-----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, JwRcZrIQpd1UfxG3okG4bdVby3JndZ1++MTGFrJI/TpvacWfXDzcVvL2imc7hYmj GXRQtZuyGugrJ92wbWHLMw== 0000912057-01-538730.txt : 20020410 0000912057-01-538730.hdr.sgml : 20020410 ACCESSION NUMBER: 0000912057-01-538730 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOG CUTTER CAPITAL GROUP INC CENTRAL INDEX KEY: 0001048566 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 522081138 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23911 FILM NUMBER: 1781314 BUSINESS ADDRESS: STREET 1: 1631 SW COLUMBIA STREET CITY: PORTLAND STATE: OR ZIP: 97201 BUSINESS PHONE: 5037216500 MAIL ADDRESS: STREET 1: 1310 S W 17TH ST CITY: PORTLAND STATE: OR ZIP: 97201 FORMER COMPANY: FORMER CONFORMED NAME: WILSHIRE REAL ESTATE INVESTMENT TRUST INC DATE OF NAME CHANGE: 19971027 10-Q 1 a2063229z10-q.txt 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-23911 FOG CUTTER CAPITAL GROUP INC. (Exact name of registrant as specified in its charter) MARYLAND 52-2081138 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1410 SW JEFFERSON STREET PORTLAND, OR 97201 (Address of principal executive offices) (Zip Code) (503) 721-6500 (Registrant's telephone number, including area code) 1631 SW COLUMBIA STREET PORTLAND, OR 97201 (Former address) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No__. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT SEPTEMBER 30, 2001 Common Stock, par value $0.0001 per share 10,507,413 shares ================================================================================ FOG CUTTER CAPITAL GROUP INC. FORM 10-Q I N D E X PAGE NO. -------- PART I--FINANCIAL INFORMATION Item 1. Interim Financial Statements (Unaudited): Consolidated Statements of Financial Condition.......................3 Consolidated Statements of Operations................................4 Consolidated Statement of Changes in Stockholders' Equity............6 Consolidated Statements of Cash Flows................................7 Notes to Consolidated Financial Statements...........................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................11 Item 3. Quantitative and Qualitative Disclosures about Market Risk..........18 PART II--OTHER INFORMATION Item 1. Legal Proceedings...................................................23 Item 2. Changes in Securities and Use of Proceeds...........................25 Item 3. Defaults Upon Senior Securities.....................................25 Item 4. Submission of Matters to a Vote of Security Holders.................25 Item 5. Other Information...................................................25 Item 6. Exhibits and Reports on Form 8-K....................................25 Signatures ..................................................................26 2 PART I -- FINANCIAL INFORMATION ITEM 1. INTERIM FINANCIAL STATEMENTS FOG CUTTER CAPITAL GROUP INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31, 2001 2000 ------------- ------------ ASSETS (Unaudited) Cash and cash equivalents ............................ $ 1,702 $ 3,394 Securities available for sale, at fair value ......... 52,880 74,731 Loans, net ........................................... 29,848 30,404 Investments in real estate held for sale ............. 23,642 24,767 Investments in WFSG and affiliates, net .............. 7,104 5,593 Investment in BEP .................................... 5,432 6,719 Accrued interest receivable .......................... 359 522 Other assets ......................................... 3,988 4,174 --------- --------- Total assets ..................................... $ 124,955 $ 150,304 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Borrowings ........................................... $ 75,731 $ 88,930 Accounts payable and accrued liabilities ............. 2,981 4,006 Dividends payable .................................... 859 1,717 --------- --------- Total liabilities ................................ 79,571 94,653 --------- --------- Commitments and Contingencies (see Note 5) 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; 11,500,100 shares issued; and 10,507,413 shares outstanding ................................. 166,981 166,981 Treasury stock; 992,687 common shares, at cost ....... (2,171) (2,171) Accumulated deficit .................................. (118,594) (106,077) Recourse loans to officers to acquire stock .......... (1,066) (1,026) Accumulated other comprehensive income (loss) ........ 234 (2,056) --------- --------- Total stockholders' equity ....................... 45,384 55,651 --------- --------- Total liabilities and stockholders' equity ....... $ 124,955 $ 150,304 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 FOG CUTTER CAPITAL GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Quarter Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net interest income: Loans .......................................... $ 673 $ 936 $ 2,199 $ 3,023 Securities ..................................... 1,715 2,623 5,865 8,461 Other investments .............................. 31 123 177 338 -------- -------- -------- -------- Total interest income ....................... 2,419 3,682 8,241 11,822 Interest expense ............................... 1,054 1,916 3,895 5,920 -------- -------- -------- -------- Net interest income before provision for loan losses .................................... 1,365 1,766 4,346 5,902 Recovery of loan losses ........................ -- -- -- 555 -------- -------- -------- -------- Net interest income after recovery of loan losses .................................... 1,365 1,766 4,346 6,457 -------- -------- -------- -------- Real estate operations: Operating income ............................... 679 1,324 1,885 4,151 Operating expense .............................. (111) (84) (339) (419) Interest expense ............................... (343) (760) (1,046) (2,349) Gain on sale of real estate .................... 141 1,020 141 2,114 Depreciation ................................... (133) (278) (400) (862) -------- -------- -------- -------- Total real estate operations .............. 233 1,222 241 2,635 -------- -------- -------- -------- Other operating (loss) income: Equity in loss in BEP .......................... (361) -- (1,163) -- Gain on sale of loans and securities ........... 452 -- 1,002 5,500 Market valuation losses and impairments ........ (4,619) (500) (8,700) (2,291) Other revenue .................................. (31) (122) (147) (175) -------- -------- -------- -------- Total other operating (loss) income ....... (4,559) (622) (9,008) 3,034 -------- -------- -------- -------- Operating expenses: Compensation and employee benefits ............. 672 992 2,932 3,499 Professional fees .............................. 222 342 781 1,398 Other .......................................... 573 762 1,996 1,906 -------- -------- -------- -------- Total operating expenses .................. 1,467 2,096 5,709 6,803 -------- -------- -------- -------- Net (loss) income before provision for income taxes and cumulative effect of a change in accounting principle ..................................... (4,428) 270 (10,130) 5,323 Provision (benefit) for income taxes ............... -- (125) -- -- -------- -------- -------- -------- Net (loss) income before cumulative effect of a .... (4,428) 395 (10,130) 5,323 change in accounting principle Cumulative effect of a change in accounting ........ -- -- (1,021) -- -------- -------- -------- -------- Net (loss) income .................................. $ (4,428) $ 395 $(11,151) $ 5,323 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 FOG CUTTER CAPITAL GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) (Unaudited) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Quarter Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2001 2000 2001 2000 ------------ ----------- ----------- ----------- Basic and diluted net (loss) income per share before cumulative effect of a change in accounting principle........................................ $ (0.42) $ .04 $ (0.96) $ .51 Cumulative effect of a change in accounting principle per share............................... -- -- (.10) -- ----------- ----------- ----------- ----------- Basic and diluted net (loss) income per share......... $ (0.42) $ .04 $ (1.06) $ .51 =========== =========== =========== =========== Weighted average shares outstanding................... 10,507,413 10,507,413 10,507,413 10,507,413
The accompanying notes are an integral part of these consolidated financial statements. 5 FOG CUTTER CAPITAL GROUP INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Recourse Loans to Accumulated Common Stock Treasury Stock Officers to Other ------------------------ --------------------- Accumulated Acquire Comprehensive Shares (1) Amount Shares Amount Deficit Stock Income(Loss) Total ----------- ---------- -------- ---------- ------------ ----------- ------------ ---------- Balance at January 1, 2001 .. 10,507,413 $ 166,981 992,687 $ (2,171) $ (106,077) $ (1,026) $ (2,056) $ 55,651 Comprehensive loss: Net loss .................. -- -- -- -- (11,151) -- -- (11,151) Other comprehensive loss: Foreign currency ......... -- -- -- -- -- -- (78) (78) Unrealized holding losses on securities available for sale ................ -- -- -- -- -- -- (5,936) (5,936) Reclassification adjustment for net losses on securities included in net loss ................ -- -- -- -- -- -- 8,304 8,304 ---------- Total comprehensive loss .... (8,861) Loans to officers, net ...... -- -- -- -- -- (40) -- (40) Dividends declared .......... -- -- -- -- (1,366) -- -- (1,366) ---------- ---------- ------- ---------- ---------- ---------- ---------- ---------- Balance at September 30, 2001 10,507,413 $ 166,981 992,687 $ (2,171) $ (118,594) $ (1,066) $ 234 $ 45,384 ========== ========== ======= ========== ========== ========== ========== ==========
- ---------- (1) Issued and outstanding. The accompanying notes are an integral part of these consolidated financial statements. 6 FOG CUTTER CAPITAL GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (DOLLARS IN THOUSANDS)
Quarter Ended Nine Months Ended September 30, September 30, --------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000 2001 2000 --------- --------- --------- -------- Net (loss) income $ (4,428) $ 395 $(11,151) $ 5,323 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 183 336 549 963 Amortization of premiums and accretion of discounts, net -- -- -- (145) Recovery of loan losses -- -- -- (555) Market valuation losses and impairments 4,619 500 8,700 2,291 Loss on foreign currency translation -- 16 116 69 Gain on sale of securities available for sale (452) -- (452) (5,342) Gain on sale of real estate (141) (1,020) (141) (2,114) Gain on sale of loans -- -- (550) (158) Loss on sale of other assets 31 -- 31 -- Equity in losses in BEP 361 -- 1,163 -- Cumulative effect in a change in accounting principle -- -- 1,021 -- Change in: Investments in WFSG and affiliates, net -- 2,292 -- 2,956 Accrued interest receivable (135) 7 94 278 Other assets (298) 230 (17) (68) Accounts payable and accrued liabilities (293) (309) (1,024) 297 -------- -------- -------- -------- Net cash (used in) provided by operating activities (553) 2,447 (1,661) 3,795 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Repayments of securities available for sale 160 1,854 1,006 3,005 Purchase of securities available for sale -- -- (695) (19,481) Proceeds from sale of loans -- -- 7,304 396 Proceeds from sale of securities available for sale 5,017 -- 7,361 44,368 Purchase of loans and discounted loans (100) (87) (1,293) (188) Principal repayments on loans and discounted loans 11 14 38 1,939 Proceeds from sale of real estate 1,441 3,036 1,539 11,810 Other (21) (799) (69) (799) -------- -------- -------- -------- Net cash provided by investing activities 6,508 4,018 15,191 41,050 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 1,028 -- 1,488 11,069 Repayments on borrowings (7,496) (7,159) (14,472) (54,346) Payment of dividends -- -- (1,366) -- Other -- (1,308) (858) (1,333) -------- -------- -------- -------- Net cash used in financing activities (6,468) (8,467) (15,208) (44,610) -------- -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 83 (14) 4 -------- -------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (512) (1,919) (1,692) 239 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,214 8,020 3,394 5,862 -------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,702 $ 6,101 $ 1,702 $ 6,101 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 1,455 $ 2,791 $ 5,050 $ 8,847 Cash paid for taxes $ -- $ -- $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements. 7 FOG CUTTER CAPITAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying interim consolidated financial statements of Fog Cutter Capital Group Inc. and Subsidiaries ("FCCG" or the "Company") (formerly known as Wilshire Real Estate Investment Inc.) are unaudited and have been prepared in conformity with the requirements of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), particularly Rule 10-01 thereof, which governs the presentation of interim financial statements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements. The accompanying interim consolidated financial statements should be read in conjunction with the Company's 2000 Annual Report on Form 10-K. A summary of the Company's significant accounting policies is set forth in Note 2 to the consolidated financial statements in the 2000 Annual Report on Form 10-K. In the Company's opinion, all adjustments, comprised of normal recurring accruals necessary for the fair presentation of the interim financial statements, have been included in the accompanying consolidated financial statements. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain items in the previously reported consolidated financial statements were reclassified to conform to the September 30, 2001 presentation, none of which affect previously reported results of operations. NOTE 2 - ORGANIZATION Effective January 25, 2001, the Company changed its name to Fog Cutter Capital Group Inc. to better reflect the opportunistic nature of its business and investments. NOTE 3 - SIGNIFICANT TRANSACTIONS In February 2001, the Company (through a 26% owned Jersey, Channel Islands company known as BEP Acquisitions) purchased all of the outstanding capital stock of Bourne End Properties PLC ("Bourne End") for 42 million British pounds. Bourne End is a specialist investor in retail property, currently owning fifteen town shopping centers located in England and Scotland. The centers range in size from 80,000 square feet to 340,000 square feet. BEP Acquisitions was incorporated in Jersey, Channel Islands for the purpose of acquiring Bourne End. BEP Acquisitions is a wholly-owned subsidiary of BEP Property Holdings Limited ("BEP"), which is 26% owned by the Company, 71% owned by Merrill Lynch (Jersey) Holdings Limited (a subsidiary of Merrill Lynch & Co., Inc.) and 3% owned by Greenbau Estuary Limited. A related company of Merrill Lynch (Jersey) Holdings Limited also provided mezzanine financing. In March 2001, the Company converted its investment in two mortgage-backed securities into ownership of the underlying loans and real estate which had served as collateral supporting these securities. The securities, which had a carrying value of $6.6 million, were converted into loans with a carrying value of $5.5 million and real estate with a carrying value of $1.1 million. 8 During the quarter ended March 31, 2001, the Company sold loans with a carrying value of $2.7 million at a gain of $0.3 million. The total proceeds from the sale were approximately $3.0 million of which $0.7 million was used to repay borrowings. During the quarter ended June 30, 2001, the Company sold loans with a carrying value of $4.1 million at a gain of $0.2 million. The total proceeds from the sale were approximately $4.3 million. No borrowings were repaid as a result of this transaction. On May 3, 2001, the Company paid a cash dividend of $0.13 per share to shareholders of record as of April 30, 2001. During July 2001, the Company sold a mortgage-backed security with a carrying value of $5.0 million. The total proceeds from the sale were $5.1 million, of which $4.9 million was used to repay borrowings. NOTE 4 - MARKET VALUATION LOSSES AND IMPAIRMENTS On an ongoing basis, the Company evaluates the carrying value of its securities portfolio, which is accounted for as available-for-sale. To the extent differences between the book basis of the securities and their current market values are deemed to be temporary in nature, such unrealized gains or losses are reflected directly in equity as "other comprehensive income or loss." In calculating the extent to which declines in the value of available-for-sale securities are other than temporary, the Company analyzes actual performance of the securities and underlying collateral, including prepayment and default statistics, as well as expectations for such performance in the future. To the extent reasonable expectations for future performance are not likely to offset declines in current market valuations, a write-down is recorded in "Market Valuation Losses and Impairments" in the consolidated statement of operations. During the nine months ended September 30, 2001 and 2000, market valuation losses and impairments of $8.7 million and $2.3 million, respectively, were recorded. During the 2001 period, $8.2 million of these market valuation losses and impairments related to the portfolio of mortgage-backed securities, primarily reflecting higher than anticipated delinquencies, losses in loans underlying certain securities and rising prepayment speeds. The remaining $0.5 million related to a market yield adjustment on a loan held for sale. During the 2000 period, the market valuation losses and impairments related to the portfolio of mortgage-backed securities. NOTE 5 - COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK The Company and two of its senior officers have been named, among other defendants, in a series of lawsuits related to the receivership of Capital Consultants, L.L.C. ("CCL"), an unaffiliated investment company. In their claims, multiple plaintiffs allege several theories of liability, including knowing participation in fiduciary breach and prohibited transactions under the Employee Retirement Income Security Act of 1974. The plaintiffs have not described with any specificity the proportion or share of losses and related amounts which they claim are attributable to the Company or its executives. Management has directed that the Company participate in good faith along with the other parties in confidential mediation in an effort to determine whether a mediated settlement may be achievable. In the event a mediated settlement is not achieved, management has directed that these cases be defended against vigorously. Because the cases are still in early stages of the pleadings and because the amount of discovery has been limited, the financial loss to the Company, if any, cannot be reasonably estimated at this time. Under their employment arrangements with the Company, the Company's senior officers may be entitled to indemnification by the Company. Messrs. Wiederhorn and Mendelsohn have notified the Company that they are reserving their rights to seek such indemnity. In addition, other former employees of the Company or of firms that were previously affiliated with the Company have been named as parties or have been requested to respond to discovery requests and/or government investigations regarding the collapse of CCL. Several of the individuals have requested indemnity from the Company for the costs of their defense. The Company has not agreed to any such indemnity requests. In addition to the civil litigation, the CCL failure has led to governmental investigations, including a criminal investigation. Messrs. Wiederhorn and Mendelsohn have received letters from the United States 9 Attorney's office in Portland, Oregon advising them that they are the subjects of a grand jury investigation into the failure of CCL. At this stage, it is not possible to predict the outcome of this investigation. The Company also 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 its consolidated financial condition or operations. The Company is authorized to utilize a wide variety of off-balance sheet financial techniques to assist 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. During the quarter ended and at September 30, 2001, the Company had no outstanding positions in these instruments. NOTE 6 - RECENTLY ISSUED ACCOUNTING STANDARDS In July 2000, the Emerging Issues Task Force ("EITF") finalized the provisions of EITF Issue No. 99-20, "Recognition of Interest Income and Impairment of Purchased and Retained Beneficial Interests in Securitized Financial Assets", ("EITF 99-20"). EITF 99-20 sets forth rules for recognizing interest income and determining when securities must be written down to fair value because of other than temporary impairments. EITF 99-20 requires the prospective method of adjusting the recognition of interest income when the anticipated cash flows have either increased or decreased. Anticipated cash flows can change as the result of factors such as credit losses and prepayment rates. Pursuant to EITF 99-20, declines in fair value are to be considered other than temporary when: (i) the carrying value of the beneficial interests exceeds the fair value of such beneficial interests using current assumptions, and (ii) the timing and/or extent of cash flows expected to be received on the beneficial interests has adversely changed (as defined) from the previous valuation date. The effective date for adoption of EITF 99-20 was April 1, 2001. As a result of the implementation of EITF 99-20 the Company recorded a "cumulative effect of a change in accounting principle" adjustment of $1.0 million relating to other than temporary impairment of mortgage-backed securities. NOTE 7 - SUBSEQUENT EVENTS During October 2001, a $25 million loan owned by the Company was repaid in full. The total proceeds from the repayment were $25.1 million, of which $18.8 million was used to repay borrowings. During October 2001, the Company redeemed the stock purchase rights (the "Rights") attached to its common stock under the Shareholder Rights Plan (the "Plan") adopted on December 23, 1999. Under the Plan, each shareholder owned one Right per share of common stock. The Plan allowed for the redemption of the Rights, at the direction of the Company's Board of Directors, at a price of $0.001 per Right. The redemption payment was made on October 16, 2001 to shareholders of record as of October 10, 2001. On October 31, 2001, the Company paid the final $0.10 per share installment (plus interest) of the $0.40 per share dividend declared in September 1998 for shareholders of record as of September 30, 1998. The Company also declared a new $0.13 per share dividend which was paid on November 1, 2001 to shareholders of record as of October 26, 2001. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF FOG CUTTER CAPITAL GROUP INC. AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS FILING. REFERENCES IN THIS FILING TO "FOG CUTTER CAPITAL GROUP INC.," "WE," "OUR," AND "US" REFER TO FOG CUTTER CAPITAL GROUP INC. AND ITS SUBSIDIARIES UNLESS THE CONTEXT INDICATES OTHERWISE. GENERAL Fog Cutter Capital Group Inc. ("FCCG" or the "Company") is a Nasdaq-listed corporation which focuses on the acquisition of assets where its expertise in intensive asset management, mortgage and real estate credit analysis and financial structuring can create value. The Company invests primarily in the following types of assets: o mortgage-backed securities, o mortgage loans, o debt and equity of real estate companies, and o other real estate-related investments. RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 NET (LOSS) INCOME. Our net loss for the nine months ended September 30, 2001 was $11.2 million, or $1.06 per share, compared with net income of $5.3 million, or $0.51 per share, for the nine months ended September 30, 2000. The net loss for the 2001 period is attributable to net interest income of $4.3 million, gain on sale of loans and securities of $1.0 million and income from real estate operations of $0.2 million, offset by market valuation losses and impairments of $8.7 million, equity in the losses of BEP of $1.2 million, the cumulative effect of a change in accounting principle of $1.0 million and operating expenses of $5.7 million. The net income for the 2000 period is attributable to net interest income of $5.9 million, gain on sale of securities of $5.3 million, recovery of loan losses of $0.6 million and income from real estate operations of $2.6 million, partially offset by market valuation losses and impairments on our portfolio of mortgage-backed securities of $2.3 million and other operating expenses of $6.8 million. 11 NET INTEREST INCOME. Our net interest income for the nine months ended September 30, 2001 was $4.3 million, compared with $5.9 million for the nine months ended September 30, 2000. The decrease is primarily attributable to a reduction of assets (reflecting our sales of mortgage-backed securities and loans and paydowns of the related debt facilities), resulting in decreases in interest income on securities, loans and other investments of $2.6 million, $0.8 million and $0.2 million, respectively, partially offset by a decrease in interest expense of $2.0 million. The following tables set forth information regarding the total amount of income from interest-earning assets and expense from interest-bearing liabilities and the resulting average yields and rates:
For the Nine Months Ended September 30, 2001 ---------------------------------------------------- Average Interest Annualized Balance Income (Expense) Yield/Rate -------------- ----------------- -------------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios................................. $ 30,589 $ 2,199 9.6% Mortgage-backed securities available for sale... 62,515 5,865 12.5% Other investments............................... 2,968 177 8.0% -------------- ------------------- ----------- Total interest-earning assets............... $ 96,072 $ 8,241 11.4% -------------- ------------------- ----------- Interest-Bearing Liabilities: Borrowings (1).................................. $ 68,398 $ (3,895) 7.6% -------------- ------------------- ----------- Total interest-bearing liabilities.......... $ 68,398 $ (3,895) 7.6% -------------- ------------------- ----------- Net interest income before provision for loan losses/spread (2)............................. $ 4,346 3.8% =================== =========== Net interest margin (3)........................ 6.0%
- ---------- (1) Excludes borrowings related to investments in real estate. (2) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average interest-earning assets. 12
For the Nine Months Ended September 30, 2001 ------------------------------------------------------- Average Interest Annualized Balance Income (Expense) Yield/Rate -------------- ----------------- -------------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios................................. $ 34,165 $ 3,023 11.8% Mortgage-backed securities available for sale............................................ 83,879 8,461 13.4% Other investments............................... 7,754 338 5.8% --------------- ----------------- ------------- Total interest-earning assets............... $ 125,798 $ 11,822 12.5% --------------- ----------------- ------------- Interest-Bearing Liabilities: Borrowings (1).................................. $ 91,013 $ (5,920) 8.7% --------------- ----------------- ------------- Total interest-bearing liabilities.......... $ 91,013 $ (5,920) 8.7% --------------- ----------------- ------------- Net interest income before provision for loan losses/spread (2)....................... $ 5,902 3.8% ================= ============= Net interest margin (3)........................ 6.3% =============
- ---------- (1) Excludes borrowings related to investments in real estate. (2) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average interest-earning assets. RECOVERY OF LOAN LOSSES. At September 30, 2001, we had $29.8 million of loans, net, that are performing according to their terms with no required loan loss allowance. Subsequent to September 30, 2001, a $25 million loan receivable was repaid in full. During the nine months ended September 30, 2000, we reviewed the adequacy of loan loss reserves and recaptured the remaining reserve balance of $0.6 million. REAL ESTATE OPERATIONS. Our real estate operations represent activity from our investment in various office buildings, retail stores, and other commercial property located in Oregon, California and the United Kingdom. During the nine months ended September 30, 2001, we realized income from real estate operations of approximately $0.2 million (net of depreciation of $0.4 million), compared with net income of $2.6 million for the nine months ended September 30, 2000. This decrease was primarily attributable to a gain of $2.1 million on the sale of office properties located in Portland, Oregon and the United Kingdom during the prior period. RESULTS OF OPERATIONS -- QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2000 NET (LOSS) INCOME. Our net loss for the quarter ended September 30, 2001 was $4.4 million, or $0.42 per share, compared with a net income of $0.4 million, or $0.04 per share, for the quarter ended September 30, 2000. The net loss for the 2001 period is attributable to net interest income of $1.4 million, income from real estate operations of $0.2 million and gain on sale of loans and securities of $0.4 million, offset by market valuation losses and impairments of $4.6 million, equity in losses of BEP of $0.3 million and operating expenses of $1.5 million. The net income for the 2000 period is attributable to net interest income of $1.8 million and income from real estate operations of $1.2 million, partially offset by market valuation losses and impairments of $0.5 million and other operating expenses of $2.1 million. NET INTEREST INCOME. Our net interest income for the quarter ended September 30, 2001 was $1.4 million, compared with $1.8 million for the quarter ended September 30, 2000. The decrease is primarily attributable to a reduction of assets (reflecting our sales of mortgage-backed securities and loans and paydowns of the related debt facilities), resulting in decreases in interest income on securities, loans 13 and other investments of $0.9 million, $0.3 million and $0.1 million, respectively, partially offset by a decrease in interest expense of $0.9 million. The following tables set forth information regarding the total amount of income from interest-earning assets and expense from interest-bearing liabilities and the resulting average yields and rates:
For the Quarter Ended September 30, 2001 --------------------------------------------------- Average Interest Annualized Balance Income (Expense) Yield/Rate --------------- ------------------- ------------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios................................ $ 30,165 $ 673 8.9% Mortgage-backed securities available for sale 54,942 1,715 12.5% Other investments.............................. 1,588 31 7.8% -------------- ------------------ ------------- Total interest-earning assets.............. $ 86,695 $ 2,419 11.2% -------------- ------------------ ------------- Interest-Bearing Liabilities: Borrowings (1)................................. $ 70,401 $ (1,054) 6.0% -------------- ------------------ ------------- Total interest-bearing liabilities......... $ 70,401 $ (1,054) 6.0% -------------- ------------------ ------------- Net interest income before provision for loan losses/spread (2)............................ $ 1,365 5.2% ================== ============= Net interest margin (3)....................... 6.3% =============
- ---------- (1) Excludes borrowings related to investments in real estate. (2) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average interest-earning assets. 14
For the Quarter Ended September 30, 2000 -------------------------------------------------------- Average Interest Annualized Balance Income (Expense) Yield/Rate ---------------- ------------------ ------------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios................................. $ 32,550 $ 936 11.5% Mortgage-backed securities available for sale.......................................... 77,982 2,623 13.5% Other investments............................... 8,235 123 6.0% --------------- ----------------- ------------- Total interest-earning assets............... $ 118,767 $ 3,682 12.4% --------------- ----------------- ------------- Interest-Bearing Liabilities: Borrowings (1).................................. $ 83,683 $ (1,916) 9.2% --------------- ----------------- ------------- Total interest-bearing liabilities.......... $ 83,683 $ (1,916) 9.2% --------------- ----------------- ------------- Net interest income before provision for loan losses/spread (2)....................... $ 1,766 3.2% ================= ============= Net interest margin (3)........................ 5.9% =============
- ---------- (1) Excludes borrowings related to investments in real estate. (2) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin represents net interest income divided by average interest-earning assets. REAL ESTATE OPERATIONS. Our real estate operations represent activity from our investment in various office buildings, retail stores, and other commercial property located in Oregon, California and the United Kingdom. During the quarter ended September 30, 2001, we realized income from real estate operations of approximately $0.2 million (net of depreciation of $0.1 million), compared with net income of $1.2 million for the quarter ended September 30, 2000. This increase was primarily attributable to gains on sale of real estate of $1.0 million in the quarter ended September 30, 2000. CHANGES IN FINANCIAL CONDITION GENERAL. Total assets decreased from approximately $150.3 million at December 31, 2000 to approximately $124.9 million at September 30, 2001. Total liabilities decreased from approximately $94.7 million at December 31, 2000 to approximately $79.6 million at September 30, 2001. Stockholders' equity decreased by approximately $10.3 million resulting primarily from the net loss of $11.2 million for the nine months ended September 30, 2001. SECURITIES AVAILABLE FOR SALE. The balance of mortgage-backed securities available for sale decreased from $74.7 million at December 31, 2000 to $52.9 million at September 30, 2001. The decrease in the balance of mortgage-backed securities was primarily due to the reclassification of $6.6 million of securities to loans and real estate, the sale of securities with a carrying value of $7.8 million and a reduction in market value of $8.1 million. These decreases were partially offset by the acquisition of $0.7 million of mortgage-backed securities. We mark our securities portfolio to fair value at the end of each month based upon broker/dealer valuations (if available), subject to an internal review process. For those securities that do not have an available market quotation, we determine the fair value of the securities by modeling the anticipated cash flows using certain estimates (e.g. prepayment speeds, default rates, severity of losses, and discount rate). 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 15 one broker/dealer. As of each reporting period, we evaluate whether and to what extent any unrealized decline in value is to be recognized as other than temporary. At September 30, 2001, securities available for sale were as follows:
Gross Amortized Gross Unrealized Cost (1) Unrealized Gain Losses Fair Value -------------- --------------- --------------- ------------- (DOLLARS IN THOUSANDS) Mortgage-backed securities $ 53,830 $ - $ (950) $ 52,880 ============= ============== ============== ============
- ---------- (1) The amortized cost of the securities reflects the market valuation losses and impairments discussed above and excludes accrued interest of $0.1 million. LOANS, NET. During the nine months ended September 30, 2001, our loans, net decreased by approximately $0.6 million due primarily to the $0.5 million market yield adjustment to the carrying value of a loan held for sale. INVESTMENTS IN WFSG AND AFFILIATES, NET. During the nine months ended September 30, 2001, our investments in WFSG and affiliates, net, increased $1.5 million, primarily as the result of an increase in the market price per share of WFSG stock as measured by the closing price at the end of the period. The Company owns 2.9 million shares of WFSG stock. The average daily trading volume of the stock is significantly less than the amount of our holdings, therefore, there can be no assurance that the Company could dispose of its investment in WFSG at the market price in a timely manner. BORROWINGS. Borrowings decreased by approximately $13.2 million during the nine months ended September 30, 2001. Of this amount, $5.6 million related to the repayment of borrowings when assets were sold, $8.8 million was due to scheduled principal payments and $0.2 million was due to currency adjustments for foreign denominated debt. These decreases were partially offset by new borrowings of $1.5 million. STOCKHOLDERS' EQUITY. Stockholders' equity decreased by approximately $10.3 million during the nine months ended September 30, 2001 primarily due to our net loss of $11.2 million and the dividend declared of $1.4 million, partially offset by decreases in other comprehensive loss of $2.3 million. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund investments, engage in loan acquisition and lending activities, meet collateral calls and for other general business purposes. The primary sources of funds for liquidity during the nine months ended September 30, 2001 consisted of net cash provided by investing activities, including the cash proceeds related to the sale of mortgage-backed securities, loans and real estate. Our 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 borrowing facilities. As of September 30, 2001, we had no outstanding collateral calls. 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." 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 16 shareholders. See "Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK." At September 30, 2001, we had total consolidated secured indebtedness of $75.7 million, as well as $3.8 million of other liabilities. The consolidated secured indebtedness consisted of (i) $27.5 million of repurchase agreements secured by $19.4 million of mortgage-backed securities and $29.8 million of loans and (ii) $48.2 million outstanding of other borrowings maturing between 2001 and 2020 which are secured by real estate and mortgage-backed securities. Approximately $27.5 million of this indebtedness had terms which allowed the lender to request additional collateral if the value of the underlying collateral declined (including financing facilities for both mortgage-backed securities and loans). Subsequent to September 30, 2001, a $25 million loan receivable was repaid in full, of which $18.8 million was used to repay the related secured indebtedness. Loans are financed through both short-term and long-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 generally financed with intermediate or long-term mortgages with banks and other financial institutions. We have historically financed 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. 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. Excluding the sale of assets from time to time, we are currently operating with negative cash flow primarily due to our investment in assets that do not currently generate positive cash flow. The Company has also recently made dividend payments, which reduce liquidity. We believe that our existing sources of funds will be adequate for purposes of meeting our short-term liquidity needs, however, there can be no assurance that this will be the case. 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 and could affect our ability to pay dividends in the future. On the other hand, material decreases in interest expense from variable-rate funding sources or an increase in market value of our mark-to-market financial assets generally would positively affect our liquidity. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, and equity prices. Although the Company's exposure to foreign currency fluctuations has increased over the past year, 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. 18 The following tables quantify the potential changes in net interest income and net portfolio value as of September 30, 2001 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 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 43.7% 15.0% -300 Basis Points 32.8% 10.8% -200 Basis Points 21.9% 7.0% -100 Basis Points 10.9% 3.4% 0 Basis Points 0.0% 0.0% 100 Basis Points -10.9% -3.2% 200 Basis Points -21.9% -6.1% 300 Basis Points -32.8% -8.9% 400 Basis Points -43.7% -11.5%
------------ (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 $ 134,632 $ 6,042,329 -300 Basis Points $ 100,974 $ 4,375,582 -200 Basis Points $ 67,316 $ 2,818,783 -100 Basis Points $ 33,658 $ 1,362,960 0 Basis Points - - 100 Basis Points $ (33,658) $ (1,277,438) 200 Basis Points $ (67,316) $ (2,476,015) 300 Basis Points $ (100,974) $ (3,601,781) 400 Basis Points $ (134,632) $ (4,660,245)
---------- (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. 19 The following table sets forth information as to the type of funding used to finance the Company's assets as of September 30, 2001. 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 September 30, 2001 (Dollars in thousands)
ASSETS INTEREST LIABILITIES INTEREST ------ -------- ----------- -------- INTEREST-BEARING ASSETS Fixed-Rate Assets, Financed Floating....... $ 55,310 Fixed $ 39,955 LIBOR Fixed-Rate Assets, No Financing............ 2,418 Fixed - None Floating-Rate Assets, Financed Floating.... 25,000 LIBOR 18,741 LIBOR Cash and Cash Equivalents.................. 1,702 Fed Funds - None --------------- ---------------- Subtotal................. 84,430 58,696 OTHER ASSETS Investments in Real Estate................. 23,642 N/A 17,035 Fixed Investments in WFSG and Affiliates, Net.... 7,104 N/A - None Investment in BEP.......................... 5,432 N/A - None Other...................................... 4,347 N/A - None --------------- ---------------- Subtotal................. 40,525 17,035 LIABILITY ONLY Dividends Payable.......................... - 859 Fixed Accounts Payable and Accrued Liabilities... - 2,981 None --------------- ---------------- Subtotal................. - 3,840 - --------------------------------------------------------------------------------------------------------------- Total $ 124,955 $ 79,571 ===============================================================================================================
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 during the nine months ended and at September 30, 2001. 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 20 rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category. The following tables set forth the estimated maturity or repricing of the Company's interest-earning assets and interest-bearing liabilities at September 30, 2001 (dollars in thousands):
One Year Within 4 to 12 to More than 3 Months Months 3 Years 3 Years Total ------------ ----------- ----------- ------------ ----------- INTEREST-SENSITIVE ASSETS(1): Cash and cash equivalents............... $ 1,702 $ - $ - $ - $ 1,702 Securities available for sale........... - - - 52,880 52,880 Loans(2)................................ 25,196 383 881 3,388 29,848 ---------- --------- ---------- --------- ---------- Total rate-sensitive assets............. $ 26,898 $ 383 $ 881 $ 56,268 $ 84,430 ========== ========= ========== ========= ========== INTEREST-SENSITIVE LIABILITIES: Borrowings.............................. $ 57,696 $ 2,040 $ - $ 15,995 $ 75,731 Dividends payable....................... 859 - - - 859 ---------- --------- ---------- --------- ---------- Total rate-sensitive liabilities........ $ 58,555 $ 2,040 $ - $ 15,995 $ 76,590 ========== ========= ========== ========= ========== Interest rate sensitivity gap........... $ (31,657) $ (1,657) $ 881 $ 40,273 Cumulative interest rate sensitivity gap..................................... $ (31,657) $ (33,314) $ (32,433) $ 7,840 Cumulative interest rate sensitivity gap as a percentage of total rate-sensitive assets................. 37% 39% 38% 9%
- ---------- (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%. 21 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, ASSET/LIABILITY MANAGEMENT AND THE IMPACT OF ONGOING LITIGATION. 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. 22 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company, Fog Cap L.P. (a subsidiary of the Company and formerly known as Wilshire Real Estate Partnership L.P.) and its two top executives, Messrs. Wiederhorn and Mendelsohn, have been named in a series of lawsuits relating to the receivership of Capital Consultants, L.L.C. ("CCL"). The cases are TOM HAZZARD, ET AL., V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1338-HU; MARK EIDEM, ET AL., V. TRUSTEES UNITED ASSN. UNION LOCAL 290, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1446-HA; NANCY SCHULTZ, ET AL., V. GARY KIRKLAND, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1377-HA; LARRY MILLER, ET AL., V. LEE CLINTON, ET AL., U.S. District Court of Oregon, Civil No. CV00-1317-HA; SALVATORE J. CHILIA, ET AL., V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1633 JE; and MADOLE V. CAPITAL CONSULTANTS ET. AL., U.S. District Court of Oregon, Civil No. CV 00-1600-HU. In the HAZZARD, CHILIA and MADOLE cases, the trustees of several Taft-Hartley trusts filed suit against CCL and several individuals and organizations CCL did business with (including the Company and Messrs. Wiederhorn and Mendelsohn). In the EIDEM, SCHULTZ and MILLER cases, the trustees who are plaintiffs in HAZZARD are in turn named as defendants in class action suits filed by beneficiaries of the Taft-Hartley trusts on which they serve as plaintiff-trustees. In the cases in which the trustees are defendants, they have filed third-party complaints against several parties, including the Company and Messrs. Wiederhorn and Mendelsohn. In addition, a group of investors that are not Taft-Hartley trusts have filed a similar complaint against the same defendants, as well as other individuals not named in the prior complaints, in the case of AMERICAN FUNERAL & CEMETERY TRUST SERVICES ET. AL. v CAPITAL CONSULTANTS ET. AL., U.S. District Court of Oregon, Civil No. 01-00609-HU. The complaints and third-party complaints are all virtually identical. They include claims against the Company, Messrs. Wiederhorn and Mendelsohn alleging breaches of fiduciary duties under the Employee Retirement Income Security Act of 1974 ("ERISA"); knowing participation in a fiduciary breach under ERISA; knowing participation in a prohibited transaction under ERISA; knowing transfer of trust assets under ERISA; negligence; common law claim for breach of fiduciary duty; tortious interference with contract; conversion; constructive trust, restitution and unjust enrichment; fraud; state securities law claims; and breach of contract. The suits also allege claims against Messrs. Wiederhorn and Mendelsohn of tortious interference with business relationships between the Taft-Hartley trusts and CCL, as well as violations of the Racketeering Influenced and Corrupt Organization provisions of the Organized Crime Control Act of 1970, 18 U.S.C. Section 1961-1965 ("RICO"). The claimants also seek attorneys' fees under their ERISA and RICO claims. The above suits name multiple defendants in addition to the Company and its executives. In addition, the claimants have asserted but have not yet filed claims against a number of additional parties regarding the same alleged losses, including a number of professional advisors to named defendants. The claimants have not described with any specificity the proportion or share of losses which they claim are attributable to the Company or its executives, as compared to the other parties and other potential defendants. The overall remedies sought against all defendants include claims for broad relief under the remedial provisions of ERISA, such as rescission of transactions and the imposition of a constructive trust over any trust assets which plaintiffs claim were obtained in violation of ERISA. Certain of the claims against the Company appear to be covered by releases that were given by CCL to the Company and Messrs. Wiederhorn and Mendelsohn. The claimants' suits seek to rescind the transactions in which the releases were granted. The claimants also seek common law remedies such as damages and punitive damages. However, certain of these common law claims may be preempted by ERISA. Although these cases were filed during the period between October 2000 and April 2001, they are still in preliminary stages of pleading and discovery. CCL was placed in receivership by the Department of Labor and the Securities and Exchange Commission in the cases of SEC V. 23 CAPITAL CONSULTANTS, L.L.C., et. al., U.S. District Court of Oregon, Case No. 00-1290-KI, and HERMAN V. CAPITAL CONSULTANTS, L.L.C., et. al., U.S. District Court of Oregon, Case No. 001291-KI. When the receivership order was entered, the court stayed other proceedings against CCL for several weeks. Once the stay was partially lifted, the parties deferred discovery and delayed the filing of any answers or legal challenges to the sufficiency of the pleadings in order to facilitate a confidential global mediation process. U.S. Circuit Court Judge Edward Leavy of the Ninth Circuit Court of Appeals has been selected as the mediator. Discovery and motion practice has been stayed pending the outcome of the mediation, excepting only a limited amount of document production by all of the parties to the litigation. No motions challenging the sufficiency of the claimants' claims have been filed or heard, and the Company and other defendants have not yet filed their answers or any cross-claims that they may have among themselves. No discovery depositions have been taken. The plaintiffs and third-party plaintiffs in the CCL litigation claim total losses by the various plaintiffs against all defendants in the range of $400 million. Approximately $160 million of this amount arises from losses on investments which plaintiffs allege relate to Messrs. Wiederhorn and Mendelsohn and companies with which they were affiliated, for which plaintiffs allege the Company shares some unspecified portion of the liability. Additional damages are claimed for prejudgment interest dating from the date of each investment under securities law claims under which plaintiffs are seeking rescission remedies. The RICO claims include additional claims for triple damages and the tort claims include claims for punitive damages. Attorneys' fees are also sought under the ERISA, RICO and securities law claims. The mediation process has been ongoing since May, 2001. Management has directed that the Company participate in good faith along with the other parties in the confidential mediation in an effort to determine whether a mediated settlement may be achievable. In the event a mediated settlement is not achieved, management has directed that these cases be defended against vigorously. Because the cases are still in early stages of the pleadings and because the amount of discovery has been limited, the financial loss to the Company, if any, cannot be reasonably estimated at this time. The employment agreements between the Company and Messrs. Wiederhorn and Mendelsohn contain provisions under which they may be entitled to indemnity for litigation expenses and personal losses that are attributable to actions which they took on account of their positions as directors or officers of the Company. Messrs. Wiederhorn and Mendelsohn have notified the Company that they are reserving their rights to seek such indemnity. In addition, other former employees of the Company or of firms that were previously affiliated with the Company have been named as parties or have been requested to respond to discovery requests and/or government investigations regarding the collapse of CCL. Several of these individuals have requested indemnity from the Company for the costs of their defense. The Company has not agreed to any such indemnity requests. In addition to the civil litigation, the CCL failure has led to governmental investigations, including a criminal investigation. Messrs. Wiederhorn and Mendelsohn have received letters from the United States Attorney's office in Portland, Oregon, advising them that they are the subjects of a grand jury investigation into the failure of CCL. At this stage, it is not possible to predict the outcome of this investigation. At this time, it is not possible to determine the extent of liability, if any, the Company may face with regard to such indemnity claims because of the preliminary nature of the underlying litigation. In addition, certain of the litigation expenses faced by Messrs. Wiederhorn and Mendelsohn may be subject to reimbursement or payment from other sources because of employment agreements and indemnity rights they may have under the articles and bylaws of other defendants named in the litigation. 24 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 11 Computation of Per Share Earnings (b) Reports on Form 8-K: A Form 8-K was filed with the Securities and Exchange Commission by the Company on October 17, 2001 announcing the resignation of David C. Egelhoff as a member of the Board of Directors. A Form 8-K was filed with the Securities and Exchange Commission by the Company on October 30, 2001 announcing the resignation of Pat Terrell as a member of the Board of Directors and the appointment of Don H. Coleman, David Dale-Johnson, and K. Kenneth Kotler as new members of the Board of Directors. 25 SIGNATURES Pursuant to the requirements of the exchange act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Fog Cutter Capital Group Inc. By: /s/ Lawrence A. Mendelsohn ------------------------------------------------- Lawrence A. Mendelsohn President By: /s/ R. Scott Stevenson ------------------------------------------------- R. Scott Stevenson Senior Vice President and Chief Financial Officer Date: November 13, 2001 26 EX-11 3 a2063229zex-11.txt EXHIBIT 11 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS
Quarter Ended Nine Months Ended September 30, September 30, ------------------------------------ ------------------------------------ 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- Diluted net (loss) income per share: Net (loss) income to common shareholders........................ $ (4,428,000) $ 395,000 $ (11,151,000) $ 5,325,000 Average number of shares outstanding......................... 10,507,413 10,507,413 10,507,413 10,507,413 Net effect of dilutive stock options based on treasury stock method...... N/A N/A N/A N/A ------------- ------------- ------------- ------------- Total average shares.................... 10,507,413 10,507,413 10,507,413 10,507,413 ============= ============= ============= ============= Diluted net (loss) income per share..... $ (0.42) $ 0.04 $ (1.06) $ 0.51
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