-----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, N0HIIZgIcrBDLo/YF5hM3pfsX6M6j13raork85Y3jD1WlkoYeGrsFkl//lFhfG+y pDXFw3K3v9vb6rRLKfUNmg== 0000912057-02-029563.txt : 20020801 0000912057-02-029563.hdr.sgml : 20020801 20020801171356 ACCESSION NUMBER: 0000912057-02-029563 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020801 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: 02717637 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 a2085781z10-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 June 30, 2002 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) 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 JULY 31, 2002 Common Stock, par value $0.0001 per share 9,806,370 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.......15 Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................26 PART II--OTHER INFORMATION Item 1. Legal Proceedings...........................................................................30 Item 2. Changes in Securities and Use of Proceeds...................................................33 Item 3. Defaults Upon Senior Securities.............................................................33 Item 4. Submission of Matters to a Vote of Security Holders.........................................33 Item 5. Other Information...........................................................................33 Item 6. Exhibits and Reports on Form 8-K............................................................34 Signatures ..........................................................................................35
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)
June 30, December 31, 2002 2001 ------------------ ------------------ (Unaudited) ASSETS Cash and cash equivalents................................. $ 21,341 $ 6,753 Restricted cash deposits.................................. 2,579 - Securities available for sale, at estimated fair value.... 54,170 51,783 Loans..................................................... 92 4,819 Investments in real estate held for sale.................. 4,443 4,471 Investments in WFSG ...................................... - 5,893 Investment in BEP......................................... 6,246 5,195 Other assets.............................................. 5,779 3,143 ------------------ ------------------ Total assets.......................................... $ 94,650 $ 82,057 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Borrowings................................................ $ 40,919 $ 37,966 Income taxes payable...................................... 2,375 - Accounts payable and accrued liabilities.................. 5,897 5,292 ------------------ ------------------ Total liabilities..................................... 49,191 43,258 ------------------ ------------------ Commitments and Contingencies (see Note 4) Temporary Equity: Common stock subject to put options....................... 3,988 - ------------------ ------------------ 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; 11,512,100 shares issued in 2002 and 11,500,100 issued in 2001; 9,806,370 shares outstanding in 2002 and 10,507,413 in 2001.......................... 167,012 166,981 Treasury stock; 1,705,730 common shares in 2002 and 992,687 common shares in 2001, at cost...... (4,004) (2,171) Common stock subject to put options....................... (3,547) - Accumulated deficit....................................... (120,522) (128,131) Recourse loans to officers to acquire stock............... (61) (171) Accumulated other comprehensive income.................... 2,593 2,291 ------------------ ------------------ Total stockholders' equity............................ 41,471 38,799 ------------------ ------------------ Total liabilities and stockholders' equity............ $ 94,650 $ 82,057 ================== ==================
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 Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 2002 2001 2002 2001 --------------- ---------------- ---------------- --------------- Net Interest Income: Loans.............................................. $ 81 $ 761 $ 192 $ 1,585 Securities......................................... 1,596 1,899 3,044 4,150 Other investments.................................. 88 27 139 87 --------------- ---------------- ---------------- --------------- Total interest income........................... 1,765 2,687 3,375 5,822 Interest expense................................... 608 1,270 1,108 2,841 --------------- ---------------- ---------------- --------------- Net interest income............................. 1,157 1,417 2,267 2,981 --------------- ---------------- ---------------- --------------- Real Estate Operations: Operating income................................... - 609 - 1,206 Operating expense.................................. (14) (134) (30) (228) Interest expense................................... (28) (348) (56) (703) Depreciation....................................... (17) (131) (33) (267) --------------- ---------------- ---------------- --------------- Total real estate operations.................. (59) (4) (119) 8 --------------- ---------------- ---------------- --------------- Other Operating Income (Loss): Gain on sale of loans and securities............... 10,185 233 10,301 550 Equity in income (losses) in BEP................... 2,077 (575) 2,049 (802) Market valuation losses and impairments............ - - - (4,081) Loan origination fees.............................. 506 - 506 - Other revenue...................................... 127 (6) (252) (116) --------------- ---------------- ---------------- --------------- Total other operating income (loss)........... 12,895 (348) 12,604 (4,449) --------------- ---------------- ---------------- --------------- Operating Expenses: Compensation and employee benefits................. 1,107 1,059 1,740 2,260 Professional fees.................................. 671 241 945 559 Other.............................................. 677 676 1,110 1,423 --------------- ---------------- ---------------- --------------- Total operating expenses...................... 2,455 1,976 3,795 4,242 --------------- ---------------- ---------------- --------------- Net income (loss) before provision for income taxes and cumulative effect of a change in accounting principle............................................ 11,538 (911) 10,957 (5,702) Provision for income taxes............................. 800 - 800 - --------------- ---------------- ---------------- --------------- Net income (loss) before cumulative effect of a change in accounting principle.................. 10,738 (911) 10,157 (5,702) Cumulative effect of a change in accounting principle............................................ - (1,021) - (1,021) --------------- ---------------- ---------------- --------------- Net Income (Loss)...................................... $ 10,738 $ (1,932) $ 10,157 $ (6,723) =============== ================ ================ ===============
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 Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 2002 2001 2002 2001 --------------- ---------------- ---------------- --------------- Basic net income (loss) per share before cumulative effect of a change in accounting principle................................. $ 1.10 $ (0.08) $ 1.01 $ (0.54) Cumulative effect of a change in accounting principle per share.................................. - (0.10) - (0.10) --------------- ---------------- ---------------- --------------- Basic net income (loss) per share...................... $ 1.10 $ (0.18) $ 1.01 $ (0.64) =============== ================ ================ =============== Basic weighted average shares outstanding.............. 9,806,370 10,507,413 10,103,388 10,507,413 Diluted net income (loss) per share before cumulative effect of a change in accounting principle............................................ $ 1.08 $ (0.08) $ 1.00 $ (0.54) Cumulative effect of a change in accounting principle per share.................................. - (0.10) - (0.10) --------------- ---------------- ---------------- --------------- Diluted net income (loss) per share.................... $ 1.08 $ (0.18) $ 1.00 $ (0.64) =============== ================ ================ =============== Diluted weighted average shares outstanding............ 9,933,863 10,507,413 10,197,217 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)
Common Common Stock Treasury Stock Stock ---------------------------- ---------------------------- Subject to Put Accumulated Shares(1) Amount Shares Amount Options Deficit ------------- ------------- ------------- ------------- ------------- ------------- Balance at January 1, 2002........ 10,507,413 $ 166,981 992,687 $ (2,171) $ - $ (128,131) Comprehensive income: Net income..................... - - - - - 10,157 Other comprehensive income: Foreign currency translation............... - - - - - - Unrealized holding gains on securities available for sale.................. - - - - - - Reclassification adjustment for net gains on securities included in net income................ - - - - - - Total comprehensive income.... Common stock issued pursuant to exercise of stock options....................... 12,000 31 - - - - Net change in recourse loans to officers to acquire stock.. - - - - - - Dividends declared............... - - - - - (2,548) Transfer to temporary equity: Put option agreements......... - - - - (3,547) - Treasury stock acquired.......... (713,043) - 713,043 (1,833) - - ------------- ------------- ------------- ------------- ------------- ------------- Balance at June 30, 2002......... 9,806,370 $ 167,012 1,705,730 $ (4,004) $ (3,547) $ (120,522) ============= ============= ============= ============= ============= =============
Recourse Loans to Accumulated Officers to Other Acquire Comprehensive Stock Income Total ------------- -------------- ------------- Balance at January 1, 2002....... $ (171) $ 2,291 $ 38,799 Comprehensive income: Net income.................... - - 10,157 Other comprehensive income: Foreign currency translation.............. - 384 384 Unrealized holding gains on securities available for sale................. - 2,217 2,217 Reclassification adjustment for net gains on securities included in net income............... - (2,299) (2,299) ------------- Total comprehensive income.... 10,459 Common stock issued pursuant to exercise of stock options....................... - - 31 Net change in recourse loans to officers to acquire stock.. 110 - 110 Dividends declared............... - - (2,548) Transfer to temporary equity: Put option agreements......... - - (3,547) Treasury stock acquired.......... - - (1,833) ------------- -------------- ------------- Balance at June 30, 2002......... $ (61) $ 2,593 $ 41,471 ============= ============== =============
- ---------------- (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 Six Months Ended June 30, June 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------- ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................... $ 10,738 $ (1,932) $ 10,157 $ (6,723) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation................................... 75 182 139 366 Market valuation losses and impairments........ - - - 4,081 Loss on foreign currency translation........... (17) 6 (14) 116 Gain on sale of securities available for sale.. (10,215) - (10,704) - Gain on sale of real estate.................... - - (17) - Loss (gain) on sale of loans................... 30 (233) 403 (550) Equity in (income) losses in BEP............... (2,077) 575 (2,049) 802 Cumulative effect of a change in accounting principle........................ - 1,021 - 1,021 Other.......................................... (43) - 349 - Change in: Accrued interest receivable................... (105) 58 (137) 229 Other assets.................................. (259) 4 35 281 Accounts payable and accrued liabilities...... 1,169 (1,000) (83) (731) ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities........................... (704) (1,319) (1,921) (1,108) ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Repayments of securities available for sale..... 1,561 196 2,850 846 Purchase of securities available for sale....... - - (8,250) (695) Proceeds from sale of loans..................... - 4,305 - 7,304 Proceeds from sale of securities available for sale....................................... 19,885 2,344 22,535 2,344 Payments made in connection with acquisition of subsidiary..................................... (1,850) - (1,850) - Purchase of loans and discounted loans.......... (26) (1,193) (26) (1,193) Principal repayments on loans and discounted loans.......................................... 2,678 10 2,751 27 Proceeds from sale of real estate............... - 98 - 98 Transfer to restricted cash deposit............. (2,579) - (2,579) - Other........................................... 1,371 (27) 641 (48) ------------ ------------ ------------ ------------ Net cash provided by investing activities....... 21,040 5,733 16,072 8,683 ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings........................ 3,041 460 10,508 460 Repayments on borrowings........................ (6,369) (3,945) (7,556) (6,976) Dividend payments on common stock............... (1,275) (2,224) (2,548) (2,224) Other........................................... 31 - 31 - ------------ ------------ ------------ ------------ Net cash used in financing activities........... (4,572) (5,709) 435 (8,740) ------------ ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH........... 3 (1) 2 (15) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 15,767 (1,296) 14,588 (1,180) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................................... 5,574 3,510 6,753 3,394 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD........ $ 21,341 $ 2,214 $ 21,341 $ 2,214 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest.......................... $ 654 $ 1,680 $ 1,174 $ 3,595 Cash paid for taxes............................. $ - $ - $ - $ - Sale of loan in exchange for treasury stock..... $ - $ - $ 1,833 $ -
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") 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 accounting principles generally accepted in the United States for complete financial statements. The accompanying interim consolidated financial statements should be read in conjunction with the Company's 2001 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 2001 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 six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 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 June 30, 2002 presentation, none of which affect previously reported results of operations. At June 30, 2002, certain Company officers and directors controlled, directly or indirectly, the significant voting majority of the Company. NOTE 2 - SIGNIFICANT TRANSACTIONS In February 2002, the Company purchased 100% of the outstanding senior mortgage-backed securities of Bear Stearns Structured Products Series Trust 2000-3 ("BSSPT 2000-3") from third party investors for a purchase price of $8.2 million. The Company had previously acquired the subordinate mortgage-backed securities and, as a result of this transaction, became the beneficial owner of 100% of BSSPT 2000-3. The acquisition was financed with repurchase agreements in the amount of $7.4 million. In order to provide for the orderly liquidation of its investment in these mortgage-backed securities, in March 2002, the Company elected to collapse BSSPT 2000-3 and took direct ownership of the 67 underlying mortgage-backed securities owned by the trust. On April 12, 2002, the Company sold eleven of the bonds, which had been acquired through the liquidation of BSSPT 2000-3 and which had a carrying value of $7.0 million. The net proceeds from the sale totaled $9.8 million. Prior to the sale, the Company repaid $1.2 million of short-term indebtedness collateralized by the bonds. The Company recorded a $3.8 million gain on the sale, $1.1 million of which was transferred out of unrealized holding gains on securities included in Other Comprehensive Income. On February 22, 2002, the Company declared a cash dividend for the quarter ended March 31, 2002 of $0.13 per share. The dividend was paid on March 13, 2002 to shareholders of record as of March 8, 2002. On May 13, 2002, the Company declared a cash dividend for the quarter ended June 30, 2002 of $0.13 per share. The dividend was paid on June 10, 2002 to shareholders of record as of May 31, 2002. On March 6, 2002, the Company purchased a total of 713,043 shares of its common stock from entities affiliated with Jordan D. Schnitzer, a former member of the Company's Board of Directors ("Schnitzer Entities"). The shares were purchased in exchange for a 46.60% participation interest in the 8 unpaid principal balance (as of December 31, 2001) of the French American International School Loan (the "FAS Loan"), which was held by the Company. The parties valued the transaction at approximately $2.175 million, or $3.05 per share. On March 6, 2002, the closing price of the Company's stock as listed on NASDAQ was $2.57 per share. The $0.4 million difference between the $2.57 per share closing price of the stock and the carrying value of the 46.60% interest in the loan was included in the Statement of Operations as a reduction in gains on sale of loans and securities. The Company also granted an option (the "Stockholder Put Option") to the Schnitzer Entities, which entitles the Schnitzer Entities to require the Company to purchase an additional 713,042 shares of FCCG common stock for $3.05 per share, less any dividends paid by the Company on the shares between March 6, 2002 and the option closing date, plus interest accrued on the net option price at a rate equal to 10.00% per annum. The Stockholder Put Option is exercisable from September 1, 2002 through September 10, 2002. In the event the Stockholder Put Option is exercised, payment for the shares will be made by delivery of an additional 46.60% participation interest in the FAS Loan, plus 46.60% of all principal payments received by the Company on the FAS Loan since December 31, 2001, plus interest on the net option price at a rate equal to 10.00% per annum, less any dividends paid by the Company on the shares between March 6, 2002 and the option closing date. In the event the Schnitzer Entities exercise the Stockholder Put Option, the Schnitzer Entities will be required to purchase the remaining 6.80% participation interest in the FAS Loan at a price of $0.3 million. Upon purchase of the remaining 6.80% participation interest, the Schnitzer Entities will receive 6.80% of all principal payments received by the Company on the FAS Loan since December 31, 2001. The Company was granted an option (the "Company Put Option") from the Schnitzer Entities, which entitles the Company to require the Schnitzer Entities to purchase the additional 53.4% participation interest in the FAS Loan at an exercise price of $2.5 million, plus any cash dividends paid on 713,042 shares of FCCG common stock owned by the Schnitzer Entities between March 6, 2002 and the option closing date, less interest accrued on the net option price at a rate equal to 10.00% per annum. The Company Put Option is exercisable from September 11, 2002 through September 20, 2002. In the event the Company Put Option is exercised, Schnitzer will receive the additional 53.4% participation interest in the FAS Loan, plus 53.4% of all principal payments received by the Company on the FAS Loan since December 31, 2001. On April 2, 2002, the French American International School loan receivable, with a carrying value (net of the 46.6% participation agreement with Schnitzer) of $2.5 million, was paid in full by the borrower. Net proceeds from the repayment totaled $2.6 million. The loan receivable had served as collateral for a $3 million line of credit, which at the time of the repayment had no borrowings outstanding. Future draws against the line of credit will not be available to the Company unless the lender agrees to accept substituted collateral. The Company granted an option (the "Stockholder Property Option") to Jordan D. Schnitzer and Edward P. Borst (collectively the "Stockholder"), which entitles the Stockholder to require the Company to purchase an additional 727,235 shares of FCCG common stock for $0.3 million in cash, plus delivery of the Company's interest in approximately 10.9 acres of land in Wilsonville, Oregon, less any dividends paid by the Company on the shares between March 6, 2002 and the option closing date. The Stockholder Property Option was terminated with respect to a portion of the shares and the Company assigned its rights and obligations thereunder to third parties on July 17, 2002. The Company also received an option (the "Company Property Option") from the Stockholder, which entitles the Company to require the Stockholder to purchase the Company's interest in approximately 10.9 acres of land in Wilsonville, Oregon, subject to certain conditions, for $1.9 million, plus any cash dividends paid on 623,265 shares of FCCG common stock owned by the Stockholder. The Company Property Option was canceled on July 17, 2002. As mentioned above, subsequent to June 30, 2002, the Company and the Stockholder terminated the Company Property Option which had entitled the Company to require the Stockholder to purchase its 9 interest in approximately 10.9 acres of land in Wilsonville, Oregon. The Company and the Stockholder also amended the Stockholder Property Option which had entitled the Stockholder to require the Company to purchase 727,235 shares of FCCG common stock. Pursuant to the amendment to the Stockholder Property Option, the parties agreed to cancel the option agreement with respect to 484,235 shares of FCCG common stock and the Company assigned its obligation to purchase the remaining 243,000 shares to certain third parties, including Donald Berchtold, who is an officer of the Company and the father-in-law of CEO Andrew Wiederhorn, who agreed to purchase 40,000 of the shares from the Stockholder. As a result of the amendment and assignment of the Stockholder Property Option, the Company will transfer $1.7 million from Temporary Equity to permanent Stockholders' Equity during the quarter ending September 30, 2002. The cancellation of the Company Property Option will have no effect on the Company's third quarter financial statements. As of June 30, 2002, the Company had secured its performance under the various options by depositing cash in escrow of $2.6 million and granting trust deeds on approximately 10.9 acres of land in Wilsonville, Oregon and certain property owned by the Company in Eugene, Oregon. The trust deeds and $0.3 million in cash were subsequently released in July 2002. As of June 30, 2002, the Stockholder had secured its performance under the various options by pledging 1,440,277 shares of FCCG common stock. (See Note 6 - Subsequent Events.) In accordance with SEC Accounting Series Release 268, the grant of the Stockholder Put Option and the Stockholder Property Option resulted in the Company recording $4.0 million in Temporary Equity on the Statement of Financial Condition as of June 30, 2002. Of this amount, $3.5 million was deducted from permanent Stockholders' Equity. The remaining $0.5 million, representing the difference between the strike price of the option shares and the quoted price of the Company's stock on NASDAQ at the grant date, was recorded as a charge to earnings. The Company Loan Option and the Company Put Option had no effect on the Statement of Operations or Statement of Financial Condition as of June 30, 2002. On May 13, 2002 the Company and two of its executives, Andrew Wiederhorn and Lawrence Mendelsohn, announced that they had reached a settlement with the claimants in a series of lawsuits (the "CCL Lawsuits") relating to the receivership of Capital Consultants, L.L.C. ("CCL"). Under the terms of the settlement, the Company and Messrs. Wiederhorn and Mendelsohn are released and discharged from any and all claims, losses or damages arising or in any way related to CCL or any matters raised, or which could have been raised in the CCL Lawsuits. The agreement also provides protection against potential claims which may be made by parties who are not participants in the settlement. The settlement agreement and the payment to be made thereunder are made in compromise of disputed claims and are not an admission of any liability of any kind. The settlement has an effective date of May 13, 2002, but it is subject to a number of conditions before any funds can be distributed, including, among other things, court approval and the entry of a claims bar order in each of the CCL Lawsuits pending before the United States District Court for the District of Oregon. The court approved the settlement and issued the claims bar order at a hearing on June 19, 2002. The Company's portion of the settlement payment was made on July 10, 2002 and did not have a material impact on its financial position or results of its operations due to the previously established settlement reserve. On May 15, 2002, the Company made a $2.3 million capital investment in a newly formed, wholly owned subsidiary, Fog Cap Commercial Lending Inc. ("FCCL"). FCCL then acquired a 51% ownership interest in Fog Cap GEMB Holdings LLC ("GEMB Holdings"). GEMB Holdings subsequently purchased all of the assets and certain identified liabilities of George Elkins Mortgage Banking Company, L.P. ("GEMB L.P."), a California mortgage banking operation, which provided brokerage services related to the production of approximately $500 million in commercial real estate mortgages in 2001. FCCL also purchased a 51% ownership interest in SJGP, Inc. SJGP, Inc., as the manager of GEMB Holdings, will act 10 as a broker of commercial mortgages through four Southern California branches doing business as George Elkins Mortgage Banking Company. The primary reason for the acquisition was to pursue special situation lending opportunities through Elkins' distribution platform and to increase its loan brokerage volume and profitability through the development of additional lender relationships. The acquisition price for the assets and certain identified liabilities of GEMB L.P. was $0.4 million. In conjunction with the acquisition, certain former employees of GEMB L.P. entered into long-term employment agreements with SJGP, Inc. The Company advanced deferred compensation payments to these employees in the amount of $1.9 million, which are included in other assets in the accompanying statement of financial position. The Company began reporting the operations of GEMB Holdings and SJGP, Inc. on a consolidated basis beginning May 15, 2002. The following supplemental pro forma information discloses the results of operations for the quarters ended June 30, 2002 and 2001, and for the six months ended June 30, 2002 and 2001 as though the acquisition had been completed as of the beginning of the period being reported:
Quarter Ended Six Months Ended June 30, June 30, --------------------------------- ---------------------------------- 2002 2001 2002 2001 ---------------- --------------- ---------------- ---------------- (DOLLARS IN THOUSANDS) Net interest income......................... $ 1,157 $ 1,417 $ 2,267 $ 2,981 Real estate operations...................... (59) (4) (119) 8 Other operating income...................... 13,012 235 13,105 (3,283) Operating expenses.......................... (2,546) (2,646) (4,300) (5,582) ---------------- --------------- --------------- ----------------- Net income (loss) before provision for taxes and cumulative effect of a change in accounting principle..................... 11,564 (998) 10,953 (5,876) Provision for income taxes.................. (800) - (800) - ---------------- --------------- --------------- ----------------- Net income (loss) before cumulative effect of a change in accounting principle....... 10,764 (998) 10,153 (5,876) Cumulative effect of a change in accounting principle...................... - (1,021) - (1,021) ---------------- --------------- --------------- ----------------- Net income (loss)........................... $ 10,764 $ (2,019) $ 10,153 $ (6,897) ================ =============== =============== ================= Basic net income (loss) per share before cumulative effect of a change in accounting principle..................... $ 1.10 $ (0.09) $ 1.00 $ (0.56) ---------------- --------------- --------------- ----------------- Cumulative effect of a change in accounting principle per share....................... - (0.10) - (0.10) ================ =============== =============== ================= Basic net income (loss) per share........... $ 1.10 $ (0.19) $ 1.00 $ (0.66) ================ =============== =============== =================
In May 2002, the Company sold, through several brokerage transactions to third parties, its entire holdings of approximately 2.9 million shares of the common stock of Wilshire Financial Services Group, Inc. ("WFSG"). The sales were prompted by recently improved market conditions surrounding WFSG and resulted in cash to the Company of $9.9 million. The sales transactions resulted in a net increase in stockholders' equity of $3.2 million. With the disposal of its entire interest in WFSG, the Company has withdrawn its application for change in control of a bank holding company (Form H-(e)1), which had been filed with the Office of Thrift Supervision on March 29, 2002. As of June 30, 2002, our other assets consisted of capitalized deferred compensation of $1.8 million, loans to executives of $1.7 million, capitalized financing fees of $0.8 million, prepaid insurance of $0.5 million and other miscellaneous assets of $1.0 million. 11 NOTE 3 - VALUATION OF MORTGAGE-BACKED SECURITIES The fair value of the Company's investment in mortgage-backed securities is determined at each reporting date as the present value of the anticipated cash flows from the underlying collateral using certain assumptions. These assumptions include: (i) future rate of prepayment; (ii) discount rate used to calculate present value; and (iii) default rates and loss severity on loan pools underlying the mortgage-backed securities. At June 30, 2002, the range of key economic assumptions used to determine the fair value of the securities was as follows: an annual prepayment speed ranging from 19% to 30%; a monthly constant default rate ranging from 0.11% to 0.48%; a loss severity ranging from 40% to 55%; and a discount rate of 13% for the BB-rated securities, 18% for the B-rated securities and 20% for the unrated securities. The Company evaluates, on an ongoing basis, the carrying value of its securities portfolio, which is accounted for as available-for-sale. To the extent differences between the book basis of the securities and their current market values are deemed to be temporary in nature, such unrealized gains or losses are reflected directly in equity as "other comprehensive income or loss." Declines in fair value are 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 from the previous valuation date. To the extent declines in fair value are considered other-than-temporary, a write-down is recorded in "Market Valuation Losses and Impairments" in the consolidated statement of operations. During the quarters ended June 30, 2002 and 2001, no market valuation losses and impairments were recorded. However, during the 2001 period, the cumulative effect of a change in accounting principle of $1.0 million relative to a mortgage-backed security was charged against earnings. NOTE 4 - COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK The Company and two of its senior officers had been named, among other defendants, in a series of civil lawsuits related to the receivership of 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. On May 13, 2002, the Company and its two top executives, Andrew Wiederhorn and Larry Mendelsohn, announced that they had reached a settlement with the claimants in these civil lawsuits (see Part II, Item 1 - Legal Proceedings). Based upon the progress of mediation, the Company had made a provision for litigation of $2 million during the quarter ended December 31, 2001. In light of the settlement agreement, the Company has determined that this reserve was adequate at June 30, 2002. Certain 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. 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. The Company has not agreed to any such indemnity requests. The Company is involved in various other legal proceedings occurring in the ordinary course of business, which the Company believes will not have a material adverse effect on the consolidated financial condition or operations of the Company. The Company may utilize a wide variety of off-balance sheet financial techniques to manage its interest rate risk. In hedging the interest rate and/or exchange rate exposure of a foreign currency denominated asset or liability, the Company may enter into hedge transactions to counter movements in the different currencies, as well as interest rates in those currencies. These hedges may be in the form of currency and interest rate swaps, options, and forwards, or combinations thereof. At June 30, 2002, the Company had one open hedging position consisting of the short sale of $5 million FNMA 30-year, 6% 12 bonds for delivery in September 2002. The fair value of the hedge liability of $22,000 is netted against other assets in the consolidated statements of financial position. NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, FASB issued FAS No. 141, Accounting for Business Combinations and FAS No. 142, Accounting for Goodwill and Intangible Assets. FAS No. 141 eliminates the ability to utilize the pooling of interests method of accounting for business combination transactions initiated after June 30, 2001. The purchase method of accounting is now required. FAS No. 142 eliminates the existing requirement to amortize goodwill through a periodic charge to earnings. For existing goodwill, the elimination of the amortization requirement is effective beginning January 1, 2002. As of that date, and at least annually thereafter, goodwill must be evaluated for impairment based on estimated fair value. The Company adopted these statements on January 1, 2002, and there was no impact on the Company's financial position or operating results upon adoption. In June 2001, FASB issued FAS No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of FAS No. 143 are effective for fiscal years beginning after June 15, 2002. Management has not yet determined the impact, if any, of adoption of FAS No. 143. In August 2001, FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS No. 144). FAS No. 144 retains the fundamental provisions in FAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with FAS No. 121. For example, FAS No. 144 provides guidance on how a long-lived asset that is used as a part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. FAS No. 144 also retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). The Company adopted this statement on January 1, 2002, and there was no impact on the Company's financial position or operating results upon adoption. NOTE 6 - SUBSEQUENT EVENTS On July 17, 2002, the Company and the Stockholder terminated the Company Property Option, which had entitled the Company to require the Stockholder to purchase its interest in approximately 10.9 acres of land in Wilsonville, Oregon. The Company and the Stockholder also amended the Stockholder Property Option which had entitled the Stockholder to require the Company to purchase 727,235 shares of FCCG common stock. Pursuant to the amendment to the Stockholder Property Option, the parties agreed to cancel the option agreement with respect to 484,235 shares of FCCG common stock and the Company assigned its obligation to purchase the remaining 243,000 shares to certain third parties, including Donald Berchtold, who is an officer of the Company and the father-in-law of CEO Andrew Wiederhorn, who agreed to purchase 40,000 of the shares from the Stockholder. As a result of the amendment and assignment of the Stockholder Property Option, the Company will transfer $1.7 million from Temporary Equity to permanent Stockholders' Equity during the quarter ending September 30, 2002. The cancellation of the Company Property Option will have no effect on the Company's third quarter financial statements. On July 9, 2002, the Company loaned Mr. Wiederhorn $2.0 million. This loan is fully recourse to Mr. Wiederhorn and is secured by trust deeds on two residences located in Oregon. The loan is due on August 1, 2007 and bears interest at 8.5% per annum, payable monthly. These terms are comparable to, or more favorable to the Company than, loans available from unaffiliated third parties negotiated in arms-length transactions. The Board of Directors, with Mr. Wiederhorn abstaining, approved this transaction. 13 On July 25, 2002, the Company purchased two Great Britain pound ("GBP") put options as a partial currency hedge on its investment in the United Kingdom. The first contract entitles the Company to sell GBP 1.0 million for U.S. dollars ("USD") at an exchange rate of 1.46 USD per one GBP. The option expires on September 26, 2003. The second contract entitles the Company to sell GBP 7.5 million for USD at an exchange rate of 1.46 USD per one GBP. The option expires on December 26, 2003. The Company paid a premium of GBP 0.2 million for the option contracts. 14 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 maintains its headquarters in Portland, Oregon and also has executive offices in New York, Los Angeles and London. The Company invests primarily in the following types of assets: MORTGAGE-BACKED SECURITIES - The Company invests in mortgage-backed securities through its wholly owned subsidiary, Fog Cutter Capital Markets Inc. We typically focus on the subordinated classes of these securities, due to the opportunity for higher risk-adjusted returns. We buy and sell these securities for our own account and utilize creative structuring to add value to these products. At June 30, 2002, we had total mortgage-backed securities of approximately $54.1 million, which were subject to $39.9 million of non-recourse financing. REAL ESTATE - The Company invests in real estate-related assets either directly or indirectly through debt or equity positions in entities that own or operate real estate. At June 30, 2002, direct holdings include three properties located in Oregon and California. In addition, we own 26% of the outstanding capital stock of Bourne End Properties Plc ("Bourne End"), a specialist investor in retail shopping centers located in the United Kingdom. In December 2000, we organized and led a group of investors, including Merrill Lynch (Jersey) Holdings Limited (a subsidiary of Merrill Lynch & Co., Inc.) to purchase all of the outstanding capital stock of Bourne End. At June 30, 2002, our investment in real estate, including the investment in Bourne End, totaled $10.7 million. Total indebtedness relating to these investments at June 30, 2002 was $1.1 million. LOANS AND MORTGAGE BANKING - The Company owns a 51% interest in the mortgage banking operation of George Elkins Mortgage Banking Company ("Elkins"). Headquartered in Los Angeles, with offices in Santa Barbara, San Diego and Newport Beach, Elkins renders brokerage services in connection with the origination of commercial mortgages, primarily for their life insurance correspondents. Elkins specializes in commercial real estate loans in a variety of property types and loan amounts. The mortgage banking operation also services in excess of $700 million of commercial mortgages for various investors. In addition to the mortgage banking operation, we invest directly in special situation loans, including charged off commercial debt. At June 30, 2002, our investment in loans and mortgage banking was $4.0 million. OTHER MISCELLANEOUS INVESTMENTS - The Company's other miscellaneous investments consist of cash deposits and other assets not included in the classifications described above. At June 30, 2002, our investments in other miscellaneous investments totaled $25.9 million, of which $21.3 million was in unrestricted cash deposits. 15 The contribution to net income (loss) for each category of investment for the quarters ended June 30, 2002 and 2001 are detailed below. General and administrative expenses are allocated based upon the percentage of total assets invested in a category.
Three Months Ended June 30, 2002 ----------------------------------------------------------------------------- Mortgage- Loans and Other backed Mortgage Miscellaneous Securities Real Estate Banking Investments Total --------------- -------------- -------------- ---------------- -------------- (DOLLARS IN THOUSANDS) Interest Income............ $ 1,596 $ - $ 128 $ 41 $ 1,765 Interest Expense........... (608) - - - (608) --------------- -------------- -------------- ---------------- -------------- Net Interest Income........ 988 - 128 41 1,157 Other Income............... 3,925 2,018 496 6,397 12,836 Other Expense.............. (1,256) (276) (92) (831) (2,455) --------------- -------------- -------------- ---------------- -------------- Net income before provision for income taxes and cumulative effect of a change in accounting principle................. 3,657 1,742 532 5,607 11,538 Provision for income taxes. (253) (121) (37) (389) (800) --------------- -------------- -------------- ---------------- -------------- Net income before cumulative effect of a change in accounting principle................. 3,404 1,621 495 5,218 10,738 Cumulative effect of a change in accounting principle................. - - - - - --------------- -------------- -------------- ---------------- -------------- Net Income................. $ 3,404 $ 1,621 $ 495 $ 5,218 $ 10,738 =============== ============== ============== ================ ==============
Three Months Ended June 30, 2001 ----------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Mortgage- Loans and Other backed Mortgage Miscellaneous Securities Real Estate Banking Investments Total --------------- -------------- -------------- ---------------- -------------- Interest Income............ $ 1,899 $ - $ 720 $ 68 $ 2,687 Interest Expense........... (939) - (322) (9) (1,270) --------------- -------------- -------------- ---------------- -------------- Net Interest Income........ 960 - 398 59 1,417 Other Income............... - (694) 233 109 (352) Other Expense.............. (840) (448) (448) (240) (1,976) --------------- -------------- -------------- ---------------- -------------- Net income before provision for income taxes and cumulative effect of a change in accounting principle................. 120 (1,142) 183 (72) (911) Provision for income taxes. - - - - - --------------- -------------- -------------- ---------------- -------------- Net income before cumulative effect of a change in accounting principle................. 120 (1,142) 183 (72) (911) Cumulative effect of a change in accounting principle................. (1,021) - - - (1,021) --------------- -------------- -------------- ---------------- -------------- Net Income................. $ (901) $ (1,142) $ 183 $ (72) $ (1,932) =============== ============== ============== ================ ==============
16 The contribution to net income (loss) for each category of investment for the six months ended June 30, 2002 and 2001 are detailed below. General and administrative expenses are allocated based upon the percentage of total assets invested in a category.
Six Months Ended June 30, 2002 ----------------------------------------------------------------------------- Mortgage- Loans and Other backed Mortgage Miscellaneous Securities Real Estate Banking Investments Total --------------- -------------- -------------- ---------------- -------------- (DOLLARS IN THOUSANDS) Interest Income............ $ 3,044 $ - $ 238 $ 93 $ 3,375 Interest Expense........... (1,108) - - - (1,108) --------------- -------------- -------------- ---------------- -------------- Net Interest Income........ 1,936 - 238 93 2,267 Other Income............... 4,413 1,947 123 6,002 12,485 Other Expense.............. (2,163) (429) (159) (1,044) (3,795) --------------- -------------- -------------- ---------------- -------------- Net income before provision for income taxes and cumulative effect of a change in accounting principle................. 4,186 1,518 202 5,051 10,957 Provision for income taxes. (306) (111) (15) (368) (800) --------------- -------------- -------------- ---------------- -------------- Net income before cumulative effect of a change in accounting principle................. 3,880 1,407 187 4,683 10,157 Cumulative effect of a change in accounting principle................. - - - - - --------------- -------------- -------------- ---------------- -------------- Net Income................. $ 3,880 $ 1,407 $ 187 $ 4,683 $ 10,157 =============== ============== ============== ================ ==============
Six Months Ended June 30, 2001 ----------------------------------------------------------------------------- Mortgage- Loans and Other backed Mortgage Miscellaneous Securities Real Estate Banking Investments Total --------------- -------------- -------------- ---------------- -------------- (DOLLARS IN THOUSANDS) Interest Income............ $ 4,150 $ - $ 1,585 $ 87 $ 5,822 Interest Expense........... (2,103) - (712) (26) (2,841) --------------- -------------- -------------- ---------------- -------------- Net Interest Income........ 2,047 - 873 61 2,981 Other Income............... (4,082) (909) 550 - (4,441) Other Expense.............. (1,844) (974) (984) (440) (4,242) --------------- -------------- -------------- ---------------- -------------- Net income before provision for income taxes and cumulative effect of a change in accounting principle................. (3,879) (1,883) 439 (379) (5,702) Provision for income taxes. - - - - - --------------- -------------- -------------- ---------------- -------------- Net income before cumulative effect of a change in accounting principle................. (3,879) (1,883) 439 (379) (5,702) Cumulative effect of a change in accounting principle................. (1,021) - - - (1,021) --------------- -------------- -------------- ---------------- -------------- Net Income................. $ (4,900) $ (1,883) $ 439 $ (379) $ (6,723) =============== ============== ============== ================ ==============
17 CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its financial statements. VALUATION At June 30, 2002, our largest asset was our portfolio of mortgage-backed securities. Listed market prices or dealer/lender value opinions are not available for most of the securities in our portfolio. Accordingly, in the absence of these third-party quotations, fair values for these securities are determined by us, using a third-party valuation model and internally developed assumptions. Valuation models and assumptions impact the carrying value of our mortgage-backed securities and the amount and timing of gains and losses recognized. The use of different valuation models or assumptions could produce different financial results. Changes in the fixed-income markets and the actual performance of our mortgage-backed securities may impact our estimates of fair value in the future, potentially affecting, positively or negatively, our future operating results and equity. Our key valuation assumptions include default rates and loss severity, which account for the anticipated credit losses in the pools of loans underlying our mortgage-backed securities. Other key valuation assumptions include prepayment rates and discount rates. Our internal valuation methodology calls for developing the key valuation assumptions of credit losses and prepayment speeds based upon the observable recent history of performance, generally averaged across the latest three to six months, subject to general economic and market considerations. Our key valuation assumption of discount rates is developed based on the assessment of the current yields required by investors for similar classes of fixed income instruments. We apply our valuation methodology consistently and believe that the resulting fair value estimates are reasonable; however, these estimated values may differ from those realized in a bona fide sale transaction, given the judgmental nature of the values of these assets. During the years ended December 31, 2001, 2000, and 1999, we incurred significant losses of $8.7 million, $21.4 million, and $19.6 million, respectively, due to decreases in value of our mortgage-backed securities. These losses resulted from the worsening credit and prepayment performance of our mortgage-backed securities as well as increases in the market yields for investments in such high-risk assets. We believe our assumptions and the resulting estimated values of the mortgage-backed securities at June 30, 2002 are conservative based on the facts and circumstances as of that date; however, there can be no assurance that there will be no future losses on these securities due to changes in their performance or overall market conditions. SALE RECOGNITION During 2002, we carried out several significant sales of our mortgage-backed securities, investment in WFSG and loans. Our accounting policy calls for the recognition of sales of financial instruments, including mortgage-backed securities and loans, only when we have irrevocably surrendered control over these assets. We do not retain any recourse or performance obligations with respect to our sales of assets. Our sales were cash sales, and the cash proceeds were not contingent upon any future event. 18 RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 NET INCOME. Our net income for the six months ended June 30, 2002 was $10.2 million, or $1.01 per share, compared with a net loss of $6.7 million, or $0.64 per share, for the six months ended June 30, 2001. The net income for the 2002 period is primarily attributable to net interest income of $2.3 million, gain on sale of loans and securities of $10.3 million, and equity in earnings of BEP of $2.1 million, partially offset by other operating expenses of $3.8 million and provision for income taxes of $0.8 million. The net loss for the 2001 period is attributable to net interest income of $3.0 million, gain on sale of loans of $0.6 million, offset by market valuation losses and impairments on our portfolio of mortgage-backed securities of $4.1 million, the cumulative effect of a change in accounting principle of $1.0 million, the equity in losses of BEP of $0.8 million and other operating expenses of $4.2 million. NET INTEREST INCOME. Our net interest income for the six months ended June 30, 2002 was $2.3 million, compared with $3.0 million for the six months ended June 30, 2001. 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 and loans of $1.1 million and $1.4 million, respectively, partially offset by a decrease in interest expense of $1.7 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 Six Months Ended June 30, 2002 -------------------------------------------------------- Average Interest Annualized Balance Income (Expense) Yield/Rate --------------- ------------------- ------------------ (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios (1)....................... $ 2,073 $ 192 18.5% Mortgage-backed securities available for sale.................................. 55,812 3,044 10.9% Other investments......................... 13,200 139 2.1% --------------- ------------------- ------------------ Total interest-earning assets......... $ 71,085 $ 3,375 9.5% --------------- ------------------- ------------------ Interest-Bearing Liabilities: Borrowings (2)............................ $ 40,391 $ (1,108) 5.5% --------------- ------------------- ------------------ Total interest-bearing liabilities.... $ 40,391 $ (1,108) 5.5% --------------- ------------------- ------------------ Net interest income before provision for loan losses/spread (3)....................... $ 2,267 4.0% =================== ================== Net interest margin (4).................. 6.4% ==================
- -------------------- (1) Interest income on loans includes $87,000 of purchase discount on charged-off loans collected in cash from borrowers. (2) Excludes borrowings related to investments in real estate. (3) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. 19
For the Six Months Ended June 30, 2001 -------------------------------------------------------- Average Interest Annualized Balance Income (Expense) Yield/Rate ---------------- ------------------ ------------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios................................. $ 30,802 $ 1,585 10.3% Mortgage-backed securities available for sale............................................ 66,302 4,150 12.5% Other investments............................... 3,657 87 4.8% ---------------- ------------------ ------------- Total interest-earning assets............... $ 100,761 $ 5,822 11.6% ---------------- ------------------ ------------- Interest-Bearing Liabilities: Borrowings (1).................................. $ 67,392 $ (2,841) 8.4% ---------------- ------------------ ------------- Total interest-bearing liabilities.......... $ 67,392 $ (2,841) 8.4% ---------------- ------------------ ------------- Net interest income before provision for loan losses/spread (2)....................... $ 2,981 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 and California. During the six months ended June 30, 2002, we realized a net loss of $0.1 million from real estate operations, compared with break-even operations for the six months ended June 30, 2001. This decrease was primarily attributable to the elimination of net rental income from office properties located in the United Kingdom which were sold during the prior year. MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses and Impairments" as used herein refers to impairment losses recognized primarily on our mortgage-backed securities and loan portfolios. During the six months ended June 30, 2002, no market valuation losses and impairments were recorded. However, during the comparable period in 2001, we recorded market valuation losses and impairments of $4.1 million and recorded the cumulative effect of a change in accounting principle of $1.0 million relating to mortgage-backed securities. This charge to the portfolio of mortgage-backed securities primarily reflected higher than anticipated delinquencies, losses in loans underlying certain securities, and varying prepayment speeds. RESULTS OF OPERATIONS -- QUARTER ENDED JUNE 30, 2002 COMPARED TO QUARTER ENDED JUNE 30, 2001 NET INCOME. Our net income for the quarter ended June 30, 2002 was $10.7 million, or $1.10 per share, compared with a net loss of $1.9 million, or $0.18 per share, for the quarter ended June 30, 2001. The net income for the 2002 period is attributable to net interest income of $1.2 million, gain on sale of loans and securities of $10.2 million, equity in earnings of BEP of $2.1 million, and other revenue of $0.6 million, partially offset by other operating expenses of $2.5 million and $0.8 million in provision for income taxes. The net loss for the 2001 period was primarily due to the cumulative effect of a change in accounting principle of $1.0 million and the equity in losses of BEP of $0.6 million. 20 NET INTEREST INCOME. Our net interest income for the quarter ended June 30, 2002 was $1.2 million, compared with $1.4 million for the quarter ended June 30, 2001. 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 and loans of $0.3 million and $0.7 million, respectively, partially offset by a decrease in interest expense of $0.7 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 June 30, 2002 --------------------------------------------------------- Average Interest Annualized Balance Income (Expense) Yield/Rate --------------- ------------------- ----------------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios (1)............................. $ 84 $ 81 385.7% Mortgage-backed securities available for sale............................................ 53,123 1,596 12.0% Other investments............................... 18,781 88 1.9% ----------------- ------------------ -------------- Total interest-earning assets............... $ 71,988 $ 1,765 9.8% ----------------- ------------------ -------------- Interest-Bearing Liabilities: Borrowings (2).................................. $ 39,644 $ (608) 6.1% ----------------- ------------------ -------------- Total interest-bearing liabilities.......... $ 39,644 $ (608) 6.1% ----------------- ------------------ -------------- Net interest income before provision for loan losses/spread (3)............................. $ 1,157 3.7% ================== ============== Net interest margin (4)........................ 6.4% ==============
- ------------------- (1) Interest income on loans includes $77,000 of purchase discount on charged-off loans collected in cash from borrowers. (2) Excludes borrowings related to investments in real estate. (3) Net interest spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets.
For the Quarter Ended June 30, 2001 -------------------------------------------------------- Average Interest Annualized Balance Income (Expense) Yield/Rate ---------------- ------------------ ------------- (DOLLARS IN THOUSANDS) Interest-Earning Assets: Loan portfolios................................. $ 30,282 $ 761 10.1% Mortgage-backed securities available for sale............................................ 61,401 1,899 12.4% Other investments............................... 3,063 27 3.5% ---------------- ------------------ ------------- Total interest-earning assets............... $ 94,746 $ 2,687 11.3% ---------------- ------------------ ------------- Interest-Bearing Liabilities: Borrowings (1).................................. $ 65,585 $ (1,270) 7.7% ---------------- ------------------ ------------- Total interest-bearing liabilities.......... $ 65,585 $ (1,270) 7.7% ---------------- ------------------ ------------- Net interest income before provision for loan losses/spread (2)....................... $ 1,417 3.6% ================== ============= Net interest margin (3)........................ 6.0% =============
- --------------------- (1) Excludes borrowings related to investments in real estate. 21 (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. During the quarter ended June 30, 2002, we realized a net loss of $0.1 million from real estate operations, compared with break-even operations for the quarter ended June 30, 2001. The decrease is primarily the result of a reduction in assets, reflecting sales of real estate during the last half of 2001. CHANGES IN FINANCIAL CONDITION GENERAL. Total assets increased from approximately $82.1 million at December 31, 2001 to approximately $94.7 million at June 30, 2002. Total liabilities increased from approximately $43.3 million at December 31, 2001 to approximately $49.2 million at June 30, 2002. Stockholders' equity increased by approximately $2.7 million resulting primarily from net income of $10.2 million and increases in other comprehensive income of $0.3 million, partially offset by dividend payments of $2.6 million, the transfer of $3.5 million to Temporary Equity relating to the grant of the Stockholder Put Options, and the acquisition of treasury stock in the amount of $1.8 million. SECURITIES AVAILABLE FOR SALE. The balance of mortgage-backed securities available for sale increased from $51.8 million at December 31, 2001 to $54.2 million at June 30, 2002. The increase was primarily the result of the purchase of 100% of the outstanding senior mortgage-backed securities of Bear Stearns Structured Products Series Trust 2000-3 ("BSSPT 2000-3") for a purchase price of $8.2 million and an increase in market value of $6.3 million, which were partially offset by the sale of other mortgage-backed securities with a carrying value of $9.1 million and cash repayments of securities of $3.1 million. We mark our securities portfolio to estimated fair value at the end of each month. 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). As of each reporting period, we evaluate whether and to what extent any unrealized loss is to be recognized as other than temporary. The Company has entered into an employment agreement, which entitles Robert G. Rosen to a bonus payment equal to $350,000 plus 10% of the excess of the cumulative net proceeds from the sale of the Company's mortgage-backed securities over a specified target amount (as defined in the employment agreement). The unrealized holding gain on securities available for sale included in other comprehensive income has been adjusted to reflect the amount of the bonus payable to Mr. Rosen under his employment agreement, assuming the Company had sold all of its mortgage-backed securities at a selling price equal to the carrying value at June 30, 2002. 22 At June 30, 2002, securities available for sale were as follows:
Gross Amortized Gross Unrealized Cost (1) Unrealized Gains Losses Fair Value -------------- --------------- --------------- --------------- (DOLLARS IN THOUSANDS) Mortgage-backed securities $ 48,911 $ 5,529 $ 270 $ 54,170 ============== =============== =============== ===============
- ----------------------- (1) The amortized cost of the securities reflects prior market valuation losses and impairments and excludes accrued interest of $0.2 million. LOANS. During the six months ended June 30, 2002, our loans decreased by approximately $4.7 million due primarily to the sale of a 46.6% participation interest in the French American International School loan in exchange for the Company's stock and the subsequent repayment of the loan by the borrower. INVESTMENT IN WFSG. We sold our entire investment in Wilshire Financial Services Group Inc. ("WFSG") common stock. Prior to the sale, we had owned approximately 2.9 million shares, and as of December 31, 2001 had been considered the second largest shareholder. We had filed a change in control application (Form H-(e)1) with the Office of Thrift Supervision (the "OTS") on March 29, 2002. On May 1, 2002 the OTS provided a written request for additional information relating to the filing. Following the sale of the stock, we withdrew the Form H-(e)1 application with the OTS. OTHER ASSETS. Our other assets increased by approximately $2.6 million during the six months ended June 30, 2002. The increase was primarily the result of the capitalization of $1.8 million in deferred compensation payments relating to the acquisition of GEMB and loans of $0.8 million to certain executives under their employment agreements. As of June 30, 2002, our other assets consisted of capitalized deferred compensation of $1.8 million, loans to executives of $1.7 million, capitalized financing fees of $0.8 million, prepaid insurance of $0.5 million and other miscellaneous assets of $1.0 million. BORROWINGS. Borrowings increased by approximately $3.0 million during the six months ended June 30, 2002, primarily due to new borrowings in the amount of $10.5 million related to the purchase of mortgage-backed securities, partially offset by $7.5 million in principal payments. INCOME TAXES PAYABLE. Our income taxes payable increased to $2.4 million at June 30, 2002. This was the result of a provision for income taxes of $0.8 million and the establishment of a tax liability of $1.6 million relating to unrealized appreciation on our mortgage-backed securities portfolio. As of June 30, 2002, we had, for U.S. Federal tax purposes, a net operating loss carryforward (`NOL") of approximately $90 million, which begins to expire in 2018. The NOL may significantly reduce or eliminate the future payment of the tax liabilities. However, U.S. tax regulations impose limitations on the use of loss carryforwards following certain changes in ownership. If such a change occurs, the limitation could significantly reduce the amount of benefits that would be available to offset future taxable income each year, starting with the year of ownership change. STOCKHOLDERS' EQUITY. Stockholders' equity increased by approximately $2.7 million during the six months ended June 30, 2002 primarily due to our net income of $10.2 million and increases in other comprehensive income of $0.3 million. These increases were partially offset by our dividend payment of $2.6 million, the transfer of $3.5 million to Temporary Equity relating to the grant of the Stockholder Put Option, and our purchase of treasury stock of $1.8 million. On March 6, 2002, The Company granted put options to entities affiliated with Jordan D. Schnitzer, a former member of the Company's Board of Directors ("Schnitzer"), which entitles Schnitzer to require the Company to purchase certain shares of FCCG common stock at a specified price. As a result, a 23 $4.0 million obligation to purchase approximately 1.4 million shares under the put option agreements has been transferred from Stockholders' Equity to Temporary Equity on the Consolidated Statements of Financial Position as of March 31, 2002. The $0.5 million difference between the $3.05 per share purchase option price on certain of the shares and the $2.57 per share NASDAQ closing price of the stock on the date of grant, was deducted from Other Operating Income in the Statement of Operations as of June 30, 2002. A portion of the options were subsequently assigned or canceled in July 2002, resulting in a restoration of $1.7 million to Stockholders' Equity. 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 six months ended June 30, 2002 consisted of net cash provided by investing activities, including the cash repayments and sales related to our mortgage-backed securities, investment in WFSG, and loan portfolios. 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. During the quarter ending June 30, 2002, we repaid or refinanced all of our remaining short-term fully-recourse repurchase agreements with non-recourse, short-term repurchase agreements held in wholly-owned subsidiaries. As a result, the potential risk to the Company from collateral calls is limited to the equity in the assets being financed, which at June 30, 2002 totaled $11.5 million. As of June 30, 2002, 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 shareholders. See "Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK." At June 30, 2002, we had total consolidated secured indebtedness of $40.9 million, as well as $8.3 million of other liabilities. The consolidated secured indebtedness consisted of (i) $13.2 million of non-recourse repurchase agreements secured by $24.7 million of mortgage-backed securities and (ii) $27.7 million outstanding of other borrowings maturing between 2003 and 2020, which are secured by real estate and mortgage-backed securities. Approximately $24.7 million of this indebtedness had terms that allowed the lender to request additional collateral if the value of the underlying collateral declined. However, due to the non-recourse nature of this debt, our exposure to collateral calls is limited to the equity in the assets being financed. Our borrowings are established through both short-term and long-term financing facilities. 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. 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 that 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 24 or additional collateral be provided by the borrower. Mortgage-backed securities subject to repurchase agreements may periodically be revalued by the lender, and a decline in the value (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. We consider the sale of assets to be a normal, recurring part of our operations and we are generating positive cash flow as a result of these transactions. However, excluding the sale of assets from time to time, we are currently operating with negative cash flow, since many of our assets do not generate current cash flows sufficient to cover current operating expenses. We believe that our existing sources of funds will be adequate for purposes of meeting our 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. 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. 25 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 significantly 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. The following tables quantify the potential changes in net interest income and net portfolio value as of June 30, 2002 should interest rates go up or down (shocked) by 100 to 200 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 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 Annual Net Change in Interest Rates (1) Net Interest Income Net Portfolio Value Interest Income Portfolio Value - ---------------------------- ------------------- ------------------- ---------------- --------------- - -200 Basis Points 7.3% 5.9% $ 27,000 $ 2,408,000 - -100 Basis Points 3.6% 3.0% $ 13,000 $ 1,213,000 0 Basis Points 0.0% 0.0% $ - $ - 100 Basis Points -3.6% -2.2% $ (13,000) $ (901,000) 200 Basis Points -7.3% -4.3% $ (27,000) $ (1,770,000)
- ----------------- (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. 26 The following table sets forth information as to the type of funding used to finance the Company's assets as of June 30, 2002. 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 June 30, 2002 (Dollars in thousands)
ASSETS INTEREST LIABILITIES INTEREST ----------- ----------- -------------- ----------- INTEREST-BEARING ASSETS Fixed-Rate Assets, Financed Floating........ $ 54,170 Fixed $ 39,896 LIBOR Fixed-Rate Assets, No Financing............. 92 Fixed - None Variable-Rate Assets, No Financing.......... 1,721 Prime - None Cash, Restricted Cash, and Cash Equivalents............................... 23,920 Fed Funds - None --------------- ------------- Subtotal.................. 79,903 39,896 --------------- ------------- OTHER ASSETS Investments in Real Estate.................. 4,443 N/A 1,023 Fixed Investment in BEP........................... 6,246 N/A - None Other....................................... 4,058 N/A - None --------------- ------------- Subtotal.................. 14,747 1,023 --------------- ------------- LIABILITY ONLY Income Taxes Payable........................ - 2,375 Accounts Payable and Accrued Liabilities........................... - 5,897 None --------------- ------------- Subtotal.................. - 8,272 - ------------------------------------------------------------------------------------------------------------- Total $ 94,650 $ 49,191 =============================================================================================================
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. At June 30, 2002, the Company had one open hedging investment which consisted of the short sale, for September 2002 delivery, of $5.0 million in FNMA 30-year, 6% bonds. 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 27 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 June 30, 2002 (dollars in thousands):
Within 4 to 12 One Year to More than 3 Months Months 3 Years 3 Years TOTAL ------------- ------------- ------------ ------------ ------------ INTEREST-SENSITIVE ASSETS(1): Cash and cash equivalents.............. $ 23,920 $ - $ - $ - $ 23,920 Securities available for sale.......... - - 54,170 54,170 Loans.................................. - 1,721 - 92 1,813 ------------- ------------ ------------ ------------ ------------ Total rate-sensitive assets............ $ 23,920 $ 1,721 $ - $ 54,262 $ 79,903 ============= ============ ============ ============ ============ INTEREST-SENSITIVE LIABILITIES: Borrowings............................ $ 39,896 $ 1,023 $ - $ - $ 40,919 ------------- ------------ ------------ ------------ ------------ Total rate-sensitive liabilities...... $ 39,896 $ 1,023 $ - $ - $ 40,919 ============= ============ ============ ============ ============ Interest rate sensitivity gap......... $ (15,976) $ 698 $ - $ 54,262 Cumulative interest rate sensitivity Gap................................ $ (15,976) $ (15,278) $ (15,278) $ 38,984 Cumulative interest rate sensitivity gap as a percentage of total rate-sensitive assets.............. -20% -19% -19% 49%
- ---------------- (1) Real estate property holdings are not considered interest rate sensitive. 28 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, DEFAULT ASSUMPTIONS AND PREPAYMENT ASSUMPTIONS, 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. 29 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, Andrew Wiederhorn and Lawrence Mendelsohn, have been named in a series of lawsuits (the "CCL Lawsuits") relating to the receivership of Capital Consultants, L.L.C. ("CCL"). The CCL Lawsuits name multiple defendants in addition to the Company and its executives. In addition, the claimants have filed claims against a number of additional parties regarding the same alleged losses, including a number of professional advisors to named defendants. The cases are TOM HAZZARD, ET AL., V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1338-HU (filed September 29, 2000); 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 (filed October 26, 2000); NANCY SCHULTZ, ET AL., V. GARY KIRKLAND, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1377-HA (filed October 10, 2000); LARRY MILLER, ET AL., V. LEE CLINTON, ET AL., U.S. District Court of Oregon, Civil No. CV00-1317-HA (filed September 26, 2000); SALVATORE J. CHILIA, ET AL., V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV 00-1633 JE (filed November 29, 2000); and MADOLE V. CAPITAL CONSULTANTS ET. AL., U.S. District Court of Oregon, Civil No. CV 00-1600-HU (filed December 1, 2000). 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 (filed April 28, 2001). The CCL Lawsuits are all virtually identical and 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 CCL Lawsuits 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 in the CCL Lawsuits 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 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 30 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. CCL was placed in receivership by the Department of Labor and the Securities and Exchange Commission in the cases of SEC V. 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. In addition to the cases identified above, the claimants have also filed other actions relating to the collapse of CCL in which neither the Company nor its officers have been named. These cases include AFTCS-Preferred Endowment etc, et. al. v. Grayson, U.S. District Court of Oregon, Civil No. CV 01 1429 HA; Chilia et. al. v. Stoel Rives LLP, et. al., U.S. District Court of Oregon, Civil No. CV 01 1315 KI; Hazzard, et. al. v. Stoel Rives LLP, State of Oregon, Multnomah County, Case No. 0108-08975; Sheet Metal Workers, etc. v. Stoel Rives LLP, U.S. District Court of Oregon, Civil No. CV 01 1314 JO; Chilea v. O'Melveny, U.S. District Court of Oregon, Civil No. CV 01 1370 AS; Carpenters Health v. CCL, U.S. District Court of Oregon, Civil No. CV 00 01660 AS; Lennon v. Moss Adams, U.S. District Court of Oregon, Civil No. 01 00440 HA; Martinez v. Sesgal Advisors, Inc., U.S. District Court C.D. California, Civil No. 01 5723; Sheet Metal Workers, etc. v. O'Melveny & Meyers et. al., U.S. District Court of Oregon, Civil No. CV 01 1369 JE; Hazzard v. Moss Adams, State of Oregon, Multnomah County, Case No. 0103-03372; McPherson v. Eight District, U.S. District Court of Oregon, Civil No. CV 00 01445 HA; Olson v. Larson, U.S. District Court of Oregon, Civil No. CV 01 00480 BR; Hazzard v. Moss Adams, U.S. District Court of Oregon, Civil No. CV 01 00603 AS; Piet, et. al. v. Lontine, U.S. District Court of Colorado, Civil No. CV 01 WM 0698; and Madole, et. al. v. Deloitte & Touche, LLP, State of Oregon, Multnomah County, Case No. 0202-01882. As a result of the mediation process, the claimants and a group of the defendants, including the Company, its subsidiaries and Messrs. Wiederhorn and Mendelsohn have reached a settlement, the terms of which are set forth in a settlement agreement. The claimants have also entered into a series of settlements with several other parties to the above referenced litigation. The settlement agreement and the payments to be made thereunder are made in compromise of disputed claims and are not an admission of any liability of any kind. The settlement has an effective date of May 13, 2002, but it is subject to a number of conditions precedent before any funds may be distributed under the settlement agreement, including, among other things, court approval and the entry of a bar order in each of the CCL Lawsuits pending before the United States District Court for the District of Oregon. The court approved the settlement and entered the claims bar order on June 19, 2002. Claimants have filed motions for approval of settlements totaling in excess of $100 million. Pursuant to the settlement agreement in which the Company is participating, the defendants and their insurers have agreed to pay the claimants the sum of $40.0 million, which includes the purchase for $10.5 million by one defendant of stock held by the receiver. The Company has agreed to pay a portion of the settlement amount. Due to the reserves previously established by the Company, the Company's settlement payment will not have a material impact on the Company's financial position or results of operations. Any amounts paid by the Company in connection with the settlement will not be subject to reimbursement from the Company's insurance carriers. The payment was made by the Company on July 10, 2002. Pursuant to the terms of the settlement agreement, the claimants and the receiver appointed for CCL released and discharged the settling defendants and certain other related parties from any and all claims, losses, damages, attorney's fees and costs, disgorgement of fees, fines and penalties, whether 31 accrued or not, whether already acquired or acquired in the future, whether known or unknown, arising or in any way related to CCL or any matters raised, or which could have been raised in the CCL Lawsuits (the "Released Claims"). The claimants also released the defendants and certain other related parties from all claims for indemnity and contribution, regardless of whether those claims are asserted under legal theories, that in any way arise out of the transactions, occurrences, or any series of transactions or occurrences related to the CCL Lawsuits, or which arise from matters raised, or which could have been raised, in the CCL Lawsuits. The claimants also covenanted not to sue the Company, its subsidiaries, Messrs. Wiederhorn and Mendelsohn and the other defendants in the CCL Lawsuits based upon the Released Claims. Each of the defendants released and covenanted not to sue each other. Certain parties that may have contribution claims or indemnity rights against the settling defendants, including the Company, are not entering into the settlement agreement. In order to induce the settling defendants to enter into the settlement agreement and protect them against claims by the non-settling parties, the parties to the settlement agreement agreed as follows: - the settlement agreement will require court approval and the entry of a bar order under which any non-settling parties will receive credit for any loss they must pay to claimants equal to the relative fault or responsibility of the settling defendants, including the Company; therefore if any cross claims are brought against a settling defendant, each settling defendant will be deemed to have already paid the full amount of its proportionate liability; - the claimants will reimburse the settling defendants from a defense fund of $2.0 million of the settlement funds, which are set aside to defend settling defendants from any contribution claims made by non-settling parties; - the claimants have also agreed that with regard to any claims they pursue against other parties, they will not seek recovery based on the alleged fault of the settling defendants, including the Company (a special verdict form will be used in such cases to allocate proportionate liability between the party against whom a judgment is obtained and the settling parties); and - an additional amount of $4.25 million will be set aside to cover potential administrative claims by the Department of Labor in the event the Department determines to advance certain claims under ERISA. Certain 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. 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. 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, which criminal investigation is ongoing. Messrs. Wiederhorn and Mendelsohn have received letters from the United States Attorney's office in Portland, Oregon, advising them that they are the targets of a grand jury investigation into the failure of CCL. At this stage, it is not possible to predict the outcome of this investigation. Messrs. Wiederhorn and Mendelsohn, pursuant to the terms of their respective employment agreements with the Company, may be entitled to indemnity for litigation expenses and personal losses from the Company in connection with such investigations and any litigation related thereto. Messrs. Wiederhorn and Mendelsohn have notified the Company that they are reserving their rights to seek such indemnity. Messrs. Wiederhorn and Mendelsohn also may be entitled to indemnification for litigation expenses and personal losses from other defendants named in the CCL Lawsuits in connection with such investigations and any litigation related thereto. 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 investigation. The Company has not agreed to any such indemnity requests. 32 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. None. ITEM 5. OTHER INFORMATION. TRANSACTIONS WITH AFFILIATES STOCKHOLDER PROPERTY OPTION; COMPANY PROPERTY OPTION As discussed in "NOTE 6 - Subsequent Events" in the notes to the financial statements, we agreed with Edward P. Borst and Jordan D. Schnitzer, a former director of the Company (collectively, the "Stockholder"), to terminate our option to put our interest in a property located in Wilsonville, Oregon to them, due to difficulties related to the timing of parceling the property as required by the Company Property Option. At the same time, the parties reached agreement with respect to the option of the Stockholder to put 727,235 shares of the Company to us in exchange for the Wilsonville property. The Stockholder decided to retain 484,235 shares of our stock and the option with respect to those shares was terminated. We assigned our obligation to purchase the remaining shares to a number of other investors. All of the other investors were unaffiliated to us, except that Donald J. Berchtold, who is one of the Company's officers and the father-in-law of CEO Andrew Wiederhorn, acquired 40,000 shares. STOCK PURCHASE LOANS TO OFFICERS Historically, we have negotiated employment agreements with senior executives, which allow these executives to borrow from us, up to a specified maximum amount to purchase shares of our common stock. These loans are full recourse, secured loans bearing interest at the prime rate. We believe that encouraging stock ownership by our executives more closely aligns these executives' interests with those of the shareholders. At June 30, 2002, we had outstanding stock purchase loans to Messrs. Wiederhorn, Mendelsohn and Rosen, including accrued interest, of approximately $880,000, $61,000 and $852,000, respectively. The loans are described as follows: ANDREW WIEDERHORN. On February 21, 2002, we loaned Mr. Wiederhorn $175,000 to finance the purchase of our common stock. This loan is fully recourse to Mr. Wiederhorn and is secured by all of Mr. Wiederhorn's rights under his employment agreement. We are entitled to net amounts payable by us under the employment agreement against any amounts payable by Mr. Wiederhorn upon any default or at maturity of the loan. At Mr. Wiederhorn's direction (in accordance with the terms of his employment agreement), on February 21, 2002, we loaned a limited partnership controlled by Mr. Wiederhorn's spouse (the "LP") $687,000 to finance the purchase of our common stock. The loan is secured by the membership interests of two limited liability companies owned by the LP. The limited liability companies each own a parcel of real property in Oregon and have no liabilities. At the time of the loan, the real property had an appraised value of $725,000. The loan is also guaranteed by Mr. Wiederhorn. The common stock purchased with the proceeds of these loans does not serve as security for the loans. LAWRENCE MENDELSOHN. On December 6, 1999, we loaned Mr. Mendelsohn $49,219 to finance the purchase of our common stock. Mr. Mendelsohn's loan is secured by a pledge of our common stock purchased by Mr. Mendelsohn with the proceeds of the loan. ROBERT G. ROSEN. On December 27, 1999, we loaned Mr. Rosen $47,868 to finance the purchase of our common stock. In September 2000, we loaned Mr. Rosen $798,000 to finance the 33 purchase of our common stock. These loans are fully recourse to Mr. Rosen and are secured by all of Mr. Rosen's rights under his employment agreement. We are entitled to net amounts payable by us under the employment agreement against any amounts payable by Mr. Rosen upon any default or at maturity of the loans. As additional security for the payment of all amounts due under the loans, Mr. Rosen agreed (i) to deliver annual financial statements of his financial condition to us during the period that the loans remained outstanding, (ii) that he would not create or incur any liens upon the whole or any part of his present of future assets without our prior written consent, and (iii) to deliver all of his shares of our stock to us, as custodian pursuant to the terms of a custody agreement. Further information on these loans to executives is included in our annual proxy statement for 2001 and prior years and these executives' employment agreements have been previously filed with the SEC. LOAN TO EXECUTIVE OFFICER On July 9, 2002, we loaned Mr. Wiederhorn $2.0 million. This loan is fully recourse to Mr. Wiederhorn and is secured by trust deeds on two residences located in Oregon. The loan is due on August 1, 2007 and bears interest at 8.5% per annum, payable monthly. The Board of Directors (with Mr. Wiederhorn abstaining) approved the transaction on July 9, 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 11 Computation of Per Share Earnings 99.1 CEO and CFO Certification (b) Reports on Form 8-K: A current report on Form 8-K was filed with the Securities and Exchange Commission by the Company on May 14, 2002 disclosing the settlement of a series of lawsuits relating to the receivership of Capital Consultants, L.L.C. 34 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/ Andrew A. Wiederhorn ----------------------------------------- Andrew A. Wiederhorn Chairman and Chief Executive Officer 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: August 1, 2002 35 EX-11 3 a2085781zex-11.txt EXHIBIT 11 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS
Quarter Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 2002 2001 2002 2001 --------------- --------------- --------------- --------------- Diluted net income (loss) per share: Net income (loss) to common Shareholders..................... $ 10,738,000 $ (1,932,000) $ 10,157,000 $ (6,723,000) Average number of shares outstanding.................... 9,800,370 10,507,413 10,103,388 10,507,413 Net effect of dilutive stock options based on treasury stock method.... 14,000 - 14,000 - Net effect of dilutive put option agreements based on the reverse treasury method................... 118,993 - 79,829 - =============== =============== =============== =============== Total average shares............. 9,933,863 10,507,413 10,197,217 10,507,413 =============== =============== =============== =============== Diluted net income (loss) per share........................ $ 1.08 $ (0.18) $ 1.00 $ (0.64)
EX-99.1 4 a2085781zex-99_1.txt EXHIBIT 99.1 Exhibit 99.1 CEO AND CFO CERTIFICATION - ------------------------- The undersigned, Chief Executive Officer and Chief Financial Officer, hereby certify, to the best of their knowledge and belief, that the Form 10-Q of Fog Cutter Capital Group, Inc. (the "COMPANY") for the quarterly period ended June 30, 2002 (the "PERIODIC REPORT") accompanying this certification fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. The foregoing certification is incorporated solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act and is not intended to be used for any other purpose. FOG CUTTER CAPITAL GROUP INC. /s/ Andrew A. Wiederhorn _____________________________ Andrew A. Wiederhorn Chief Executive Officer /s/ R. Scott Stevenson ______________________________ R. Scott Stevenson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----