SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended March 31, 2004 Commission file number 1-467
WILSHIRE ENTERPRISES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-0513668
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
921 Bergen Avenue - Jersey City, New Jersey 07306-4204
------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(201) 420-2796
--------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 13, 2004.
Common Stock $1 Par Value ----- 7,802,831
WILSHIRE ENTERPRISES, INC
INDEX
Page No.
--------
Part I 1. Financial Information
Financial Information: 1
Condensed Consolidated Balance Sheets -
March 31, 2004 (Unaudited) and December 31, 2003
Unaudited Condensed Consolidated Statements of Income - 2
Three months ended March 31, 2004 and 2003
Unaudited Condensed Consolidated Statement of Cash Flows - 3
Three months ended March 31, 2004 and 2003
Notes to Unaudited Condensed Consolidated Financial Statements 4
2. Management's Discussion and Analysis 10
of Financial Condition and Results of Operations
3. Quantitative and Qualitative Disclosure About Market Risk 15
4. Controls and Procedures 16
Part II Other Information
6. Exhibits and Reports on Form 8-K 17
WILSHIRE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
(Unaudited)
---------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $11,489,000 $ 7,763,000
Restricted cash 184,000 327,000
Marketable securities, available-for-sale, at fair value 2,070,000 1,996,000
Accounts receivable net of allowance of $65,000 in 2004
and 2003, respectively 1,357,000 1,802,000
Prepaid expenses and other current assets 2,057,000 1,870,000
---------------- -----------------
Total current assets 17,157,000 13,758,000
---------------- -----------------
NONCURRENT ASSETS
Mortgage notes receivable 1,850,000 2,504,000
Other noncurrent 865,000 860,000
PROPERTY AND EQUIPMENT
Oil and gas properties - Held for sale 143,298,000 143,601,000
Real estate properties 54,414,000 54,162,000
Real estate properties - Held for sale 9,456,000 17,907,000
---------------- -----------------
207,168,000 215,670,000
Less:
Accumulated depreciation and amortization 15,246,000 14,721,000
Accumulated depreciation, depletion and amortization- Property held for sale 117,207,000 119,074,000
---------------- -----------------
74,715,000 81,875,000
---------------- -----------------
TOTAL ASSETS $ 94,587,000 $98,997,000
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 737,000 $ 3,645,000
Accounts payable 1,921,000 1,894,000
Income taxes payable 1,134,000 154,000
Deferred income taxes 10,522,000 10,489,000
Accrued liabilities 1,721,000 800,000
Deferred income 570,000 419,000
Current liabilities associated with discontinued operations 1,771,000 3,520,000
---------------- -----------------
Total current liabilities 18,376,000 20,921,000
NONCURRENT LIABILITIES
Long-term debt, less current portion 47,247,000 47,719,000
Deferred income taxes 1,402,000 1,058,000
Deferred income 655,000 725,000
Other Long-term liabilities 224,000 227,000
Non current liabilities associated with discontinued operations - 3,820,000
---------------- -----------------
Total liabilities 67,904,000 74,470,000
---------------- -----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 1,000,000 shares authorized; none
issued and outstanding in 2004 and 2003 - -
Common stock, $1 par value, 15,000,000 shares authorized; issued
10,013,544 shares in 2004 and 2003 10,014,000 10,014,000
Capital in excess of par value 9,029,000 9,029,000
Treasury stock 2,210,713 and 2,210,713 shares at March 31, 2004
and December 31,2003, respectively, at cost (10,355,000) (10,355,000)
Retained earnings 19,866,000 17,267,000
Accumulated other comprehensive loss (1,871,000) (1,428,000)
---------------- -----------------
Total shareholders' equity 26,683,000 24,527,000
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 94,587,000 $ 98,997,000
================ =================
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
1
WILSHIRE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 2004 and 2003
March 31, March 31,
2004 2003
---------------------- --------------------
Revenues
Real estate $ 3,037,000 $ 2,926,000
---------------------- --------------------
Total revenues 3,037,000 2,926,000
---------------------- --------------------
Cost and Expenses
Real estate operating expenses 1,763,000 1,672,000
Depreciation and amortization 542,000 763,000
General and administrative 329,000 274,000
---------------------- --------------------
Total costs and expenses 2,634,000 2,709,000
---------------------- --------------------
Income from Operations 403,000 217,000
Other Income
Dividend and interest income 194,000 224,000
Gain on sale of securities - 261,000
Other Income (expense) 53,000 126,000
Insurance Proceeds - 1,000,000
Interest Expense (763,000) (1,442,000)
---------------------- --------------------
Income (loss) before provision for income taxes (113,000) 386,000
Provision (Benefit) for Income Taxes (54,000) (100,000)
---------------------- --------------------
Net Income (loss) from Continuing Operations (59,000) 486,000
Discontinued Operations - Real Estate, Net of Taxes
Loss from operations (121,000) (119,000)
Gain from sales 3,036,000 --
Discontinued Operations - Oil & Gas, Net of Taxes (257,000) 646,000
---------------------- --------------------
Net Income $ 2,599,000 $ 1,013,000
====================== ====================
Basic earnings per share:
Earnings (loss) from continuing operations $ (0.01) $ 0.06
Earnings from discontinued operations 0.34 0.07
---------------------- --------------------
Net earnings applicable to common stockholders $ 0.33 $ 0.13
====================== ====================
Diluted earnings per share:
Earnings (loss) from continuing operations $ (0.01) $ 0.06
Earnings from discontinued operations 0.34 0.07
---------------------- --------------------
Net earnings applicable to common stockholders $ 0.33 $ 0.13
====================== ====================
The accompanying notes to consolidated financial statements are an integral part
of these financial statements.
2
WILSHIRE ENTERPRISES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
March 31, March 31,
2004 2003
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,599,000 $ 1,013,000
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation, depletion and amortization 1,342,000 1,544,000
Deferred income tax provision (benefit) 344,000 1,311,000
Increase (Decrease) in deferred income 43,000 (230,000)
Gain on sales of real estate assets (4,897,000) -
Gain on sales of marketable securities -
(261,000)
Changes in operating assets and liabilities -
Decrease (Increase) in accounts receivable 445,000 (891,000)
Increase in income taxes receivable (312,000) (1,077,000)
Decrease (Increase) in prepaid expenses and other current assets 125,000 (410,000)
Increase (Decrease) in other liabilities (8,000) 470,000
Increase (Decrease) in accounts payable, accrued
liabilities and taxes payable 1,784,000 (888,000)
-------------- -------------
Net cash provided by operating activities 1,465,000 581,000
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Capital expenditures - real estate (340,000) (3,633,000)
Proceeds (Capital expenditures) - oil & gas 146,000 (646,000)
Proceeds from sales and redemptions of marketable securities - 781,000
Proceeds from sales of real estate properties 10,909,000 -
Proceeds on mortgage notes receivable 654,000 151,000
Decrease in restricted cash 143,000 -
-------------- -------------
Net cash provided by (used in) investing activities 11,512,000 (3,347,000)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt - 35,471,000
Principal payments of long-term debt (8,767,000) (34,368,000)
Financing Costs - (398,000)
-------------- -------------
Net cash used in financing activities (8,767,000) 705,000
-------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (484,000) 438,000
-------------- -------------
Net increase (decrease) in cash and cash equivalents 3,726,000 (1,623,000)
CASH AND CASH EQUIVALENTS, beginning of year 7,763 ,000 4,164,000
-------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 11,489,000 $2,541,000
============== =============
SUPPLEMENTAL DISCLOSURES TO THE STATEMENTS OF CASH FLOWS:
Cash paid during the year for -
Interest $ 756,000 $1,744,000
============== =============
Income taxes, net $ 76,000 $ 160,000
============== =============
The accompanying notes to consolidated financial statements are an integral part
of these financial statements
3
WILSHIRE ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements included herein
have been prepared by the Registrant, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to
such rules and regulations, although the Registrant believes that the
disclosures are adequate to make the information presented not misleading.
It is suggested that these unaudited condensed consolidated financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
This condensed financial information reflects, in the opinion of
management, all adjustments necessary to present fairly the results for
the interim periods.
Net income for the first quarter in 2003 as previously reported has been
reduced by $109,000 to record the under-accrual of certain General and
Administrative expenses. This correction, resulted in an adjustment to net
income for the first quarter of 2003 from $1,122,000 or $0.14 per share as
originally reported, to $1,013,000 or $0.13 per share.
In July 2003 the Company committed to the sale of its oil and gas
operations. The financial statements have been adjusted to reflect the oil
and gas operations as "Discontinued Operations" in 2003 and 2004.
In April 2004 the Company sold its oil and gas operations for $28.3
million in gross proceeds, of which $600,000 has been placed in escrow to
allow for any potential post closing adjustments relating to its U.S.
operations. As the sale was effective as of March 1, 2004, the financial
statements as presented only reflect oil and gas operations for the first
two months of 2004, compared to a full three months of operations in 2003.
Pursuant to Statement of Financial Accounting Standard No. 144 (SFAS 144),
the Company is required to reflect the gain on the sale of real estate
properties plus the properties' year to date revenue, operating expenses
and related interest expense as "Discontinued Operations". On March 31,
2004, the Company consummated the sale of eleven real estate properties in
Jersey City, New Jersey for a net book gain after taxes of approximately
$3.0 million. This transaction, less related mortgage debt, increased the
Company's capital resources by approximately $5.3 million. In addition,
properties currently under contract for sale are presented as "Real estate
properties - Held for sale" on the Balance Sheet and the related property
operations are shown as Discontinued on the statement of income.
Basis of Presentation
Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform to the 2004 presentation.
Accounting for Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 148 to amend alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, Statement No. 148 amends
the disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. However, the Company has continued
to account for options in accordance with the provision of APB Opinion No.
25, "Accounting for Stock Issues to Employees" and related
interpretations. Accordingly, no compensation expense has been recognized
for stock option plans.
4
The following tables sets forth the Company's pro forma information for
its common stockholders for the three months ended March 31, 2004 and 2003
(in thousands except earnings per share data):
For Three Months Ended March 31,
2004 2003
---------------- ---------------
Net income as reported $2,599 $1,013
Add: Stock option expense included in net income (loss) - -
Less: Stock option expense determined under fair value recognition
method for all awards (5) (15)
------------- ------------
Pro forma net income $2,594 $998
============= ============
Net income per share as reported:
Basic Earnings per share:
Earnings per share from continuing operations $ (0.01) $ 0.06
Earnings per share from discontinued operations 0.34 0.07
------------- ------------
Net earnings applicable to common shareholders $ 0.33 $ 0.13
============= ============
Diluted Earnings per share:
Earnings per share from continuing operations $ (0.01) $ 0.06
Earnings per share from discontinued operations 0.34 0.07
------------- ------------
Net earnings applicable to common shareholders $ 0.33 $ 0.13
============= ============
Pro forma net income per share:
Basic Earnings per share:
Earnings per share from continuing operations $(0.01) $ 0.06
Earnings per share from discontinued operations 0.34 0.07
------------- ------------
Net earnings applicable to common shareholders $0.33 $ 0.13
============= ============
Diluted Earnings per share:
Earnings per share from continuing operations $(0.01) $0.06
Earnings per share from discontinued operations 0.33 0.07
------------- ------------
Net earnings applicable to common shareholders $0.32 $0.13
============= ============
The fair value was estimated using the Black-Scholes option-pricing model
based on the weighted average market price at grant date of $3.32 in 2002
and $3.51 in 2003 and the following weighted average assumptions;
risk-free interest rate of 3.87% for 2002 and 3.00% for 2003, volatility
of 33.1% for 2002 and 2003, no dividend yield for 2002 or 2003, and an
expected option life of 5 years. There were no options issued in the three
months ended March 31, 2004.
Oil and Gas Properties
The Company follows the accounting policy, generally known in the oil and
gas industry as "full cost accounting". Under full cost accounting, the
Company capitalizes all costs, including interest costs, relating to the
exploration for and development of its mineral resources. Under this
method, all costs incurred in the United States and Canada are accumulated
in separate cost centers and are amortized using the gross revenue method
based on total future estimated recoverable oil and gas reserves. In July
2003 the Company committed to the sale of its oil and gas properties.
These properties were sold in April 2004, with an effective sale date of
March 1, 2004.
5
2. SEGMENT INFORMATION
For the first two months of 2004 the Company was engaged in the
exploration of oil and gas, both in its own name and through several
wholly-owned subsidiaries, on the North American continent. In July 2003
the Company committed to the sale of its oil and gas operations and
consummated the sale, effective March 1, 2004 in April 2004. The financial
statements have been adjusted to present oil and gas operations as
"Discontinued Operations" in 2003 and 2004. The Company also conducts real
estate operations throughout the United States, owning apartment complexes
as well as commercial and retail properties.
6
Oil and Gas
The Company conducted its oil and gas operations in the United States and
Canada. Oil and gas operations in the United States were located in
Arkansas, California, Kansas, Nebraska, New Mexico, Ohio, Oklahoma,
Pennsylvania, Texas and Wyoming. In Canada, the Company conducted oil and
gas operations in the Provinces of Alberta, British Columbia and
Saskatchewan. In July 2003 the Company committed to the sale of its oil
and gas properties. This sale was completed in April 2004 when the Company
finalized the sale of its United States and Canadian oil and gas
properties, effective March 1, 2004.
Real Estate
The Company's real estate operations are conducted in the states of
Arizona, Texas, Florida, Georgia and New Jersey. The Company's properties
consist of apartment complexes as well as commercial and retail
properties. During the first quarter of 2004 the Company sold eleven real
estate properties. The gains from these sales as well as the revenue,
operating expenses and mortgage interest expense have been reflected as
Discontinued Operations - Real Estate as required by FAS 144. In addition,
the operations of real estate properties currently under contract for sale
are also reflected in Discontinued Operations and as Real Estate
Properties - Held for Sale.
Corporate
The Company holds investments in certain marketable securities, which are
classified as available for sale. From time to time, the Company buys and
sells securities in the open market. Over the years, the Company has
decreased its holding in marketable securities and focused its resources
in the oil and gas and real estate divisions.
The following segment data is presented based on the Company's internal
management reporting system-
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2004 2003
(Unaudited) (Unaudited)
-------------- --------------
Revenues-
Oil and gas - United States $ 937,000 $ 1,253,000
Oil and gas - Canada 970,000 1,260,000
Real estate 3,669,000 3,637,000
-------------- --------------
$ 5,576,000 $ 6,150,000
-------------- --------------
Income (loss) from operations and reconciliation
to income before provision for income taxes-
Oil and gas - United States (a) $ (854,000) $ 21,000
Oil and gas - Canada (a) 385,000 555,000
Real estate 305,000 452,000
Corporate (208,000) (74,000)
-------------- --------------
Income from operations (372,000) 954,000
Other income 5,145,000 1,632,000
Interest expense (851,000) (1,627,000)
-------------- --------------
Income before provision for income taxes $ 3,922,000 $ 959,000
-------------- --------------
Identifiable assets-
Oil and Gas Properties - United States $ 15,337,000 $14,418,000
Oil and Gas Properties - Canada 14,073,000 20,041,000
Real estate properties 51,738,000 59,482,000
Corporate 13,439,000 17,007,000
-------------- --------------
$ 94,587,000 $110,948,000
-------------- --------------
(a) Represents revenues less all operating costs, including depreciation,
depletion and amortization.
7
3. COMPREHENSIVE INCOME
Comprehensive income for the three months ended March 31, 2004 and 2003 is
as follows:
2004 2003
(Unaudited) (Unaudited)
----------------- -----------------
Net income $2,599,000 $1,013,000
----------------- -----------------
Other comprehensive income net of taxes
Foreign currency translation adjustments (484,000) 438,000
Change in unrealized gain on marketable securities 41,000 196,000
----------------- -----------------
Other comprehensive (loss) income (443,000) 634,000
----------------- -----------------
Comprehensive income $2,156,000 $1,691,000
================= =================
Changes in the components of Accumulated Other Comprehensive Income (Loss)
for the year 2003 and for the three months ended March 31, 2004 are as
follows-
Unrealized Gains Cumulative Accumulated
(Losses) on Foreign Currency Other
Available-for-Sale Translation Comprehensive
Securities Adjustment Income (Loss)
----------------- ---------------- -------------
BALANCE, December 31, 2002 $ 653,000 $(3,742,000) $(3,089,000)
Change for the year 2003 (545,000) 2,206,000 1,661,000
----------------- ---------------- -------------
BALANCE, December 31, 2003 108,000 (1,536,000) (1,428,000)
Change for the three months 41,000 (484,000) (443,000)
----------------- ---------------- -------------
BALANCE, March 31, 2004 $149,000 $(2,020,000) $(1,871,000)
================= ================ =============
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share-
Three Months Ended March 31
------------------------------------------
2004 2003
---- ----
Numerator-
Net (loss)income from continuing operations $ (59,000) $ 481,000
Net income from discontinued operations 2,658,000 532,000
------------- --------------
Net Income $ 2,599,000 $ 1,013,000
============= ==============
Denominator-
Weighted average common
shares outstanding - Basic 7,802,831 7,809,834
Incremental shares from assumed
conversions of stock options 184,396 37,461
------------- --------------
Weighted average common shares
outstanding - Diluted 7,987,227 7,847,295
============= ==============
Basic earnings per share:
Earnings(loss)per share from continuing operations $ (0.01) $ 0.06
Earnings per share form discontinued operations 0.34 0.07
------------- --------------
Net earnings applicable to common shareholders $ 0.33 $ 0.13
============= ==============
Diluted earnings per share:
Earnings (loss) per share from continuing operations $ ( 0.01) $ 0.06
Earnings per share form discontinued operations 0.34 0.07
------------- --------------
Net earnings applicable to common shareholders $ 0.33 $ 0.13
============= ==============
5. OTHER INCOME
Other income for 2003 includes $1,000,000 received as the beneficiary of
life insurance policies on the life of the Company's former Chairman and
President who had been serving as its Senior Consultant up to his death on
January 7, 2003. The receipt of these funds are nontaxable to the Company.
8
6. INTEREST EXPENSE
During the first quarter of 2003 the Company was able to refinance and
modify the majority of its mortgage notes payable reducing its overall
effective interest rate from 7.36% to 6.10% and extending its maturity and
terms. During the next ten years, the Company's interest expense related
to its current debt should decrease approximately $600,000 annually.
7. COMMITMENTS AND CONTINGENCIES
In June 1996 the Company's Board of Directors adopted the Stockholder
Protection Rights Plan (the Rights Plan). The Rights Plan provides for
issuance of one Right for each share of common stock outstanding as of
July 6, 1996. The Rights are separable from and exercisable upon the
occurrence of certain triggering events involving the acquisition of at
least 15% (or, in the case of certain existing stockholders, 25%) of the
Company's common stock by an individual or group, as defined in the Rights
Plan (an Acquiring Person) and may be redeemed by the Board of Directors
at a redemption price of $0.01 per Right at any time prior to the
announcement by the Company that a person or group has become an Acquiring
Person.
On and after the tenth day following such triggering events, each Right
would entitle the holder (other than the Acquiring Person) to purchase $50
in market value of the Company's Common Stock for $25. In addition, if
there is a business combination between the Company and an Acquiring
Person, or in certain other circumstances, each Right (if not previously
exercised) would entitle the holder (other than the Acquiring Person) to
purchase $50 in market value of the common stock of the Acquiring Person
for $25.
As of March 31, 2004 and 2003, 7,802,831 and 7,809,834, respectively, of
Rights were outstanding. Each Right entitles the holder to purchase, for
an exercise price of $25, one one-hundredth of a share of Series A
Participating Preferred Stock. Each one one-hundredth share of Series A
Participating Preferred Stock is designed to have economic terms similar
to those of one share of common stock but will have one one-hundredth of a
vote. Because the Rights are only exercisable under certain conditions,
none of which were in effect as of March 31, 2004 and 2003, the
outstanding Rights are not considered in the computation of basic and
diluted earnings per share.
The Company does not have significant lease commitments or post retirement
benefits.
8. INCOME TAXES
On January 7, 2003 the Company's former Chairman and President who had
been serving as its Senior Consultant, passed away. The Company was the
beneficiary of $1,000,000 of life insurance proceeds in the first quarter
of 2003 that are not taxable income.
9. SUBSEQUENT EVENT
In April 2004 the Company consummated the sale of its U.S. and Canadian
oil and gas operations for $28.3 million in gross proceeds of which
$600,000 has been placed in escrow to allow for any potential post closing
adjustments relating to its U.S. operations. As the sales were effective
as of March 1, 2004, the financial statements, as presented, only reflect
oil and gas operations for the first two months of 2004 compared to a full
three months of operations in 2003. In addition, the net carrying value of
the assets sold have been adjusted to reflect the proceeds received. A
corresponding charge of $564,000 to Discontinued Operations - Oil & Gas,
Net of Taxes was recorded for the quarter ended 2004 to record the excess
carrying value as of March 31, 2004 as a result of the negative change in
the Cumulative Foreign Currency Translation Adjustment, additional closing
costs and a subsequent purchase price adjustment from the original
estimated sales price.
On April 30, 2004 the Company sold for $1,240,000 a 22 unit residential
property in Perth Amboy, New Jersey and realized a net book gain after
taxes of approximately $524,000. A mortgage of $332,000 was extinguished
with the sale.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion addresses material changes in the Company's
results of operations for the three month period ended March 31, 2004, compared
to the three month period ended March 31, 2003, and its financial condition
since December 31, 2003. It is presumed that readers have read or have access to
Wilshire's 2003 Annual Report on Form 10-K which includes disclosures regarding
critical accounting policies as part of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Overview
Net earnings for the three months ended March 31 increased from
$1,013,000 or $0.13 per share for 2003 to $2,599,000 or $0.33 per share in 2004.
Operations are shown as continuing and discontinued as a result of the Company's
announced plans to sell its oil and gas operations in July 2003 which was
consummated in April, 2004 as well as having to reflect the net income from
properties held for sale and the gain from the sale of real estate properties
sold in the period as discontinued operations.
On April 8, 2004 the Company announced that it had consummated the sale
of its Canadian oil and gas business to Addison Energy Inc., a wholly owned
subsidiary of Exco Resources, Inc. for $15 million in gross proceeds. On April
23, 2004 the Company announced that it had consummated the sale of its United
States oil and gas business to Crow Creek Energy LLC, a Tulsa, Oklahoma based
privately held portfolio company of Natural Gas Partners of Dallas, Texas, for
$13.3 million in gross proceeds of which $600,000 has been placed in escrow to
allow for any potential post closing adjustments.
In March 2004 the Company consummated the sale of eleven real estate
properties for gross proceeds of $11 million and a net book gain, after taxes,
of approximately $3.0 million.
Results of Operations
Three Months Ended March 31, 2004 ("2004") Compared with Three Months Ended
March 31, 2003 ("2003")
Continuing Operations:
Revenue increased from $2,926,000 in 2003 to $3,037,000 in 2004, an
increase of $111,000 or 3.8%. Occupancy rates have been static from period to
period. The increase for the quarter is primarily due to a higher reimbursement
of real estate tax expense applicable to the Company's triple net leased hotel
and conference facility. The Company has been impacted in both comparative years
by low mortgage rates which have made the purchase of residences attractive to
persons who might otherwise have rented apartments in the Company's properties.
Further, the Company did not add new rental properties during 2004 and 2003.
Real Estate operating expenses increased from $1,672,000 in 2003 to
$1,763,000 in 2004, an increase of $91,000 or 5.4%. The majority of the increase
was due to higher real estate tax expense applicable to the Company's hotel and
conference facility that was reimbursed.
10
Depreciation and amortization decreased from $763,000 in 2003 to
$542,000 in 2004. The decrease is primarily attributed to the reduction of
amortization expense in the amount of $221,000 associated with the write-off of
unamortized mortgage costs applicable to the $31.5 million of debt that was
refinanced during the first quarter of 2003.
General and administrative expenses increased from $274,000 in 2003 to
$329,000 in 2004. This increase was primarily due to higher corporate insurance
expenses and legal and accounting fees.
Income from operations increased from $217,000 in 2003 to $403,000 in
2004. This increase was primarily due the reduction of amortization expense
previously noted offset by higher general and administrative expense.
Other income decreased from $1,611,000 in 2003 to $247,000 in 2004.
This decrease includes $1,000,000 received by the Company in 2003 as a
beneficiary of life insurance policies on the life of the Company's former
Chairman and President Siggi B. Wilzig, who had been serving as its Senior
Consultant up to his death on January 7, 2003. The receipt of these funds were
not taxable to the Company. In addition, the Company sold marketable securities
and recognized gains of $261,000 in 2003. No marketable securities were sold in
the comparable period in 2004.
Interest expense decreased from $1,442,000 in 2003 to $763,000 in 2004.
Interest expense in 2003 includes a one time prepayment penalty of $469,000 to
secure the refinancing of certain real estate properties. This refinancing of
the mortgage notes payable reduced the effective rate paid by the Company from
7.36% to 6.10% and extended its maturity and terms. During the next ten years,
the Company's annual interest expense related to its current debt should
decrease by approximately $600,000 as a result of this refinancing. In addition,
the Company paid down approximately $1.2 million of mortgage debt during 2004.
Net income from Continuing Operation's decreased from $486,000 in 2003
to a loss of $59,000 in 2004. Earnings per share from continuing operations
decreased from $0.06 in 2003 to a loss of $0.01 in 2004. This decrease is
primarily due to the decrease in other income reduced by increased income from
operations as previously discussed.
Discontinued Operations:
Real Estate
Discontinued Operations - Real Estate, Net of Taxes reflects the gain
from the sale of the eleven real estate properties sold in 2004 of $3,036,000,
offset in part by a $121,000 net loss from the operation of such properties and
other properties held for sale. The net loss from operations of such properties
and other properties held for sale in 2003 was $119,000.
Oil and Gas
Discontinued Operations - Oil and Gas, Net of Taxes reflects a net loss
of $257,000 in 2004 compared to a profit of $646,000 in 2003. As the Company's
sale of its oil and gas assets was effective March 1, 2004, the current periods
operations, net of taxes, only reflect revenues less production expenses for two
months and operating expenses for three months or $207,000 compared to a full
three months of operations in 2003 or $646,000. The net profit, net of taxes, in
2004 has been reduced by a charge of $564,000 to record the excess carrying
value as of March 31, 2004 as a result of the negative change in the Cumulative
Foreign Currency Translation Adjustment, additional closing costs and a
subsequent purchase price adjustment from the original estimated sales price.
11
Liquidity and Capital Resources
At March 31, 2004 the Company had approximately $2.1 million in
marketable securities at market value, compared to $2.0 million at December 31,
2003. The Company had $2.5 million in short-term debt on March 31, 2004 compared
to $7.0 million on December 31, 2003. For purposes of this calculation, included
in current assets are properties held for sale since it is contemplated that
these properties will be sold within one year and the liabilities associated
with these sales are classified as current. The current ratio was 2.9 to 1 at
March 31, 2004 compared to 2.3 to 1 at December 31, 2003. The Company's working
capital was approximately $34.3 million at March 31, 2004, an increase of $2.8
million from $31.5 million on December 31, 2003. Management considers these
amounts adequate for the Company's current business.
In April 2004, with an effective date of March 1, 2004, the Company
closed the sale of its oil and gas operations in the United States and Canada
and will either reinvest the net proceeds in its ongoing real estate business or
otherwise utilize the proceeds in a manner designed to maximize shareholder
value.
In the meantime, the Company continues to explore real estate
acquisitions as they arise. The timing of any such acquisitions will depend on,
among other things, economic conditions and the favorable evaluation of specific
opportunities presented to the Company. During the first quarter, the Company
realized proceeds of $11 million from the sale of a real estate property
generating an after tax gain of approximately $3.0 million.
Net cash provided by operating activities increased from $581,000 in
2003 to $1,468,000 in 2004. The increase of $887,000 is mainly due to an
increase in net income and to increases in accounts payable and decreases in
accounts receivable and prepaid expenses offset by the gain on sale of real
estate assets.
Net cash (used in) provided by investing activities increased from
$(3,347,000) in 2003 to $11,512,000 in 2004. This increase is due mainly from
the sale of real estate assets in the first quarter of 2004.
Net cash used in financing activities decreased from $705,000 in 2003
to $(8,770,000) in 2004. This decrease principally relates to the payment of
long-term debt associated with the 11 real estate properties sold.
The Company believes it has adequate capital resources to fund
operations for the foreseeable future.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon unaudited consolidated financial statements
prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (effective January 1, 2003). SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this pronouncement in 2003 resulted in a financial statement charge, net of
taxes, of approximately $44,000 as of March 31, 2003 and $200,000 as of March
31, 2004.
12
Impairment of Property and Equipment
In October 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard harmonizes the accounting for impaired assets and resolves some of
the implementation issues as originally described in SFAS 121. SFAS 144, among
other things, will require the Company to classify the operations and cash flow
of properties to be disposed of as discontinued operations. The Company adopted
this pronouncement on January 1, 2002. This adoption impacted how the Company
reported its results of operations and financial position as of March 31, 2004
and 2003.
On a periodic basis, management assesses whether there are any
indicators that the value of the real estate properties may be impaired. A
property's value is considered impaired if management's estimate of the
aggregate future cash flows (undiscounted and without interest charges) to be
generated by the property are less than the carrying value of the property. To
the extent impairment has occurred, the loss shall be measured as the excess of
the carrying amount of the property over the fair value of the property.
Management does not believe at March 31, 2004 that the value of any of its
rental properties is impaired.
Revenue Recognition
Revenue from oil and gas properties is recognized at the time these
products are delivered to third party purchasers. Revenue from real estate
properties is recognized during the period in which the premises are occupied
and rent is due from tenant. Rental revenue is recognized on a straight-line
basis over the term of the lease. The excess of rents recognized over amounts
contractually due pursuant to the underlying leases are included in accounts
receivable. An allowance for uncollectible accounts is maintained based on the
Company's estimate of the inability of its joint interest partners in the oil
and gas division and its tenants in the real estate division to make required
payments.
Foreign Operations
The assets and liabilities of the Company's Canadian subsidiary have
been translated at quarter-end exchange rates. The related revenues and expenses
have been translated at average annual exchange rates. The aggregate effect of
translation gains and losses are reflected as a component of "Accumulated other
comprehensive income (loss)" until the sale or liquidation of the underlying
foreign investment.
As a result of the sale of its Canadian oil and gas assets in April
2004, the Company intends to dissolve its Canadian subsidiary and remit all
prior years' earning to the U. S. The Company has provided approximately $1.2
million of Federal income taxes that will result from the receipt of such funds.
Accounting for Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123).
13
Oil and Gas Properties
On April 8, 2004 the Company announced that it had consummated the sale
of its Canadian oil and gas business effective March 1, 2004 to Addison Energy,
Inc., a wholly owned subsidiary of Exco Resources, Inc. for $15 million in gross
proceeds. On April 23, 2004 the Company announced that, effective March 1, 2004,
it had consummated the sale of its United States oil and gas business to Crow
Creek Energy, LLC, a Tulsa, Oklahoma based privately held portfolio company of
Natural Gas Partners of Dallas, Texas, for $13.3 million in gross proceeds
(before potential post closing adjustments).
14
Forward-Looking Statements
This Report on Form 10-Q for the quarter ended March 31, 2004 contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements included herein other than
statements of historical fact are forward-looking statements. Although the
Company believes that the underlying assumptions and expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. The Company's business and prospects
are subject to a number of risks which could cause actual results to differ
materially from those reflected in such forward-looking statements, including
uncertainties inherent in any attempt to sell a portion or all of the business
at an acceptable price, environmental risks relating to the Company's real
estate properties, competition, the substantial capital expenditures required to
fund the Company's real estate operations, market and economic changes in areas
where the Company holds real estate properties, interest rate fluctuations,
government regulation, and the ability of the Company to implement its business
strategy.
Item 3 - Qualitative and Quantative Disclosure About Market Risk
The Company has investments in domestic equity securities for which the
Company has exposure to the risk of market loss.
The Company is exposed to changes in interest rates from its floating
rate debt arrangements. At March 31, 2004, the Company had $49,727,000 of debt
outstanding of which $48,316,000 bears interest at fixed rates. The interest
rate on the Company's revolving credit lines, under which $1,411,000 was
outstanding at March 31, 2004 and related entirely to its Canadian revolving
demand loan, is at prime for U.S. borrowings and prime plus .25% for its
Canadian revolving demand loan which was paid off on April 8, 2004 with the sale
of the Canadian oil and gas assets. The Company had no floating rate debt
outstanding under its $2 million U. S. credit line as of March 31, 2004.
SUMMARY OF INDEBTNESS
Long-term debt as of March 31, 2004 and December 31, 2003 consists of
the following -
2004 2003
(Unaudited)
--------------- --------------------
Mortgage notes payable $48,316,000 $53,824,000
Note payable - 2,700,000
Revolving demand loan 1,411,000 1,970,000
--------------- --------------------
Total 49,727,000 58,494,000
Less-Current portion 2,480,000 6,989,000
--------------- --------------------
Long term portion $47,247,000 $51,505,000
=============== ====================
The aggregate maturities of the long-term debt in each of the five
years subsequent to March 31, 2004 and thereafter are -
2004 $ 2,480,000
2005 728,000
2006 775,000
2007 824,000
2008 871,000
Thereafter 44,049,000
------------------
$49,727,000
==================
15
Item 4- Controls and Procedures
(a) Disclosure controls and procedures. As of the end of the Company's most
recently completed fiscal quarter covered by this report, the Company
carried out an evaluation, with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures pursuant to Securities Exchange Act Rule 13a-15.
Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms.
(b) Changes in internal controls over financial reporting. There have been no
changes in the company's internal control over financial reporting that
occurred during the Company's last fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
16
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section
302 of Sarbanes-Oxley Act
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to Section
906 of Sarbanes-Oxley Act
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to Section
906 of Sarbanes-Oxley Act
The Company has filed the following Form 8-K for the quarter
ended March 31, 2004.
Date of Report
(Date of Earliest Event) Filing Dates Subject
- ------------------------ ------------ -------
March 17, 2004 March 17, 2004 Item 9 - Press release announcing the
Company's definitive agreement to sell
its United States oil and gas business.
March 30, 2004 March 31, 2004 Item 9 - Press release announcing the
Company's results of its fiscal 2003
fourth quarter and full year operations.
March 31, 2004 April 15, 2004 Item 2- The Company reported the completion
of the sale of 11 real estate properties
in Jersey City, New Jersey.
April 8, 2004 April 8, 2004 Item 9 - Press release announcing the
Company's sale of its Canadian
oil and gas business.
April 23, 2004 April 26, 2004 Item 9- Press release announcing the Company's
sale of its U. S. oil and
gas business.
April 29, 2004 April 29, 2004 Item 9- Press release announcing the
employment of a new executive
officer.
17
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILSHIRE ENTERPRISES, INC.
--------------------------
Registrant)
Date: May 17, 2004 /s/ S. Wilzig Izak
------------------
By: S. Wilzig Izak
Chairman of the Board and
Chief Executive Officer
/s/ Philip G. Kupperman
-----------------------
By: Philip G. Kupperman
President and Chief Financial Officer