliates on December 10, 1999 (see Note 2), the Company received
1,112,500 of the options issued to WRSC at the initial public offering, which
were subsequently cancelled.
A summary of the Company's stock options as of and for the year ended
December 31, 1999 is presented below:
Weighted Average
Exercise
Shares Price
---------- ------
Outstanding at beginning of period .............. -- $ --
Granted ......................................... 1,165,500 $15.89
Forfeited ....................................... 2,048,000 $ 4.52
Cancelled/Forfeited ............................. (1,117,500) $16.00
----------
Outstanding at end of period .................... 2,096,000 $ 4.75
==========
Weighted Average Weighted Average
Range of Remaining Exercise
Exercise Prices Shares Life Price
- ------------------------------------ ----------- ----------------- -----------------
$2.34............................... 4,500 10.00 $ 2.48
$2.81-4.26.......................... 18,500 9.00-9.50 $ 3.57
$3.30-4.53.......................... 2,034,500 9.75 $ 4.53
$11.28-18.63........................ 38,500 8.25-8.75 $ 17.37
F-19
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
A summary of the Company's stock options as of and for the period ended
December 31, 1998 is presented below:
Weighted Average
Exercise
Shares Price
---------- ------
Outstanding at beginning of period .............. -- $ --
Granted ......................................... 1,168,500 $15.89
Forfeited ....................................... (3,000) $14.96
----------
Outstanding at end of period .................... 1,165,500 $15.89
==========
Weighted Weighted
Average Average
Range of Remaining Exercise
Exercise Prices Shares Life Price
- ------------------------------------------ ---------- ----------- ---------
$2.81 - 3.37.............................. 9,500 10.00 $ 3.08
$11.28.................................... 3,000 9.75 $ 11.28
$16.00.................................... 1,150,000 9.25 $ 16.00
$18.63.................................... 3,000 9.50 $ 18.63
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for the Option Plan. Accordingly, no compensation expense has been
recognized in the Consolidated Statements of Operations for grants under the
Option Plan. Had compensation expense for the Company's Option Plan been
determined based on the fair value at the grant date consistent with the methods
of SFAS No. 123 "Accounting for Stock Based Compensation", the Company's net
loss and loss per share for the year ended December 31, 1999 and 1998 would have
been increased to the pro forma amounts indicated below:
Year ended December 31,
-------------------------
1999 1998
--------- ---------
Net loss:
As reported................................... $ (26,647) $ (56,388)
Pro forma..................................... $ (27,083) $ (58,265)
Net loss per common and common share equivalent:
Basic loss per share:
As reported.............................. $ (2.33) $ (4.94)
Pro forma................................ $ (2.37) $ (5.10)
Diluted loss per share:
As reported.............................. $ (2.33) $ (4.94)
Pro forma................................ $ (2.37) $ (5.10)
There were no options granted in 1999 or 1998 with exercise prices below
the market value of the stock at the grant date. The weighted average fair value
of options granted during 1999 and 1998 was $0.45 and $3.80, respectively, for
options with exercise prices exceeding the market price of the stock at the
grant date. Fair values were estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions used: 1% dividend yield,
expected volatility of 25%, risk-free interest rate of 5.0% and expected lives
of three to five years.
On December 15, 1999, the Company declared a distribution of one right (a
"Right") to purchase one one-tenth of a share of the Company's Common Stock for
each outstanding share of Common Stock, payable to the stockholders of record on
January 3, 2000. The Board of Directors authorized and directed the issuance of
one Right with respect to each Common Share issued thereafter until the
Distribution Date (as defined in the Rights Agreement) and, in certain
circumstances, with respect to Common Shares issued after the Distribution Date.
The description and terms of the Rights are set forth in a Rights Agreement
between the Corporation and The Bank
F-20
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
of New York, as Rights Agent, dated as of December 23, 1999. The Rights are not
exercisable until the Distribution Date and will expire at the close of business
on December 23, 2009, unless earlier redeemed by the Corporation.
NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
December 31, 1999 December 31, 1998
-------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ---------- -----------
Assets:
Cash and cash equivalents..................... $ 5,862 $ 5,862 $ 4,782 $ 4,782
Mortgage-backed securities available for sale. 104,572 104,572 148,805 148,805
Other securities available for sale........... - - 9,933 9,933
Loans, loans held for sale, and discounted
loans, net................................. 31,634 31,727 115,628 117,921
Liabilities:
Short-term borrowings......................... 96,815 96,815 225,566 225,566
Other borrowings.............................. 64,412 64,412 60,577 60,577
The methods and assumptions used to estimate the fair value of each class
of financial instrument for which it is practicable to estimate that value are
explained below:
Cash and cash equivalents-The carrying amounts approximate fair values due
to the short-term nature of these instruments.
Mortgage-backed securities-The fair values of securities are based upon
broker dealer quotes, subject to the Company's internal review process.
Loans, loans held for sale and discounted loans, net-The fair value of
discounted loans, which are predominately non-performing loans, is more
difficult to estimate due to uncertainties as to the nature, timing and extent
to which the loans will be either collected according to original terms,
restructured, or foreclosed upon. Discounted loans fair values were estimated
using the Company's best judgment for these factors in determining the estimated
present value of future net cash flows discounted at a risk-adjusted market rate
of return. For other loans, fair values are estimated for portfolios of loans
with similar financial characteristics. Loans are segregated by type, such as
fixed- and adjustable-rate interest terms. The fair values of fixed-rate
mortgage loans are based on discounted cash flows utilizing applicable
risk-adjusted spreads relative to the current pricing of similar fixed-rate
loans as well as anticipated prepayment schedules. The fair values of
adjustable-rate mortgage loans are based on discounted cash flows utilizing
discount rates that approximate the pricing of available mortgage-backed
securities having similar rate and repricing characteristics, as well as
anticipated prepayment schedules. No value adjustments have been made for
changes in credit within the loan portfolio. It is management's opinion that the
allowance for estimated loan losses pertaining to loans results in a fair value
adjustment of the credit risk of such loans.
Short-term borrowings-The carrying amounts of short-term borrowings
approximate fair value due to the short-term nature of these instruments.
Other borrowings-The fair value of other borrowings is estimated based on
current market rates for similar borrowings with similar characteristics.
F-21
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1999 and 1998,
respectively. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date, and therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarter Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
1999 1999 1999 1999
----------------- --------------------------------- ------------
Interest income................................ $ 4,517 $ 4,805 $ 6,280 $ 7,084
Interest expense............................... (3,056) (2,803) (3,345) (3,693)
(Recapture) provision for loan losses.......... -- -- -- (1,150)
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses................................ 1,461 2,002 2,935 4,541
Real estate operations, net.................... 1,000 597 (91) (61)
Other operating income (loss).................. 490 (10,096) (21,761) (1,233)
Other operating expenses....................... (2,017) (1,675) (1,259) (1,480)
---------- ---------- ---------- ----------
Income (loss) before income taxes.............. 934 (9,172) (20,176) 1,767
Income tax (benefit) provision................. (200) 200 -- --
---------- ---------- ---------- ----------
Net income (loss).............................. $ 1,134 $ (9,372) $ (20,176) $ 1,767
========== ========== ========== ==========
Earnings (loss) per share:
Basic..................................... $ 0.10 $ (0.82) $ (1.75) $ 0.15
Diluted................................... $ 0.10 $ (0.82) $ (1.75) $ 0.15
Quarter Ended
-------------------------------------------------
December 31, September 30, June 30,
1998 1998 1998
-------------------------------------------------
Interest income................................ $ 10,957 $ 11,645 $ 5,090
Interest expense............................... (6,095) (6,012) (1,501)
Provision for loan losses...................... (8,842) (3,000) -
------------ ------------ ------------
Net interest (loss) income after provision for
loan losses............................... (3,980) 2,633 3,589
Real estate operations, net.................... (13) 428 363
Other operating loss........................... (3,950) (48,586) -
Other operating expenses....................... (2,607) (3,355) (910)
------------ ------------ ------------
(Loss) income before income taxes.............. (10,550) (48,880) 3,042
Income tax provision........................... -- -- --
------------ ------------ ------------
Net (loss) income.............................. $ (10,550) $ (48,880) $ 3,042
============ ============ ============
(Loss) earnings per share:
Basic.................................... $ (0.92) $ (4.25) $ 0.27
Diluted............................... $ (0.92) $ (4.25) $ 0.27
F-22
WILSHIRE REAL ESTATE INVESTMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 16 - PARENT COMPANY INFORMATION
Condensed Statements of Financial Condition
December 31,
---------------------
1999 1998
------- -------
ASSETS
Cash ............................................... $ 4 $ 3
Investments in subsidiaries ........................ 78,205 97,185
------- -------
Total assets .................................... $78,209 $97,188
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities ............. $ 235 $ 506
Intercompany payable, net .......................... 23,012 19,639
Dividend payable ................................... 4,090 4,600
------- -------
Total liabilities ............................... 27,337 24,745
Contributed and retained equity .................... 50,872 72,443
------- -------
Total liabilities and equity .................... $78,209 $97,188
======= =======
Condensed Statements of Operations
Year Ended December 31,
-----------------------
1999 1998
--------- ---------
Total revenues ..................................... $ -- $ --
Total expenses ..................................... 412 48
-------- --------
Loss before equity in losses of subsidiaries
and income tax provision ......................... (412) (48)
Equity in losses of subsidiaries ................... (26,235) (56,340)
Income tax provision ............................... -- --
-------- --------
Net loss ........................................... $(26,647) $(56,388)
======== ========
F-23
Condensed Statements of Cash Flows
Year Ended December 31,
-----------------------
1999 1998
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ....................................................... $ (26,647) $ (56,388)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Equity in loss of subsidiaries .............................. 26,235 56,340
Change in:
Accounts payable and other liabilities .................. (271) 506
Intercompany payable .................................... 1,170 19,639
--------- ---------
Net cash provided by operating activities .......... 487 20,097
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investment in subsidiaries ............................ -- (183,970)
--------- ---------
Net cash used in investing activities ............. -- (183,970)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend payments on common stock ........................ (486) (3,105)
Issuance of capital stock ................................ -- 166,981
--------- ---------
Net cash (used in) provided by financing activities (486) 163,876
--------- ---------
NET INCREASE IN CASH ........................................... 1 3
CASH:
Beginning of year ........................................ 3 --
--------- ---------
End of year .............................................. $ 4 $ 3
========= =========
NONCASH FINANCING ACTIVITIES:
Common stock dividend declared but not paid .............. $ -- $ 4,600
Purchase of treasury stock ............................... $ (2,171) $ --
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf on March 17, 2000 by the undersigned, thereunto duly authorized.
Wilshire Real Estate Investment Inc.
By: /s/ Lawrence A. Mendelsohn
----------------------------------
Lawrence A. Mendelsohn
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 17, 2000 by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/ Andrew A. Wiederhorn
--------------------------------------
Andrew A. Wiederhorn
Chairman of the Board, Chief Executive
Officer, Secretary and Treasurer
/s/ Lawrence A. Mendelsohn
--------------------------------------
Lawrence A. Mendelsohn
President
/s/ Chris Tassos
--------------------------------------
Chris Tassos
Executive Vice President and Chief
Financial Officer
/s/ David C. Egelhoff
--------------------------------------
David C. Egelhoff
Director
/s/ Jordan D. Schnitzer
--------------------------------------
Jordan D. Schnitzer
Director
/s/ Patrick Terrell
--------------------------------------
Patrick Terrell
Director
Exhibit Index
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999)
3.2 By-laws (Incorporated by reference to the Company's
Registration Statement on Form S-11 (Registration No.
333-39035))
10.1 Form of Management Agreement (Incorporated by reference to the
Company's Registration Statement on Form S-11 (Registration
No. 333-39035))
10.2 Form of Partnership Agreement of Wilshire Real Estate
Partnership L.P. (Incorporated by reference to the Company's
Registration Statement on Form S-11 (Registration No.
333-39035))
10.3 Form of Stock Option Plan (Incorporated by reference to the
Company's Registration Statement on Form S-11 (Registration
No. 333-39035))
10.4 Form of Real Estate Asset Servicing Agreement (Incorporated by
reference to the Company's Registration Statement on Form S-11
(Registration No. 333-39035))
10.5 Form of services Agreement (Incorporated by reference to the
Company's Registration Statement on Form S-11 (Registration
No. 333-39035))
10.6 Purchase and Sale Agreement, dated April 7, 1998 among WREP
1998-1 LLC, G.I. Joe's Inc. and PD Properties, L.L.C.
(Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998)
10.7 Amendment No. 1 to Management Agreement dated as of April 6,
1998 between the Company and Wilshire Realty Services
Corporation (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999)
10.8 Loan Servicing Agreement dated as of April 6, 1998 between the
Company and Wilshire Credit Corporation (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999)
10.9 Amended and Restated Loan Servicing Agreement dated as of
December 23, 1998 between the Company and Wilshire Servicing
Company UK Limited (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998)
*10.10 Employment Agreement dated September 4, 1999 between the
Company and Wilshire Real Estate Partnership L.P. and Andrew
A. Wiederhorn
*10.11 Employment Agreement dated September 4, 1999 between the
Company and Wilshire Real Estate Partnership L.P. and Lawrence
A. Mendelsohn
*10.12 Employment Agreement dated October 9, 1999 between the Company
and Wilshire Real Estate Partnership L.P. and Chris Tassos
*10.13 Employment Agreement dated October 9, 1999 between the Company
and Wilshire Real Estate Partnership L.P. and Robert G. Rosen
*10.14 Employment Agreement dated October 9, 1999 between the Company
and Wilshire Real Estate Partnership L.P. and Richard Brennan
*11 Computation of Loss Per Common Share
16.1 Letter dated November 12, 1999 from Arthur Andersen
(Incorporated by reference to the Company's Current Report on
Form 8-K filed November 15, 1999)
*21.1 Subsidiaries
99.1 Settlement Agreement, dated as of December 10, 1999, among the
Company, on behalf of itself and all of its subsidiaries and
affiliates, Andrew A. Wiederhorn, Lawrence A. Mendelsohn,
Wilshire Financial Services Group Inc., on behalf of itself
and all of its subsidiaries and affiliates other than First
Bank of Beverly Hills, F.S.B. (Incorporated by reference to
the Company's Current Report on Form 8-K filed December 17,
1999.)
- ----------
*Filed herewith.