**SECURITIES AND EXCHANGE COMMISSION**

** **

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark one)**                   |
|----------------------------------|
|                             |
| **ý**                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                             |   |
|                             | **For the quarterly period ended  March 31, 2003** |
|                             |   |
| **OR**                           |
|                             |   |
| **o**                            | **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 registrantas specified in its charter)

 

| **Maryland**                                                     |   | **52-2081138**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer   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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.  Yes ý No o.

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes oNo ý.

 

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

 

| **Class**                                  |   | **Outstanding  at March 31, 2003** |
|--------------------------------------------|--------|------------------------------------|
| Common Stock, par value  $0.0001 per share |   | 8,484,200 shares                   |

 

 

----

 

FOG CUTTER CAPITAL GROUPINC.

 

FORM 10-Q

 

I N D E X

 
| **PART I — FINANCIAL  INFORMATION** |
|------------------------------------------|
|                                     |
| Item 1.                                  | Interim Financial  Statements (Unaudited): |
|                                     |   |
|                                     | Consolidated  Statements of Financial Condition |
|                                     |   |
|                                     | Consolidated  Statements of Operations |
|                                     |   |
|                                     | Consolidated  Statement of Changes in Stockholders’ Equity |
|                                     |   |
|                                     | Consolidated  Statements of Cash Flows |
|                                     |   |
|                                     | Notes to  Consolidated Financial Statements |
|                                     |   |
| Item  2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                     |   |
| Item  3.                                 | Quantitative  and Qualitative Disclosures about Market Risk |
|                                     |   |
| Item 4.                                  | Controls and Procedures |
|                                     |
| **PART II — OTHER INFORMATION**     |
|                                     |   |
| Item 1.                                  | Legal Proceedings |
|                                     |   |
| Item  2.                                 | Changes  in Securities and Use of Proceeds |
|                                     |   |
| Item 3.                                  | Defaults Upon  Senior Securities |
|                                     |   |
| Item  4.                                 | Submission  of Matters to a Vote of Security Holders |
|                                     |   |
| Item 5.                                  | Other Information |
|                                     |   |
| Item 6.                                  | Exhibits and  Reports on Form 8-K |
|                                     |   |
| Signatures                               |

 

i

----

 

## **PART I — FINANCIAL INFORMATION**

 

## **ITEM 1. INTERIM FINANCIAL STATEMENTS**

 

FOG CUTTER CAPITAL GROUPINC.CONSOLIDATED STATEMENTS OFFINANCIAL CONDITION*(dollarsin thousands, except share data)*

 
|                                                                                                                                                                                                                  |   | **March 31**    |    | **December 31** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|---------|-----------------|--------|
|                                                                                                                                                                                                                  |   | **2003**        |    | **2002**        |   |
|                                                                                                                                                                                                                  |   | **(Unaudited)** |    |            |   |
| Assets                                                                                                                                                                                                                |   |            |    |            |   |
| Cash and cash equivalents                                                                                                                                                                                             |   | $               | 11,807  |            | $      | 14,505 |   |
| Securities available for sale, at estimated fair value                                                                                                                                                                |   | 57,599          |    | 59,318          |   |
| Loans, net                                                                                                                                                                                                            |   | 2,183           |    | 2,245           |   |
| Investments in real estate, net                                                                                                                                                                                       |   | 21,356          |    | 21,498          |   |
| Investment in and loans to Strouds                                                                                                                                                                                    |   | 2,446           |    | —          |   |
| Investment in BEP                                                                                                                                                                                                     |   | 5,036           |    | 5,579           |   |
| Other assets                                                                                                                                                                                                          |   | 6,965           |    | 7,441           |   |
| Total assets                                                                                                                                                                                                          |   | $               | 107,392 |            | $      | 110,586 |   |
|                                                                                                                                                                                                                  |   |            |    |            |   |
| Liabilities and Stockholders’ Equity                                                                                                                                                                             |   |            |    |            |   |
| Liabilities:                                                                                                                                                                                                          |   |            |    |            |   |
| Borrowings and notes payable                                                                                                                                                                                          |   | $               | 37,647  |            | $      | 35,478 |   |
| Obligations under capital leases                                                                                                                                                                                      |   | 16,700          |    | 16,847          |   |
| Dividend payable                                                                                                                                                                                                      |   | —          |    | 1,253           |   |
| Obligation to repurchase stock                                                                                                                                                                                        |   | —          |    | 4,201           |   |
| Income taxes payable                                                                                                                                                                                                  |   | 4,764           |    | 4,134           |   |
| Accounts payable and accrued liabilities                                                                                                                                                                              |   | 2,854           |    | 4,466           |   |
| Total liabilities                                                                                                                                                                                                     |   | 61,965          |    | 66,379          |   |
|                                                                                                                                                                                                                  |   |            |    |            |   |
| Commitments and contingencies                                                                                                                                                                                         |   |            |    |            |   |
|                                                                                                                                                                                                                  |   |            |    |            |   |
| 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;  11,530,100 shares issued in 2003 and 11,518,600 shares issued in 2002;  8,484,200 shares outstanding in 2003 and 9,517,460 shares outstanding in 2002 |   | 167,062         |    | 167,027         |   |
| Treasury stock; 3,045,900 common shares in 2003, and 2,001,140 common  shares in 2002, at cost                                                                                                                        |   | (8,017          | )       | (4,886          | )      |
| Common stock, subject to put options; no shares in 2003; 1,044,760  common shares in 2002                                                                                                                             |   | —          |    | (3,131          | )      |
| Accumulated deficit                                                                                                                                                                                                   |   | (115,946        | )       | (116,503        | )      |
| Accumulated other comprehensive income                                                                                                                                                                                |   | 2,328           |    | 1,700           |   |
| Total stockholders’ equity                                                                                                                                                                                       |   | 45,427          |    | 44,207          |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                       |   | $               | 107,392 |            | $      | 110,586 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

1

----

 

FOG CUTTER CAPITAL GROUPINC.CONSOLIDATED STATEMENTS OFOPERATIONS(Unaudited)*(dollarsin thousands, except share data)*

 
|                                                 |   | **Quarter  Ended March 31,** |   |
|------------------------------------------------------|--------|------------------------------|--------|
|                                                 |   | **2003**                     |   | **2002** |   |
| Net Interest  Income:                                |   |                         |   |   |   |
| Loans                                                |   | $                            | 190    |   | $ | 131 |   |
| Securities                                           |   | 775                          |   | 1,448 |   |
| Other  investments                                   |   | 55                           |   | 31 |   |
| Total interest  income                               |   | 1,020                        |   | 1,610 |   |
| Interest expense                                     |   | 208                          |   | 500 |   |
| Net interest  income                                 |   | 812                          |   | 1,110 |   |
|                                                 |   |                         |   |   |   |
| Real Estate  Operations:                             |   |                         |   |   |   |
| Operating income                                     |   | 972                          |   | — |   |
| Operating  expense                                   |   | (538                         | )      | (16 | ) |
| Interest expense                                     |   | (360                         | )      | (28 | ) |
| Depreciation                                         |   | (153                         | )      | (16 | ) |
| Total real  estate operations                        |   | (79                          | )      | (60 | ) |
|                                                 |   |                         |   |   |   |
| Other Operating  (Loss) Income:                      |   |                         |   |   |   |
| Equity in losses  of equity investees                |   | (1,008                       | )      | (28 | ) |
| Gain on sale of  loans and securities                |   | 4,788                        |   | 116 |   |
| Loan origination  income                             |   | 800                          |   | — |   |
| Other                                                |   | 191                          |   | (379 | ) |
| Total other  operating (loss) income                 |   | 4,771                        |   | (291 | ) |
|                                                 |   |                         |   |   |   |
| Operating  Expenses:                                 |   |                         |   |   |   |
| Compensation and  employee benefits                  |   | 2,203                        |   | 633 |   |
| Professional  fees                                   |   | 499                          |   | 274 |   |
| Other                                                |   | 900                          |   | 433 |   |
| Total operating  expenses                            |   | 3,602                        |   | 1,340 |   |
|                                                 |   |                         |   |   |   |
| Net income  (loss) before provision for income taxes |   | 1,902                        |   | (581 | ) |
| Provision for  income taxes                          |   | 242                          |   | — |   |
| Net income  (loss)                                   |   | $                            | 1,660  |   | $ | (581 | ) |
|                                                 |   |                         |   |   |   |
| Basic income (loss)  per share                       |   | $                            | 0.20   |   | $ | (0.06 | ) |
| Basic weighted  average shares outstanding           |   | 8,478,450                    |   | 10,269,665 |   |
| Diluted net  income (loss) per share                 |   | $                            | 0.19   |   | $ | (0.06 | ) |
| Diluted weighted  average shares outstanding         |   | 8,767,617                    |   | 10,535,578 |   |
| Dividends  declared per share                        |   | $                            | 0.13   |   | $ | 0.13 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

2

----

 

**FOGCUTTER CAPITAL GROUP INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**(Unaudited)(dollars in thousands)

 
|                                                                        |   | **Common Stock** |       | **Treasury Stock** |       | **Common Stock  Subject to Options** |      | **Accumulated   Deficit** |   | **Accumulated Other  Comprehensive  Income** |   | **Total** |   |
|-----------------------------------------------------------------------------|--------|------------------|------------|--------------------|------------|--------------------------------------|-----------|---------------------------|--------|----------------------------------------------|--------|-----------|--------|
| **Shares(1)**                                                               |   | **Amount**       | **Shares** |               | **Amount** |
|                                                                        |   |             |       |               |       |                                 |      |                      |   |                                         |   |      |   |   |   |   |   |
| Balance at January 1, 2003                                                  |   | 9,517,460        |       | $                  | 167,027    |                                 | 2,001,140 |                      | $      | (4,886                                       | )      | $         | (3,131 | ) | $ | (116,503 | ) | $ | 1,700 |   | $ | 44,207 |   |
| Comprehensive income:                                                       |   |             |       |               |       |                                 |      |                      |   |                                         |   |      |   |   |   |   |   |
| Net income                                                                  |   | —           |       | —             |       | —                               |      | —                    |   | —                                       |   | 1,660     |   | — |   | 1,660 |   |
| Other comprehensive income:                                                 |   |             |       |               |       |                                 |      |                      |   |                                         |   |      |   |   |   |   |   |
| Foreign currency translation                                                |   | —           |       | —             |       | —                               |      | —                    |   | —                                       |   | —    |   | (106 | ) | (106 | ) |
| Unrealized holding gains on securities available for sale                   |   | —           |       | —             |       | —                               |      | —                    |   | —                                       |   | —    |   | 3,160 |   | 3,160 |   |
| Reclassification adjustment for gains on securities included in net  income |   | —           |       | —             |       | —                               |      | —                    |   | —                                       |   | —    |   | (2,426 | ) | (2,426 | ) |
| Total comprehensive income                                                  |   | —           |       | —             |       | —                               |      | —                    |   | —                                       |   | —    |   | — |   | 2,288 |   |
| Purchase of treasury stock                                                  |   | (1,044,760       | )          | —             |       | 1,044,760                            |      | (3,131                    | )      | 3,131                                        |   | —    |   | — |   | — |   |
| Common stock issued pursuant to exercise of stock options                   |   | 11,500           |       | 35                 |       | —                               |      | —                    |   | —                                       |   | —    |   | — |   | 35 |   |
| Dividends declared                                                          |   | —           |       | —             |       | —                               |      | —                    |   | —                                       |   | (1,103    | )      | — |   | (1,103 | ) |
| Balance at March 31, 2003                                                   |   | 8,484,200        |       | $                  | 167,062    |                                 | 3,045,900 |                      | $      | (8,017                                       | )      | $         | — |   | $ | (115,946 | ) | $ | 2,328 |   | $ | 45,427 |   |

 

----

(1)  Issued and outstanding

 

The accompanying notesare an integral part of these consolidated financial statements.

 

3

----

 

FOG CUTTER CAPITAL GROUPINC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)*(dollarsin thousands)*

 
|                                                                     |   | **Quarter  Ended March 31,** |   |
|--------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                     |   | **2003**                     |   | **2002** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                   |   |                         |   |   |   |
| Net income  (loss)                                                       |   | $                            | 1,660  |   | $ | (581 | ) |
| Adjustments to  reconcile net income (loss) to net operating cash flows: |   |                         |   |   |   |
| Depreciation                                                             |   | 192                          |   | 64 |   |
| Unrealized  foreign currency losses                                      |   | 2                            |   | 3 |   |
| Gain on sale of  loans and securities                                    |   | (4,788                       | )      | (116 | ) |
| Equity in losses  of equity investees                                    |   | 1,008                        |   | 28 |   |
| Gain on sale of  real estate                                             |   | —                       |   | (17 | ) |
| Loss on grant of  put options                                            |   | —                       |   | 392 |   |
| Change in:                                                               |   |                         |   |   |   |
| Accrued interest  receivable                                             |   | (13                          | )      | (32 | ) |
| Other assets                                                             |   | 502                          |   | 294 |   |
| Accounts payable  and accrued liabilities                                |   | (1,443                       | )      | (1,252 | ) |
| Net cash used in  operating activities                                   |   | (2,880                       | )      | (1,217 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                   |   |                         |   |   |   |
| Purchase of  securities                                                  |   | —                       |   | (8,250 | ) |
| Principal  payments on securities available for sale                     |   | 2,139                        |   | 1,289 |   |
| Proceeds from  sale of securities available for sale                     |   | 5,560                        |   | 2,650 |   |
| Investment in  loans                                                     |   | (64                          | )      | — |   |
| Principal  repayments on loans                                           |   | 127                          |   | 73 |   |
| Investment in  and loans to equity investees                             |   | (3,000                       | )      | — |   |
| Other                                                                    |   | (23                          | )      | (730 | ) |
| Net cash  provided by (used in) investing activities                     |   | 4,739                        |   | (4,968 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                   |   |                         |   |   |   |
| Proceeds from  borrowings                                                |   | —                       |   | 7,467 |   |
| Proceeds from  issuance of common stock                                  |   | 35                           |   | — |   |
| Dividend  payments on common stock                                       |   | (2,356                       | )      | (1,273 | ) |
| Payment on  obligation to purchase treasury stock                        |   | (1,399                       | )      | — |   |
| Principal  payments on borrowings and notes payable                      |   | (820                         | )      | (1,187 | ) |
| Net cash (used  in) provided by financing activities                     |   | (4,540                       | )      | 5,007 |   |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                 |   | (17                          | )      | (1 | ) |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                               |   | (2,698                       | )      | (1,179 | ) |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                        |   | 14,505                       |   | 6,753 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                              |   | $                            | 11,807 |   | $ | 5,574 |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW:                                  |   |                         |   |   |   |
| Cash paid for  interest                                                  |   | $                            | 566    |   | $ | 520 |   |
| Cash paid for  taxes                                                     |   | $                            | — |   | $ | — |   |
| NON-CASH  FINANCING AND INVESTING ACTIVITIES:                            |   |                         |   |   |   |
| Notes payable  issued to settle obligation to purchase treasury stock    |   | $                            | 2,800  |   | $ | — |   |
| Treasury stock  acquired in exchange for assets                          |   | $                            | — |   | $ | 1,833 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

4

----

 

FOG CUTTER CAPITAL GROUPINC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(Unaudited)

 

**NOTE 1****-BASIS OF PRESENTATION**

 

The accompanying interim consolidated financialstatements of Fog Cutter Capital Group Inc. and Subsidiaries (“FCCG” or the“Company”) are unaudited and have been prepared in conformity with therequirements of Regulation S-X promulgated under the Securities Exchange Act of1934, as amended (the “Exchange Act”), particularly Rule 10-01 thereof, whichgoverns the presentation of interim financial statements.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The accompanying interim consolidatedfinancial statements should be read in conjunction with the Company’s 2002Annual Report on Form 10-K.  A summaryof the Company’s significant accounting policies is set forth in Note 2 to theconsolidated financial statements in the 2002 Annual Report on Form 10-K.

 

In the Company’s opinion, all adjustments, comprisedof normal recurring accruals necessary for the fair presentation of the interimfinancial statements, have been included in the accompanying consolidatedfinancial statements.  Operating resultsfor the three months ended March 31, 2003 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2003.

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requires theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosures of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.  Certain items in the previously reportedconsolidated financial statements were reclassified to conform to the March 31,2003 presentation, none of which affected previously reported results ofoperations.

 

At March 31, 2003, certain Company officers anddirectors controlled, directly or indirectly, the significant voting majorityof the Company.

 

**NOTE 2****-SIGNIFICANT TRANSACTIONS**

 

Treasury Stock

 

On February 7, 2003, the Company purchased 1,044,760shares of the Company’s common stock (the “Option Shares”) under a put optionagreement (the “Put Option”) with Lawrence A. Mendelsohn (“Mendelsohn”) and agroup of related shareholders (the “Stockholders”).  Prior to his resignation on August 30, 2002, Mendelsohn was thePresident and a member of the Board of Directors of the Company.

 

Under the Put Option, the Stockholders had the rightto require the Company to purchase the Option Shares at a price per share equalto eighty percent (80%) of the book value per share of the Company as of theend of the most recent calendar month preceding the delivery of the exercisenotice.

 

The Stockholders exercised their right to require thepurchase of the Option Shares on December 24, 2002.  The option price was determined to be $4.02 per share and theclosing date was February 7, 2003. One-third of the total purchase price of $4.2 million for the shares waspaid in cash to the Stockholders at closing. The remaining purchase price was paid with a promissory note whichmatures 11 months following the closing date and bears interest at 0% for thefirst 90 days and 12% per annum thereafter. The note may be prepaid by the Company at any time without penalty orpremium.

 

5

----

 

The acquisition of the Option Shares resulted in theCompany recording $3.1 million in treasury stock as of March 31, 2003 andreducing the number of outstanding shares by 1,044,760.  The Company also recorded notes payableof  $2.8 million.  The Company’s performance under the notespayable is secured by the pledge of 696,500 shares of the Company’s treasurystock.

 

Dividends

 

On February 19, 2003,the Company announced the declaration of a $0.13 per share cash dividend on theCompany’s common Stock.  The dividendwas paid on March 7, 2003, to stockholders of record on February 28, 2003.

 

Strouds Acquisition Corporation

 

On March 6, 2003, the Company acquired a 49.5%interest in Strouds Acquisition Corporation (“Strouds”), a specialty retailerwith annual sales of approximately $150 million.  Strouds is a retailer of bed, bath, tabletop and other hometextile products, offering an extensive selection of high quality, brand namelinens for the home. Strouds operate a chain of 50 stores, primarily inCalifornia, with other locations in Nevada, Minnesota and Arizona.  Strouds employs over 1,000 full-time andpart-time associates and operates in two primary lines of business:  upper-scale retail stores and discountedoutlet centers.  Catalog and internetsales are also offered by the retailer. Strouds  operates a 180,000square foot distribution center and headquarters in the City of Industry,California.

 

The Company invested $3 million in the Stroudstransaction, acquiring a combination of preferred stock, common stock warrants,and secured debt.  In addition, ifcertain conditions are met, the Company has agreed to fund an additional $2million in secured debt within 90 days of the initial investment.  The transaction also included additionalinvestment and participation by the Chairman of Stroud’s board of directors andthe reinstatement of a $35 million inventory line of credit from Fleet RetailFinance Inc.  Following the transaction,FCCG controlled three of the five seats on the Stroud’s board of directors.

 

The acquisition of Strouds resulted in the Companyrecording an initial investment of $0.3 million in the preferred stock andcommon stock warrants. The Company also recorded loans receivable of $2.7million.  During the quarter ended March31, 2003, the Company recorded $0.6 million in losses relating to its share ofthe operating losses of Strouds since the acquisition.  This had the result of reducing theCompany’s carrying value in the preferred shares and common stock warrants tozero, and reduced the carrying value in the loans to $2.4 million as of March31, 2003.

 

Mortgage-Backed Securities

 

On March 7, 2003, the Company sold eightmortgage-backed securities for $5.6 million in cash.  The Company recognized a gain on the sale of $4.8 million.

 

**NOTE 3****-VALUATION OF MORTGAGE-BACKED SECURITIES**

 

When possible, the fairvalue of the Company’s investment in mortgage-backed securities is determinedby market quotes at each reporting date. At March 31, 2003, approximately $48.6 million of the Company’smortgage-backed securities consisted of a “AAA” rated FNMA certificate forwhich market quotes were obtained.  Inthose instances where market quotes are not available, the fair value isdetermined by the Company as the present value of the anticipated cash flowsfrom the underlying collateral using certain assumptions.  These assumptions include:  (i) future rate of prepayment; (ii) discountrate used to calculate present value; and (iii) default rates and loss severityon loan pools underlying the mortgage-backed securities.  At March 31, 2003, the range of key economicassumptions used to determine the fair value of the securities was as follows:an annual prepayment speed ranging from 11.4% to 33.2%; a monthly constantdefault rate ranging from 0.4% to 54.5%; a loss severity of 30%; and a discountrate of 18% for the B-rated securities and 20% for the unrated securities.

 

6

----

 

The Company evaluates, on an ongoing basis, thecarrying value of its securities portfolio, which is accounted for asavailable-for-sale.  To the extent differencesbetween the book basis of the securities and their current market values aredeemed to be temporary in nature, such unrealized gains or losses are reflecteddirectly in equity as “other comprehensive income or loss.”  Declines in fair value are consideredother-than-temporary when: (i) the carrying value of the beneficial interestsexceeds 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 thebeneficial interests has adversely changed from the previous valuationdate.  To the extent declines in fairvalue are considered other-than-temporary, a write-down is recorded in “MarketValuation Losses and Impairments” in the consolidated statement of operations.

 

During the quarters ended March 31, 2003 and 2002, nomarket valuation losses and impairments were recorded.

 

**NOTE 4 –COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK**

 

The failure and subsequentreceivership of Capital Consultants, L.L.C. (“CCL”), a lender of a formeraffiliate of the Company, has led to governmental investigations, including anongoing criminal investigation. The Company’s Chief Executive Officer, AndrewWiederhorn, and former president, Lawrence Mendelsohn, have received letters fromthe United States Attorney’s office in Portland, Oregon, advising them thatthey are the targets of a grand jury investigation into the failure ofCCL.  At this stage, it is not possibleto predict the outcome of this investigation. Messrs. Wiederhorn and Mendelsohn, pursuant to the terms of theirrespective employment agreements with the Company, may be entitled to indemnityfrom the Company for litigation expenses and personal losses in connection withsuch investigations and any litigation related thereto.  Messrs. Wiederhorn and Mendelsohn havenotified the Company that they are reserving their rights to seek suchindemnity.  Messrs. Wiederhorn andMendelsohn may be entitled to indemnification from other sources for litigationexpenses and personal losses in connection with these investigations and anylitigation related thereto.  At thistime, it is not possible to determine the extent of liability, if any, theCompany may face with regard to these indemnity claims.  The Company has not agreed to any indemnityrequests.

 

The Company is involved in various other legalproceedings occurring in the ordinary course of business, which the Companybelieves will not have a material adverse effect on the consolidated financialcondition or operations of the Company.

 

The Company may utilize a wide variety of off-balancesheet financial techniques to manage its risk. In hedging the interest rate or exchange rate exposure of a foreigncurrency, the Company may enter into hedge transactions to counter movements ininterest rates or foreign currencies. These hedges may be in the form of currency and interest rate swaps,options, and forwards, or combinations thereof.  At March 31, 2003, the Company’s economic hedging activities werelimited to two Great Britain pound (“GBP”) purchased put options.  The contracts entitle FCCG to sell a totalof GBP 8.5 million for U.S. dollars (“USD”) at an exchange rate of 1.46 USD perone GBP.  The options expire during2003.  The estimated fair value of thesecurrency hedging contracts was $0.1 million at March 31, 2003, and was includedin other assets on the accompanying statement of financial condition.

 

 

**NOTE 5 – RECENTLY ISSUED ACCOUNTINGSTANDARDS**

 

In January 2003, the FASB issued FASB InterpretationNo. 46 (FIN 46), “*Consolidation of Variable Interest Entities*”. The objectiveof this interpretation is to provide guidance on how to identify a variableinterest entity (VIE) and determine when the assets, liabilities,non-controlling interests, and results of operations of a VIE need to beincluded in a company’s consolidated financial statements. The provisions ofthis interpretation became effective upon issuance. The adoption of thisinterpretation did not have a material impact on results of operations,financial position, or liquidity of the Company.

 

In November 2002, the FASB issued FASB InterpretationNo. 45 (FIN 45), “*Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of*

 

7

----

 

*Others*”.This interpretation expands the disclosures to be made by a guarantor in itsfinancial statements about its obligations under certain guarantees andrequires the guarantor to recognize a liability for the fair value of anobligation assumed under a guarantee. The disclosure requirements of FIN 45were effective for the Company as of December 31, 2002, and require disclosureof the nature of the guarantee, the maximum potential amount of future paymentsthat the guarantor could be required to make under the guarantee, and thecurrent amount of the liability, if any, for the guarantor’s obligations underthe guarantee. The recognition requirements of FIN 45 are to be appliedprospectively to guarantees issued or modified after December 31, 2002. TheCompany does not have guarantees that are subject to the disclosurerequirements of FIN 45. As a result, the Company’s implementation of therequirements of FIN 45 did not have a material impact on results of operations,financial position, or liquidity.

 

In December 2002, the FASB issued SFAS 148, “*Accountingfor Stock-Based Compensation - Transition and Disclosure*”, whichprovides guidance on how to transition from the intrinsic value method ofaccounting for stock-based employee compensation under APB 25 to SFAS 123’sfair value method of accounting, if a company so elects.  The Company has elected not to adopt thefair value method of recording stock options under SFAS 123.

 

In July 2002, the FASB issued SFAS 146, “*Accountingfor Costs Associated with Exit or Disposal Activities*”.  The standard became effective beginningJanuary 1, 2003. This statement requires a cost associated with an exit ordisposal activity, such as the sale or termination of a line of business to berecorded as a liability at fair value when it becomes probable the cost will beincurred and no future economic benefit will be gained by the Company for suchcost. The adoption of this standard did not have a material impact on resultsof operations, financial position, or liquidity.

 

In June 2001, FASB issued FAS 143, “*Accountingfor Asset Retirement Obligations*”, which requires that the fairvalue of a liability for an asset retirement obligation be recognized in theperiod in which it is incurred if a reasonable estimate of fair value can bemade.  The associated asset retirementcosts would be capitalized as part of the carrying amount of the long-livedasset and depreciated over the life of the asset.  The liability is accreted at the end of each period throughcharges to operating expense.  If theobligation is settled for other than the carrying amount of the liability, theCompany will recognize a gain or loss on settlement.  The provisions of FAS 143 became effective for the Company onJanuary 1, 2003.  The adoption of thisstandard did not have a material impact on results of operations, financialposition, or liquidity.

 

**NOTE 6 –EQUITY INVESTEES**

 

In February 2001, the Company, together with otherinvestors, completed the purchase of all of the outstanding capital stock ofBourne End Properties PLC (“Bourne End”) through a 26% owned Jersey, ChannelIslands company known as BEP Acquisitions (“BEP”).  Bourne End is a specialist investor in retail property, currentlyowning six town shopping centers located in England and Scotland.  BEP is highly leveraged, and operatingincome from the properties is offset by interest expense and depreciation.  The Company accounts for this investmentusing the equity method, thereby recording its share of net income or lossgenerated by BEP.  For the quarter endedMarch 31, 2003, the Company recorded $0.4 million in losses relating to itsshare of the net loss of BEP.  Since itsoriginal acquisition of BEP, the Company has recorded $0.7 million in net lossfrom its investment.  The summarizedfinancial information for BEP is as follows:

 

8

----

 

BEP Acquisitions Ltd.Unaudited Statements of Financial Condition(dollars in thousands)

 
|                                             |   | **March 31** |    | **December  31** |   |
|--------------------------------------------------|--------|--------------|---------|------------------|--------|
|                                             |   | **2003**     |    | **2002**         |   |
| Assets                                           |   |         |    |             |   |
| Cash                                             |   | $            | 649     |             | $      | 1,760 |   |
| Real estate                                      |   | 112,640      |    | 115,236          |   |
| Accounts  receivable                             |   | 4,093        |    | 4,165            |   |
| Other assets                                     |   | 286          |    | 292              |   |
| Total assets                                     |   | $            | 117,668 |             | $      | 121,453 |   |
|                                             |   |         |    |             |   |
| Liabilities and  Stockholders’ Equity       |   |         |    |             |   |
| Accrued expense  and other liabilities           |   | $            | 7,078   |             | $      | 7,202 |   |
| Borrowings                                       |   | 88,877       |    | 90,438           |   |
| Other  liabilities                               |   | 2,690        |    | 2,738            |   |
| Total  liabilities                               |   | 98,645       |    | 100,378          |   |
|                                             |   |         |    |             |   |
| Stockholders’  equity                       |   | 19,023       |    | 21,075           |   |
| Total  Liabilities and Stockholders’ Equity |   | $            | 117,668 |             | $      | 121,453 |   |

 

BEP Acquisitions Ltd.Unaudited Statements of Operations(dollars in thousands)

 
|                        |   | **Quarter  Ended March 31,** |   |
|-----------------------------|--------|------------------------------|--------|
|                        |   | **2003**                     |   | **2002** |   |
|                        |   |                         |   |   |   |
| Rental income               |   | $                            | 4,223  |   | $ | 3,804 |   |
| Operating  expense          |   | (1,024                       | )      | (923 | ) |
| Interest expense            |   | (3,621                       | )      | (3,262 | ) |
| Depreciation                |   | (941                         | )      | (847 | ) |
| Other income  (expense)     |   | 6                            |   | 5 |   |
| Loss before  taxes          |   | (1,357                       | )      | (1,223 | ) |
| Provision for  income taxes |   | —                       |   | — |   |
| Net loss                    |   | $                            | (1,357 | ) | $ | (1,223 | ) |

 

On March 6, 2003, the Company acquired a 49.5%interest in Strouds Acquisition Corporation (“Strouds”), a specialty retailerwith annual sales of approximately $150 million.  Strouds is a retailer of bed, bath, tabletop and other hometextile products, offering an extensive selection of high quality, brand namelinens for the home. Strouds operates a chain of 50 stores, primarily inCalifornia, with other locations in Nevada, Minnesota and Arizona.  Strouds employs over 1,000 full-time andpart-time

 

9

----

 

associates and operates in two primary lines of business; upper-scaleretail stores and discounted outlet centers. Catalog and internet sales are also offered by the retailer.  Strouds operates a 180,000 square footdistribution center and headquarters in the City of Industry, California.

 

The Company invested $3 million in the Stroudstransaction, acquiring a combination of preferred stock, common stock warrants,and secured debt.  Of the initialinvestment, $0.3 million related to the preferred stock and common stockwarrants.  The balance of the investmentrelated to secured loans.

 

The Company accounts for this investment using theequity method, thereby recording its share of net income or loss generated byStrouds. Equity accounting is appropriate since the Company currently controls40% of the voting securities of Strouds, and owns warrants which, if converted,would increase that control to 49.5%. During the quarter ended March 31, 2003, the Company recorded $0.6million in losses relating to its share of the net loss of Strouds since theacquisition.  The recognition of theselosses reduced the carrying value of the preferred stock and common stockwarrants to zero.  It also reduced thecarrying value of the secured loans by $0.3 million.  While equity accounting requires the recognition of these losses,the Company believes that its investment is currently protected by subordinatedinvestments made by unrelated third parties. The operations of Strouds are currently generating net losses, whichwill likely continue in the near term. There can be no assurance that these subordinated investments will besufficient to protect the Company’s investment.

 

The summarized financial information for Strouds is asfollows:

 

Strouds AcquisitionCorporationUnaudited Statements of Financial Condition(dollars in thousands)

 
|                                              |   | **March 31** |   | **December  31** |   |
|---------------------------------------------------|--------|--------------|--------|------------------|--------|
|                                              |   | **2003**     |   | **2002**         |   |
| Assets                                            |   |         |   |             |   |
| Cash                                              |   | $            | 858    |             | $      | 387 |   |
| Accounts  receivable                              |   | 947          |   | 1,083            |   |
| Inventory, net                                    |   | 29,165       |   | 40,061           |   |
| Property and  equipment, net                      |   | 14,125       |   | 14,687           |   |
| Other assets                                      |   | 2,854        |   | 3,631            |   |
| Total assets                                      |   | $            | 47,949 |             | $      | 59,849 |   |
|                                              |   |         |   |             |   |
| Liabilities and  Stockholders’ Deficit       |   |         |   |             |   |
| Accounts payable                                  |   | $            | 8,514  |             | $      | 9,315 |   |
| Accrued expenses                                  |   | 4,583        |   | 7,195            |   |
| Borrowings                                        |   | 27,734       |   | 29,500           |   |
| Obligation under  capital lease                   |   | 9,526        |   | 9,546            |   |
| Other  liabilities                                |   | 2,099        |   | 5,358            |   |
| Total liabilities                                 |   | 52,456       |   | 60,914           |   |
|                                              |   |         |   |             |   |
| Stockholders’  deficit                       |   | (4,507       | )      | (1,065           | )      |
| Total  liabilities and stockholders’ deficit |   | $            | 47,949 |             | $      | 59,849 |   |

 

10

----

 

Strouds AcquisitionCorporationUnaudited Statements of Operations(dollars in thousands)

 
|                                 |   | **Quarter  Ended March 31,** |   |
|--------------------------------------|--------|------------------------------|--------|
|                                 |   | **2003**                     |   | **2002** |   |
|                                 |   |                         |   |   |   |
| Net sales                            |   | $                            | 26,725 |   | $ | 41,087 |   |
| Cost of goods  sold                  |   | (16,251                      | )      | (25,390 | ) |
| Gross margin                         |   | 10,474                       |   | 15,697 |   |
| Store operating  expenses            |   | (5,818                       | )      | (7,621 | ) |
| Occupancy expenses                   |   | (4,399                       | )      | (4,113 | ) |
| General and  administrative expenses |   | (2,788                       | )      | (3,724 | ) |
| Interest expense                     |   | (917                         | )      | (507 | ) |
| Other expenses                       |   | (46                          | )      | (105 | ) |
| Loss before  taxes                   |   | (3,494                       | )      | (373 | ) |
| Provision for  income taxes          |   | (104                         | )      | — |   |
| Net loss                             |   | $                            | (3,598 | ) | $ | (373 | ) |

 

**NOTE 7 –STOCK OPTIONS AND RIGHTS**

 

The Company has adopted a non-qualified stock optionplan (“the Option Plan”) which provides for options to purchase shares of theCompany’s common stock.  The maximumnumber of shares of common stock that may be issued pursuant to options grantedunder the Option Plan is 3,500,000 shares.

 

The Company applies Accounting Principles BoardOpinion No. 25, *“Accounting for Stock Issued to Employees,”*and relatedinterpretations in accounting for the Option Plan. Accordingly, no compensationexpense has been recognized in the Consolidated Statements of Operations forgrants under the Option Plan. Had compensation expense for the Company’s OptionPlan been determined based on the fair value at the grant date consistent withthe methods of SFAS No. 123 “*Accounting for Stock Based Compensation*”,the Company’s net loss and loss per share for the three months ended March 31,2003 and 2002 would have been increased to the pro forma amounts indicatedbelow:

 
|                                                                      |   | **Three  months ended March 31,**              |   |
|---------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                      |   | **2003**                                       |   | **2002** |   |
|                                                                      |   | **(dollars  in thousands, except share data)** |   |
| Net income  (loss):                                                       |   |                                           |   |   |   |
| As reported                                                               |   | $                                              | 1,660  |   | $ | (581 | ) |
| Pro forma  compensation expense from stock based compensation, net of tax |   | (14                                            | )      | (25 | ) |
| Pro forma net  income (loss)                                              |   | $                                              | 1,646  |   | $ | (606 | ) |
| Net income  (loss) per common and common share equivalent:                |   |                                           |   |   |   |
| Basic income  (loss) per share:                                           |   |                                           |   |   |   |
| As reported                                                               |   | $                                              | 0.20   |   | $ | (0.06 | ) |
| Pro forma                                                                 |   | $                                              | 0.19   |   | $ | (0.06 | ) |
| Diluted income  (loss) per share:                                         |   |                                           |   |   |   |
| As reported                                                               |   | $                                              | 0.19   |   | $ | (0.06 | ) |
| Pro forma                                                                 |   | $                                              | 0.19   |   | $ | (0.06 | ) |

 

 

11

----

 

There were no options granted with exercise pricesbelow the market value of the stock at the grant date. Fair values wereestimated using the Black-Scholes option-pricing model with the followingweighted average assumptions used: 1% dividend yield, expected volatility of25%, risk-free interest rate of 5.0% and expected lives of three to five years.

 

**NOTE 8 –SUBSEQUENT EVENTS**

 

Bourne End Properties PLC, the 26% owned U.K.affiliate of the Company, has entered into conditional agreements to sell twoof its retail shopping centers in England for a total sales price ofapproximately GBP 31.0 million ($49.0 million).  Proceeds from the sales will primarily be used to repay realestate debt.  The gain to Bourne End,upon completion of the transactions, is expected to be GBP 5.3 million ($8.4million).  The transactions are expectedto close during the quarter ended June 30, 2003.

 

The Company has entered into an agreement to purchase15 freestanding retail buildings for a purchase price of $4.6 million.  The Company is the lessee of each of thebuildings and currently sub-leases 12 of the 15 properties to a variety ofsmall businesses.  Each property has4,500 square feet of retail space.  Theproperties being purchased are located in Texas, California, Arizona, Oklahomaand Mississippi.  The transaction isexpected to close during the quarter ended June 30, 2003.

 

On April 28, 2003, the Company declared a $0.13 pershare cash dividend on the Company’s common Stock.  The dividend is payable on June 3, 2003, to stockholders ofrecord on May 20, 2003.

 

12

----

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing discussion and analysis should be read in conjunction with theInterim Consolidated Financial Statements of Fog Cutter Capital Group Inc. andthe 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 itssubsidiaries 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 ofassets where its expertise in intensive asset management and financialstructuring can create value.  Wemaintain our headquarters in Portland Oregon, and also have executive officesin New York, Los Angeles, and London. We invest primarily in the following types of assets:

 

•                  equity or debt of corporations in theprocess of restructuring,

•                  mortgage-backed securities,

•                  real estate, and

•                  other finance-related investments.

 

Our business strategy focuses on diversifiedinvesting, structuring and managing of financial assets.  We provide debt or equity capital tobusinesses that are in the process of restructuring their operations.  Many of these investments are made inconjunction with partners.  We maintaina flexible approach with respect to the nature of our investments, seeking totake advantage of opportunities as they arise or are developed.

 

**CriticalAccounting Policies**

 

Management’s Discussion andAnalysis of Financial Condition and Results of Operations discusses ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Management bases its estimates and judgmentson historical experience and on various other factors that are believed to bereasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.  Managementbelieves the following critical accounting policies, among others, affect itsmore significant judgments and estimates used in the preparation of itsfinancial statements.

 

***Accounting For Equity Investees***

 

The equity method of accounting is used forinvestments in associated companies which are not unilaterally controlled bythe Company and in which the Company’s interest is generally between  20% and 50% of the outstanding votingrights.  The Company’s  share of earnings  or  losses of associated companies, in which at least 20% of the voting securitiesis owned, is included in the consolidated statement of operations.

 

***Valuation***

 

At March 31, 2003, ourlargest asset was our portfolio of mortgage-backed securities.  Approximately $48.6 million of ourmortgage-backed securities consisted of a “AAA” rated FNMA certificate forwhich market quotes were obtained.  Whenavailable, we use listed market prices or dealer/lender value opinions todetermine the fair value of the securities in our portfolio.  However, in the

 

13

----

 

absence of these third-party quotations, fairvalues for these securities are determined by us, using a third-party valuationmodel and internally developed assumptions.

 

Valuation models andassumptions impact the carrying value of our mortgage-backed securities and theamount and timing of gains and losses recognized.  The use of different valuation models or assumptions couldproduce different financial results. Changes in the fixed-income markets and the actual performance of our mortgage-backedsecurities may impact our estimates of fair value in the future, potentiallyaffecting, positively or negatively, our future operating results and equity.

 

Our key valuationassumptions include default rates and loss severity, which account for theanticipated credit losses in the pools of loans underlying our mortgage-backedsecurities.  Other key valuationassumptions include prepayment rates and discount rates.  Our internal valuation methodology calls fordeveloping the key valuation assumptions of credit losses and prepayment speedsbased upon the observable recent history of performance, generally averagedacross the latest three to six months, subject to general economic and marketconsiderations.  Our key valuationassumption of discount rates is developed based on the assessment of thecurrent yields required by investors for similar classes of fixed incomeinstruments.  We apply our valuationmethodology consistently and believe that the resulting fair value estimatesare reasonable;  however, theseestimated values may differ from those realized in a bona fide saletransaction, given the judgmental nature of the values of these assets.  We believe our assumptions and the resultingestimated values of the mortgage-backed securities at March 31, 2003 areconservative, based on the facts and circumstances as of that date; however,there can be no assurance that there will be no future losses on thesesecurities due to changes in their performance or overall market conditions.

 

***Sale Recognition***

 

We continue to be involvedin significant sales of mortgage-backed securities and other assets.  Our accounting policy calls for therecognition of sales of financial instruments, including mortgage-backedsecurities and loans, only when we have irrevocably surrendered control overthese assets.  We do not retain anyrecourse or performance obligations with respect to our sales of assets.  Our sales were cash sales, and the cashproceeds were not contingent upon any future event.

 

**RESULTSOF OPERATIONS****3⁄4QUARTER ENDED MARCH 31, 2003, COMPARED TO QUARTER ENDED MARCH 31, 2002**

 

NET INCOME. Our net income for the quarter ended March 31, 2003 was $1.7 million, or$0.20 per share, compared with a net loss of $0.6 million, or $0.06 per share,for the quarter ended March 31, 2002. The net income for the quarter ended March 31, 2003 was primarily theresult of gains on the sale of securities of $4.8 million, partially offset byequity in losses of equity investees of $1.0 million and by operatingexpenses.  The net loss for the quarterended March 31, 2002 was primarily attributable to operating expenses of $1.3million and losses recognized relating to the grant of certain put options inthe Company’s common stock of $0.4 million, partially offset by net interestincome of $1.1 million.

 

NET INTEREST INCOME. Our net interest income for the quarter ended March 31, 2003 was $0.8million, compared with $1.1 million for the quarter ended March 31, 2002.  The decrease is primarily attributable tothe sale of higher yielding subordinated mortgage-backed securities and thepurchase of a high quality, lower yielding FNMA certificate, resulting indecreases in interest income on securities of $0.7 million, partially offset bya decrease in interest expense of $0.3 million.  The following tables set forth information regarding the totalamount of income from interest-earning assets and expense from interest-bearingliabilities and the resulting average yields and rates:

 

14

----

 
|                                                             |   | **For the  Quarter Ended March 31, 2003** |     |
|------------------------------------------------------------------|--------|-------------------------------------------|----------|
|                                                             |   | **Average  Balance**                      |     | **Income  Interest (Expense)** |   | **Annualized  Yield/Rate** |   |
|                                                             |   | **(dollars in thousands)**                | * * |
| Interest-Earning  Assets:                                        |   |                                      |     |   |   |   |   |
|                                                             |   |                                      |     |   |   |   |   |
| Loan portfolios                                                  |   | $                                         | 2,232    |   | $ | 190 |   | 34.1 | % |
| Mortgage-backed  securities available for sale                   |   | 60,343                                    |     | 775 |   | 5.1 |   |
| Cash deposits  and other investments                             |   | 16,075                                    |     | 55 |   | 1.4 |   |
| Total  interest-earning assets                                   |   | $                                         | 78,650   |   | 1,020 |   | 5.2 | % |
|                                                             |   |                                      |     |   |   |   |   |
| Interest-Bearing  Liabilities:                                   |   |                                      |     |   |   |   |   |
|                                                             |   |                                      |     |   |   |   |   |
| Borrowings and  notes payable (1)                                |   | $                                         | 35,278   |   | (208 | ) | 2.4 | % |
| Total  interest-bearing liabilities                              |   | $                                         | 35,278   |   | (208 | ) | 2.4 | % |
|                                                             |   |                                      |     |   |   |   |   |
| Net interest  income before provision for loan losses/spread (2) |   |                                      |     | $ | 812 |   | 2.8 | % |
| Net interest  margin (3)                                         |   |                                      |     |   |   | 4.1 | % |

 

----

(1)          Excludes borrowings andobligations under capital leases related to investments in real estate.

(2)          Net interest spreadrepresents the difference between the average rate on interest-earning assetsand the average cost of interest-bearing liabilities.

(3)          Net interest marginrepresents net interest income divided by average interest-earning assets.

 
|                                                             |   | **For the  Quarter Ended March 31, 2002** |     |
|------------------------------------------------------------------|--------|-------------------------------------------|----------|
|                                                             |   | **Average  Balance**                      |     | **Interest  Income (Expense)** |   | **Annualized  Yield/Rate** |   |
|                                                             |   | **(dollars in thousands)**                | * * |
| Interest-Earning  Assets:                                        |   |                                      |     |   |   |   |   |
|                                                             |   |                                      |     |   |   |   |   |
| Loan portfolios                                                  |   | $                                         | 4,045    |   | $ | 110 |   | 10.9 | % |
| Mortgage-backed  securities available for sale                   |   | 57,409                                    |     | 1,448 |   | 10.1 |   |
| Cash deposits  and other investments                             |   | 6,171                                     |     | 52 |   | 3.3 |   |
| Total  interest-earning assets                                   |   | $                                         | 67,625   |   | 1,610 |   | 9.5 | % |
|                                                             |   |                                      |     |   |   |   |   |
| Interest-Bearing  Liabilities:                                   |   |                                      |     |   |   |   |   |
|                                                             |   |                                      |     |   |   |   |   |
| Borrowings and  notes payable (1)                                |   | $                                         | 42,171   |   | (500 | ) | 4.7 | % |
| Total  interest-bearing liabilities                              |   | $                                         | 42,171   |   | (500 | ) | 4.7 | % |
|                                                             |   |                                      |     |   |   |   |   |
| Net interest  income before provision for loan losses/spread (2) |   |                                      |     | $ | 1,110 |   | 4.8 | % |
| Net interest  margin (3)                                         |   |                                      |     |   |   | 6.6 | % |

 

----

(1)          Excludes borrowingsrelated to investments in real estate.

(2)          Net interest spreadrepresents the difference between the average rate on interest-earning assetsand the average cost of interest-bearing liabilities.

(3)          Net interest marginrepresents net interest income divided by average interest-earning assets.

 

15

----

 

REAL ESTATE OPERATIONS.  Our real estate operations represent activity from our investmentin commercial property located in Oregon and California, as well as theoperations of our leasehold interest in 109 freestanding retail buildingslocated throughout the United States. During the quarter ended March 31, 2003, we realized a net loss fromreal estate operations of $0.1 million, compared with a net loss from realestate operations of $0.1 million for the quarter ended March 31, 2002.

 

In October 2002, the Company assumed leaseholdinterests in 109 free-standing retail stores located throughout the United States.  The leased properties are sublet to a broadtenant mix including convenience stores, shoe stores, video rental outlets,auto parts dealers, carpet retailers and other small businesses.  The leases cover approximately 512,000square feet of retail space located in 25 states. The stores are free-standing,retail locations ranging from 4,500-7,000 square feet each.  The initial term of the leasehold interestshas an average expiration of approximately 6 years.  However, the Company is entitled to exercise extension optionswhich will allow the Company to control the properties for an additional 15 to30 years.  In approximately 70% of theleases, the rent during the extended term is less than currently being chargedor is below the Company’s estimate of the then current market rents.

 

The Company has the option to terminate a lease bygiving notice to the property owner. The notice to terminate must include an offer to purchase the propertyat a price calculated using a declining percentage of the original fair marketvalue of the property at the time the original lease was initiated (generallyin the 1970’s and 1980’s).  The propertyowner then has the option to accept the Company’s offer to purchase theproperty or allow the lease to terminate.

 

Of the leases, 46 were on terms and conditions thatrequired capitalization of the obligation. As a result, the Company capitalized a $17.6 million investment in realestate as a result of the transaction, and recognized a capital leaseobligation of $16.9 million. The remaining 63 leases are classified asoperating leases.  All of our subleasesare accounted for as operating leases.

 

OTHER OPERATING INCOME (LOSS).  Our other operating income was approximately$4.8 million for the three months ended March 31, 2003.  This compares to a loss of  $0.3 million for the three months endedMarch 31, 2002.  The primary componentsof our net other operating income (loss) include the following:

 

*Equityin Losses of Equity Investees*. In February 2001, we completedthe purchase, together with other investors, of all of the outstanding capitalstock of Bourne End Properties PLC (“Bourne End”) through a 26% owned Jersey,Channel Islands company known as BEP Acquisitions (“BEP”).  Bourne End is a specialist investor inretail property, currently owning six town shopping centers located in Englandand Scotland.  BEP is highly leveragedand operating income from the properties is offset by interest expense anddepreciation.  We account for thisinvestment using the equity method, thereby recording our share of net incomeand loss generated by BEP.  During thethree months ended March 31, 2003, we recorded $0.4 million in losses relatingto our share of the net loss of BEP. This compares to a loss of less than $0.1 million for the similar periodin 2002.

 

On March 6, 2003, we acquired a 49.5% interest inStrouds Acquisition Corporation (“Strouds”), a specialty retailer with annualsales of approximately $150 million. Strouds is a retailer of bed, bath, tabletop and other home textileproducts, offering an extensive selection of high quality, brand name linensfor the home. Strouds operates a chain of 50 stores, primarily in California,with other locations in Nevada, Minnesota and Arizona.  Strouds employs over 1,000 full-time and part-timeassociates and operates in two primary lines of business;  upper-scale retail stores and discountedoutlet centers.  Catalog and internetsales are also offered by the retailer. Strouds  operates a 180,000square foot distribution center and headquarters in the City of Industry,California.  During the quarter endedMarch 31, 2003, we recorded $0.6 million is losses relating to our share of thenet loss of Strouds since our acquisition.

 

*Gainon the Sale of Loans and Securities. *Duringthe three months ended March 31, 2003 and 2002, we sold loans and securities tounrelated third parties for approximately $5.6 million and $2.7 million,respectively, resulting in gains of approximately $4.8 million and $0.1million, respectively.

 

16

----

 

*LoanOrigination Income.* On May 15, 2002, we acquired a 51%ownership interest in George Elkins Mortgage Banking Company (“George Elkins”),a California mortgage banking operation, which operates as a broker ofcommercial real estate mortgages through four Southern Californiabranches.  We began reporting theoperations of George Elkins on a consolidated basis beginning May 15,2002.  During the three months endedMarch 31, 2003, we recognized loan origination income of $0.8 million relatingto the operations of George Elkins.

 

OPERATING EXPENSES. During the quarter ended March 31, 2003, operating expenses totaled $3.6million and were comprised of compensation and employee benefits of $2.2million, professional fees of $0.5 million and other costs of $0.9million.  The compensation costs for2003 include $0.9 million in compensation paid to employees of George Elkinsand $0.7 million in bonuses connected with the sale of mortgage-backedsecurities.  A significant portion ofthe compensation paid to employees of George Elkins consisted of commissionsrelating to the organization of commercial real estate loans.  During the quarter ended March 31, 2002,operating expenses totaled $1.3 million and were comprised of compensation andemployee benefits of $0.6 million, professional fees of $0.3 million and othercosts of $0.4 million.

 

## **CHANGES INFINANCIAL CONDITION**

 

GENERAL.  Totalassets decreased from approximately $111.6 million at December 31, 2002 toapproximately $107.4 million at March 31, 2003.  Total liabilities decreased from approximately $66.4 million atDecember 31, 2002 to approximately $62.0 million at March 31, 2003.  Stockholders’ equity increased byapproximately $1.2 million resulting primarily from net income of $1.6 million,and increases in other comprehensive income of $0.6 million, partially offsetby a dividend payment of $1.1 million.

 

SECURITIES AVAILABLE FOR SALE.  The balance of mortgage-backed securitiesavailable for sale decreased from $59.3 million at December 31, 2002 to $57.6million at March 31, 2003.  The decreasewas primarily the result of the sale ofmortgage-backed securities with a carrying value of $5.5  million and cash repayments of securities of$2.1 million, partially offset by increases in market value of $3.8 million.

 

We mark our securities portfolio to estimated fairvalue at the end of each month.  Wedetermine the fair value of the securities by utilizing market quotes, whenavailable, or 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 evaluatewhether and to what extent any unrealized loss is to be recognized as other thantemporary.  At March 31, 2003, approximately$48.6 million of our mortgage-backed securities portfolio consisted of a “AAA”rated FNMA certificate for which market value quotes were obtained.

 

We have entered into an employment agreement which entitles the Company’s president, Robert G. Rosen,to a bonus payment equal to $350,000 plus 10% of the excess of the cumulativenet proceeds from the sale of certain of our mortgage-backed securities over aspecified target amount (as defined in the employment agreement).  All but $9.0 million of the securitiessubject to the bonus formula had been sold as of March 31, 2003. The amount ofunrealized gain included in other comprehensive income in stockholders’ equityin the accompanying statement of financial position relating to the remaining$9.0 million in securities has been reduced by the amount of the bonus thatwould have been payable to Mr. Rosen had these securities been sold at their carrying value.

 

17

----

 

At March 31, 2003, securities available for sale wereas follows:

** **
|                        |   | **Amortized  Cost (1)**    |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|-----------------------------|--------|----------------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                        |   | **(dollars in thousands)** |   |
|                        |   |                       |   |                         |   |                          |   |           |   |
| Mortgage-backed  securities |   | $                          | 53,712 |                         | $      | 4,082                         |   | $              | (195   | ) | $ | 57,599 |   |
|                             |        |                            |        |                              |        |                               |        |                |        |  |  |  |  |

 

----

(1)                                  Theamortized cost of the securities reflects the market valuation losses andimpairments discussed above and excludes accrued interest of $0.2 million.

 

OTHER ASSETS. At March 31, 2003, the Company’s other assets consisted of thefollowing:

 
| Loans to  executives               |   | $         | 2,929,000 |   |
|------------------------------------|--------|-----------|-----------|--------|
| Capitalized  deferred compensation |   | 1,526,000 |      |
| Deposits in  escrow                |   | 252,000   |      |
| Investment in  operating leases    |   | 718,000   |      |
| Prepaid expenses                   |   | 417,000   |      |
| Other                              |   | 1,123,000 |      |
| Total                              |   | $         | 6,965,000 |   |

 

The loans to executives included in other assets wereapproved and funded prior to the passage of the Sarbanes-Oxley Act of 2002, andare further described in Item 5 of Part II, “Other Information” of the Form10-Q.

 

The capitalized deferred compensation included inother assets relates to the acquisition of George Elkins and is being amortizedover the remaining vesting period of approximately 50 months.

 

BORROWINGS AND NOTES PAYABLE.  Borrowings and notes payable increased byapproximately $2.2 million during the three months ended March 31, 2003,primarily due to newly issued notes payable in the amount of $2.8 millionrelated to the purchase of treasury stock, partially offset by scheduledprincipal payments.

 

OBLIGATION TO PURCHASE TREASURY STOCK.  During the three months ended March 31,2003, we fulfilled our obligation to purchase treasury stock under an exercisedput option. On February 7, 2003, we purchased 1,044,760 shares of the Company’scommon stock (the “Option Shares”) under a put option agreement (the “PutOption”) with Lawrence A. Mendelsohn (“Mendelsohn”) and a group of relatedshareholders (the “Stockholders”). Prior to his resignation on August 30, 2002, Mendelsohn was thePresident and a member of the Board of Directors of the Company.  One-third of the $4.2 million purchase pricefor the shares was paid in cash to the Stockholders at closing.  The remaining purchase price was paid with apromissory note which matures 11 months following the closing date and whichbears interest at 0% for the first 90 days and 12% per annum thereafter.  The $2.8 million note may be prepaid at anytime without penalty or premium and is carried in “Borrowings and notespayable” at March 31, 2003 on the accompanying statements of financialcondition.

 

INCOME TAXES PAYABLE. Our income taxes payable increased $0.6 million to $4.8 million at March31, 2003.  This was the result of anaccrued provision for income taxes of $0.2 million and the establishment of atax liability of $0.4 million relating to unrealized appreciation on our mortgage-backedsecurities portfolio.  As of December31, 2002, we had, for U.S. Federal tax purposes, a net operating losscarryforward (“NOL”) of approximately $94 million which begins to expire in2018.  The NOL may significantly reduceor eliminate the future payment of the tax liability.  However, U.S. tax regulations impose limitations on the use ofloss carry forwards following certain changes in ownership.  If such a

 

18

----

 

change occurs, the limitation could significantly reduce the amount ofbenefits that would be available to offset future taxable income each year,starting with the year of ownership change.

 

In order to protect the NOL, on October 18, 2002, weannounced a dividend distribution of one right (a “Right”) to purchaseone-tenth of a share of our common stock for each outstanding share of commonstock, payable to the stockholders of record on October 28, 2002 (the “RecordDate”).  Rights will also be attached toeach common share issued after the Record Date.  Generally, each Right entitles the registered holder to purchaseone-tenth of a common share from us at a price of $15 per whole commonshare.  The Rights are intended toprotect our income tax loss carryforward from the limitations imposed under theInternal Revenue Code if there is a change in control.  Under certain circumstances, individualsattempting to acquire a 5% ownership interest in the Company (or individualsattempting to increase their existing holdings in excess of 5% by more than 1%)will have their interests immediately diluted through distributions of stock toall other Right holders.  Thedescription and terms of the Rights are set forth in a Rights Agreement (the“Rights Agreement”) between us and The Bank of New York, as Rights Agent, datedas of October 18, 2002.  We filed asummary of the Rights Agreement with the Securities and Exchange Commission onForm 8-K on October 18, 2002.

 

STOCKHOLDERS’ EQUITY. Stockholders’ equity increased by approximately $1.2 million during thethree months ended March 31, 2003 primarily due to our net income of $1.6million, and increases in other comprehensive income of $0.6 million, whichwere partially offset by a declared dividend of $1.1 million.

 

## **LIQUIDITY ANDCAPITAL RESOURCES**

 

Liquidity is a measurement of our ability to meetpotential cash requirements, including ongoing commitments to repay borrowings,fund investments, engage in loan acquisition and lending activities, meetcollateral calls and for other general business purposes.  The primary sources of funds for liquidityduring the three months ended March 31, 2003 consisted of net cash provided byinvesting activities, including interest and principal payments related to ourmortgage-backed securities portfolio and the sale of mortgage-backedsecurities.

 

Our borrowings and the availability of furtherborrowings are substantially affected by, among other things, changes ininterest rates, changes in market spreads whereby the market value of thecollateral securing such borrowings may decline substantially, or decreases incredit quality of underlying assets.  Inthe event of declines in market value or credit quality, we may be required toprovide additional collateral for, or repay a portion of outstanding balancesof, our short-term borrowing facilities. However, our borrowings againstsecurities consist of non-recourse, short-term repurchase agreements held inwholly-owned subsidiaries.  As a result,our potential risk from collateral calls is limited to the equity in the assetsbeing financed, which at March 31, 2003 totaled $22.3 million.  We consider the potential exposure tocollateral calls to be significantly less than the $22.3 million equity since$17.7 million relates to our equity in a “AAA” rated FNMA security.  As of March 31, 2003, we had no outstandingcollateral calls.  For additionalinformation with respect to our monthly mark-to-market of our securitiesavailable for sale portfolio, see “CHANGES IN FINANCIAL CONDITION–SECURITIESAVAILABLE FOR SALE.”

 

Fluctuations in interest rates will continue to impactour net interest income to the extent our fixed rate assets are funded byvariable rate debt or our variable rate assets reprice on a different scheduleor in relation to a different index than any floating rate debt which in turncould impact potential returns to shareholders.  See “Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.”

 

At March 31, 2003, we had total consolidated securedindebtedness of $54.3 million, as well as $7.6 million of other liabilities.The consolidated secured indebtedness consisted of (i) $34.8 million ofrepurchase agreements secured by $55.7 million of mortgage-backed securities,(ii) $16.7 million outstanding of obligations under capital leases maturingbetween 2010 and 2040 which are secured by real

 

19

----

 

estate, and (iii) notes payable in connection with the acquisition oftreasury stock of $2.8 million. Approximately $34.8 million of this indebtedness had terms which allowedthe lender to request additional collateral if the value of the underlyingcollateral declined.  However, due tothe non-recourse nature of this debt, our exposure to collateral calls islimited to the equity in the assets being financed.

 

If our existing liquidity position were to proveinsufficient, and we were unable to fund additional collateral requirements orto repay, renew or replace maturing indebtedness on terms reasonablysatisfactory to us, we may be required to sell (potentially on short notice) aportion of our assets, and could incur losses as a result.  Furthermore, since from time to time thereis extremely limited liquidity in the market for subordinated and residualinterests in mortgage-related securities, there can be no assurance that wewill be able to dispose of such securities promptly for fair value in suchsituations.

 

We consider the sale of assets to be a normal,recurring part of our operations and we are currently generating positive cashflow as a result of these transactions. However, excluding the sale of assets from time to time, we arecurrently operating with negative cash flow, since many of our assets do notgenerate current cash flows sufficient to cover current operatingexpenses.  We believe that our existingsources 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 fromvariable-rate funding sources, collateral calls, or material decreases inmonthly cash receipts, generally would negatively impact our liquidity.  On the other hand, material decreases ininterest expense from variable-rate funding sources or an increase in marketvalue of our mark-to-market financial assets generally would positively affectour liquidity.

 

20

----

##  

## **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market risk is the exposure to loss resulting fromchanges in interest rates, foreign currency exchange rates, commodity prices,and equity prices.  We have someexposure to foreign currency fluctuations (approximately 11% of the Company’sequity is invested in assets located in the United Kingdom at March 31, 2003),which we have mitigated through the purchase of two Great Britain pound (“GBP”)put options.  The contracts entitle usto sell a total of GBP 8.5 million for U.S. dollars (“USD”) at an exchange rateof 1.46 USD per one GBP. The options expire during 2003.  The estimated fair value of these currencyhedging contracts was $0.1 million at March 31, 2003, and was included in otherassets on the accompanying statement of financial condition.

 

The primary market risk to which we are exposed isinterest rate risk.  This type of riskis highly sensitive to many factors beyond our control, including governmentalmonetary and tax policies, domestic and international economic and politicalconsiderations, and other factors. Changes in the general level of interest rates can affect our netinterest income by affecting the spread between our interest-earning assets andour interest-bearing liabilities. Changes in the level of interest rates can also affect, among otherthings, the value of our interest-earning assets (including mortgage-backedsecurities) and our ability to acquire loans.

 

It is our objective to attempt to control risksassociated with interest rate movements. In general, our strategy is to limit our exposure to earnings variationsand variations in the value of assets and liabilities as interest rates changeover time.  Our asset and liabilitymanagement strategy is formulated and monitored regularly to review, amongother things, the sensitivity of our assets and liabilities to interest ratechanges, the book and market values of assets and liabilities, unrealized gainsand losses, including those attributable to hedging transactions, purchase andsecuritization activity, and maturities of investments and borrowings.

 

The following table quantifies the potential changesin net interest income and net portfolio value as of March 31, 2003 shouldinterest rates go up or down (shocked) by 100 or 200 basis points, assuming theyield curves of the rate shocks will be parallel to each other andinstantaneous. Net portfolio value is calculated as the sum of the value ofoff-balance sheet instruments and the present value of cash in-flows generatedfrom interest-earning assets net of cash out-flows in respect ofinterest-bearing liabilities. The cash flows associated with the loanportfolios and securities available for sale are calculated based on prepaymentand default rates that vary by asset but not by changes in interest rates.Projected losses, as well as prepayments, are generated based upon the actualexperience with the subject pool, as well as similar, more seasoned pools. To theextent available, loan characteristics such as loan-to-value ratio, interestrate, credit history and product types are used to produce the projected lossand prepayment assumptions that are included in the cash flow projections ofthe securities.  The following tableapplies the U.S. Treasury yield curve generally for assets and LIBOR forrepurchase agreement liabilities and assume a uniform change in bothrates.  The table assumes that changesin interest rates occur instantaneously.  The table also reflectsthat we have a significant exposure to LIBOR rates since our short-termrepurchase agreement borrowings are generally based on LIBOR rates.  Actual results could differ significantlyfrom those estimated in the table.

 
| **Projected Percent Change In**   |   |
|-----------------------------------|--------|
| **Change in  Interest Rates (1)** |   | **Net Interest  Income** |   | **Net Portfolio  Value** |   | **Change in Annual   Net****Interest Income** |   | **Change in Net  Portfolio  Value** |   |
| -200 Basis Points                 |   | 11.1 | % | 17.8 | % | $ | 380,000 |   | $ | 8,152,000 |   |
| -100 Basis Points                 |   | 5.1 | % | 7.8 | % | $ | 174,000 |   | $ | 3,574,000 |   |
| 0 Basis Points                    |   | 0.0 | % | 0.0 | % | $ | — |   | $ | — |   |
| 100 Basis Points                  |   | -5.1 | % | -6.2 | % | $ | (174,000 | ) | $ | (2,832,000 | ) |
| 200 Basis Points                  |   | -10.2 | % | -11.5 | % | $ | (349,000 | ) | $ | (5,245,000 | ) |
|                                   |        |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Assumesthat 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 theLondon interbank market.

 

21

----

 

The following table setsforth information as to the type of funding used to finance the Company’sassets as of March 31, 2003.  Asindicated in the table, a large percentage of the Company’s fixed-rate assetsare financed by floating-rate liabilities and the Company’s variable-rateassets are generally funded by variable-rate liabilities which use the sameindex.

 

Assetsand LiabilitiesAs of March 31, 2003(dollars in thousands)

 
|                                     |   | **Basis  Amount** |    | **Coupon  Type** |   | **Liability** |   | **Type** |   |
|------------------------------------------|--------|-------------------|---------|------------------|--------|---------------|--------|----------|--------|
| Interest-Bearing Assets                  |   |              |    |             |   |          |   |     |   |
|                                     |   |              |    |             |   |          |   |     |   |
| Fixed-rate asset, financed floating      |   | $                 | 7,114   |             | Fixed  |          | $      | 3,946    |   | LIBOR |   |
| Fixed-rate assets, no financing          |   | 6,753             |    | Fixed            |   | —        |   | None     |   |
| Variable-rate, financed variable         |   | 48,606            |    | 1 TCM(1)         |   | 30,859        |   | LIBOR    |   |
| Variable-rate assets, no financing       |   | 2,684             |    | Prime            |   | —        |   | None     |   |
| Cash and cash equivalents                |   | 11,807            |    | N/A              |   | —        |   | None     |   |
| Subtotal                                 |   | 76,964            |    |             |   | 34,805        |   |     |   |
|                                     |   |              |    |             |   |          |   |     |   |
| Other Assets                             |   |              |    |             |   |          |   |     |   |
|                                     |   |              |    |             |   |          |   |     |   |
| Investments in real estate               |   | 21,356            |    | N/A              |   | 16,700        |   | Fixed    |   |
| Investment in BEP                        |   | 5,036             |    | N/A              |   | —        |   | None     |   |
| Other                                    |   | 4,036             |    | N/A              |   | —        |   | None     |   |
| Subtotal                                 |   | 30,428            |    |             |   | 16,700        |   |     |   |
|                                     |   |              |    |             |   |          |   |     |   |
| Liability Only                           |   |              |    |             |   |          |   |     |   |
|                                     |   |              |    |             |   |          |   |     |   |
| Note payable to acquire treasury stock   |   | —            |    |             |   | 2,842         |   | Fixed    |   |
| Income taxes payable                     |   | —            |    |             |   | 4,764         |   | None     |   |
| Accounts payable and accrued liabilities |   | —            |    |             |   | 2,854         |   | None     |   |
| Total                                    |   | $                 | 107,392 |             |   |          | $      | 61,965   |   |   |   |

 

----

(1)  TCM means the one year Treasury ConstantMaturity Index.

 

Asset and liability management involves managing thetiming and magnitude of the repricing of assets and liabilities.  It is our objective to attempt to controlrisks associated with interest rate movements. Asset and liability management can utilize a wide variety of off-balancesheet financial techniques to assist it in the management of interest raterisk.  For example, in hedging theinterest rate and exchange rate exposure of a foreign currency denominatedasset or liability, we may enter into hedge transactions to counter movementsin the different currencies as well as interest rates in those currencies.  These hedges may be in the form of currencyand interest rate swaps, options, and forwards, or combinations thereof.  No such interest rate techniques were in useas of March 31, 2003.

 

Methods for evaluating interest rate risk include ananalysis of our interest rate sensitivity “gap,” which is defined as thedifference between interest-earning assets and interest-bearing liabilitiesmaturing or repricing within a given time period.  A gap is considered positive when the amount of interest-ratesensitive assets exceeds the amount of interest-rate sensitiveliabilities.  A gap is considerednegative when the amount of interest-rate sensitive liabilities exceedsinterest-rate sensitive assets.  Duringa period of rising interest rates, a negative gap would tend to adverselyaffect net interest income, while a positive gap would tend to result in anincrease in net interest income.  Duringa period of falling interest rates, a negative gap would tend to result in anincrease in net interest income, while a positive gap would tend to affect netinterest income adversely.  Since differenttypes of assets and liabilities with the same or similar maturities may reactdifferently to changes in overall market rates or conditions, changes ininterest rates

 

22

----

 

may affect net interest income positively or negatively even if aninstitution were perfectly matched in each maturity category.

 

The following table sets forth the estimatedcontractual maturity or repricing of our interest-earning assets andinterest-bearing liabilities at March 31, 2003.

 

Asof March 31, 2003

(dollarsin thousands)

 
|                                                                                    |   | **Within****3 Months** |    | **4 to 12****Months** |   | **One Year to****3 Years** |   | **More than****3 Years** |   | **TOTAL** |   |
|-----------------------------------------------------------------------------------------|--------|------------------------|---------|-----------------------|--------|----------------------------|--------|--------------------------|--------|-----------|--------|
| Interest-sensitive assets(1):                                                           |   |                   |    |                  |   |                       |   |                     |   |      |   |
| Cash and cash equivalents                                                               |   | $                      | 11,807  |                  | $      | —                     |   | $                        | — |      | $      | — |   | $ | 11,807 |   |
| Securities available for sale                                                           |   | —                 |    | —                |   | 48,606                     |   | 8,993                    |   | 57,599    |   |
| Loans                                                                                   |   | 3,710                  |    | —                |   | —                     |   | 919                      |   | 4,629     |   |
| Other                                                                                   |   | -                      |    | 929                   |   | —                     |   | 2,000                    |   | 2,929     |   |
| Total rate-sensitive assets                                                             |   | $                      | 15,517  |                  | $      | 929                        |   | $                        | 48,606 |      | $      | 11,912 |   | $ | 76,964 |   |
|                                                                                    |   |                   |    |                  |   |                       |   |                     |   |      |   |
| Interest-sensitive liabilities :                                                        |   |                   |    |                  |   |                       |   |                     |   |      |   |
| Borrowings and notes payable                                                            |   | $                      | 37,647  |                  | — |                       | — |                     | — |      | $      | 37,647 |   |
| Obligations under capital leases                                                        |   | —                 |    | —                |   | —                     |   | 16,700                   |   | 16,700    |   |
| Total rate-sensitive liabilities                                                        |   | $                      | 37,647  |                  | $      | —                     |   | $                        | — |      | $      | 16,700 |   | $ | 54,347 |   |
|                                                                                    |   |                   |    |                  |   |                       |   |                     |   |      |   |
| Interest rate sensitivity gap                                                           |   | $                      | (22,130 | )                     | $      | 929                        |   | $                        | 48,606 |      | $      | (4,788 | ) |   |   |
| Cumulative interest rate sensitivity gap                                                |   | $                      | (22,130 | )                     | $      | (21,201                    | )      | $                        | 27,405 |      | $      | 22,617 |   |   |   |
| Cumulative interest rate sensitivity gap as a percentage of total rate-sensitive assets |   | -29                    | %       | -28                   | %      | 36                         | %      | 29                       | %      |      |   |

 

----

(1)  Real estate property holdings are notconsidered interest rate sensitive.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**(A)  Evaluation of disclosure controls and procedures**.  OurChief Executive Officer and our Chief Financial Officer, after evaluating theeffectiveness of the Company’s “disclosure controls and procedures” (as definedin the Securities and Exchange Act of 1934 Rules 13a-14 (c) and 15d-14 (c)) asof a date (the “Evaluation Date”) within 90 days before the filing date of thisquarterly report, have concluded that as of the Evaluation Date, our disclosurecontrols and procedures were adequate and designed to ensure that materialinformation relating to us and our consolidated subsidiaries would be madeknown to them by others within these entities.

 

**(B) Changes in internal controls**.  There were no significantchanges in our internal controls or to our knowledge, in other factors thatcould significantly affect those controls and procedures subsequent to theEvaluation Date.

 

23

----

 

FORWARD-LOOKING STATEMENTS

 

CERTAIN STATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED INFUTURE FILINGS BY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTSAND ARE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THESECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGEACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOMEOF WHICH ARE BEYOND THE COMPANY’S CONTROL) MAY BE IDENTIFIED BY REFERENCE TO AFUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS“MAY,” “WILL,” “BELIEVE,” “EXPECT,” “ANTICIPATE,” “CONTINUE,” OR SIMILAR TERMSOR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS.  ACTUAL RESULTS COULD DIFFER MATERIALLY FROMTHOSE 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 FINANCIALAND SECURITIES MARKETS AND THE AVAILABILITY OF AND COSTS ASSOCIATED WITHSOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND PRICING, THE REAL ESTATE MARKET,FISCAL AND MONETARY POLICIES OF THE U.S. GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES, ACQUISITIONS AND THEINTEGRATION OF ACQUIRED BUSINESSES, PERFORMANCE OF RETAIL/CONSUMER MARKETS,DETERIORATION IN CONSUMER CREDIT, CREDIT RISK MANAGEMENT, ASSET/LIABILITYMANAGEMENT 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 OFANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECTTHE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTERTHE DATE OF SUCH STATEMENTS.

 

24

----

##  

## **PART II — OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

The failure and subsequentreceivership of Capital Consultants, L.L.C. (“CCL”), a lender to a formeraffiliate of the Company, has led to governmental investigations, including anongoing criminal investigation. The Company’s Chief Executive Officer, AndrewWiederhorn, and former president, Lawrence Mendelsohn, have received lettersfrom the United States Attorney’s office in Portland, Oregon, advising themthat they are the targets of a grand jury investigation into the failure ofCCL.  At this stage, it is not possibleto predict the outcome of this investigation. Messrs. Wiederhorn and Mendelsohn, pursuant to the terms of theirrespective employment agreements with the Company, may be entitled to indemnityfrom the Company for litigation expenses and personal losses in connection withsuch investigations and any litigation related thereto.  Messrs. Wiederhorn and Mendelsohn havenotified the Company that they are reserving their rights to seek suchindemnity.  Messrs. Wiederhorn andMendelsohn may be entitled to indemnification from other sources for litigationexpenses and personal losses in connection with these investigations and anylitigation related thereto.  At thistime, it is not possible to determine the extent of liability, if any, theCompany may face with regard to these indemnity claims.  The Company has not agreed to any indemnityrequests.

 

**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.

 

**Item5.  Other Information.**

# ** **

# **TRANSACTIONS WITH AFFILIATES**

# ** **

# **Mendelsohn Put Option**

 

On August 8, 2002, we entered into an agreement (the“Assignment”), effective July 31, 2002, in which we accepted the assignment ofthe obligations of the grantor, pursuant to a Stock Option and Voting Agreementdated October 16, 2001, granted by Mr. Wiederhorn to Mr. Mendelsohn,(“Mendelsohn”) and other related stockholders for whom Mendelsohn was servingas agent, (collectively, the “Stockholders”). At the time of the assignment, Mr. Mendelsohn was the President anda member of the Board of Directors of the Company.  Mr. Mendelsohn resigned from the Company on August 30, 2002.

 

Under the Assignment, the Stockholders had the option(the “Put Option”) to require us to purchase up to 1,044,760 shares of commonstock (the “Option Shares”) at a price per share equal to eighty percent (80%)of the book value per share of the Company as of the end of the most recentcalendar month preceding the delivery of the exercise notice (the “EvaluationDate”).

 

The Stockholders exercised their right to require usto purchase the Option Shares on December 24, 2002.  The option price was determined to be $4.02 per share and theclosing date was February 7, 2003.  Onethird of the purchase price for the shares purchased under the Option Agreementwas paid in cash to the Stockholders at closing.  The remaining purchase price was paid with a promissory notewhich matures 11 months following the closing date and which bears interest at0% for the first 90 days and 12% per annum thereafter.  The note may be prepaid at any time withoutpenalty or premium.

 

**Stock Purchase Loans to Officers**

 

The Company has employment agreements with Mr.Wiederhorn and Mr. Rosen, which allowed these executives to borrow a specifiedmaximum amount from us to purchase shares of Common Stock.  We granted loans to Mr. Wiederhorn and Mr.Rosen prior to the passage of the Sarbanes-Oxley Act of 2002.  These loans are full recourse, secured loansbearing interest at the prime rate.  AtMarch 31, 2003, in addition to the $2 million loan to Mr. Wiederhorn describedin “Loan to Executive Officer” below, we had outstanding stock purchase loansto Mr. Wiederhorn, including accrued interest, of approximately $0.9million.  The loans to Mr. Rosenwere paid off before the 2002 year end. The Company is not obligated to make additional advances on loans underthe employment agreements.  The loan toMr. Wiederhorn is further described as follows:

 

25

----

 

*AndrewWiederhorn*.  OnFebruary 21, 2002, we loaned Mr. Wiederhorn $175,000 to finance the purchase ofCommon Stock.  This loan is fullyrecourse to Mr. Wiederhorn and is secured by all of Mr. Wiederhorn’s rightsunder his employment agreement.  We areentitled to net amounts payable under the employment agreement against anyamounts payable by Mr. Wiederhorn upon any default or at maturity of theloan.  At Mr. Wiederhorn’s direction (inaccordance 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 Common Stock.  The loan is secured by the membershipinterests of two limited liability companies owned by the LP.  The limited liability companies each own aparcel of real property in Oregon and have no liabilities.  At the time of the loan, the real propertyhad an appraised value of $725,000.  Theloan is also guaranteed by Mr. Wiederhorn. The Common Stock purchased with the proceeds of these loans does notserve as security for the loans.  Theloans are due on February 21, 2007, and bear interest at the prime rate, aspublished in the Wall Street Journal, which interest is added to the principalannually.

Further information on these loans to executives isincluded in our 2002 annual report on Form 10-K and proxy statements for our2003 and prior years Annual Meeting of Stockholders, and these executives’employment agreements have been previously filed with the SEC.

 

**Loan to Executive Officer**

 

Prior to the passage of the Sarbanes-Oxley Act of2002, we loaned Mr. Wiederhorn $2.0 million. This loan is fully recourse to Mr. Wiederhorn and his spouse and issecured by trust deeds on two residences located in Oregon.  The loan is due on August 1, 2007 and bearsinterest at 8.5% per annum, payable monthly. The Board of Directors (with Mr. Wiederhorn abstaining) concludedthat the terms of the loan were at least as favorable to the Company as wouldbe available in an arms length, third party transaction and approved the loanon July 9, 2002.

 

**Fog CutterLong-Term Vesting Trust**

 

In the fourth quarter of 2000,we established a trust which purchased 525,000 shares of the Company’s commonstock from an unrelated shareholder. Our contribution to the trust of approximately $1.3 million was includedin compensation expense for the year ended December 31, 2000.  The trust was established for the benefit ofour employees and directors to raise their ownership in the Company, therebystrengthening the mutuality of interests between them and ourshareholders.  While these shares areheld in trust, they will be voted ratably with ballots cast by all othershareholders.  In December 2002, usingthe retained earnings on trust assets, the trust purchased an additional 100,000shares of our stock in the open market.

 

Andrew Wiederhorn, DavidDale-Johnson and Don H. Coleman are the trustees for the trust.  Pursuant to the terms of the trust, thetrustees will, from time to time, allocate the shares to our directors and employees.  A beneficiary shall not have any rights withrespect to any shares allocated unless and until the beneficiary completes fiveyears of continuous service with the Company, commencing with the date thebeneficiary is first allocated such shares. Upon the beneficiary’s completion of the vesting period, the trusteesshall promptly distribute the shares allocated to the beneficiary;  provided, however, that the trustees may, inlieu of distributing the shares, make a cash payment to the beneficiary equalto the fair market value of the shares allocated as of the date immediatelyprior to the date of distribution or distribute any combination of cash orshares, as determined by the trustees, in their sole discretion.

 

As of  March 31, 2003, the trustees had allocated 285,500 shares to ouremployees and directors.

 

**Business Use ofPrivate Aircraft**

 

During the three months endedMarch 31, 2003, we paid $131,000 to Peninsula Capital Partners LLC (“PeninsulaCapital”), an entity owned by Mr. Wiederhorn, for the Company’s business use ofcertain private aircraft.  The Board ofDirectors is aware of the relationship and approved the fees for the use of theaircraft.  The fee paid is areimbursement of costs to Peninsula Capital for the Company’s use of the aircraftand is included in other expense on the accompanying statements of operations.

 

26

----

 

**Item6.  Exhibits and Reports on Form 8-K.**

 

(a)          Reportson Form 8-K:

 

A Form 8-K was filed with the Securities and ExchangeCommission by the Company on January 6, 2003 announcing the appointment of  Robert G. Rosen as president of the Company.

 

A Form 8-K was filed with the Securities and ExchangeCommission by the Company on January 16, 2003 announcing the appointment of  M. Ray Mathis as a member of the Board ofDirectors of the Company.

 

A Form 8-K was filed with the Securities and ExchangeCommission by the Company on February 10, 2003, announcing the acquisition of1,044,760 shares of treasury stock by the Company in accordance with the termsof an exercised put option granted to Lawrence Mendelsohn, a former officer anddirector of the Company.

 

A Form 8-K was filed with the Securities and ExchangeCommission by the Company on March 7, 2003, announcing the acquisition of a49.5% interest in Strouds Acquisition Corporation.

 

(b)         Exhibits

 

See Exhibit Index immediately following the signaturepage and certifications.

 

27

----

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon 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/ R. Scott Stevenson |   |
|                           | R. Scott  Stevenson |
|                           | Senior Vice  President and Chief Financial Officer |
|                           |   |
|                           |   |
| Date:  May 1, 2003        |

 

28

----

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

I, Andrew A. Wiederhorn, Chairman of the Board of Directors and ChiefExecutive Officer of Fog Cutter Capital Group Inc., certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Fog Cutter Capital GroupInc;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)          Designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)         Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)          Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)          All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)         Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: May 1, 2003 |
|-------------------|
|              | /s/ ANDREW A. WIEDERHORN |   |
|              | Andrew A.  Wiederhorn |
|              | Chairman of the  Board of Directors |
|              | and Chief  Executive Officer |

 

29

----

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

 

I, R. Scott Stevenson, Chief Financial Officer of Fog Cutter CapitalGroup Inc., certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Fog Cutter Capital GroupInc;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)          Designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)         Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)          Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)          All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)         Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: May 1, 2003 |
|-------------------|
|              | /s/ R. SCOTT STEVENSON |   |
|              | R. Scott  Stevenson |
|              | Chief Financial  Officer |

 

30

----

 

**Exhibit Index**

 

2.1                                 Purchaseand Sale Agreement between WREP Islands, Limited and The Aggmore LimitedPartnership, dated November 19, 2001, incorporated by reference toExhibit 2.1 to a Form 8-K dated November 19, 2001, as previously filed with theSEC on December 4, 2001.

 

2.2                                 LoanOption Agreement, by and between the Registrant and entities listed therein,dated January 1, 2002, incorporated by reference to Exhibit 2.1 to the Form 8-Kdated March 6, 2002, as previously filed with the SEC on March 8, 2002.

 

2.3                                 PropertyOption Agreement, by and between the Registrant and the entities listedtherein, dated effective March 6, 2002, incorporated by reference toExhibit 2.2 to the Form 8-K dated March 6, 2002, as previously filed with theSEC on March 8, 2002.

 

2.4                                 MediumTerm Participation Agreement by and among Fog Cap L.P. and participants listedtherein, dated March 6, 2002, incorporated by reference to Exhibit 2.3 tothe Form 8-K dated March 6, 2002, as previously filed with the SEC onMarch 8, 2002.

 

3.1                               Amendedand Restated Articles of Incorporation of the Registrant, incorporated byreference to Exhibit 3.1 to the Form 10-Q for the period ended September 30,1999, as previously filed with the SEC on November 22, 1999.

 

3.2                                 Bylawsof the Registrant, incorporated by reference to Exhibit 3.2 to Amendment No. 3to the Registration Statement (Registration No. 333-39035) on Form S-11, aspreviously filed with the SEC on March 30, 1998.

 

4.1                                 CommonStock Certificate Specimen, incorporated by reference to Exhibit 4.1 toAmendment No. 3 to the Registration Statement (Registration No. 333-39035) onForm S-11, as previously filed with the SEC on March 30, 1998.

 

4.2                                 Formof Registration Rights Agreement, incorporated by reference to Exhibit 10.8 toAmendment No. 3 to the Registration Statement (Registration No. 333-39035) onForm S-11, as previously filed with the SEC on March 30, 1998.

 

4.3                                 Formof Stock Option Plan, incorporated by reference to Exhibit 10.3 to Amendment No.3 to the Registration Statement (Registration No. 333-39035) on Form S-11, aspreviously filed with the SEC on March 30, 1998.

 

4.4                                 LongTerm Vesting Trust Agreement among the Registrant and Lawrence Mendelsohn,Andrew Wiederhorn and David Egelhoff, dated October 1, 2000, incorporated byreference to Exhibit 4.4 to the Form 10-K for the year endedDecember 31, 2002, as previously filed with the SEC on March 3, 2003.

 

4.5                                 Waiver,Release, Delegation and Amendment to Stock Option and Voting Agreement amongAndrew A. Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, TiffanyWiederhorn, and the Registrant, dated July 31, 2002, incorporated byreference to Exhibit 2.1 to the Form 8-K dated August 8, 2002, as previouslyfiled with the SEC on August 15, 2002.

 

4.6                                 Summaryof Rights to Purchase Shares, incorporated by reference to Exhibit 99.1 to theForm 8-K dated October 18, 2002, as previously filed with the SEC on October18, 2002.

 

31

----

 

4.7                                 RightsAgreement dated as of October 18, 2002 between the Registrant and The Bank ofNew York, incorporated by reference to Exhibit 1 to Form 8-A, as previouslyfiled with the SEC on October 29, 2002.

 

10.1                           Form ofPartnership Agreement of Wilshire Real Estate Partnership L.P., incorporated byreference to Exhibit 10.2 to Amendment No. 3 to the Registration Statement(Registration No. 333-39035) on Form S-11, as previously filed with the SEC onMarch 30, 1998.

 

10.2                           Deed ofTrust, by and among WREP Islands Limited, The Aggmore Limited Partnership andthe Registrant and Fog Cap L.P., dated November 19, 2001, incorporated byreference to Exhibit 2.2 to the Form 8-K dated November 19, 2001, as previouslyfiled with the SEC on December 12, 2001.

 

10.3                           StockOption Agreement, by and among individuals listed on Schedule 4 thereto,Aggmore Limited Partnership acting through its General Partner, Anglo IrishEquity Limited and the Registrant, dated November 19, 2001, incorporated byreference to Exhibit 2.3 to the Form 8-K dated November 19, 2001, as previouslyfiled with the SEC on December 4, 2001.

 

10.4                           EmploymentAgreement dated September 4, 1999, and amended and restated December 31, 2001between the Registrant and Fog Cap L.P. and Andrew A. Wiederhorn, incorporatedby reference to Exhibit 10.10 to the Form 10-K for the year ended December 31,2001, as previously filed with the SEC on March 22, 2002.

 

10.5                           EmploymentAgreement dated September 4, 1999, and amended and restated December 31, 2001,between the Registrant and Fog Cap L.P. and Lawrence A. Mendelsohn,incorporated by reference to Exhibit 10.11 to the Form 10-K for the year endedDecember 31, 2001, as previously filed with the SEC on March 22, 2002.

 

10.6                           AmendedEmployment Agreement dated October 9, 1999, and amended and restated December31, 2001, between the Registrant and Fog Cap L.P. and Robert G. Rosen,incorporated by reference to Exhibit 10.12 to the Form 10-K for the year endedDecember 31, 2001, as previously filed with the SEC on March 22, 2002.

 

11.1                           Computationof Earnings (Loss) per Common Share.

 

99.1                           Letter,dated October 28, 1998, from Steven Kapiloff to Andrew Wiederhorn, incorporatedby reference to Schedule 99.2 to the Form 10-Q for the period ended September30, 1998, as previously filed with the SEC on November 23, 1998.

 

99.2                           Letterdated November 12, 1999 from Arthur Andersen LLP, incorporated by reference toExhibit 99.1 to the Form 8-K dated November 12, 1999, as previously filed withthe SEC on November 15, 1999.

 

99.3                           SettlementAgreement, dated as of December 10, 1999 by and between the Registrant, onbehalf of itself and all of its subsidiaries and affiliates, Andrew A.Wiederhorn, and Lawrence A. Mendelsohn, and Wilshire Financial Services GroupInc., on behalf of itself and all of its subsidiaries and affiliates, otherthan First Bank of Beverly Hills, F.S.B., incorporated by reference to Exhibit99.1 to the Form 8-K dated December 13, 1999, as previously filed with the SECon December 17, 1999.

 

99.4                           JordanD. Schnitzer Resignation Letter dated March 5, 2002, incorporated by referenceto Exhibit 1.1 to the Form 8-K dated March 5, 2002, as previously filed withthe SEC on March 7, 2002.

 

99.5                           SettlementAgreement, incorporated by reference to Exhibit 99.1 to the Form 8-K dated May13, 2002, as previously filed with the SEC on May 14, 2002.

 

99.6                           LawrenceA. Mendelsohn Resignation Letter dated August 30, 2002, incorporated byreference to Exhibit 1.1 to the Form 8-K dated August 30, 2002, as previouslyfiled with the SEC on September 3, 2002.

 

32

----

 

99.7                           Certificationof the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

### **99.8**                           Certification of the Chief Financial Officer, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

33

----