-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PuXWvXoeAPEFVqR/CJRC/2urG7+kGq2LRJHRpuSELm/aNU6fZBbuGbOt8IE63ben unX5xVlMfC3zC0xeXxX2tQ== 0001065407-99-000060.txt : 19990302 0001065407-99-000060.hdr.sgml : 19990302 ACCESSION NUMBER: 0001065407-99-000060 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19990301 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: WILSHIRE REAL ESTATE INVESTMENT TRUST INC CENTRAL INDEX KEY: 0001048566 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 911851535 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: SEC FILE NUMBER: 005-54067 FILM NUMBER: 99554641 BUSINESS ADDRESS: STREET 1: C/O WILSHIRE FINANCIAL SERVICES GROUP IN STREET 2: 1776 SW MADISON STREET CITY: PORTLAND STATE: OR ZIP: 97205 BUSINESS PHONE: 5032235600 MAIL ADDRESS: STREET 1: C/O WILSHIRE FINANCIAL SERVICES GROUP IN STREET 2: 1776 SW MADISON STREET CITY: PORTLAND STATE: OR ZIP: 97205 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: VALUE PARTNERS LTD /TX/ CENTRAL INDEX KEY: 0000926614 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752291866 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: C/O FISHER EWING PARTNERS STREET 2: 2200 ROSE AVE SUITE 4660 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2149991900 MAIL ADDRESS: STREET 1: C/O FISHER EWING PARTNERS STREET 2: 2200 ROSS AVE #4660 CITY: DALLAS STATE: TX ZIP: 75201 SC 13D/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 (Amendment No. 1) Wilshire Real Estate Investment Trust Inc. - ------------------------------------------------------------------------- (Name of Issuer) Common Stock, par value $0.0001 per share - ------------------------------------------------------------------------- (Title of Class of Securities) 971892104 - -------------------------------------------------------------------------- (CUSIP Number) Value Partners, Ltd. 4514 Cole Avenue Suite 808 Dallas, Texas 75205 Attn.: Timothy G. Ewing (214) 522-2100 - ---------------------------------------------------------------------------- (Name, Address, Telephone Number of Person Authorized to Receive Notices and Communications) February 26, 1999 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule Sections 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box [x]. Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7(b) for other parties to whom copies are to be sent. The information required on the remainder of this cover page shall not be deemed to be filed for the purpose of Section 18 of the Securities Exchange Act of 1934 (the "Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). - --------------------------- CUSIP No. 971892104 13D - --------------------------- - ---------------------------------------------------------------------------- 1. NAMES OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY) Value Partners, Ltd., 75-2291866 - ---------------------------------------------------------------------------- 2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [ ] - ---------------------------------------------------------------------------- 3. SEC USE ONLY - ---------------------------------------------------------------------------- 4. SOURCE OF FUNDS WC - ---------------------------------------------------------------------------- 5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) [ ] N/A - ---------------------------------------------------------------------------- 6. CITIZENSHIP OR PLACE OF ORGANIZATION Texas - ---------------------------------------------------------------------------- NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH 7. SOLE VOTING POWER 1,000,000 --------------------------------------------- 8. SHARED VOTING POWER 0* --------------------------------------------- 9. SOLE DISPOSITIVE POWER 1,000,000 --------------------------------------------- 10. SHARED DISPOSITIVE POWER 0* --------------------------------------------- - ---------------------------------------------------------------------------- 11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,000,000* - ---------------------------------------------------------------------------- 12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] - ---------------------------------------------------------------------------- 13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 8.7% - ---------------------------------------------------------------------------- 14. TYPE OF REPORTING PERSON PN - ---------------------------------------------------------------------------- - --------------------------- CUSIP No. 971892104 13D - --------------------------- *But see Item 5. - ---------------------------------------------------------------------------- 1. NAMES OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY) Ewing & Partners, 75-2741747 - ---------------------------------------------------------------------------- 2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [ ] - ---------------------------------------------------------------------------- 3. SEC USE ONLY - ---------------------------------------------------------------------------- 4. SOURCE OF FUNDS N/A - ---------------------------------------------------------------------------- 5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e) [ ] N/A - ---------------------------------------------------------------------------- 6. CITIZENSHIP OR PLACE OF ORGANIZATION Texas - ---------------------------------------------------------------------------- NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH --------------------------------------------- 7. SOLE VOTING POWER 0 --------------------------------------------- 8. SHARED VOTING POWER 1,000,000* --------------------------------------------- 9. SOLE DISPOSITIVE POWER 0 --------------------------------------------- 10. SHARED DISPOSITIVE POWER 1,000,000* - ---------------------------------------------------------------------------- 11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,000,000* - ---------------------------------------------------------------------------- 12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES[ ] - ---------------------------------------------------------------------------- 13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 8.7%* - ---------------------------------------------------------------------------- 14. TYPE OF REPORTING PERSON* PN - ---------------------------------------------------------------------------- - --------------------------- CUSIP No. 971892104 13D - --------------------------- *But See Item 5. - ---------------------------------------------------------------------------- 1. NAMES OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY) Timothy G. Ewing - ---------------------------------------------------------------------------- 2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [ ] - ---------------------------------------------------------------------------- 3. SEC USE ONLY - ---------------------------------------------------------------------------- 4. SOURCE OF FUNDS N/A - ---------------------------------------------------------------------------- 5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED [ ] PURSUANT TO ITEM 2(d) OR 2(e) N/A - ---------------------------------------------------------------------------- 6. CITIZENSHIP OR PLACE OF ORGANIZATION United States of America - ---------------------------------------------------------------------------- NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH ------------------------------------------- 7. SOLE VOTING POWER 0 ------------------------------------------- 8. SHARED VOTING POWER 1,000,000* ------------------------------------------- 9. SOLE DISPOSITIVE POWER 0 ------------------------------------------- 10. SHARED DISPOSITIVE POWER 1,000,000* - ---------------------------------------------------------------------------- 11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,000,000* - ---------------------------------------------------------------------------- 12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES[ ] - ---------------------------------------------------------------------------- 13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 8.7%* - ---------------------------------------------------------------------------- 14. TYPE OF REPORTING PERSON IN - ---------------------------------------------------------------------------- Amendment No. 1 Value Partners, Ltd. ("Value Partners") hereby amends its Schedule 13D relating to the shares of common stock, par value $0.0001 per share (the "Common Stock"), of Wilshire Real Estate Investment Trust Inc. (the "Company"). The following Items are hereby supplemented in the manner indicated. Item 2. Identity and Background - -------------------------------- (a)-(b) Value Partners, Ltd. ("Value Partners") is a Texas limited partnership. Ewing & Partners, a Texas general partnership, is the general partner of Value Partners. Timothy G. Ewing and Ewing Asset Management, Inc., a Texas limited liability company ("EAM"), are the general partners of Ewing & Partners, and Mr. Ewing is the managing general partner of Ewing & Partners. EAM is controlled by Mr. Ewing. The principal place of business for Value Partners, Ewing & Partners, EAM and Mr. Ewing is 4514 Cole Avenue, Suite 808, Dallas, Texas 75205. Value Partners, Ewing & Partners and Mr. Ewing are sometimes hereinafter referred to as the "Reporting Persons." Item 4. Purpose of Transaction - ------------------------------- The shares of Common Stock purchased by Value Partners have been acquired for investment purposes. Value Partners may make additional purchases of Common Stock either in the open market or in private trans- actions depending on its evaluation of the Company's business, financial condition, prospects, the market for the Common Stock, other opportunities available to Value Partners, general market and economic conditions and other future developments. Depending on the same factors, Value Partners may decide to sell all or part of its investment in the Common Stock, although it has no current intention to do so. As previously reported, although Value Partners' purchases of Common Stock have been made for investment, as a result of recent losses reported by the Company, Value Partners intends to evaluate means of enhancing the value of its and other shareholders' investment in the Common Stock of the Company, including without limitation the appropriateness of (i) changes in the board of directors or management of the Company; (ii) the composition of the assets of the Company; (iii) the investment policies and practices of the Company; (iv) the Company's status as a real estate investment trust under the Internal Revenue Code of 1986, as amended; (v) the status of Wilshire Realty Services Corporation, a wholly-owned subsidiary of Wilshire Financial Services Group Inc. ("WFSG"), as manager of the Company; (vi) consummated and proposed trans- actions between the Company and WFSG, whether pursuant to WFSG's proposed reorganization or otherwise; and (vii) a merger or other change in control involving the Company. In connection with the foregoing evaluation, which is ongoing, on February 26, 1999,Value Partners sent a letter to the current and former directors of the Company which expressed concerns 1 regarding, among other things, (i) past transactions between the Company and WFSG and its affiliates and (ii) proposed transactions between the Company and WFSG and its affiliates as part of a proposed pre-packaged filing by WFSG under Chapter 11 of the U.S. Bankruptcy Code, as described in a Solicitation and Disclosure Statement of WFSG, dated February 1, 1999. In its letter to current and former directors of the Company, a copy of which is filed as an exhibit to this amended Schedule 13D and is hereby incorporated herein by reference, Value Partners requested that the Company should re-open negotiations immediately with WFSG in order to address the damage already inflicted on the Company by the referenced transactions and in order to mitigate the effects on the Company of the proposed reorganization of WFSG. Among other things, Value Partners requested that (i) the terms of a $10.0 million debtor-in-possession loan facility proposed to be provided by the Company (through a subsidiary) to WFSG be revised to provide for repayment by WFSG immediately upon the effective date of its bankruptcy reorganization; (ii) the proposed terms for settlement of a $17.7 million unsecured loan previously made by the Company to WFSG be revised to provide for cash payments at a market interest rate for similar unsecured debt; (ii) Andrew A. Wiederhorn and Lawrence A. Mendelsohn, directors and executive officers of the Company and directors, executive officers and controlling stockholders of WFSG, immediately resign from the Board of Directors of the Company because of their fundamental and irreconcilable conflicts of interest, to be replaced by independent directors acceptable to the shareholders of the Company; and (iv) the Board of Directors of the Company retain independent counsel to (x) review the Management Agreement between the Company and Wilshire Realty Services Corporation, a subsidiary of WFSG, to determine whether a basis exists for termination thereof for cause and (y) investigate and advise the Board of Directors as to any possible claims which the Company may have against WFSG, its corporate affiliates and their respective directors and officers for breach of their duties and obligations to the Company, and pending completion of such investigation, Value Partners requested that the Company not give any releases to WFSG, its corporate affiliates or any of their respective directors or officers. Should the Board of Directors of the Company fail to address the foregoing issues immediately, Value Partners intends to pursue all legal remedies available to it. Other than as set forth above, none of the Reporting Persons has any specific plans or proposals which relate to or would result in: (a) the acquisition by any person of additional securities of the Company, or the disposition of securities of the Company; (b) an extraordinary corporate trans- action, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries; (c) a sale or transfer of a material amount of assets of the Company or any of its subsidiaries; (d) any change in the present board of directors or management of the Company, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board; (e) any material change in the present capitalization or dividend policy of the Company; (f) any other material change in the Company's business or corporate structure; (g) changes in the Company's charter, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of the Company by any person; (h) causing a class of securities of the Company to be delisted from a national securities exchange or to cease to be authorized to be quoted in an interdealer quotation system of a registered national securities association; (i) a class of equity securities of the Company becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Act; or (j) any action similar to any of those enumerated above. 2 Item 7. Material to Be Filed as Exhibits - ----------------------------------------- The following documents are filed as exhibits to this Schedule 13D: Exhibit 1 Second Amended and Restated Agreement of Limited Partnership of Value Partners, dated as of January 1, 1998.(1) Exhibit 2 Amended and Restated Management Agreement between Ewing & Partners and Value Partners (included as Exhibit A to Exhibit 1 to this Schedule 13D).(1) Exhibit 3 Amended and Restated Agreement of General Partnership of Ewing & Partners, dated as of January 1, 1998.(2) Exhibit 4 Joint Filing Agreement, dated as of February 8, 1998, among Value Partners, Ewing & Partners and Mr. Ewing.(1) Exhibit 5 Letter, dated February 26, 1999, from Value Partners to current and former directors of the Company. - -------------- (1) Incorporated by reference to the initial filing on Schedule 13D to which this Amendment relates. (2) Incorporated by reference to Amendment No. 9 to the Schedule 13D filed on January 8, 1998 by Value Partners, Ewing & Partners and Mr. Ewing with respect to their interests in Allstate Financial Corporation. 3 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, each of the undersigned certifies that the information set forth in this statement is true, complete and correct. VALUE PARTNERS, LTD. By: EWING & PARTNERS, its General Partner March 1, 1999 By: /s/ Timothy G. Ewing -------------------------------- Timothy G. Ewing, Managing Partner EWING & PARTNERS March 1, 1999 By: /s/ Timothy G. Ewing --------------------------------- Timothy G. Ewing, Managing Partner March 1, 1999 By: /s/ Timothy G. Ewing --------------------------------- Timothy G. Ewing 4 EX-5 2 EXHIBIT 5 February 26, 1999 VIA FEDERAL EXPRESS Lawrence A. Mendelsohn Jordan D. Schnitzer Wilshire Real Estate Investment Trust, Inc. Jordan Schnitzer Properties 1776 SW Madison Street 1121 S.W. Salmon Street Portland, Oregon 97205 Portland, Oregon 97205 David C. Egelhoff Andrew A. Wiederhorn Macadam Forbes, Inc. Wilshire Real Estate Investment 1800 S.W. 1st Street Trust, Inc. Suite 100 1776 SW Madison Street Portland, Oregon 97201 Portland, Oregon 97205 John C. Condas Patrick Terrell Jackson, DeMarco & Peckenpaugh c/o Wilshire Real Estate Investment Four Park Plaza, 16th Floor Trust, Inc. Irvine, California 92714 1776 SW Madison Street Portland, Oregon 97205 Steven Kapiloff Winthrop, Stimson, Putnam & Roberts 695 East Main Street Post Office 6760 Stamford, Connecticut 06904 Gentlemen: As you know, Value Partners, Ltd. ("Value Partners") is the owner of one million shares of issued and outstanding common stock of Wilshire Real Estate Investment Trust, Inc. ("WREI"). We have recently received certain solicitation materials of Wilshire Financial Services Group, Inc. ("WFSG") in connection with its proposed pre-packaged Chapter 11 plan of reorganization (the "Solicitation"). The Solicitation describes both past transactions between WREI and WFSG and current negotiations and proposed transactions between WREI and WFSG as part of an anticipated Chapter 11 filing for WFSG. February 26, 1999 Page 2 This letter is directed to each of you as a current or former director of WREI in order to place you on notice of Value Partners' claims and objections to matters raised in the Solicitation, as well as to certain aspects of the Board's overall stewardship of WREI. Background ---------- In the short time since WREI's initial public offering, WREI's financial situation has deteriorated dramatically. Specifically, in merely the first two quarters of WREI's operations ending September 30, 1998, shareholders' equity declined from approximately $146.8 million to $100.4 million, or by over $46 million. Value Partners suspects that WREI has incurred additional substantial losses during its quarter ending December 31, 1998, thereby reducing shareholders' equity to perhaps a level below $75 million. While some of this decline is attributable to losses incurred during the liquidation of significant assets in the fall of 1998 to meet margin calls, a troubling percentage of WREI's true liquidity crisis and decline in shareholders' equity to date has been triggered by questionable loan transactions in the third quarter of 1998 between WREI, WFSG and Wilshire Credit Corporation ("WCC"), an entity controlled by Messrs. Weiderhorn and Mendelsohn. In addition, WREI recently agreed to loan $5 million to WFSG with actual knowledge that WFSG anticipated filing a Chapter 11 Petition. WREI also has negotiated debtor in possession ("DIP") financing to WFSG on terms which WFSG has stated in the Solicitation are unavailable from any other source. "This compromise and settlement was only reached after the Company [WFSG] had approached several well known debtor in possession lenders, all of whom declined to provide such financing on comparable terms." (Solicitation p. 4.) "The Company [WFSG] is unaware of any other potential source of DIP financing other than the DIP Facility." (Solicitation p. 15.) The following transactions in particular require an explanation by each of you as a member of the Board of Directors of WREI: 1. Loans Between WREI and WFSG. During the quarter ending September 30, 1998, a wholly owned subsidiary of WFSG (WMFC 1997-1) loaned WREI $15.6 million secured by operating real estate of WREI. During that same quarter, WREI loaned WFSG $17.7 million on an unsecured basis. In addition, WREI borrowed $17.4 million on an unsecured basis from WCC. This raises a simple question. Why would a Board of Directors, acting with the best interests of WREI in mind, permit WREI to borrow money on a secured basis, and loan money to that same lender's parent on an unsecured basis? It is reasonable to assume that had WREI refused to loan WFSG $17.7 million, WREI would not have had to borrow from and repay to WCC $17.4 million. February 26, 1999 Page 3 While the substance of the above transactions is questionable, the structure is also troubling. Because a different WFSG affiliated entity (or WCC) was a party to each of these three loan transactions, it appears WFSG acted from the outset to create indebtedness for WREI which WREI could not eliminate or minimize through set offs against loans to WFSG or its affiliates. Because of WFSG's present financial condition, WREI's $17.7 million loan to WFSG remains outstanding and is to be seriously compromised or converted to equity at a sub- stantial loss to WREI. Meanwhile, WREI must repay its loans from WCC and WFSG which totaled $33 million (or perhaps has already paid these in part with pro- ceeds of a recovery from Southern Pacific). A decision to put at risk in excess of 10% of WREI's original shareholder value in a single unsecured loan to WFSG in this manner is indefensible.(1) 2. Debtor in Possession Financing. In the Solicitation, WFSG disclosed that it proposes to borrow an additional $10 million from WREI (through WREI's subsidiary, Wilshire Real Estate Partnership, L.P. ("WREP")) to fund certain needs in a Chapter 11 bank- ruptcy of WFSG. This proposed loan includes the following features: a. Interest Rate 12% b. Maturity-this loan does not mature until February 29, 2004, to be repaid through principal and interest payments commencing on February 29, 2000. Prior to February 29, 2000, interest only will be payable on the facility. Hence, a company with severe liquidity problems is loaning $10 million, or approximately fif- teen percent (15%) of what we project will be its remaining shareholders' equity, to a company about to enter the uncertain future of Chapter 11. The loan will not be repaid in full until 2004 and is secured by stock in a bank subject to significant regulatory action by the Office of Thrift Supervision ("OTS") as of January 1999. c. Commitment Fee-WFSG is not paying a commitment fee to WREI/WREP. d. Security-The proposed DIP loan is to be secured by common stock of First Bank of Beverly Hills, FSB ("First Bank") and its parent (a direct subsidiary of WFSG), subject to existing liens. According to the Solicitation, prior to October, 1998, First Bank was under a cease and desist order by the OTS; and again on January 7, 1999, the OTS issued a new cease and desist order with respect to transactions with affiliates. The Solicitation fur- ther states that the OTS could re-evaluate WFSG's ownership of First Bank or place First Bank in conservatorship or receiver- ship. The most recent OTS enforcement action is very telling, as it appears to have arisen as a result of affiliated - -------------- 1 The Solicitation also states that WREI holds approximately $20 million prin- cipal amount of Series B notes of WFSG. Value Partners would like an explanation as to how much was paid for these securities, when such sum was paid and to whom. February 26, 1999 Page 4 transactions between First Bank and various entities controlled by Mr. Wiederhorn and Mr. Mendelsohn, transactions perhaps similar to the affiliated transactions between WREI, WFSG, and WFSG's other related parties. e. Pre-Bankruptcy Interim Loan-$5 million of the proceeds of the DIP loan are to be used to repay a disclosed $5 million interim loan made in January 1999 by WREP to WFSG, (through Wilshire Acquisition Corporation ("WAC"), a subsidiary of WFSG), which loan was presumably approved by each of you. This pre-petition loan is allegedly secured by a priority lien on First Bank common stock. f. Pre-bankruptcy Unsecured Debt- As set forth above, WREI and WREP loaned WFSG $17.7 million on an unsecured basis. In the event WREI enters into this DIP loan, this debt will be restructured from a 13% loan due upon thirty (30) days notice to a 6% Payment in Kind ("PIK") note due 2006. In the event that the DIP loan is not made, this debt will be converted to equity equal to between 37% and 42% of the debt's original value (according to the Solicitation). Accordingly, it appears that a questionable unsecured loan which never should have been made can now be "salvaged" (if a 7 year 6% PIK note can be considered a reasonably equivalent asset) only by WREI's loaning an additional $10 million on a post-petition basis to a distressed company. g. Lack of Liquidity WREI apparently lacks the ability to make this loan unless it can liquidate certain assets. This issue is discussed in more detail below. 3. Pre-Bankruptcy Interim Loan. In January 1999, WREP agreed to loan to WFSG (through WAC) the sum of $5 million, which is referenced above. This loan is secured by a priority lien on First Bank stock. The following features on this interim loan were set forth in the solicitation material: a. In the event the DIP loan is not made by WREP, this interim loan will not be paid immediately and collateral pledged to secure repayment will be subordinated to a new DIP lender, if any. "The Interim Facility is guaranteed by the Company [WFSG] and is secured by a first priority pledge of all of the stock of First Bank; provided, however, if WFSG obtains one or more commitments from other lenders meeting certain conditions and WREP declines to make a comparable lien WREP agrees to subordinate its security interest in the shares of First Bank to those of such other lenders up to a maximum amount of such indebtedness. " (Solicitation p. 132.) Under such circumstances, the interim facility will mature February 29, 2004, with fully February 26, 1999 Page 5 amortizing principal and interest payments commencing February 29, 2000. This loan will further be subject to modification in WFSG's bankruptcy proceeding. In addition, to the extent WSFG has preference or fraudulent transfer claims against WREI (none of which are described in the Solicitation), there is a real concern as to whether such claims can be asserted as a defense against payment of the interim facility. b. Given the liquidity problems of WREP, the DIP facility can be funded only in the event WREP liquidates certain of its assets. "The funding of the DIP Facility is subject to a number of conditions, including WREP having sufficient available funds to make disbursements under the DIP Facility, the restructuring of one of WREP's outstanding borrowings, and the sale by WREP of a large loan in its portfolio. There can be no assurance that the DIP Facility will be funded." (Solicitation p. 133.) Absent such an asset liquidation and restructuring (which it appears WREI is undertaking to meet WFSG's needs and not its own), the DIP loan cannot be made and $5 million in liquidity is gone. In the event it can liquidate this asset, the DIP loan will be made and $10 million in liquidity has disappeared. c. In the Solicitation, WFSG notes that the proposed DIP facility was offered to a number of institutions, all of whom refused to enter into such an agreement on terms similar to this DIP facility. This suggests that while the opportunity is favorable to WFSG, it is unfavorable to WREP. d. As is set forth above, should WREI be unable to make the DIP loan, the interim loan is to be repaid over five years. Further, its security interest in the common stock of the First Bank is to be subordinated to a new DIP lender, if any. In short, you author- ized a $5 million interim loan which can be repaid immediately only in the event that WREI successfully liquidates much needed assets in order to make a $10 million DIP loan on terms no experienced DIP lender would authorize. This is not in WREI's best interests. 4. Non-Payment of Dividend. On September 17, 1998, WREI announced a dividend of $0.40 per share, pay- able on October 27, 1998. On October 26, 1998, WREI announced that it had lost between $40 and $50 million on investments and was delaying for ninety (90) days the $0.40 per share dividend. On November 23, 1998, WREI announced that its decision to postpone the payment of the $0.40 per share dividend was ". . . to increase short-term liquidity. . .," but reiterated its intention to pay the postponed $0.40 per share dividend on January 27, 1999. However, on December 30, 1998, WREI announced that ". . . its Board of Directors has authorized the repurchase of up to one million shares of the February 26, 1999 Page 6 Company's common stock . . ." and that ". . . it will further postpone its pre- vious announced third quarter dividend to increase short-term liquidity." To date, WREI has not paid its previously declared $0.40 per share dividend. Rather, WREI diverted limited available cash to a $5 million interim loan to WFSG that may not be repaid in full until the year 2004. The Solicitation suggests that the Board of Directors of WREI has breached its duties to WREI and its shareholders by entering into highly questionable transactions which put at risk a significant portion of the shareholders' equity of WREI and have seriously impaired WREI's future liquidity. These public dis- closures support the conclusion that this Board is failing to exercise independent judgment in negotiations with WFSG. Given that Mr. Wiederhorn and Mr. Mendelsohn are the chairman/chief executive officer and the president, respectively, of both WREI and WFSG, each of you should have exercised heightened scrutiny of these transactions. 5. Management Agreement and Servicing Agreement. WREI and WREP entered into a Management Agreement with Wilshire Realty Services Corporation. ("WRSC"), a subsidiary of WFSG. In addition, WREI entered into a loan servicing agreement with WCC, which is owned by Mr. Wieder- horn and Mr. Mendelsohn. According to the Solicitation, WCC is to become a subsidiary of WFSG. Given the impending Chapter 11 proceeding of WFSG and the questionable transactions between WFSG and WREI, there is not a good reason why WREI and WREP should continue the Management and Service Agreements with WFSG and its wholly owned subsidiaries. This is particularly true given that WFSG has done such a poor job of managing WREI thus far. Summary ------- As members of the Board of Directors of WREI, you owed and continue to owe a duty to take actions in the best interest of WREI's shareholders. Subsequent to the public offering and while under your stewardship, WREI entered into a number of transactions with WFSG (or subsidiaries) and WCC which require immediate explanation, not only as to their substance, but also in some cases as to a structure seemingly established for the benefit of WFSG or WCC, to the detriment of WREI. While the loans between WREI, WFSG and WCC appear to involve a similar exchange of value in and out of WREI, the net effect is that WREI owed WFSG and WCC approximately $33 million, of which debts $15.6 million owed to WFSG is secured, and none of which could not be offset against a $17.7 million unsecured loan that WREI made to WFSG. To make matters worse, you are in the process of squandering an opportunity to minimize the impact of the un- even treatment accorded WREI in 1998 and 1999 by WFSG through the negotiation of interim and DIP financing with WFSG. Rather than strengthen WREI's position, you have actually weakened WREI's financial condition by placing at risk $10 million in liquidity. In effect, you, as a Board, have allowed WFSG to use WREI February 26, 1999 Page 7 in a way that parallels WFSG's use of First Bank, which use has precipitated recent regulatory prohibitions. In order to address the severe damage already inflicted on WREI, and in order to mitigate the effects of the proposed reorganization of WFSG in its anticipated Chapter 11 filing, WREI should re-open negotiations immediately with WFSG to obtain, at least, the following in exchange for the proposed DIP facility: 1. The terms of the DIP financing should be revised to provide for repay- ment of any outstanding balance of the DIP facility immediately upon the effective date of WFSG's bankruptcy reorganization, assuming the Board can demonstrate that it is in fact prudent for WREI to undertake the DIP facility; 2. The proposed terms for settlement of the $17.7 million loan to WFSG should be revised to provide for cash payments at a normal market interest rate for similar unsecured debt. This loan is clearly impaired notwithstanding WFSG's self serving categorization of the loan as unimpaired in its reorgan- ization plan. WREI should assert its rights accordingly; 3. Messrs. Weiderhorn and Mendelsohn should immediately resign from the Board of Directors of WREI and be replaced with two independent directors accept - -able to the shareholders. Messrs. Weiderhorn and Mendelsohn's conflicts are fundamental and irreconcilable; and 4. The Board should retain independent counsel to (i) review the Manage- ment Agreement with WRSC and WFSG to determine whether a basis exists for the termination of that contract for cause and (ii) investigate, and advise the Board as to, any possible claims that WREI or WREP may have against WFSG, WRSC, WCC and WAC, and their officers and directors, for breach of their duties and obligations to WREI or WREP. In the interim, WREI should not give any releases to WFSG, its affiliates or any of its officers or directors. Absent adequate resolution of these above issues, WREI should not provide the DIP facility and should object to any proposed plan to reorganize WFSG. Should the Board fail to address these issues immediately, Value Partners intends to pursue all legal remedies available to it.2 I would like to arrange a meeting with you at once to learn how you intend to resolve these issues in a manner that serves the best interests of WREI and its shareholders. I look forward to hearing from you as soon as possible. - --------------- 2 This letter is not intended to be an exhaustive analysis of all issues, and there are other issues that exist, including, but not limited to, WREI's failure to qualify as a REIT for federal tax purposes. February 26, 1999 Page 8 Sincerely yours, VALUE PARTNERS, LTD. By: Ewing & Partners, Its General Partner /s/ Timothy G. Ewing ------------------------- Timothy G. Ewing Managing Partner cc: Jack R. Bird, Esq.- Bergman, Yonks, Stein & Bird, L.L.P. Anthony J. Trenga, Esq.- Miller & Chevalier -----END PRIVACY-ENHANCED MESSAGE-----