FOG CUTTER CAPITAL GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

(Mark one)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the year ended December 31, 2001
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-23911

FOG CUTTER CAPITAL GROUP INC.
(Exact name of registrant as specified in its charter)

MARYLAND 52-2081138
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1410 SW JEFFERSON STREET
PORTLAND, OR 97201
(Address of principal executive offices) (Zip Code)

(503) 721-6500
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /.

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /

The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the closing price as quoted on NASDAQ
on January 31, 2002 was $15,284,000.

As of January 31, 2002, 10,507,413 shares, not including options to
purchase 1,778,000 shares of Fog Cutter Capital Group Inc.'s common stock and
992,687 treasury shares, par value $0.0001 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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FOG CUTTER CAPITAL GROUP INC.

FORM 10-K

INDEX

FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE
FILINGS BY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS
(SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL) MAY BE IDENTIFIED BY REFERENCE
TO A FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY,
SUCH AS "MAY," "WILL," "BELIEVE," "EXPECT," "ANTICIPATE," "CONTINUE," OR SIMILAR
TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING
STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE
RELATED TO THE ECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH
THE COMPANY OPERATES, THE FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY
OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND
PRICING, THE REAL ESTATE MARKET, FISCAL AND MONETARY POLICIES OF THE U.S.
GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES, ACQUISITIONS AND THE
INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK MANAGEMENT AND ASSET/LIABILITY
MANAGEMENT. EXCEPT AS MAY BE REQUIRED BY LAW, THE COMPANY DOES NOT UNDERTAKE,
AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF
ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS.

PART I

ITEM 1. BUSINESS

GENERAL

Fog Cutter Capital Group Inc. ("FCCG" or the "Company") is a Nasdaq-listed
corporation which focuses on the acquisition of assets where its expertise in
intensive asset management, mortgage and real estate credit analysis and
financial structuring can create value. The Company invests primarily in the
following types of assets:

- equity and debt of real estate corporations,
- mortgage-backed securities,
- mortgage loans, and
- other real estate-related investments.

The Company was originally incorporated as Wilshire Real Estate Investment
Trust Inc. in the State of Maryland on October 24, 1997. However, in order to
benefit from potential tax benefits related to significant net operating loss
carryforwards and to avoid any risk of not qualifying as a real estate
investment trust ("REIT"), the Company, with the approval of its shareholders,
elected in September 1999 not to be taxed as a REIT, and the Company's name was
changed to Wilshire Real Estate Investment Inc. Effective January 25, 2001, the
Company changed its name to Fog Cutter Capital Group Inc. to better reflect the
opportunistic nature of its business and investments.

BUSINESS STRATEGY

Our business strategy focuses on opportunistic investing, structuring and
managing real estate-related assets such as mortgage-backed securities,
mezzanine real estate loans and real estate, as well as the acquisition of
companies engaged in investing in such assets. We will concentrate on the
acquisition of assets where our expertise in intensive asset management,
mortgage and real estate credit analysis and financial structuring can create
value. Further, we expect that many of these investments, particularly in
corporate acquisitions, will be acquired in conjunction with partners.

Beginning in August 1998, we were significantly and adversely affected by
the dramatic movement of liquidity towards low-risk assets (e.g., U.S. Treasury
instruments) and away from higher risk assets. In particular, the markets for
certain mortgage-backed securities and pools of mortgage loans experienced
significant declines as Wall Street investment banks marked these assets down
(including illiquid and infrequently traded subordinated mortgage-backed
securities) to their view of the market price and lenders became unwilling to
lend against low-rated or unrated mortgage-backed securities and many pools of
mortgage loans. These factors resulted in a dramatic reduction in market
valuations for our mortgage-backed securities and mortgage loans, as well as a
reduction in the availability of borrowings for those assets. The Company was
forced to liquidate holdings at reduced prices, resulting in significant losses.

In response to these adverse market conditions and the resulting effect on
our operations, we focused our efforts on stabilizing our existing asset and
liability structure and reduced our acquisition activities. These efforts
continued throughout 2000 and 2001 as we wrote down the value of certain of our
mortgage-backed securities in both years and disposed of certain mortgage-backed
securities in 2001 and in early 2002. As a result of these efforts, we have
significantly reduced our short-term, mark-to-market-based financing for
mortgage-backed securities and we believe that the value of our mortgage-backed
securities portfolio has stabilized and that barring unforeseen circumstances,
we should not continue to experience the same high level of losses experienced
by the Company in the last three years on its mortgage-backed securities
portfolio. Over the last two years, we resumed investing activities, focusing on
real estate investments and we also resumed paying dividends. We believe that we
are in a position to begin growing the business again.

INVESTMENTS

We seek to invest directly or indirectly in real estate-related assets
that provide us with an appropriate risk-adjusted rate of return and the
opportunity for capital gains. We maintain a flexible approach with respect
to the nature of our investments, seeking to take advantage of opportunities
as they arise or are developed.

We have set forth below information regarding our principal categories of
investment at December 31, 2001 and 2000.

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(1) At December 31, 2001, our mortgage-backed securities are secured
primarily by residential mortgage loans.
(2) Our loans are secured by commercial properties.

The following sections provide additional detail of specific investments as
of December 31, 2001.

MORTGAGE-BACKED SECURITIES

Mortgage-backed securities ("MBS") are interests in pools of
mortgages that have been securitized and are usually issued in multiple
classes ranging from the most senior to the most subordinate class. We focus
on the subordinated classes, which we believe offer

higher risk-adjusted returns. At December 31, 2001, our mortgage-backed
securities were principally backed by pools of residential mortgage loans and
were subordinated in right of payment to more senior interests in those
pools. On December 31, 2001, our portfolio of mortgage-backed securities
consisted of sixteen classes of mortgage-backed securities representing
interests in seven securitizations from four different issuers. We are
currently focusing our efforts on investing in other real estate related
assets, as opposed to mortgage-backed securities. During 2000 and 2001, we
sold certain of our mortgage-backed securities and we are also considering
further disposals in our portfolio of mortgage-backed securities.
Subordinated mortgage-backed securities are generally the
non-investment-grade classes of mortgage-backed securities that provide
credit enhancement to more senior classes by having a lower payment priority
in the cash flow from the underlying mortgage loans and absorbing the first
losses on the underlying mortgage loans. In "senior/subordinate" structures,
each subordinated class has a principal face amount equal to the
subordination level required for the classes, if any, which are senior to the
respective subordinated class and the subordination level required at the
respective rating (i.e., BBB, BB, B, NR). Our mortgage-backed securities
consist of securities backed by loans that were originated and are being
serviced by unaffiliated, non-governmental third parties.

At December 31, 2001 and 2000, we valued our securities available for sale
portfolio and recorded gross unrealized gains and losses thereon as follows:

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(1) The amortized cost of our securities is net of the market valuation
losses and impairments discussed in "Results of Operations." The
unrealized gains and losses represent market value changes that, unlike
"market value loss and impairment," the Company believes are temporary.

Following December 31, 2001, we sold mortgage-backed securities having a
carrying value of $2.2 million. The fair value of our mortgage-backed
securities portfolio is determined by us at each reporting date by
discounting the anticipated cash flows using certain estimates (e.g.
prepayment speeds, default rates, severity of losses, and discount rate). For
example, the fair value of our investment in the resecuritized
mortgage-backed securities is determined by us at each reporting date as the
present value of the anticipated cash flows from the underlying collateral
(primarily "A" quality, jumbo, fixed-rate, 15- to 30-year term loans) using
certain assumptions. We are responsible for developing these assumptions
which include: (i) future rate of prepayment; (ii) discount rate used to
calculate present value; and (iii) default rates and loss severity on loan
pools underlying the mortgage-backed securities in the resecuritization. At
December 31, 2001, we used an annual constant prepayment rate of 10.2%, a
discount rate of 20%, and an annual constant default rate of 0.33% with a
loss severity of 32.3% to estimate the fair value of our interest in the
resecuritization. The future cash flows and the discount rate represent our
best estimate; however, there can be no assurance that actual results will
match these estimates. We review the fair value of our interest in the
resecuritization by analyzing current interest rates, and prepayment,
discount rate and loss assumptions in relation to the actual experience and
current rates of prepayment and loss prevalent in the underlying loan pools.
Changes in these factors may lead to significant fluctuations in the fair
value of our investment which may affect earnings, if the fair value decrease
is determined by us to be of an other-than-temporary nature.

Declines in fair value are considered other-than-temporary when: (i) the
carrying value of the beneficial interests exceeds the fair value of such
beneficial interests using current assumptions, and (ii) the timing and/or
extent of cash flows expected to be received on the beneficial interests has
adversely changed from the previous valuation date.

There was no material difference between our amortized cost of
mortgage-backed securities available for sale and current market values at
December 31, 2001. Payments on mortgage-backed securities are subject to a
number of market factors, which can significantly affect the amount and rate
of payments on mortgage-backed securities, including, without limitation,
defaults on the underlying loans, the level of subordination of the
mortgage-backed securities, changes in interest rates and the rate of
prepayments on the underlying loans. To the extent that these and other
factors change, the anticipated cash flow on our mortgage-backed securities
may not be sufficient to cover our amortized cost. Also, if we sell one of
these mortgage-backed securities at a market price which is below its
amortized cost, we will realize a loss attributable to such mortgage-backed
security.

The following table sets forth information, as of December 31, 2001,
regarding our mortgage-backed securities. The table sets forth the credit rating
designated by the rating agency for each securitization structure. Classes
designated "A" have a superior claim on payment to those rated "B", which are
superior to those rated "C." Additionally, multiple letters have a superior
claim to designations with fewer letters. Thus, for example, "BBB" is superior
to "BB," which in turn is superior to "B." The lower class designations in any
securitization will receive interest payments subsequent to senior classes and
will experience losses prior to any senior class. The lowest potential class
designation is not rated ("NR") which, if included in a securitization, will
generally receive interest last and experience losses first. The mortgage loans
underlying the Company's mortgage-backed securities are primarily residential
mortgage loans which generally may be prepaid at any time without penalty.

MORTGAGE-BACKED SECURITIES
DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)

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(1) NR means the security is not rated.
(2) Based on the amortized cost basis, which is the post-impairment basis
(purchase price less amortization and impairment thereof) of the
mortgage-backed securities.
(3) The Company resecuritized mortgage-backed securities with a carrying value
of approximately $20.1 million in 2000 and retained 100% of the
subordinated interest in the underlying trust. The principal balance of the
resecuritized mortgage-backed securities at December 31, 2001 was $58.8
million. The outstanding unpaid principal balance of the underlying
residential mortgage loans totaled $6.4 billion at December 31, 2001.
The outstanding principal balance of the senior bonds issued by the trust
and held by third party investors amounted to $29.2 million at December 31,
2001. The Company's basis in the subordinated interest at December 31, 2001
was $8.5 million.
(4) Securities backed by loans serviced by an affiliate of WFSG. The Cityscape
securities were sold subsequent to December 31, 2001 for $2.6 million.
(5) Securities backed by loans that were previously held in the portfolio of
WFSG or its affiliates and for which WFSG or one of its affiliates is
continuing to act as servicer.

MORTGAGE-BACKED SECURITIES
DECEMBER 31, 2001
(CONTINUED)
(DOLLARS IN THOUSANDS)

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N/A Information is not available.

(1) Data provided by trustees or servicers for the securities or other
third-party sources. Delinquency data does not incorporate payment recency.
For example, if a loan is 90 days delinquent at a point in time, and from
that point on makes each regular monthly payment, that loan would be
current on a recency basis, but not on a contractual delinquency basis.
Because of this, for certain pools, delinquency rates may imply higher
expected defaults than may actually occur. Cumulative losses include only
those losses incurred on underlying mortgages since the inception date of
the security.
(2) Delinquency amounts do not include Foreclosure, Real Estate Owned, or
Bankruptcy amounts included elsewhere in this table.
(3) Based on loans which were in bankruptcy as of December 31, 2001.
(4) Securities backed by loans serviced by an affiliate of WFSG. The Cityscape
securities were sold subsequent to December 31, 2001 for $2.6 million.
(5) Delinquency amounts include Foreclosure, Real Estate Owned, and Bankruptcy
amounts.
(6) Securities backed by loans that were previously held in the portfolio
of WFSG or its affiliates and for which WFSG or one of its affiliates
is continuing to act as servicer.

LOANS

Our Loans were primarily secured by commercial properties and were current
on their monthly payments at December 31, 2001. Set forth below is a brief
description of the principal Commercial Loan in our loan portfolio at December
31, 2001:

NW CORNELL & MILLER. This is a first lien mortgage loan for the
construction of a private school located in Portland, Oregon. The original
construction loan rolled into a first lien, ten-year, fixed-rate loan at 9%, due
April 1, 2009. The loan currently pays monthly principal and interest and has a
balloon payment of $4.8 million due in 2009. The principal balance of the note
at December 31, 2001 was $5.2 million and had a net carrying value of $4.7
million. Following December 31, 2001, the Company sold an approximately 46%
participation in this loan to a former director of the Company and obtained the
right to put the remaining amount of this loan to such party during a specified
period during the third quarter of 2002.

REAL ESTATE

We invest in commercial and multi-family real estate located in the United
States and the United Kingdom. During 2001, the Company sold all of its direct
investment in real estate located in the United Kingdom. The following table
sets forth information regarding our investments in real estate at December 31,
2001:

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N/A Not applicable
(1) None of the properties was subject to a lease at December 31,
2001.

Set forth below is a brief description of each of the properties set forth in
the above table:

90005 PRAIRIE ROAD ("EUGENE WAREHOUSE"). This building is an
84,000-square-foot warehouse located on 4.5 acres with access to Interstate
Route 5 via Belt Line Road and to the Eugene-Springfield metropolitan and
Gateway areas. The property is within the West Eugene enterprise zone. This
property is being marketed for lease or sale.

BUENA VISTA BUSINESS PARK, 2400 BLOCK OF BATEMAN AVENUE, IRWINDALE,
CALIFORNIA. This property was acquired on November 18,1998 and consists of three
finished industrial zoned lots ranging from 36,068 to 154,943 square feet and
totaling 227,863 square feet or 5.2 acres. The parcels are fully improved with
all the major off-sites in place, i.e., paved-streets, streetlights, curbs,
gutters and utilities. Irwindale is located at the center of the San Gabriel
Valley which is located between the inland empire region and downtown Los
Angeles. This site has access to Interstate Route 210 and Interstate Route 605.
The parcels are all under contract for sale in 2002.

WILSONVILLE LAND. This 10.9-acre parcel of undeveloped land is located in
the city of Wilsonville, Oregon. The property is being held for sale. Following
December 31, 2001, the Company entered into option agreements to sell this
property to a former director of the Company during a specified period ending
early in 2003.

MORTGAGE INDEBTEDNESS. Our general strategy is to leverage our investments
by incurring borrowings secured by such investments. Set forth below is
information regarding our mortgage indebtedness relating to our real estate as
of December 31, 2001.

OTHER INVESTMENTS

The Company also invests in other real estate-related opportunities,
including the debt or equity of real estate corporations. In December 2000, Fog
Cutter Capital Group organized and led a group of investors to purchase all of
the outstanding capital stock of Bourne End Properties Plc ("Bourne End"), a
specialist investor in retail property. BEP Acquisitions was incorporated in
Jersey, Channel Islands for the purpose of acquiring Bourne End. BEP
Acquisitions is a wholly-owned subsidiary of BEP Property Holdings Limited
("BEP"), which is 26% owned by the Company, 71% owned by Merrill Lynch (Jersey)
Holdings Limited (a subsidiary of Merrill Lynch & Co., Inc.) and 3% owned by
Greenbau Estuary Limited. A related company of Merrill Lynch (Jersey) Holdings
Limited also provided mezzanine financing.

At the time of the acquisition, Bourne End had approximately GBP 169.6
million of assets and GBP 123.1 million of debt. The real estate assets
consisted of 1.7 million square feet in fifteen shopping centers located in the
United Kingdom. Six of these properties were sold during 2001. The sales are
consistent with the group's strategy to reposition each of the centers,
including selected new capital expenditures on existing space and new
development on excess or adjoining land, with the ultimate goal of reselling
many of the properties. Based on square footage, the sales during 2001 represent
22% of the original Bourne End portfolio and are in line with the acquiring
group's business plan.

The Company also owns 2.9 million shares (18.1%) of the outstanding common
stock of Wilshire Financial Services Group Inc. (WFSG). WFSG is a diversified
financial services company, which conducts banking operations in southern
California and specialty loan servicing and finance operations nationwide. The
Company does not control WFSG or participate in its management.

FUNDING SOURCES

In order to maximize the return on our investments, we generally fund
acquisitions with third-party debt and equity financing so that our invested
capital represents a relatively small percentage of the purchase price. The
principal sources for funding loans and mortgage-backed securities have
historically been repurchase agreements with major investment banks. Repurchase
agreements are secured lending arrangements which involve the borrower selling
an asset to a lender at a fixed price with the borrower having an obligation to
repurchase the asset within a specified period (generally 30 days) at a higher
price reflecting the interest cost of the loan. If the value of the underlying
asset declines as determined by the lender, the lender may request that the
amount of the loan be reduced by cash payments from the borrower or additional
collateral be provided by the borrower (generally known as "collateral calls").
As part of our efforts to stabilize our balance sheet, we have over the last two
years significantly reduced our reliance on short term repurchase agreement
financing. Funding for real property assets generally are longer-term
traditional mortgage financing with banks and other financial institutions. We
closely monitor rates and terms of competing sources of funds on a regular basis
and generally utilize the source which is the most cost effective. The following
table sets forth information relating to our borrowings and other
interest-bearing obligations at December 31, 2001 and 2000.

Repurchase agreements - 19,025

Mortgages secured by real estate 1,035 17,532

Senior bonds - mortgage-backed securities 29,170 34,203

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30,205 70,760
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$ 37,966 $ 88,930
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The following table sets forth certain information related to the Company's
borrowings. During the reported period, borrowings were comprised of warehouse
lines, repurchase agreements, real estate loans, and senior bonds issued in
connection with a securitization. Averages are determined by utilizing month-end
balances.

ASSET QUALITY

MORTGAGE-BACKED SECURITIES. The majority of our assets are mortgage-backed
securities which represent beneficial interests in pools of residential mortgage
loans. These loans are secured by residential one-to-four family real estate
properties. The majority of these loans represent exposure to lower credit grade
borrowers and bear a higher risk of delinquency, default, and losses than loans
to borrowers with prime credit. We incorporate our assumptions with respect to
the credit quality and performance of the underlying pools of mortgage loans
into our valuation of the mortgage-backed securities. To the extent the mortgage
loans perform better or worse compared to our assumptions, the value of our
mortgage-backed securities may change positively or negatively and impact our
future financial position and operating results.

LOANS. At December 31, 2001, we designated our loans as held-for-sale and
carried these loans at the lower of cost or estimated market value. Our estimate
of market value included our consideration of the credit performance of these
loans.

REGULATORY

The Company currently owns approximately 2.9 million shares of WFSG's
common stock. Effective December 31, 2001, WFSG repurchased a total of 4,168,854
shares of its common stock from entities affiliated with American Express
Financial Advisors Inc. (collectively, "AXP"). These shares represented AXP's
entire interest in WFSG's common stock, or approximately 21% of the total WFSG
shares previously outstanding. This transaction between WFSG and AXP resulted in
the Company becoming the second largest shareholder of WFSG, a savings and loan
holding company.

The status of owning more than 10% and being one of the two largest
shareholders of a savings and loan holding company creates a rebuttable
presumption, for regulatory purposes, that such a shareholder "controls" the
savings and loan holding company. As a result of the Company being one of the
two largest shareholders of WFSG, a change in control application (Form H-(e)1)
must be filed with the Office of Thrift Supervision ("OTS") within ninety days
of achieving such status. In lieu of the Form H-(e)1, the Company may file a
rebuttal of control application ("Rebuttal Application") in which the Company
demonstrates (and makes related contractual commitments in a rebuttal of control
agreement with the OTS) that its ownership of WFSG does not constitute
"control". The Company is in the process of preparing the Form H-(e)1 for filing
with the OTS on or before March 31, 2002.

There can be no assurance that the OTS will approve the Form H-(e)1. If the
Form H-(e)1 is not approved by the OTS, the Company may be required to sell a
portion of its WFSG common stock in order to reduce its investment below the
next largest shareholder. Such a forced divestiture might result in losses to
the Company.

The Company is continuing to consider what course of action might best
maximize the value of its investment in WFSG. Any course of conduct (including
retention of the Company's current position) needs to comply with requirements
of the OTS, including those relating to the "control" of savings and loan
holding companies such as WFSG. As a result, the Company may decide to sell some
or all of its shares of WFSG or retain its current ownership position. The
Company does not believe, at this time, that it would seek to increase its
ownership of WFSG shares, which would require specific OTS approval.

ITEM 2. PROPERTIES

The Company's corporate headquarters are located in Portland, Oregon, where
the Company leases approximately 5,000 square feet of office space under a lease
expiring in 2004. The Company also leases an executive office in New York and
London, England.

ITEM 3. LEGAL PROCEEDINGS

The Company, Fog Cap L.P. (a subsidiary of the Company and formerly known
as Wilshire Real Estate Partnership L.P.) and its two top executives, Messrs.
Wiederhorn and Mendelsohn, have been named in a series of lawsuits relating to
the receivership of Capital Consultants, L.L.C. ("CCL"). The cases are TOM
HAZZARD, ET AL., V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV
00-1338-HU (filed September 29, 2000); MARK EIDEM, ET AL., V. TRUSTEES UNITED
ASSN. UNION LOCAL 290, ET AL., U.S. District Court of Oregon, Civil No. CV
00-1446-HA (filed October 26, 2000); NANCY SCHULTZ, ET AL., V. GARY

KIRKLAND,ET AL., U.S. District Court of Oregon, Civil No. CV 00-1377-HA (filed
October 10, 2000); LARRY MILLER, ET AL., V. LEE CLINTON, ET AL., U.S. District
Court of Oregon, Civil No. CV00-1317-HA (filed September 26, 2000); SALVATORE J.
CHILIA, ET AL., V. CCL, ET AL., U.S. District Court of Oregon, Civil No. CV
00-1633 JE (filed November 29, 2000); and MADOLE V. CAPITAL CONSULTANTS ET. AL.,
U.S. District Court of Oregon, Civil No. CV 00-1600-HU (filed December 1, 2000).
In the HAZZARD, CHILIA and MADOLE cases, the trustees of several Taft-Hartley
trusts filed suit against CCL and several individuals and organizations CCL did
business with (including the Company and Messrs. Wiederhorn and Mendelsohn). In
the EIDEM, SCHULTZ and MILLER cases, the trustees who are plaintiffs in HAZZARD
are in turn named as defendants in class action suits filed by beneficiaries of
the Taft-Hartley trusts on which they serve as plaintiff-trustees. In the cases
in which the trustees are defendants, they have filed third-party complaints
against several parties, including the Company and Messrs. Wiederhorn and
Mendelsohn. In addition, a group of investors that are not Taft-Hartley trusts
have filed a similar complaint against the same defendants, as well as other
individuals not named in the prior complaints, in the case of AMERICAN FUNERAL &
CEMETERY TRUST SERVICES ET. AL. v CAPITAL CONSULTANTS ET. AL., U.S. District
Court of Oregon, Civil No. 01-00609-HU (filed April 28, 2001). The complaints
and third-party complaints are all virtually identical. They include claims
against the Company, Messrs. Wiederhorn and Mendelsohn alleging breaches of
fiduciary duties under the Employee Retirement Income Security Act of 1974
("ERISA"); knowing participation in a fiduciary breach under ERISA; knowing
participation in a prohibited transaction under ERISA; knowing transfer of trust
assets under ERISA; negligence; common law claim for breach of fiduciary duty;
tortious interference with contract; conversion; constructive trust, restitution
and unjust enrichment; fraud; state securities law claims; and breach of
contract. The suits also allege claims against Messrs. Wiederhorn and Mendelsohn
of tortious interference with business relationships between the Taft-Hartley
trusts and CCL, as well as violations of the Racketeering Influenced and Corrupt
Organization provisions of the Organized Crime Control Act of 1970, 18 U.S.C.
Section 1961-1965 ("RICO"). The claimants also seek attorneys' fees under their
ERISA and RICO claims.

The above suits name multiple defendants in addition to the Company and its
executives. In addition, the claimants have asserted but have not yet filed
claims against a number of additional parties regarding the same alleged losses,
including a number of professional advisors to named defendants. The claimants
have not described with any specificity the proportion or share of losses which
they claim are attributable to the Company or its executives, as compared to the
other parties and other potential defendants. The overall remedies sought
against all defendants include claims for broad relief under the remedial
provisions of ERISA, such as rescission of transactions and the imposition of a
constructive trust over any trust assets which plaintiffs claim were obtained in
violation of ERISA. Certain of the claims against the Company appear to be
covered by releases that were given by CCL to the Company and Messrs. Wiederhorn
and Mendelsohn. The claimants' suits seek to rescind the transactions in which
the releases were granted. The claimants also seek common law remedies such as
damages and punitive damages. However, certain of these common law claims may be
preempted by ERISA.

Although these cases were filed during the period between October 2000 and
April 2001, they are still in preliminary stages of pleading and discovery. CCL
was placed in receivership by the Department of Labor and the Securities and
Exchange Commission in the cases of SEC V. CAPITAL CONSULTANTS, L.L.C., et. al.,
U.S. District Court of Oregon, Case No. 00-1290-KI, and HERMAN V. CAPITAL
CONSULTANTS, L.L.C., et. al., U.S. District Court of Oregon, Case No. 001291-KI.
When the receivership order was entered, the court stayed other proceedings
against CCL for several weeks. Once the stay was partially lifted, the parties
deferred discovery and delayed the filing of any answers or legal challenges to
the sufficiency of the pleadings in order to facilitate a confidential global
mediation process. U.S. Circuit Court Judge Edward Leavy of the Ninth Circuit
Court of Appeals has been selected as the mediator. Discovery and motion
practice has been stayed pending the outcome of the mediation, excepting only a
limited amount of document production by all of the parties to the litigation.
No motions challenging the sufficiency of the claimants' claims have been filed
or heard, and the Company and other defendants have not yet filed their answers
or any cross-claims that they may have among themselves. No discovery
depositions have been taken.

The plaintiffs and third-party plaintiffs in the CCL litigation claim total
losses by the various plaintiffs against all defendants in the range of $400
million. Approximately $160 million of this amount arises from losses on
investments which plaintiffs allege relate to Messrs. Wiederhorn and Mendelsohn
and companies with which they were affiliated, for which plaintiffs allege the
Company shares some unspecified portion of the liability. Additional damages are
claimed for prejudgment interest dating from the date of each investment under
securities law claims under which plaintiffs are seeking rescission remedies.
The RICO claims include additional claims for triple damages and the tort claims
include claims for punitive damages. Attorneys' fees are also sought under the
ERISA, RICO and securities law claims.

The mediation process has been ongoing since May 2001. Management has
directed that the Company participate in good faith along with the other parties
in the confidential mediation in an effort to determine whether a mediated
settlement may be achievable. It is impossible to predict with any certainty at
this stage of the proceedings whether the mediation will result in a settlement
of the case. In the event a mediated settlement is not achieved, management has
directed that these cases be defended against vigorously. Because the cases are
still in early stages of the pleadings and because the amount of discovery has
been limited, the ultimate financial loss to the Company cannot be reasonably
estimated at this time. However, based upon the progress of the mediation
through December 31, 2001, the Company has made a provision for litigation of $2
million. The Company can give no assurances that the ultimate settlement or
result of litigation will be limited to the amount of the provision.

The employment agreements between the Company and Messrs. Wiederhorn and
Mendelsohn contain provisions under which they may be entitled to indemnity for
litigation expenses and personal losses that are attributable to actions which
they took on account of their positions as directors or officers of the Company.
Messrs. Wiederhorn and Mendelsohn have notified the Company that they are
reserving their rights to seek such indemnity. In addition, other former
employees of the Company or of firms that were previously affiliated with the
Company have been named as parties or have been requested to respond to
discovery requests and/or government investigations regarding the collapse of
CCL. Several of these individuals have requested indemnity from the Company for
the costs of their defense. The Company has not agreed to any such indemnity
requests.

At this time, it is not possible to determine the extent of liability, if
any, the Company may face with regard to such indemnity claims because of the
preliminary nature of the underlying litigation. In addition, certain of the
litigation expenses faced by Messrs. Wiederhorn and Mendelsohn may be subject to
reimbursement or payment from other sources because of employment agreements and
indemnity rights they may have under the articles and bylaws of other defendants
named in the litigation.

In addition to the civil litigation, the CCL failure has led to
governmental investigations, including a criminal investigation. Messrs.
Wiederhorn and Mendelsohn have received letters from the United States
Attorney's office in Portland, Oregon, advising them that they are the subjects
of a grand jury investigation into the failure of CCL. At this stage, it is not
possible to predict the outcome of this investigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On December 14, 2001, at the annual stockholders' meeting, the Company's
stockholders elected six persons to the Board of Directors of the Company and
ratified the selection of Ernst & Young LLP as the Company's auditors for the
year ending December 31, 2001.

In connection with the election of directors, the shares of common stock
present in person or by proxy were voted as follows:

All of the elected directors continued their term of office as directors
after the annual stockholders' meeting.

In connection with the proposal to approve the ratification of the
selection of Ernst & Young LLP, independent certified public accountants, as the
Company's auditors for the year ending December 31, 2001: 10,196,423 shares were
voted in favor of the proposal, 36,764 shares were voted against the proposal
and there were 7,483 abstentions.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Effective April 6, 1998, our common stock, par value $0.0001 per share (the
"Common Stock") became quoted on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). The Common Stock is traded under the
symbol "FCCG." The approximate number of record holders (not shareholders, as
most shares are held in brokerage house's name) of our Common Stock at January
31, 2002 was 20.

The following table sets forth the high and low sales prices for the Common
Stock as quoted on the NASDAQ for the periods indicated.

During the year ended December 31, 2001, we declared and paid dividends
totaling $0.39 per share ($4.1 million). During the year ended December 31,
2000, we did not declare any cash dividends. We had delayed the payment date of
a $0.40 cash dividend payable on October 27, 1998 to shareholders of record at
September 30, 1998 and announced that we would pay interest, at the rate of 4%
per annum, on the amount due from the original payment date through the date of
the actual payment. During the year ended December 31, 2000, we paid one-half of
the deferred dividend payable and paid the remainder during 2001.

It is our intention to pay dividends quarterly. We may declare and pay new
dividends on our common stock in 2002, subject to our financial condition,
results of operations and capital requirements as well as other factors deemed
relevant by the Board of Directors.

On March 13, 2002, we paid a cash dividend of $0.13 per share to
stockholders of record as of March 8, 2002.

On December 15, 1999, we declared a distribution of one right (a "Right")
to purchase one-tenth of a share of the Company's Common Stock for each
outstanding share of Common Stock, payable to the stockholders of record on
January 3, 2000. The Board of Directors authorized and directed the issuance of
one Right with respect to each share of Common Stock issued thereafter until the
Distribution Date. During 2001, our Board of Directors elected to redeem the
Rights in order to give us the flexibility to purchase shares of our Common
Stock if opportunities arose at attractive prices. The Board was concerned that
the repurchase of our Common Stock would likely cause a number of parties to
exceed the five percent ownership limit established in the Rights Plan. The
Board concluded that the value of the potential opportunities created by
redeeming the Rights, exceeded the potential tax benefits of the protection from
a change in ownership provided by the Rights Plan. The Rights were redeemed by
the Company in October 2001.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical, financial and operating
data on a consolidated basis at December 31, 2001, 2000, and 1999 and for the
years then ended. The information contained in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our historical consolidated financial statements,
including the notes thereto, included elsewhere in this report.

Net loss before cumulative effect of a change in
accounting principle (16,925) (15,542) (26,647)
Cumulative effect of a change in accounting principle (1,021) - -
----------------- ----------------- -----------------
Net loss $ (17,946) $ (15,542) $ (26,647)
================= ================= =================

- ----------
(1) EBITDA means net income or (loss) plus interest expense plus taxes and
depreciation plus (or minus) amortization of premiums and discounts,
net.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto.

GENERAL

During the year ended December 31, 2001, we continued to restructure the
asset and liability structure of our balance sheet, significantly reduced our
exposure to short-term, mark-to-market-based financing, disposed of our directly
owned U.K. commercial property portfolio and began arranging and investing in
new transactions.

Our results of operations for the year ended December 31, 2001 reflect
further impairment write-downs of mortgage-backed securities of $8.7 million.

As a result of the continued impact of the marketplace on the Company,
stockholders' equity decreased to $38.8 million at December 31, 2001 from $55.7
million at December 31, 2000, a decrease of $16.9 million or 30.3%. During this
same period, the size of our balance sheet was reduced from $150.3 million to
$82.1 million.

The Company's business strategy focuses on opportunistic investing,
structuring and managing real estate-related assets such as mortgage-backed
securities, mezzanine real estate loans and real estate, as well as the
acquisition of companies engaged in investing in such assets. We concentrate on
the acquisition of assets where our expertise in intensive asset management,
mortgage and real estate credit analysis and financial structuring can create
value. Further, we expect that many of these investments, particularly in
corporate acquisitions, will be in conjunction with partners.

CRITICAL ACCOUNTING POLICIES

VALUATION

At December 31, 2001, our largest asset was our portfolio of
mortgage-backed securities, which includes a retained interest in a
resecuritization of several mortgage-backed securities. Listed market prices or
dealer/lender value opinions are not available for most of the securities in our
portfolio. Accordingly, in the absence of these third-party quotations, fair
values for these securities are determined by us, using a third-party valuation
model and internally developed assumptions.

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

Our key valuation assumptions include default rates and loss severity,
which account for the anticipated credit losses in the pools of loans underlying
our mortgage-backed securities. Other key valuation assumptions include
prepayment rates and discount rates. Our internal valuation methodology calls
for developing the key valuation assumptions of credit losses and prepayment
speeds based upon the observable recent history of performance, generally
averaged across the latest 3 to 6 months, subject to our general economic and
market considerations. Our key valuation assumption of discount rates is
developed based on the assessment of the current yields required by investors
for similar classes of fixed income instruments. We apply our valuation
methodology consistently and believe that the resulting fair value estimates are
reasonable, however, these estimated values may differ from those realized in a
bona fide sale transaction, given the judgmental nature of the values of these
assets.

During the years ended December 31, 2001, 2000, and 1999, we incurred
significant losses of $8.7 million, $21.4 million, and $19.6 million,
respectively, due to decreases in value of our mortgage-backed securities. These
losses resulted from the worsening credit and prepayment performance of our
mortgage-backed securities as well as increases in the market yields for
investments of such high risk assets. We believe our assumptions and the
resulting estimated values of the mortgage-backed securities at December 31,

2001 are conservative based on the facts and circumstances as of that date;
however, there can be no assurance that there will be no future losses on these
securities due to changes in their performance or overall market conditions.

SALE RECOGNITION

During 2001, we carried out several significant sales of our real estate
investments, mortgage-backed securities, and loans. Our accounting policy calls
for the recognition of sales of the financial instruments, including
mortgage-backed securities and loans, only when we have surrendered irrevocable
control over these assets. Our accounting policy calls for the recognition of
sales of real estate upon closing when we transferred the usual risks of
ownership and all or substantially all of the rewards of ownership to the buyer.
We do not retain any recourse or performance obligations with respect to our
sales of assets. Our sales were cash sales, and the cash proceeds were not
contingent upon any future event.

RESULTS OF OPERATIONS - 2001 COMPARED TO 2000

NET LOSS. Our net loss for the year ended December 31, 2001 amounted to
$17.9 million, or $1.71 per share, compared to $15.5 million, or $1.48 per share
for the year ended December 31, 2000. The 2001 net loss is primarily
attributable to $11.4 million of market valuation losses and impairments and
significant operating expenses. The net loss for 2000 was primarily the result
of $22.3 million of market valuation losses and impairments.

NET INTEREST INCOME. The following tables set forth information regarding
the total amount of income from interest-earning assets and expenses from
interest-bearing liabilities and the resulting average yields and rates:

- ----------
(1) Net interest spread represents the unweighted difference
between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by
average interest-earning assets.

For the year ended December 31, 2000, the Company recovered $0.6 million of
the allowance for loan losses. This amount is not reflected in the net interest
income/spread above.

Prepayments, delinquencies and defaults affect the net spread of the
Company, primarily through their impact on mortgage loans that underlie the
securities in the Company's mortgage-backed securities portfolio. For principal
and interest subordinated mortgage-backed securities, which the Company
generally purchases at a discount to principal amount, increased prepayments
recapture such purchase discount sooner and therefore increase spread. Fewer
prepayments would have the opposite effect, reducing spread. For residuals,
prepayment increases generally reduce spread since these securities derive their
value from interest payments on loans that are outstanding. Residuals have both
a principal face amount and often a credit related IO component. Increased
prepayment often reduces spread except to the extent that such prepayment is
related to a recovery on a defaulted loan. The impact on spread, however,
depends upon the degree to which prepayment is less than or exceeds the
Company's assumptions for prepayment at its time of purchase.

The Company buys mortgage-backed securities based on prepayment,
delinquency and default assumptions. Delinquency itself has little effect on
spread from the Company's mortgage-backed securities portfolio since the loan
servicers for each security generally advance both principal and interest
payments and, therefore, the Company generally receives payments on such loans
on a timely basis. More important is the loss severity on defaulted loans.
Generally, the larger the loss severity is, the greater the reduction in spread
will be. However, the Company's spread is only negatively impacted to the extent
the principal face amount of defaults and the cumulative loss severity exceeds
or is expected to exceed the Company's assumptions at its time of purchase or as
subsequently adjusted through an other than temporary impairment determination.

RECOVERY OF LOAN LOSSES. During the year ended December 31, 2000, we
reviewed the adequacy of loan loss reserves and recaptured the remaining reserve
balance of $0.6 million. At December 31, 2001, we had $4.8 million of loans that
are performing according to their terms with no required loan loss allowance.

REAL ESTATE OPERATIONS. During the years ended December 31, 2001 and 2000,
real estate operating income was comprised primarily of $2.2 million and $4.9
million, respectively, in gross rental and other income earned on such
investments. Expenses incurred on such real estate investments for the years
ended December 31, 2001 and 2000 include $1.2 million and $2.7 million,
respectively, of interest expense, $0.4 million and $0.6 million, respectively,
of rental operating expense and $0.5 million and $1.0 million, respectively, of
depreciation expense.

OTHER LOSS. Our other loss was approximately $14.5 million and $17.1
million for the years ended December 31, 2001 and 2000, respectively. The
components of the Company's net non-interest loss are comprised of the
following:

MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses
and Impairments" as used herein refers to impairment losses recognized primarily
on our mortgage-backed securities and loan portfolios. Total market valuation
losses and impairments for the year ended December 31, 2001 were $11.4 million.
This amount includes $8.7 million of market valuation losses and impairments
related to our portfolio of mortgage-backed securities available for sale, $0.5
million related to our investment in loans, $2.0 million related to our
investment in prepaid service fees in an affiliate of WFSG, and $0.2 million
related to our investment in real estate. As a result of the write down in the
value of certain of our mortgage-backed securities and the sale of other
mortgage-backed securities in 2000 and 2001, we believe that the value of our
mortgage-backed securities portfolio has stabilized and that barring unforeseen
circumstances, we should not continue to experience the same level of losses
experienced by the Company in the last two years.

Total market valuation losses and impairments for the year ended December
31, 2000 were $22.3 million. This amount includes $21.4 million of market
valuation losses and impairments related to our portfolio of mortgage-backed
securities available for sale and $0.9 million related to our prepaid service
fees from an affiliate of WFSG. Approximately $20.0 million of these amounts
were impaired in the fourth quarter of 2000 due primarily to the receipt of
additional detailed information from the servicer of the underlying mortgages to
certain mortgage-backed securities.

PROVISION FOR LITIGATION CLAIMS. The Company and two of its senior officers
have been named, among other defendants, in a series of lawsuits related to the
receivership of an unaffiliated investment company. In their claims, multiple
plaintiffs allege several theories of liability, including knowing participation
in fiduciary breach and prohibited transactions under the Employee Retirement
Income Security Act of 1974. Because the cases are still in early stages of the
pleadings and because the amount of discovery has been limited, the ultimate
financial loss to the Company cannot be reasonably estimated at this time.
However, based upon the progress of the mediation through December 31, 2001, the
Company has made a provision for litigation of $2 million. The Company can give
no assurances that the ultimate settlement or result of litigation will be
limited to the amount of the provision.

EQUITY IN LOSSES OF BEP. In February 2001, the Company (through a 26% owned
Jersey, Channel Islands company known as BEP Acquisitions) purchased all of the
outstanding capital stock of Bourne End Properties PLC ("Bourne End"). Bourne
End is a specialist investor in retail property, currently owning fifteen town
shopping centers located in England and Scotland. BEP is highly leveraged and
operating income from the properties is offset by interest expense and
depreciation. The Company accounts for this investment using the equity method,
thereby recording its share of income and expense generated by BEP. During 2001,
the Company recorded $1.3 million in operating losses relating to this
investment. BEP is expected to become profitable as it sells properties and
retires indebtedness, a process which began during the fourth quarter of 2001.

GAIN ON THE SALE OF SECURITIES. During the years ended December 31, 2001
and 2000, we sold mortgage-backed securities to unrelated third parties for
approximately $7.4 million and $51.6 million, respectively, resulting in gains
of approximately $0.5 million and $5.2 million, respectively.

OPERATING EXPENSES. During 2001, operating expenses were comprised of
compensation and employee benefits of $5.1 million, professional fees of 1.4
million and other costs of $2.5 million. In an effort to improve profitability
and liquidity, we have

sought to reduce our expenses. In that connection, in August, 2001, we moved our
executive offices to smaller offices, which better reflected our needs. In
addition, effective during the fourth quarter of 2001, we entered into new
employment agreements with our Chief Executive Officer, President and an
Executive Vice President, and re-structured the compensation for our directors.

In the fourth quarter of 2000, the Company established a trust, which
purchased 525,000 shares of the Company's common stock from an unrelated
shareholder. The Company's contribution of approximately $1.3 million is
included in compensation expenses. The trust was established for the benefit of
the Company's employees and directors to raise their ownership in the Company,
thereby strengthening the mutuality of interests between them and the Company's
shareholders. While these shares are held in trust, they will be voted ratably
with ballots cast by all other shareholders.

RESULTS OF OPERATIONS - 2000 COMPARED TO 1999

NET LOSS. Our net loss for the year ended December 31, 2000 amounted to
$15.5 million, or $1.48 per share, compared to $26.6 million, or $2.33 per share
for the year ended December 31, 1999. The 2000 net loss is primarily
attributable to $22.3 million of market valuation losses and impairments
compared to $30.0 million of market valuation losses and impairment for 1999.

NET INTEREST INCOME. The following tables set forth information regarding
the total amount of income from interest-earning assets and expenses from
interest-bearing liabilities and the resulting average yields and rates:

----------
(1) Net interest spread represents the unweighted difference
between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by
average interest-earning assets.

For the year ended December 31, 2000, the Company recovered $0.6 million of
the allowance for loan losses compared to a recovery of $1.1 million in 1999.
These amounts are not reflected in the net interest income/spread above.

Prepayments, delinquencies and defaults affect the net spread of the
Company, primarily through their impact on mortgage loans that underlie the
securities in the Company's mortgage-backed securities portfolio. For principal
and interest subordinated mortgage-backed securities, which the Company
generally purchases at a discount to principal amount, increased prepayments
recapture such purchase discount sooner and therefore increase spread. Fewer
prepayments would have the opposite effect, reducing spread. For IOs and
residuals, prepayment increases generally reduce spread since these securities
derive their value from interest payments on loans that are outstanding. IOs
have no principal face amount other than a notional balance and therefore are
quite responsive to changes in prepayment. Residuals have both a principal face
amount and often a credit related IO component. Increased prepayment often
reduces spread except to the extent that such prepayment is related to a
recovery on a defaulted loan. The impact on spread, however, depends upon the
degree to which prepayment is less than or exceeds the Company's assumptions for
prepayment at its time of purchase.

The Company buys mortgage-backed securities based on prepayment,
delinquency and default assumptions. Delinquency itself has little effect on
spread from the Company's mortgage-backed securities portfolio since the loan
servicers for each security generally advance both principal and interest
payments and, therefore, the Company generally receives payments on such loans
on a timely basis. More important is the loss severity on defaulted loans.
Generally, the larger the loss severity is, the greater the reduction in spread
will be. However, the Company's spread is only negatively impacted to the extent
the principal face amount of defaults and the cumulative loss severity exceeds
or is expected to exceed the Company's assumptions at its time of purchase or as
subsequently adjusted through an other than temporary impairment determination.

RECOVERY OF LOAN LOSSES. During the year ended December 31, 2000, we
reviewed the adequacy of loan loss reserves and recaptured the remaining reserve
balance of $0.6 million. At December 31, 2000, we had $30.4 million of loans
that are performing according to their terms with no required loan loss
allowance. During the year ended December 31, 1999, we reversed a provision for
losses of $3.9 million taken in prior periods for a loan held for sale. The loan
was secured by commercial properties in the United Kingdom ("UK") with a
carrying value of approximately $47.9 million. This valuation allowance had been
established in 1998 based upon management's estimate at that time of the
ultimate recoverability of the asset. This provision reversal was partially
offset by a provision for losses on loans of $0.1 million. In addition, we
recognized a net write-down of $2.7 million in the carrying value of a $17.0
million note receivable from WFSG to reflect the estimated value of the common
stock of WFSG.

REAL ESTATE OPERATIONS. During the years ended December 31, 2000 and 1999,
real estate operating income was comprised primarily of $4.9 million and $7.1
million, respectively, in gross rental and other income earned on such
investments. Expenses incurred on such real estate investments for the years
ended December 31, 2000 and 1999 include $2.7 million and $4.5 million,
respectively, of interest expense, $0.6 million and $0.2 million, respectively,
of rental operating expense and $1.0 million and $1.1 million, respectively, of
depreciation expense.

OTHER LOSS. Our other loss was approximately $17.1 million and $32.6
million for the years ended December 31, 2000 and 1999, respectively. The
components of the Company's net non-interest loss are comprised of the
following:

MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses
and Impairments" as used herein refers to impairment losses recognized primarily
on our mortgage-backed securities and loan portfolios. Total market valuation
losses and impairments for the year ended December 31, 2000 were $22.3 million.
This amount includes $21.4 million of market valuation losses and impairments
related to our portfolio of mortgage-backed securities available for sale and
$0.9 million related to our prepaid service fees from an affiliate of WFSG.
Approximately $20.0 million of these amounts were impaired in the fourth

quarter of 2000 due primarily to the receipt of additional detailed information
from the servicer of the underlying mortgages to certain mortgage-backed
securities.

Total market valuation losses and impairments for the year ended December
31, 1999 were $30.0 million. This amount includes $19.6 million of market
valuation losses and impairments related to our portfolio of mortgage-backed
securities available for sale, $8.7 million related to our investment in
newly-issued WFSG stock, $1.0 million related to fees for advisory services in
connection with our investment in WFSG stock and $0.7 million related to our
holdings of WFSG's 13% Series B Notes prior to their conversion to newly-issued
WFSG stock.

PROVISION FOR DISPUTES WITH WFSG. The Company decided to become internally
managed in the third quarter of 1999 which resulted in disputes between the
Company, on the one hand, and WFSG and certain of its affiliates, on the other.
In connection with these disputes, the Company recorded a reserve for potential
resolution of disputes with WFSG and its affiliates of $4.1 million at September
30, 1999. Following a partial settlement of disputes with WFSG, the remaining
reserve for potential resolution of disputes with WFSG and its affiliates was
$2.5 million at December 31, 1999. During the year ended December 31, 2000, the
Company settled all remaining disputes with WFSG and its affiliates which
resulted in an additional provision of $0.2 million.

GAIN ON THE SALE OF SECURITIES. During the years ended December 31, 2000
and 1999, we sold mortgage-backed securities to unrelated third parties for
approximately $51.6 million and $46.6 million, respectively, resulting in gains
of approximately $5.2 million and $1.3 million, respectively.

OPERATING EXPENSES. As discussed above, we decided to become internally
managed in the third quarter of 1999. As a result, management fees payable to
our prior manager have ceased and have been replaced with compensation to the
Company's employees. The Company now incurs its own overhead and operating costs
that were previously incurred primarily by the manager. Professional fees during
the year ended December 31, 2000 were higher than 1999 primarily due to the
litigation with WFSG and its affiliates.

In the fourth quarter of 2000, the Company established a trust which
purchased 525,000 shares of the Company's common stock from an unrelated
shareholder. The Company's contribution of approximately $1.3 million is
included in compensation expenses. The trust was established for the benefit of
the Company's employees and directors to raise their ownership in the Company,
thereby strengthening the mutuality of interests between them and the Company's
shareholders. While these shares are held in trust, they will be voted ratably
with ballots cast by all other shareholders.

CHANGES IN FINANCIAL CONDITION

During 2001, total assets decreased to $82.1 million from $150.3 million at
December 31, 2000. This decrease was primarily the result of a net reduction of
$22.9 million of securities available for sale, $25.6 million of loans and $20.3
million of investments in real estate. Total liabilities decreased to $43.3
million during the period, primarily as a result of a net decrease of $51.0
million in borrowings associated with sales of mortgage-backed securities, loans
and investments in real estate.

SECURITIES AVAILABLE FOR SALE. At December 31, 2001, securities available
for sale included mortgage-backed securities with an aggregate market value of
$51.8 million, net of realized and unrealized gains or losses, compared to $74.7
million at December 31, 2000. This decrease of $22.9 million is primarily due to
the sale of $6.9 million of securities, net principal payments received of $2.1
million, conversion of $6.6 million of mortgage-backed securities into the loans
and real estate which had served as collateral supporting these securities and a
decrease in market value of $7.3 million.

In December 2000, we refinanced the debt on approximately $43.2 million of
our mortgage-backed securities portfolio. This transaction was treated as a
secured financing transaction rather than a sale for accounting purposes due to
certain call provisions retained by the Company. As such, our balance sheet
continues to reflect these securities as well as the senior bonds of $34.2
million which replaced the short-term, mark-to-market debt previously
collateralized by these securities.

We mark our securities portfolio to fair value at the end of each month. We
determine the fair value of the securities by

modeling the anticipated cash flows using certain estimates (e.g. prepayment
speeds, default rates, severity of losses, and discount rate). As of each
reporting period, we evaluate whether and to what extent any unrealized loss is
to be recognized as other than temporary.

LOAN PORTFOLIO. During the year ended December 31, 2001, our loan portfolio
was reduced primarily as a result of principal repayments to approximately $4.8
million from $30.4 million at December 31, 2000. We maintain an allowance for
loan losses at a level that the Company considers adequate to provide for
probable losses based upon an evaluation of known and inherent risks. Based upon
our assessment, no allowance for loan losses was required at December 31, 2001
and 2000.

INVESTMENTS IN REAL ESTATE. Investments in real estate decreased
approximately $20.3 million during the year ended December 31, 2001. This
decrease was primarily due to sale of eighteen retail and office properties, all
located in the United Kingdom, with a carrying value of approximately $19.2
million. In addition, we recognized approximately $0.5 million of depreciation
expense related to operating properties.

We are currently in the process of marketing certain other commercial
properties for sale as we continue to reduce our level of investment in
commercial real estate income properties to increase liquidity for working
capital and reinvestment opportunities.

BORROWINGS. Borrowings decreased to approximately $38.0 million during the
year ended December 31, 2001, funded primarily from the sale of real estate,
subordinated mortgage-backed securities and the receipt of principal payments on
our loan portfolio. Interest rates on borrowings under these facilities are
generally based on 30-day London Interbank Offer Rate ("LIBOR") rates, plus a
spread. Repurchase agreements are secured lending arrangements which involve the
borrower selling an asset to a lender at a fixed price with the borrower having
an obligation to repurchase the asset within a specified period (generally 30
days) at a higher price reflecting the interest cost of the loan. If the value
of the underlying asset declines or the lender marks the asset lower, the lender
may request that the amount of the loan be reduced by cash payments from the
borrower or additional collateral be provided by the borrower (generally known
as "collateral calls"). Accordingly, in an environment where lenders
consistently mark down the value of the underlying assets, a borrower can become
subject to significant collateral calls. If the borrower does not have
sufficient cash to meet the collateral call or additional unencumbered assets to
pledge, it may be forced to sell assets to repay the loan. If the Company
experiences further downward marks to market of its assets subject to repurchase
agreements, it could experience cash collateral calls, thereby reducing
liquidity, or be forced to sell further assets, which could result in losses. We
have significantly reduced our exposure to short-term financing for
mortgage-backed securities and the possibility of collateral calls with respect
to these financings.

At December 31, 2001, we had $38.0 million of borrowings. Of this amount,
$1.0 million financed real estate investments of $2.2 million; $7.8 million
consisted of repurchase agreements on mortgage-backed securities, and $29.2
million related to senior bonds issued as part of the resecuritization discussed
above. Our borrowings had a weighted average interest rate of 5.6% at December
31, 2001.

During 2000, we sold a pool of mortgage-backed securities to a special
purpose vehicle which acquired the loans from us with the proceeds from the
issuance of long-term indebtedness. We retained an equity interest in the
special purpose vehicle and there is no recourse to the Company in respect of
the indebtedness incurred by the special purpose vehicle.

STOCKHOLDERS' EQUITY. Stockholders' equity decreased to $38.8 million
during the year ended December 31, 2001. The net decrease in stockholders'
equity during this period was primarily attributable to our net loss of $17.9
million.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, engage in loan acquisition and lending activities, meet collateral
calls and for other general business purposes. The primary sources of funds for
liquidity during the year ended December 31, 2001 consisted of net cash provided
by investing activities, including cash repayments related to our
mortgage-backed securities portfolio, and the sale of mortgage-backed securities
and real estate.

Our borrowings and the availability of further borrowings are substantially
affected by, among other things, changes in interest rates, changes in market
spreads whereby the market value of the collateral securing such borrowings may
decline

substantially, or decreases in credit quality of underlying assets. In the event
of declines in market value or credit quality, we may be required to provide
additional collateral for, or repay a portion of outstanding balances of, our
short-term borrowing facilities. As of December 31, 2001, we had no outstanding
collateral calls. For additional information with respect to our monthly
mark-to-market of our securities available for sale portfolio, see "CHANGES IN
FINANCIAL CONDITION-SECURITIES AVAILABLE FOR SALE."

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

At December 31, 2001, we had total consolidated secured indebtedness of
$38.0 million, as well as $5.3 million of other liabilities. The consolidated
secured indebtedness consisted of (i) $7.8 million of repurchase agreements
secured by $9.5 million of mortgage-backed securities and (ii) $30.2 million
outstanding of other borrowings maturing between 2001 and 2020 which are secured
by real estate and mortgage-backed securities. Approximately $7.8 million of
this indebtedness had terms which allowed the lender to request additional
collateral if the value of the underlying collateral declined (including
financing facilities for both mortgage-backed securities and loans). Although
the Company believes that the likelihood of significant declines in asset values
has decreased since the third quarter of 1998, the Company is seeking to
maintain a larger cash position and more unencumbered assets to deal with any
future potential collateral calls.

Borrowings are established through both short-term and long-term financing
facilities. If the value of the assets securing the loan declines as determined
by the lender, the lender may request that the amount of the loan be reduced by
cash payments from the borrower or additional collateral be provided by the
borrower (generally known as "collateral calls"). Accordingly, in an environment
where lenders consistently mark down the value of the underlying assets, a
borrower can become subject to collateral calls, which can have a significant
impact on liquidity. Similarly, if interest rates increase significantly, the
borrowing cost under the financing facility may also increase while the interest
rate on the assets securing the loan may not increase at the same time or to the
same degree. Real property acquisitions are financed with intermediate or
long-term mortgages with banks and other financial institutions.

We have historically financed acquisitions of mortgage-backed securities
through committed and uncommitted thirty-day repurchase agreements with major
Wall Street investment banks. Repurchase agreements are secured lending
arrangements, which involve the borrower selling an asset to a lender at a fixed
price with the borrower having an obligation to repurchase the asset within a
specified period (generally 30 days) at a higher price reflecting the interest
cost of the loan. If the lender marks the asset lower, the lender may request
that the amount of the loan be reduced by cash payments from the borrower or
additional collateral be provided by the borrower. Mortgage-backed securities
which are subject to repurchase agreements, as well as loans which secure other
indebtedness, periodically are revalued by the lender, and a decline in the
value that is recognized by the lender (whether or not the lender recognizes the
full fair value of the security) may result in the lender requiring us to
provide additional collateral to secure the indebtedness.

Other than an unfunded $3 million secured line of credit, substantially all
of our assets that are capable of being pledged have been pledged to secure our
outstanding indebtedness. As a result, if we are unable to fund additional
collateral requirements or to repay, renew or replace maturing indebtedness on
terms reasonably satisfactory to us, we may be required to sell (potentially on
short notice) a portion of our assets, and could incur losses as a result.
Furthermore, since from time to time there is extremely limited liquidity in the
market for subordinated and residual interests in mortgage-related securities,
there can be no assurance that we will be able to dispose of such securities
promptly for fair value in such situations.

Although we are currently operating with negative cash flow (primarily due
to the continued repayment of debt and refinancing of our mortgage-backed
securities portfolio), we believe that our existing sources of funds will be
adequate for purposes of meeting our short-term liquidity needs. There can be no
assurance that this will be the case, however. Material increases in interest
expense from variable-rate funding sources, collateral calls, or material
decreases in monthly cash receipts, generally would negatively impact our
liquidity. On the other hand, material decreases in interest expense from
variable-rate funding sources generally would positively affect our liquidity.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices, and equity prices. The
Company's exposure to foreign currency fluctuations has decreased significantly
during the year ended December 31, 2001 (approximately 13.4% of the Company's
equity is invested in the United Kingdom at December 31, 2001). The primary
market risk to which the Company is exposed is interest rate risk, which is
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations, and
other factors beyond the control of the Company. Changes in the general level of
interest rates can affect the Company's net interest income, which is the
difference between the interest income earned on interest-earning assets and the
interest expense incurred in connection with its interest-bearing liabilities,
by affecting the spread between the Company's interest-earning assets and
interest-bearing liabilities. Changes in the level of interest rates also can
affect, among other things, the ability of the Company to acquire loans, the
value of the Company's mortgage-backed securities and other interest-earning
assets, and its ability to realize gains from the sale of such assets.

It is the objective of the Company to attempt to control risks associated
with interest rate movements. In general, the Company's strategy is to limit our
exposure to earnings variations and variations in the value of assets and
liabilities as interest rates change over time. Our asset and liability
management strategy is formulated and monitored regularly to review, among other
things, the sensitivity of our assets and liabilities to interest rate changes,
the book and market values of assets and liabilities, unrealized gains and
losses, including those attributable to hedging transactions, purchase and
securitization activity, and maturities of investments and borrowings.

The following tables quantify the potential changes in net interest income
and net portfolio value as of December 31, 2001 should interest rates go up or
down (shocked) by 100 to 400 basis points, assuming the yield curves of the rate
shocks will be parallel to each other and instantaneous. Net portfolio value is
calculated as the sum of the value of off-balance sheet instruments and the
present value of cash in-flows generated from interest-earning assets net of
cash out-flows in respect of interest-bearing liabilities. The cash flows
associated with the loan portfolios and securities available for sale are
calculated based on prepayment and default rates that vary by asset but not by
changes in interest rates. Projected losses, as well as prepayments, are
generated based upon the actual experience with the subject pool, as well as
similar, more seasoned pools. To the extent available, loan characteristics such
as loan-to-value ratio, interest rate, credit history and product types are used
to produce the projected loss and prepayment assumptions that are included in
the cash flow projections of the securities. The following tables apply the U.S.
Treasury yield curve generally for assets and LIBOR for repurchase agreement
liabilities and assume a uniform change in both rates. The tables assume that
changes in interest rates occur instantaneously. The tables also reflect that
the Company has a significant exposure to LIBOR rates since its short-term
repurchase agreement borrowings are generally based on LIBOR rates. Actual
results could differ significantly from those estimated in the tables.

- ----------
(1) Assumes that uniform changes occur instantaneously in both
the yield on 10-year U.S. Treasury notes and the interest
rate applicable to U.S. dollar deposits in the London
interbank market.

The following table sets forth information as to the type of funding used
to finance the Company's assets as of December 31, 2001. As indicated in the
table, a large percentage of the Company's fixed-rate assets are financed by
floating-rate liabilities and the Company's variable-rate assets are generally
funded by variable-rate liabilities which use the same index.

Assets and Liabilities
As of December 31, 2001
(Dollars in Thousands)

Asset and liability management involves managing the timing and magnitude
of the repricing of assets and liabilities. It is the objective of the Company
to attempt to control risks associated with interest rate movements. Asset and
liability management can utilize a wide variety of off-balance sheet financial
techniques to assist it in the management of interest rate risk. For example, in
hedging the interest rate and exchange rate exposure of a foreign currency
denominated asset or liability, we may enter into hedge transactions to counter
movements in the different currencies as well as interest rates in those
currencies. These hedges may be in the form of currency and interest rate swaps,
options, and forwards, or combinations thereof. No such techniques were in use
as of December 31, 2001.

Methods for evaluating interest rate risk include an analysis of the
Company's interest rate sensitivity "gap," which is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities. A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to affect net interest income adversely. Since different
types of assets and liabilities with the same or similar maturities may react
differently to changes in overall market rates or conditions, changes in
interest rates may affect net interest income positively or negatively even if
an institution were perfectly matched in each maturity category.

The following table sets forth the estimated contractual maturity or
repricing of the Company's interest-earning assets and interest-bearing
liabilities at December 31, 2001.

AS OF DECEMBER 31, 2001
------------------------
(Dollars in thousands)

- ----------
(1) Real estate property holdings are not considered interest rate
sensitive.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 14 of Part IV of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth information about our executive officers and
directors as of February 28, 2002. The business address of each executive
officer and director is the address of the Company, 1410 SW Jefferson Street,
Portland, OR 97201, and each executive officer and director is a United States
citizen.

ANDREW A. WIEDERHORN, age 36, has been the Chairman of the Board of
Directors and Chief Executive Officer of the Company since its formation. Mr.
Wiederhorn also serves as Treasurer and Secretary. Until August 1999, Mr.
Wiederhorn was also the Chairman of the Board of Directors, Chief Executive
Officer, Secretary, Treasurer and a director for both WFSG and WRSC. In 1987,
Mr. Wiederhorn founded Wilshire Credit Corporation ("WCC") and served as the
Chief Executive Officer of WCC and certain of its affiliates until August 1999.
Mr. Wiederhorn received his B.S. degree in Business Administration from the
University of Southern California.

LAWRENCE A. MENDELSOHN, age 40, has been a director and the President of
the Company since its formation. From December 1996 until August 1999, Mr.
Mendelsohn was also the President of WFSG and WCC. From January 1992 until
February 1993, Mr. Mendelsohn was Vice President, Principal and Head of Capital
Markets for Emerging Markets at Bankers Trust New York Corporation/BT Securities
Corporation. From August 1987 until January 1992, Mr. Mendelsohn was the Vice
President, Senior Options Principal and Head of Proprietary Trading for
Equities, Equity Options and Distressed Debt at J.P. Morgan and Co./J.P. Morgan
Securities. Mr. Mendelsohn received an A.B. degree in Economics from the
University of Chicago, an M.A. degree in International Politics from the
University of Texas, an M.S. degree in Business Research from the University of
Southern California and a Ph.D./ABD in Finance from the University of Southern
California.

JORDAN D. SCHNITZER, age 51, has been a director since March 27, 1998. Mr.
Schnitzer has been President of Jordan Schnitzer Properties, an owner and
developer of commercial and residential properties in Oregon, Washington and
California, since 1976. Mr. Schnitzer is also President of Harsch Investment
Properties, LLC, which owns and operates a portfolio of properties in seven
western U.S. states. Mr. Schnitzer received his undergraduate degree in
Literature from the University of Oregon in 1973 and his J.D. from the
Northwestern School of Law of Lewis and Clark College in 1976. Mr. Schnitzer
resigned as a director effective March 5, 2002.

DON H. COLEMAN, age 63, has been Chief Operating Officer of Eagle
Telephonics Inc. ("Eagle"), a designer and manufacturer of telephonic switches,
since January 2000. In addition, since 1992, Mr. Coleman has been Vice President
of International Communication Technologies Inc., a founder of and partner in
several private telephone service provider companies in foreign countries, and a
significant investor in Eagle. Mr. Coleman has also been a director of Aster
Telesolutions, Inc., a privately-held telephone systems engineering company,
since 2000. Mr. Coleman was a director of WFSG from 1996 until 1999, and a
director of First Bank of Beverly Hills, FSB, a savings bank and subsidiary of
WFSG ("FBBH") from 1993 until 1999. Other positions held by Mr. Coleman in the
past include CEO of Liquid Spring Technologies, Inc., CEO of Clarion Corporation
and various positions held over fourteen years at Ford Motor Company. Mr.
Coleman holds B.A. and M.B.A. degrees from Stanford University.

DAVID DALE-JOHNSON, PH.D., age 54, is an associate professor, and the
Director of the Program in Real Estate, at the Marshall School of Business,
University of Southern California, at which Professor Dale-Johnson has held
various teaching, researching and administrative positions since 1979. Mr.
Dale-Johnson is also Director of LECG, Inc., an economics and finance consulting
firm for which he has served as an expert in real estate economics and finance
since August 2001. Prior to August 2001, Mr. Dale-Johnson was a Senior
Consultant for Economic Analysis LLC, an economics and finance consulting firm.
Mr. Dale-Johnson was a director of WFSG from 1996 until 1999, and a director of
FBBH from 1993 until 1999. Mr. Dale-Johnson is also Chairman, a director and
member of the executive committee of CCEO, Inc., a charitable organization
involved in housing, rehabilitation, education and training of at-risk youth.

K. KENNETH KOTLER, age 49, is an attorney and was admitted to the
California bar in 1978. Mr. Kotler has been a sole practitioner since July of
1991, with a practice focusing on commercial collection matters. From 1994 to
1999, Mr. Kotler was a member of the boards of directors of First Bank of
Beverly Hills ("FBBH") and Girard Savings Bank, FSB, a predecessor to FBBH.

ROBERT G. ROSEN, age 36, is Executive Vice President of the Company. From
November 1997 until October 1999, Mr. Rosen was Senior Vice President, Asset
Securitization and Capital Markets for WFSG. Mr. Rosen was the Vice President of
Securitization at BTM Capital Corp., a wholly-owned subsidiary of the Bank of
Tokyo-Mitsubishi, Ltd. from March 1997 until October 1997. From January 1995
until March 1997, Mr. Rosen was a Director of Black Diamond Advisors, Inc., a
firm specializing in securitization and capital markets needs of finance
companies.

R. SCOTT STEVENSON, age 45, has been Senior Vice President of the Company
since October 1999 and was appointed Chief Financial Officer in June 2001. Mr.
Stevenson was Senior Vice President of WFSG from September 1997 to October 1999.
Mr. Stevenson was a director and President of Girard Savings Bank, FSB from 1991
to September 1997. Mr. Stevenson holds B.S. and Masters degrees in accounting
from Brigham Young University. He is a certified public accountant licensed in
the state of California.

At our Annual Meeting of stockholders for 2001, the stockholders elected
six directors to the Board of Directors, each to serve until the 2002 Annual
Meeting of stockholders or until their successors are elected and qualified.
Though the Board of Directors had increased the size of the Board on October
28, 2001 from five members to seven members, the Board was only been able to
identify 6 willing and able candidates in the short space of time prior to
the mailing of the proxy materials for our 2001 Annual Meeting. Effective
March 5, 2002, Jordan Schnitzer resigned as a member of the Board of
Directors. If the Board identifies an appropriate candidate to fill either of
these vacancies prior the 2002 Annual Meeting, the Board anticipates
appointing such individual or individuals to fill the vacancies as provided
in our Charter and By-laws.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires a company's
directors and executive officers, and beneficial owners of more than 10% of the
common stock of such company, to file with the Securities and Exchange
Commission initial reports of ownership and periodic reports of changes in
ownership of the company's securities. Based solely on a review of Forms 3, 4
and 5 and amendments thereto furnished to us for the year ended December 31,
2001, the Company's directors, officers, or beneficial owners of more than 10%
of the Company's Common Stock timely furnished reports on Forms 3, 4 or 5.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

During the ten months ended October 31, 2001, each non-employee director
was paid an annual director's fee equal to $50,000. Each non-employee director
also received an annual fee equal to $25,000 for each committee upon which such
non-employee director serves. Effective November 1, 2001, each non-employee
director was paid a director's fee of $1,000 per month. In addition, beginning
January 1, 2002, each non-employee director will be paid $1,000 per month for
serving on one or more of the committees of the Board.

All non-employee directors are reimbursed for their costs and expenses in
attending all meetings of the Board of Directors. In addition, on the last day
of each calendar quarter beginning December 31, 2001, each non-employee director
receives a non-statutory stock option for 1,500 shares of Common Stock at an
exercise price equal to 110% of the fair market value of the Common Stock on
that day. Such grants vest one-third on each of the first three anniversaries of
the grant date and expire on the tenth anniversary of the grant date.

SUMMARY COMPENSATION TABLE

The following table sets forth the total compensation paid or accrued by
the Company for services rendered during the last three fiscal years to the
Chief Executive Officer of the Company, and to each of the four other most
highly compensated executive officers of the Company whose total cash
compensation for the year ended December 31, 2001 exceeded $100,000 (the "Named
Executive Officers").

- ----------
(1) Bonuses for 1999 are shown net of a $378,000 reimbursement from
WFSG to the Company under a settlement agreement.
(2) At December 31, 2001, bonuses were accrued but unpaid in the
amount of $750,000 for Mr.Wiederhorn, $500,000 for Mr. Mendelsohn,
and $1.1 million for Mr. Rosen.
(3) Mr. Tassos' employment with the Company ended on May 31, 2001.
Mr. Tassos received severance pay of $235,000. Mr. Tassos' options
were canceled when his employment with the Company ended.

During the third quarter of 1999, the Company decided to become internally
managed and retained senior executives and other employees to implement this
decision. Prior to this decision and subject to the supervision of the Company's
Board of Directors, the Company's business affairs and day-to-day operations had
been managed by Wilshire Realty Services Corporation ("WRSC"), a wholly-owned
subsidiary of WFSG, pursuant to a management agreement (the "Management
Agreement"). Until their employment with the Company, the executive officers of
the Company did not receive any compensation from the Company for their
services. To the extent such officers were also officers of WFSG, they were
compensated by WFSG for their services. Following the Company's decision to
become internally managed, the Company entered into the employment agreements
with its executive officers described

below.

EMPLOYMENT AND OTHER ARRANGEMENTS

The Company has entered into employment agreements with Andrew A.
Wiederhorn (as Chief Executive Officer), Lawrence A. Mendelsohn (as President),
and Robert G. Rosen (as Executive Vice President) (each an "Executive" and
collectively, the "Executives").

The employment agreements with Messrs. Wiederhorn and Mendelsohn were
amended and restated effective December 31, 2001. Each such employment agreement
provides for an initial three-year term commencing October 1, 2000, which is
automatically renewable for successive two-year terms unless either party gives
written notice of termination to the other at least 90 days prior to the
expiration of the then-current employment term.

Effective December 31, 2001, the employment agreements provide for an
annual base salary of $250,000 each for Mr. Wiederhorn and Mr. Mendelsohn (which
may be increased, but not decreased, by the Compensation Committee of the Board
of Directors). In addition, Mr. Wiederhorn and Mr. Mendelsohn are entitled to a
bonus payment during the first quarter of 2002 of $750,000 and $500,000
respectively. We will apply such bonus to repay any amounts outstanding pursuant
to certain bonus advances made by us to Messrs. Wiederhorn and Mendelsohn during
the twelve-month period commencing on October 1, 2000 and ending on September
30, 2001, which at December 31, 2001 amounted to $0 and $492,000 for Mr.
Wiederhorn and Mr. Mendelsohn, respectively. The Compensation Committee may
award other compensation from time to time as it deems appropriate and
reasonable.

Prior to December 31, 2001 Mr. Wiederhorn and Mr. Mendelsohn earned annual
base salaries of $750,000 and $500,000 respectively, and had been entitled to
share in a bonus pool based upon the Company achieving certain performance
goals. Mr. Wiederhorn had been entitled to receive an annual bonus equal to 45%
of the bonus pool and Mr. Mendelsohn will be entitled to receive an annual bonus
equal to 30% of the bonus pool. If the Company's return on equity (as defined in
the employment agreements) determined on a post bonus basis was 15% or more, Mr.
Wiederhorn and Mr. Mendelsohn were entitled to share in a bonus pool equal to
25% of the Company's after-tax income (prior to subtracting the amount of the
bonuses paid by the Company). If the Company's return on equity (as defined in
the employment agreements) determined on a post bonus basis was 10% or greater
but less than 15%, Mr. Wiederhorn and Mr. Mendelsohn were entitled to share in a
bonus pool equal to 20% of the Company's after-tax income (prior to subtracting
the amount of the bonuses paid by the Company). If the Company's return on
equity (as defined in the employment agreements) determined on a post bonus
basis was between 5% or greater but less than 10%, Mr. Wiederhorn and Mr.
Mendelsohn were entitled to share in a bonus pool equal 10% of the Company's
after-tax income (prior to subtracting the amount of the bonuses paid by the
Company). If the return on equity (as defined in the employment agreements)
determined on a post bonus basis was less than 5%, Mr. Wiederhorn and Mr.
Mendelsohn were not entitled to a bonus.

The employment agreement with Mr. Rosen was amended and restated effective
October 1, 2001. The employment agreement provides for an initial twelve month
term commencing October 1, 2001 which may be extended for six additional months
if certain of the employment objectives have not been met and either party gives
written notice of extension to the other at least 30 days prior to the
expiration of the then employment term. The employment agreement provides for an
annual salary for Mr. Rosen of $250,000 (which may be increased, but not
decreased, by the Compensation Committee of the Board of Directors). In
addition, if (i) the Company sells its interest in the BSMSI Class B4, BSSP
2000-3 Class B and BSSP 2000-5 Classes B1, B2 and B3 for total net proceeds of
at least $20.65 million, Mr. Rosen will be entitled to a bonus payment equal to
$350,000 plus 10% of the excess of net proceeds over $20.65 million, and (ii) if
the Company sells its interest in the Cityscape Series 1997-A Class R1,
Cityscape Series 1997-B Class R and Cityscape Series 1997-C Classes RI and RII
for total net proceeds of at least $1.5 million, Mr. Rosen will be entitled to a
bonus payment equal to 2% of the Cityscape net proceeds. Unless Mr. Rosen is
terminated for Cause or voluntarily resigns prior to the expiration of the
employment agreement, he is entitled to deferred compensation, payable at the
expiration of the employment agreement, in the amount of $1.1 million.

For the period commencing October 9, 1999 and ending on November 30, 2000,
Mr. Rosen was entitled to receive a bonus in the amount of $368,004. The bonus
was paid to Mr. Rosen in January 2001 based upon the Company materially
achieving a majority of the following goals during the bonus period: (i)
reduction or elimination of the liability risk associated with short-term,
mark-to-market financing for those applicable assets, (ii) sale, upgrade of the
ratings or improvement in the marketability of some or all of the

Company's mortgage-backed securities, (iii) focus on and/or implementation of a
successful resolution strategy for the Cityscape mortgage-backed securities
position, (iv) completion and closure of the "P.O." deal, subject to acceptable
structure, (v) exploration and provision of advice to the Company on the process
of launching a collateralized bond obligation or other form of long-term
financing or take-out strategy for the mortgage-backed securities portfolio and
(vi) demonstration of the ability to functionally work 50% of the time away from
the Portland office (as a result of being in the New York office or traveling on
behalf of the Company). In addition, for the 12-month period commencing October
1, 2000 and ending September 30, 2001, Mr. Rosen was entitled to an annual bonus
of $850,000, of which $725,000 was a minimum guaranteed bonus payable on a
quarterly basis and the remainder was an incentive bonus. An incentive bonus of
$62,500 was earned by Mr. Rosen, as a result of the following performance goal
being obtained: sale of the Company's GI Joes commercial real estate retail and
warehouse portfolio. An additional incentive bonus of $62,500 would have been
earned by Mr. Rosen, if two of the following four performance goals had been
obtained: (1) an annual increase in the Company's book value from September 3,
2001; (2) the Company's income, excluding charges from the impairment of
mortgage-backed securities, divided by its net shareholders' equity, exceeds the
10 year U.S. Treasury note yield as measured using the rate in effect on the
first business day of each period beginning October 1; (3) the Company's Funds
From Operations, including capital gains and losses, but excluding charges from
the impairment of mortgage backed securities, exceeds $5 million; or (4) a
recovery of more than $2,000,000 in the Company's unrealized loss allowance for
its existing mortgage-backed securities portfolio of WFSG and subsidiary or
affiliate issued deals from October 1, 2000 to September 30, 2001.

The employment agreements also provide that the Executives may participate
in the Company's Stock Plan.

The employment agreements provide that during the Employment Term and
thereafter, the Company will indemnify the Executives to the fullest extent
permitted by law, in connection with any claim against the Executive as a result
of the Executive serving as an officer or director of the Company or in any
capacity at the request of the Company in or with regard to any other entity,
employee benefit plan or enterprise.

Mr. Wiederhorn and Mr. Mendelsohn may terminate their employment agreement
at any time for Good Reason or with or without Good Reason during the Change in
Control Protection Period (if a Change in Control occurs) (capitalized terms as
defined in the respective employment agreements of Messrs. Wiederhorn and
Mendelsohn). If Mr. Wiederhorn or Mr. Mendelsohn terminates his employment
agreement at any time for Good Reason or with or without Good Reason during the
Change in Control Protection Period (if a Change in Control occurs), or if Mr.
Wiederhorn or Mr. Mendelsohn is terminated by the Company without Cause or the
employment agreement is not renewed in accordance with the employment agreement,
the Executive will be entitled to receive (i) any unreimbursed business
expenses, (ii) any base salary, bonus, vacation pay or other deferred
compensation accrued or earned but not yet paid at the date of termination, and
(iii) three month's base salary in effect on the date of termination.

Mr. Wiederhorn and Mr. Mendelsohn will also be entitled (i) accelerated
full vesting under all outstanding equity-based and long-term incentive plans
with options remaining outstanding as provided under the applicable stock option
plan and a pro rata payment under any long term incentive plans based on actual
coverage under such plans payment being made at the time payments would normally
be made under such plans; (ii) any other amounts or benefits due Executive under
the then applicable employee benefit plans of the Company (in accordance with
such plan, policy or practice); (iii) one year of additional service and
compensation credit (at his then compensation level) for pension purposes under
any defined benefit type qualified or nonqualified pension plan or arrangement
of the Company, measured from the date of termination of employment and not
credited to the extent that Executive is otherwise entitled to such credit
during such one year period, which payments shall be made through and in
accordance with the terms of the nonqualified defined benefit pension
arrangement if any then exists, or, if not, in an actuarially equivalent lump
sum (using the actuarial factors then applying in the Company's defined benefit
plan covering Executive); (iv) one year of the maximum Company contribution
(assuming Executive deferred the maximum amount and continued to earn his then
current salary) measured from the date of termination under any type of
qualified or nonqualified 401(k) plan (payable at the end of each such year);
and (v) continued medical coverage for the Executive, his spouse and dependents
for one year.

If termination is the result of Executive's death, the Company will pay to
the Executive's spouse (or his estate), an amount equal to (i) any earned but
not yet paid compensation, (ii) in the case of Mr. Rosen the $1.1 million
deferred compensation, (iii) accelerated full vesting under all outstanding
equity-based and long term incentive plans with options remaining outstanding
as provided under the applicable stock option plan and a pro rata payment under
any long term incentive plans based on actual coverage under such plans at the
time payments normally would be made under such plans, (iv) any other amounts or
benefits due under then

applicable employee benefit plans of the Company (in accordance with such plan,
policy or practice), (v) in the case of Mr. Wiederhorn and Mr. Mendelsohn,
payment on a monthly basis of six months of base salary to Executive's spouse or
dependents and (vi) continued medical coverage for the Executive's spouse and
dependents for up to one year. In addition, the Executive will receive
accelerated full vesting under all outstanding equity-based and long-term
incentive plans.

If Executive's employment is terminated by reason of disability, the
Executive will be entitled to receive payments and benefits to which his
representatives would be entitled in the event of his termination by reason of
death, provided that the payment of base salary will be reduced by any long-term
disability payments under any policy maintained by the Company.

If the Executive is terminated by the Company with Cause or the Executive
terminates his employment without Good Reason outside of the Change in Control
Protection Period, the Executive will be entitled to receive only his base
salary through the date of termination and any unreimbursed business expenses.

The employment agreements also provide for the Company to make a recourse
loan to each Executive up to approximately $850,000 for Mr. Wiederhorn, $50,000
for Mr. Mendelsohn and $843,000 for Mr. Rosen for the purchase of the Company's
stock by such Executive. The loans bear interest at the prime rate. Interest is
not paid in cash but payable in kind on an annual basis (i.e., compounded
annually). Except in the case of Mr. Rosen, upon termination of employment, the
loan becomes due and payable six months after the date of termination. Mr.
Rosen's loan becomes due and payable at the termination of the employment
agreement and will be netted against the $1.1 million deferred compensation
otherwise payable to Mr. Rosen. At December 31, 2001, the Company had
outstanding loans of $1.1 million to the Executives.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors of the Company (the
"Committee") administers the executive compensation programs of the Company.
From January 1, 2001 through October 16, 2001, the members of the Committee were
David C. Egelhoff, Patrick Terrell, and Jordan D. Schnitzer, all of whom were
independent directors as the members of the Committee. Messieurs Egelhoff and
Terrell resigned as directors and as members of the Compensation Committee on
October 16, 2001 and October 28, 2001, respectively. Effective December 4, 2001,
the Board of Directors appointed Jordan D. Schnitzer, Don H. Coleman, David
Dale-Johnson, and K. Kenneth Kotler as the members of the Committee. All actions
of the Committee pertaining to executive compensation are submitted to the Board
of Directors for approval.

The Company's executive compensation program is designed to attract,
retain, and motivate high caliber executives and to focus the interests of the
executives on objectives that enhance stockholder value. These goals are
attained by emphasizing "pay for performance" by having a portion of the
executive's compensation dependent upon business results and by providing equity
interests in the Company. The principal elements of the Company's executive
compensation program are base salary, bonus, and stock options. In addition, the
Company recognizes individual contributions as well as overall business results,
using a discretionary bonus program.

BASE SALARY. Base salaries for the Company's executives are intended to
reflect the scope of each executives' responsibilities, the success of the
Company, and contributions of each executive to that success. Executive salaries
are adjusted gradually over time and only as necessary to meet this objective.
Increases in base salary may be moderated by other considerations, such as
geographic or market data, industry trends or internal fairness within the
Company.

The base salaries for Andrew A. Wiederhorn, Lawrence A. Mendelsohn, and
Robert G. Rosen for 2001 are set forth in their respective employment
agreements.

BONUSES. The Company paid annual bonuses in 2001. The Committee determined
the amount of the annual discretionary and other bonuses paid by the Company.

STOCK OPTION PLAN. At its initial public offering in April 1998, the
Company adopted the Stock Plan. The purpose of the Stock Plan is to enable the
Company to attract, retain and motivate key employees and directors by providing
them with equity participation in the Company. Accordingly, the Stock Plan
permits the Company to grant stock options, restricted stock and stock
appreciation rights (collectively "Awards") to employees, directors,
consultants, and vendors of the Company and subsidiaries of the

Company. The Board of Directors has delegated administration of the Stock Plan
to the Committee.

Under the Stock Plan, the Committee may grant stock options with an
exercise price not less than the fair market value of the shares covered by the
option on the date the option is granted. The Committee may also grant Awards of
restricted shares of Common Stock. Each restricted stock Award would specify the
number of shares of Common Stock to be issued to the recipient, the date of
issuance, any consideration for such shares and the restrictions imposed on the
shares (including the conditions of release or lapse of such restrictions). The
Committee may also grant Awards of stock appreciation rights. A stock
appreciation right entitles the holder to receive from the Company, in cash or
Common Stock, at the time of exercise, the excess of the fair market value at
the date of exercise of a share of Common Stock over a specified price fixed by
the Committee in the Award, multiplied by the number of shares as to which the
right is being exercised. The specified price fixed by the Committee will not be
less than the fair market value of shares of Common Stock at the date the stock
appreciation right was granted.

In 2001, no options were issued to executive officers and employees.

RESTRICTED STOCK TRUST. In the fourth quarter of 2000, the Company
established a trust, which purchased 525,000 shares of the Company's common
stock from an unrelated shareholder. The Company's contribution to the trust of
approximately $1.3 million is included in the Company's compensation expenses.
The trust was established for the benefit of the Company's employees and
directors to raise their ownership in the Company, thereby strengthening the
mutuality of interests between them and the Company's shareholders. While these
shares are held in trust, they will be voted ratably with ballots cast by all
other shareholders.

Andrew Wiederhorn, Lawrence Mendelsohn, and Don H. Coleman are the trustees
for the trust. Pursuant to the terms of the trust, the trustees will, from time
to time, allocate the Contributed Shares to the Company's employees. An employee
shall not have any rights with respect to any Contributed Shares allocated to
him unless and until the employee completes five years of continuous service
with the Company, commencing with the date the employee is first allocated such
shares. Upon the employee's completion of the vesting period, the trustees shall
promptly distribute to such employee the shares allocated to such employee;
provided, however, that the trustees may, in lieu of distributing the shares,
make a cash payment to the employee equal to the fair market value of the shares
allocated to such employee as of the date immediately prior to the date of
distribution or distribute any combination of cash or shares, as determined by
the trustees, in their sole discretion.

As of January 31, 2002, the trustees had not allocated any shares to the
Company's employees or directors.

POLICY OF DEDUCTIBILITY OF COMPENSATION. Section 162(m) of the Internal
Revenue Code limits the Company's tax deduction to $1 million for compensation
paid to the Named Executive Officers, unless certain requirements are met. One
of these requirements is that compensation over $1 million must be performance
based. The Committee intends to continue to use performance-based compensation
in the future, which should minimize the effect of this deduction limitation.
However, the Committee strongly believes that its primary responsibility is to
provide a compensation program that will attract, retain and reward the
executive talent necessary to maximize the return to stockholders, and that the
loss of a tax deduction may be necessary in some circumstances. Base salary does
not qualify as performance-based compensation under IRS regulations.

CEO COMPENSATION AND PRESIDENT COMPENSATION. Andrew A. Wiederhorn was
appointed the Company's Chief Executive Officer and Lawrence A. Mendelsohn was
appointed its President at its formation. The base salary for each of these
officers for 2001 was determined by the Committee and is set forth in their
employment agreements.

COMPENSATION COMMITTEE

Jordan Schnitzer
Don H. Coleman
David Dale-Johnson
K. Kenneth Kotler

PERFORMANCE GRAPH

The Performance Graph shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act or under the Exchange Act, except to
the extent the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under the Securities Act or the Exchange
Act.

The following Performance Graph covers the period beginning April 6, 1998
when our Common Stock was first traded on the NASDAQ Stock Market through
December 31, 2001. The graph compares the shareholder return on the Company's
Common Stock to the Standard & Poor's 500 Stock Index ("S&P 500") and a peer
group of companies ("PGI").

[CHART OF PERFORMANCE GROWTH]

- ----------
(1) Assumes all distributions to stockholders are reinvested on the
payment dates.
(2) Assumes $100 invested on April 6, 1998 in our Common Stock, the
S&P 500 Index and the PGI.
(3) The companies included in the PGI are Anthracite Capital,
Amresco Capital Trust Inc., Resource America Inc., Dynex Capital
Inc., Hanover Capital Mortgage Holdings, Novastar Financial Inc.
and Capital Trust.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of January 31, 2002, the beneficial
ownership of Common Stock with respect to (i) each person who was known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director, (iii) each executive officer of the Company, and (iv)
directors and executive officers as a group.

- ----------
(1) The address for each stockholder is c/o Fog Cutter Capital Group Inc.,
1410 SW Jefferson Street, Portland, OR 97201-2548.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of Common Stock subject to
options or warrants exercisable within 60 days of January 31, 2002 are
deemed outstanding for computing the percentage beneficially owned by
the person or group holding such options or warrants, but are not
deemed outstanding for computing the percentage of any other person.
Except as noted, each stockholder has sole voting power and sole
investment power with respect to all shares beneficially owned by such
stockholder.
(3) Includes 629,255 shares of Common Stock held by Mr. Wiederhorn's
spouse, 13,826 shares held by a limited liability company (Mr.
Wiederhorn's spouse is the manager and owner of the limited liability
company), 419,489 shares of Common Stock held by a partnership
controlled by Mr. Wiederhorn's spouse and 45,613 shares of Common
Stock owned by Mr. Wiederhorn's and his spouse's minor children. Also
includes 530,720 shares of Common stock with respect to which Mr.
Wiederhorn has shared voting and the option to purchase pursuant to
the Put/Call Option Agreements, as amended entered into with each of
Orin Kramer, B.P. Institutional Partners, L.P., Boston Provident
Partners, L.P., Leon & Toby Cooperman Foundation, Watchung Road
Associates, L.P. and Cobalt Capital Management, Inc. on October 16,
2001. Also includes 1,044,760 shares of Common Stock with respect to
which Mr. Wiederhorn has shared voting power pursuant to a Stock
Option and Voting Agreement entered into with Lawrence Mendelsohn, Mr.
Mendelsohn's spouse and certain other entities dated October 16, 2001.
Also includes 467,745 shares of Common Stock with respect to which Mr.
Wiederhorn has shared voting power pursuant to a Stock Option and
Voting Agreement dated January 28, 2002 with Robert Rosen and his
spouse as joint tenants, and Robert Rosen, individually. Mr.
Wiederhorn disclaims beneficial ownership of any of the foregoing
shares of Common Stock. Also includes 315,000 shares of Common Stock
issuable upon the exercise of outstanding options. Excludes 525,000
shares of Common Stock held in the Trust established for the benefit
of certain employees of the Company. Although Mr. Wiederhorn and Mr.
Mendelsohn act as Trustees for the Trust, they do not have any
beneficial ownership or voting rights with respect to the 525,000
shares of Common Stock in the Trust. (See "Recent Developments"
below.)
(4) Includes 175,000 shares of Common Stock issuable upon the exercise of
outstanding options. Also includes 17,158 shares of Common Stock held
by Mr. Mendelsohn's spouse and 403,102 shares of Common Stock held by
two limited liability companies controlled by Mr. Mendelsohn's spouse
and 80,000 shares of Common Stock held by a limited partnership
controlled by Mr. Mendelsohn and his spouse. Mr. Mendelsohn disclaims
beneficial ownership of the 17,158 shares of Common Stock held for the
account of Mrs. Mendelsohn, the 80,000 shares of Common Stock held for
the account of the limited partnership, except to the extent of his
pecuniary interest and the 403,102 shares of Common Stock held for the
account of the two limited liability companies. Excludes 525,000
shares of Common Stock held in the Fog Cutter Long Term Vesting Trust
(the "Trust') established for the benefit of certain employees of the
Issuer. Although Mr. Wiederhorn and Mr. Mendelsohn act as Trustees for
the Trust, they do not have any beneficial ownership or voting rights
with respect to the 525,000 shares of Common Stock in the Trust.
(5) Based upon information obtained from a Schedule 13D filed with the
Securities and Exchange Commission on or about August 26, 1999.
(6) Includes 90,000 shares of Common Stock issuable upon the exercise of
outstanding options.
(7) Includes 115,000 shares of Common Stock issuable upon the exercise of
outstanding options.
(8) Includes 5,000 shares of Common Stock issuable upon the exercise of
outstanding options. Also includes 1,496 shares held by Mr.
Berchtold's spouse.
(9) Includes 5,000 shares of Common Stock issuable upon the exercise of
outstanding options and 75 shares held by Mr. Stevenson's spouse.
(10) Includes 5,000 shares of Common Stock issuable upon exercise of
outstanding options.
(11) Includes 725,000 shares of Common Stock issuable upon the exercise of
outstanding options.
* Less than one percent.

RECENT DEVELOPMENTS

On October 16, 2001, Andrew Wiederhorn entered into a series of separate
but substantially identical Put/Call Option and Voting Agreements with each of
Boston Provident Partners, L.P., B.P. Institutional Partners, L.P., Orin Kramer,
the Leon & Toby Cooperman Foundation, Watchung Road Associates, L.P., and Cobalt
Capital Management, Inc. (each a "Stockholder", and collectively, the
"Stockholders"). Pursuant to each Put/Call Option and Voting Agreement, each
Stockholder granted to Mr. Wiederhorn a call option to purchase all of the
shares of Common Stock held by such Stockholder, numbering 1,009,954 in the
aggregate at $3.40 per share (subject to adjustment). In consideration for
granting the call option, Mr. Wiederhorn paid to each Stockholder $0.10 per
share. Pursuant to the Put/Call Option and Voting Agreements, Mr. Wiederhorn
granted each Stockholder a conditional put option to sell to Mr. Wiederhorn all
of the shares of Common Stock held by such Stockholder, numbering 1,009,954 in
the aggregate at $3.40 per share (subject to adjustment) in the event that the
Company redeems, repurchases or otherwise acquires any shares of the Common
Stock other than by means of a redemption, repurchase or acquisition available
to the Stockholder on terms at least as favorable to the Stockholder as the most
favorable terms available to the other stockholders of the Company.

On January 11, 2001, Mr. Wiederhorn entered into amendments to the Put/Call
Option and Voting Agreements with each of the Stockholders, pursuant to which
the parties agreed to (i) extend the exercise period until January 31, 2002,
(ii) allow Mr. Wiederhorn the right to exercise less than all of his call
options and (iii) allow Mr. Wiederhorn to assign his right to receive, and
delegate his obligation to pay for the shares of Common Stock subject to the
call options to a person reasonably acceptable to the Stockholders. On January
11, 2002, Mr. Wiederhorn, elected to exercise his options to purchase an
aggregate of 479,234 shares of Common Stock at $3.14 per share. Prior to the
closing, which occurred on January 15, 2002, Mr. Wiederhorn assigned his right
to receive, and delegated his obligation to pay for 319,489 shares of the Common
Stock that Mr. Wiederhorn elected to purchase to a partnership controlled by Mr.
Wiederhorn's spouse and 159,745 shares of the Common Stock that Mr. Wiederhorn
elected to purchase to Robert Rosen. Upon the closing of the purchase, which
occurred on January 15, 2002, there were no remaining call options under the
Put/Call Option Voting Agreements with B.P. Institutional Partners, L.P., Orin
Kramer, and the Leon & Toby Cooperman Foundation.

On January 31, 2002, Mr. Wiederhorn entered into amendments to the Put/Call
Option and Voting Agreements with each of Boston Provident Partners, L.P.,
Watchung Road Associates, L.P. and Cobalt Management, Inc. (the "Remaining
Stockholders"). Pursuant to the amendments, the exercise period was extended
until February 21, 2002 and Mr. Wiederhorn agreed to pay the sum of $.05 per
subject share and granted the Remaining Stockholders a put option to require Mr.
Wiederhorn to purchase each Remaining Stockholder's subject shares. Each of the
Remaining Stockholders exercised its put option for all of its subject shares
(an aggregate of 530,720) on or prior to February 18, 2002 and Mr. Wiederhorn
assigned his obligations to purchase the subject shares to a partnership
controlled by Mr. Wiederhorn's spouse on February 21, 2002. The partnership
consummated the purchase of such shares on February 21, 2002. Effective February
21, 2002, there were no shares of Common Stock subject to the Put/Call Option
and Voting Agreements. See "Note 17 - Subsequent Events" in the financial
statements for information regarding other recent transactions in the Company's
Common Stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

WFSG AND ITS AFFILIATES

Prior to September 1999, the Company and WFSG had the same senior
management team (though the Company had a different stockholder base and the
majority of its directors were independent), and the Company's business affairs
and day-to-day operations were managed by WRSC, pursuant to a management
agreement ("Management Agreement"). After September 1999, the Company's
independent directors decided that the Company should be internally managed and
the Company and WFSG ceased to have the same senior executives and no longer had
any common directors. Accordingly, the Company no longer views WFSG and its
subsidiaries as affiliated parties.

The Company continues to maintain certain business relationships with WFSG
and its affiliates which include the following:

- The Company owns approximately 2.9 million shares of WFSG's
outstanding common stock.
- An affiliate of WFSG services loans underlying certain
mortgage-backed securities owned by the Company.
- The Company has a prepaid servicing fee credit with an
affiliate of WFSG to be utilized by servicing loans for the
Company (exclusive of mortgage-backed securities). Due to the
specialized and illiquid nature of the servicing credit, the
Company recorded a $2.0 million impairment during 2001,
resulting in a net carrying value of zero.

LOANS TO OFFICERS

The employment agreements with Messrs. Wiederhorn, Mendelsohn, and Rosen
provide for the Company to make a recourse loan to each executive up to a
maximum of $850,000, $50,000, and $843,000, respectively. The loans bear
interest at the prime rate. Interest is not paid in cash but payable in kind on
an annual basis (i.e., compounded annually). Upon termination of any such
executive, the executive's loans will become due and payable six months after
the date of termination (other than in the case of Mr. Rosen, whose loan becomes
due upon termination). At December 31, 2001, the Company had outstanding loans
including compounded interest to Messrs. Wiederhorn, Mendelsohn, and Rosen of
approximately $113,000, $58,000, and $906,000, respectively.

FOG CUTTER LONG-TERM VESTING TRUST

In the fourth quarter of 2000, the Company established a trust which
purchased 525,000 shares of the Company's common stock from an unrelated
shareholder. The Company's contribution to the trust of approximately $1.3
million is included in the Company's compensation expenses. The trust was
established for the benefit of the Company's employees and directors to raise
their ownership in the Company, thereby strengthening the mutuality of interests
between them and the Company's shareholders. While these shares are held in
trust, they will be voted ratably with ballots cast by all other shareholders.

Andrew Wiederhorn, Lawrence Mendelsohn and Don H. Coleman are the trustees
for the trust. Pursuant to the terms of the trust, the trustees will, from time
to time, allocate the shares to the Company's employees. An employee shall not
have any rights with respect to any shares allocated to him unless and until the
employee completes five years of continuous service with the Company, commencing
with the date the employee is first allocated such shares. Upon the employee's
completion of the vesting period, the trustees shall promptly distribute to such
employee the shares allocated to such employee; provided, however, that the
trustees may, in lieu of distributing the shares, make a cash payment to the
employee equal to the fair market value of the shares allocated to such employee
as of the date immediately prior to the date of distribution or distribute any
combination of cash or shares, as determined by the trustees, in their sole
discretion.

As of January 31, 2002, the trustees had not allocated any shares to the
Company's employees or directors.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Financial Statements

Consolidated Statements of Financial Condition at December 31, 2001 and
2000
Consolidated Statements of Operations for the Years Ended December
31, 2001, 2000, and 1999
Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000, and 1999
All financial statement schedules of the Company
are omitted because they are not required or are not applicable.

(b) Reports on Form 8-K filed during the fourth quarter of the period
covered by this report:

Current Report on Form 8-K filed December 4, 2001 announcing the sale
of eighteen retail buildings, totaling 242,000 square feet, to The
Anglo-Aggmore Limited Partnership, an unaffiliated third party. Pro
forma financial information giving effect to sale was filed as an
exhibit to the Current Report on Form 8-K.

Current Report on Form 8-K filed October 30, 2001 announcing the
resignation of Pat Terrell as a member of the Board of Directors and
announcing the appointment of Don H. Coleman, David Dale-Johnson, and
K. Kenneth Kotler as members of the Board of Directors.

Current Report on Form 8-K filed October 17, 2001 announcing the
resignation of David C. Egelhoff as a member of the Board of Directors.

(c) Exhibits

See Exhibit Index immediately following the signature pages.

INDEX TO FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Fog Cutter Capital Group Inc.

We have audited the accompanying consolidated statements of financial
condition of Fog Cutter Capital Group Inc. and Subsidiaries (the "Company") as
of December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Fog Cutter Capital Group Inc. and Subsidiaries as of December 31, 2001 and 2000,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Los Angeles, California
February 5, 2002

F-2

FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated
financial statements.

F-3

FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated
financial statements.

F-4

FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated
financial statements.

F-5

FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated
financial statements.

F-6

FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these consolidated
financial statements.

F-7

F-8

FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND AS NOTED)

NOTE 1 - ORGANIZATION AND RELATIONSHIPS

The Company was originally incorporated as Wilshire Real Estate
Investment Trust Inc. in the State of Maryland on October 24, 1997. On April
6, 1998, the Company was capitalized with the sale of 11,500,000 shares of
common stock, par value $.0001 per share, at a price of $16.00 per share (the
"Offering"). Total net proceeds of the Offering after underwriting and
offering expenses were $167.0 million. In September 1999, in order to benefit
from significant net operating loss carryforwards and to avoid any risk of
not qualifying as a real estate investment trust ("REIT"), the Company, with
the approval of its shareholders, elected not to be taxed as a REIT, and the
Company's name was changed to Wilshire Real Estate Investment Inc. Effective
January 25, 2001, the Company changed its name to Fog Cutter Capital Group
Inc. to better reflect the opportunistic nature of its business and
investments. At December 31, 2001, certain former and present Company
officers and directors controlled, directly or indirectly, the significant
voting majority of the Company.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS - The operations of the Company consist primarily of
the acquisition of pools of performing, sub-performing and non-performing
residential and commercial mortgage loans, as well as commercial real estate and
mortgage-backed securities. The Company's primary sources of revenue are from
loans, mortgage-backed securities and real estate.

PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Fog Cutter Capital Group Inc. and its
subsidiaries, including Fog Cap L.P. (formerly Wilshire Real Estate Partnership
L.P.), WREP 1998-1 LLC, Fog Cutter Securities Corporation (formerly WREI
Securities Corporation), Fog Cutter Servicing Inc. (formerly WREI Mortgage Inc.)
and WREP Islands Limited. Intercompany accounts have been eliminated in
consolidation.

USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS-The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements.
Significant estimates include the determination of fair values of certain
financial instruments for which there is no active market, the allocation of
basis between assets sold and retained, and valuation allowances for loans
and real estate owned. Estimates and assumptions also affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

CASH AND CASH EQUIVALENTS - For purposes of reporting the consolidated
financial condition and cash flows, cash and cash equivalents include
non-restricted cash and due from banks, repurchase agreements and securities
with original maturities of 90 days or less.

SECURITIES AVAILABLE FOR SALE - Securities available for sale include
mortgage-backed securities and other securities that are designated as assets
available for sale because the Company does not intend to hold them to
maturity. Securities available for sale are carried at estimated fair values
with the net unrealized gains or losses reported in accumulated other
comprehensive loss, which is included as a separate component in
stockholders' equity. The Company determines the fair value of its securities
by discounting the anticipated cash flows using certain assumptions (e.g.
prepayment speeds, default rates, severity of losses, and discount rate). As
of each reporting period, the Company evaluates whether and to what extent
any decline in the estimated fair values is to be recognized in earnings as
other than temporary. Other than temporary declines in the carrying value of
securities, if any, are charged to earnings and the basis of each security is
adjusted, accordingly. At disposition, the realized net gain or loss is
included in earnings on a specific identification basis. Actual prepayment
experience, credit losses and the yields are reviewed at least quarterly.
Declines in fair value are to be considered other than temporary and the
security is impaired when: (i) the carrying value of the beneficial interests
exceeds the fair value of such beneficial interests using current
assumptions, and (ii) the timing and/or extent of cash flows expected to be
received on the beneficial interests has adversely changed from the previous
valuation date.

LOANS - Loans are designated as held-for-sale and are carried at the lower
of cost or estimated market value.

INVESTMENTS IN REAL ESTATE - Real estate purchased directly is originally
recorded at the purchase price. Real estate acquired in settlement of loans is
originally recorded at fair value less estimated costs to sell. Any excess of
net loan cost basis over the fair value less estimated selling costs of real
estate acquired through foreclosure is charged to the allowance for loan losses.
Any

F-9

subsequent operating expenses or income, reductions in estimated
fair values, as well as gains or losses on disposition of such properties, are
recorded in current operations. Depreciation on investments in real estate is
computed using the straight-line method over the estimated useful lives of the
assets as follows:

Expenditures for repairs and maintenance are charged to operations as
incurred. Significant renovations are capitalized and amortized over their
expected useful lives. Fees and costs incurred in the successful negotiation
of leases are deferred and amortized on a straight-line basis over the terms
of the respective leases. Rental revenue is reported on a straight-line basis
over the terms of the respective leases.

INVESTMENT IN BOURNE END PROPERTIES PLC ("BEP") The equity method of
accounting is used for investments in associated companies which are not
controlled by the Company and in which the Company's interest is generally
between 20% and 50%. The Company's share of earnings or losses of associated
companies, in which at least 20% of the voting securities is owned, is
included in the consolidated statement of operations.

INCOME TAXES-The Company files its income tax returns with the relevant tax
authorities in the United States on a consolidated basis. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided when it is not probable that
some portion or all of the deferred tax assets will be realized.

NET LOSS PER SHARE-Basic EPS excludes dilution and is computed by dividing
the net loss available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company.

During the years ended December 31, 2001, 2000, and 1999, however, the
Company experienced a net loss, which resulted in common stock equivalents
having an anti-dilutive effect on earnings per share. Weighted average shares
outstanding are therefore equivalent for basic and diluted net loss per share.

RECLASSIFICATIONS-Certain items in the consolidated financial statements
for 2000 and 1999 were reclassified to conform to the 2001 presentation.

NOTE 3 - RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 138, ACCOUNTING FOR CERTAIN
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, AN AMENDMENT OF FASB
STATEMENT NO. 133 ("FAS 138") which amends certain provisions of Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("FAS No. 133"). These statements establish accounting
and financial reporting for derivative instruments and hedging activities and
require the Company to recognize and report all derivative instruments at
their fair value in the Company's consolidated statement of financial
position with changes in fair value recorded generally in operations. The
Company adopted these statements on January 1, 2001, and there was no impact
on the Company's financial position or operating results upon adoption.

In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENT OF LIABILITIES ("FAS No. 140").FAS No. 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Other provisions of the statement are effective
for fiscal years ended after December 15, 2000 and include additional disclosure
requirements and changes related to the recognition and reclassification of
collateral. FAS No. 140 disclosures are included in Note 4.

In July 2000, the Emerging Issues Task Force ("EITF") finalized the
provisions of EITF Issue No. 99-20, "Recognition of Interest Income and
Impairment of Purchased and Retained Beneficial Interests in Securitized
Financial Assets", ("EITF 99-20").

F-10

EITF 99-20 sets forth rules for recognizing interest income and determining when
securities must be written down to fair value because of other than temporary
impairments. EITF 99-20 requires the prospective method of adjusting the
recognition of interest income when the anticipated cash flows have either
increased or decreased. Anticipated cash flows can change as the result of
factors such as credit losses and prepayment rates. Pursuant to EITF 99-20,
declines in fair value are to be considered other than temporary when: (i) the
carrying value of the beneficial interests exceeds the fair value of such
beneficial interests using current assumptions, and (ii) the timing and/or
extent of cash flows expected to be received on the beneficial interests has
adversely changed (as defined) from the previous valuation date.

The effective date for adoption of EITF 99-20 was April 1, 2001. As a
result of the implementation of EITF 99-20 the Company recorded a "cumulative
effect of a change in accounting principle" adjustment of $1.0 million relating
to other than temporary impairment of mortgage-backed securities.

In July 2001, FASB issued FAS No. 141, Accounting for Business Combinations
and FAS No. 142, Accounting for Goodwill and Intangible Assets. FAS No. 141
eliminates the ability to utilize the pooling of interests method of accounting
for business combination transactions initiated after June 30, 2001. The
purchase method of accounting is now required. FAS No. 142 eliminates the
existing requirement to amortize goodwill through a periodic charge to earnings.
For existing goodwill, the elimination of the amortization requirement is
effective beginning January 1, 2002. As of that date, and at least annually
thereafter, goodwill must be evaluated for impairment based on estimated fair
value. As of December 31, 2001, the Company did not have any recorded goodwill.
Since goodwill and related amortization has not been significant to the
consolidated balance sheet and results of operations, the implementation of this
standard is not expected to be material to the consolidated balance sheet or
results of operations.

In June 2001, FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs would be capitalized as part of the carrying amount of the long-lived
asset and depreciated over the life of the asset. The liability is accreted at
the end of each period through charges to operating expense. If the obligation
is settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The provisions of FAS No. 143 are
effective for fiscal years beginning after June 15, 2002. Management has not yet
determined the impact, if any, of adoption of FAS No. 143.

In August 2001, FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (FAS No. 144). FAS No. 144 retains
the fundamental provisions in FAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with FAS No. 121. For example, FAS No. 144 provides guidance on how a
long-lived asset that is used as a part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is held for sale,
and prescribes the accounting for a long-lived asset that will be disposed of
other than by sale. FAS No. 144 retains the basic provisions of Opinion 30 on
how to present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business).

The Company is required to adopt FAS No. 144 no later than the year
beginning after December 15, 2001, and plans to adopt its provisions for the
quarter ending March 31, 2002. Management does not expect the adoption of FAS
No. 144 for long-lived assets held for use to have a material impact on the
Company 's financial statements because the impairment assessment under FAS No.
144 is largely unchanged from FAS No. 121. The provisions of the statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
FAS No. 144 will have on the Company 's financial statements.

NOTE 4 - SECURITIES AVAILABLE FOR SALE

At December 31, 2001 and 2000, securities available for sale were as
follows:

F-11

The Company expects to receive payments on securities over periods that are
considerably shorter than the contractual maturities of the securities, which
range from 6 to 30 years, due to prepayments. At December 31, 2001,
approximately $49.5 million of securities available for sale were pledged to
secure borrowings (see Note 7).

The fair value of the Company's investment in mortgage-backed securities
is determined at each reporting date as the present value of the anticipated
cash flows from the underlying collateral using certain assumptions. These
assumptions include: (i) future rate of prepayment; (ii) discount rate used
to calculate present value; and (iii) default rates and loss severity on loan
pools underlying the mortgage-backed securities. At December 31, 2001, the
range of key economic assumptions used to determine the fair value of the
securities was as follows: an annual prepayment speed ranging from 19% to
30%; a monthly constant default rate ranging from 0.11% to 0.48%, a loss
severity ranging from 40% to 55%; and a discount rate of 13% for the BB-rated
securities, 18% for the B-rated securities and 20% for the unrated securities.

During the years ended December 31, 2001, 2000, and 1999, the Company
incurred significant losses of $ 8.7 million, $21.4 million, and $ 19.6
million, respectively, due to the other-than-temporary decreases in value of
mortgage-backed securities. These losses resulted from the worsening credit
and prepayment performance of the mortgage-backed securities as well as
increases in the market yields for investments in such high-risk assets. The
assumptions and the resulting estimated values of the mortgage-backed
securities at December 31, 2001 are believed to be conservative based on the
facts and circumstances as of that date, however, there can be no assurance
that there will be no future losses on these securities due to changes in
their performance or overall market conditions.

The Company resecuritized approximately $20.1 million of its
mortgage-backed securities portfolio in 2000 and acquired a subordinated
interest in the underlying trust. The outstanding balance (unpaid principal
balance) of the underlying residential mortgage loans totaled $6.4 billion at
December 31, 2001. At December 31, 2001, underlying loans of $72.9 million were
delinquent on their payments by greater than 90 days. Cumulative losses on the
underlying loans, since the resecuritization in May 2000, were $2.2 million
through December 31, 2001.

The fair value of the Company's investment in the resecuritized
mortgage-backed securities is determined at each reporting date as the
present value of the anticipated cash flows from the underlying collateral
(primarily "A" quality, jumbo, fixed-rate, 15- to 30-year term loans) using
certain assumptions. These assumptions include: (i) future rate of
prepayment; (ii) discount rate used to calculate present value; and (iii)
default rates and loss severity on loan pools underlying the mortgage-backed
securities in the resecuritization. At December 31, 2001, key economic
assumptions and the sensitivity of the current fair value of the Company's
subordinated interest, included in the $51.8 million carrying value of the
Company's mortgage-backed securities portfolio, as effected by immediate 10%
and 20% adverse changes in assumed economics were as follows:

FAIR VALUE OF THE SUBORDINATED INTEREST $ 8,454

PREPAYMENT SPEED (ANNUAL RATE) 10.2%

Fair value after 10% adverse change $ 8,049

Fair value after 20% adverse change $ 7,646

DEFAULT RATE (ANNUAL RATE) 0.33%

Fair value after 10% adverse change $ 7,652

Fair value after 20% adverse change $ 6,940

LOSS SEVERITY 32.3%

Fair value after 10% adverse change $ 7,623

F-12

Fair value after 20% adverse change $ 6,907

DISCOUNT RATE (ANNUAL RATE) 20%

Fair value after 10% adverse change $ 7,771

Fair value after 20% adverse change $ 7,151

These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10 percent variation in assumptions generally
cannot be extrapolated because the relationship of the change in assumption to
the change in fair value may not be linear. Also, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated
without changing any other assumption: in reality, changes in one factor may
result in changes in another (for example, increases in market interest rates
may result in lower prepayments and increase credit losses), which might magnify
or counteract the sensitivities.

F-13

NOTE 5 - LOANS

The Company's loans are comprised of the following loan categories at
December 31, 2001 and 2000:

As of December 31, 2001 and 2000, the unpaid principal balances of loans
with adjustable rates of interest were $0.0 million and $25.0 million,
respectively, and loans with fixed rates of interest were $4.8 million and $5.4
million, respectively, net of market valuation.

At December 31, 2001 and 2000, substantially all loans were pledged to
secure borrowings. At December 31, 2001, the Company had no impaired loans.

Activity in the allowance for loan losses is summarized as follows:

NOTE 6 - INVESTMENTS IN REAL ESTATE

At December 31, 2001 and 2000, the Company's investments in real estate
were comprised of the following:

At December 31, 2001, all of the investments in commercial real estate were
located in the United States. At December 31, 2000 approximately $20.0 million
or 80.7% of the investments in commercial and multi-family real estate were
located in the United Kingdom and the remainder of commercial or multi-family
properties were located in the United States.

The Company holds its investments in real estate as held for sale at
lower of cost, less accumulated depreciation, or estimated market value, not
to exceed the net realizable value of the properties on an individual basis.

NOTE 7 - BORROWINGS

Borrowings at December 31, 2001 and 2000 include repurchase agreements,
line of credit borrowings, real estate loans and senior bonds issued in
conjunction with a securitization. Proceeds from the various credit facilities
are used primarily for the acquisition of mortgage-backed securities, real
estate and loan pools.

At December 31, 2001, the Company had $38.0 million of borrowings with a
weighted average interest rate of 5.6%. Investments in real estate with a
carrying amount of $2.1 million and mortgage-backed securities with a carrying
value of $49.5 million

F-14

were pledged as collateral against these borrowings. Maturities of these
borrowings range from 2002 to 2020. Following is information about borrowings:

At December 31, 2001, the contractual repayment terms of borrowings and
estimated repayment of the senior bonds issued in conjunction with a
resecuritization for each of next five years and the total thereafter is as
follows:

The Company is subject to various covenants in the agreements evidencing
its indebtedness. At December 31, 2001, management believes the Company was in
compliance with all obligations under the agreements evidencing its
indebtedness, as defined in the applicable agreements. In certain instances,
lenders on mortgage-backed securities have withheld principal and/or interest
payments on such assets in order to reduce outstanding, unpaid collateral calls.
At December 31, 2001 and 2000, there were no outstanding unpaid collateral
calls.

NOTE 9 - DIVIDENDS PAYABLE

During the year ended December 31, 2001, the Company declared and paid cash
dividends totaling $0.39 per share ($4.1 million). The Company had delayed the
payment date of a $0.40 cash dividend payable on October 27, 1998 to
shareholders of record at September 30, 1998 and announced that it would pay
interest, at the rate of 4% per annum, on the amount due from the previously
announced payment date through the date of the actual payment. During the year
ended December 31, 2000, the Company paid one-half of the cash dividend payable
plus interest and paid the remainder during the year ended December 31, 2001. No
dividends were declared during the year ended December 31, 2000.

NOTE 10 - INCOME TAXES

The Company originally was formed with a view of qualifying as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
However, to qualify as a REIT, the Company must first make an affirmative
election to be taxed as a REIT when the Company files its federal income tax
return.

Due to the significant potential tax benefits from net operating loss
carryforwards of the Company and risks of not qualifying as a REIT, the Company
reevaluated its original plan to elect to be taxed as a REIT. On September 10,
1999, the Company's shareholders voted not to elect REIT status and, as a
result, the Company will be subject to corporate taxation.

As of December 31, 2001, the Company had, for U.S. Federal tax purposes, a
net operating loss carryforward of approximately $94 million, which begins to
expire in 2018. U.S. tax regulations impose limitations on the use of loss
carryforwards following certain changes in ownership. If such a change were to
occur with respect to the Company, the limitation could significantly reduce the
amount of benefits that would be available to offset future taxable income each
year, starting with the year of ownership change. To reduce the potential impact
of such ownership changes, the Company established a Shareholder Rights Plan
dated as of December 23, 1999 and effective January 3, 2000 (the "Rights").
During 2001, the Company elected to redeem the Rights in order to

F-15

provide the flexibility to repurchase shares of the Company's common stock if
opportunities arose at attractive prices. The Company concluded that the value
of the potential opportunities created by redeeming the Rights, exceeded the
potential tax benefits of the protection from a change in ownership provided by
the Rights Plan. The Company redeemed the Rights in October 2001. The Company
has not recorded any tax assets for the future benefits of the net operating
loss carryforwards.

A reconciliation, stated as a percentage of pretax loss, of the U.S.
federal statutory rate to the effective tax rate on the loss from continuing
operations is as follows:

The tax effects of temporary differences and carryforwards resulting in
deferred income taxes are as follows:

Given the lack of sufficient earnings history, the Company does not believe
the recognition of a deferred tax asset is appropriate at this time.

NOTE 11 - COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK

The Company and two of its senior officers have been named, among other
defendants, in a series of lawsuits related to the receivership of an
unaffiliated investment company. In their claims, multiple plaintiffs allege
several theories of liability, including knowing participation in fiduciary
breach and prohibited transactions under the Employee Retirement Income Security
Act of 1974. The plaintiffs have not described with any specificity the
proportion or share of losses and related amounts which they claim are
attributable to the Company or its executives. Because the cases are still in
early stages of the pleadings and because the amount of discovery has been
limited, the ultimate financial loss to the Company cannot be reasonably
estimated at this time. However, based upon the progress of mediation through
December 31, 2001, the Company has made a provision for litigation of $2
million. The Company and its executives have directed that these cases be
defended against vigorously. Under their employment arrangements with the
Company, the Company's senior officers may be entitled to indemnification by the
Company. Due to the preliminary nature of the underlying litigation, the Company
has not determined whether such indemnification will be granted, and
accordingly, the Company does not believe it is possible to estimate the extent
of liability, if any, related to such indemnification.

The Company is involved in various other legal proceedings occurring in
the ordinary course of business which the Company believes will not have a
material adverse effect on the consolidated financial condition or operations of
the Company.

F-16

The Company may utilize a wide variety of off-balance sheet financial
techniques to manage its interest rate risk. In hedging the interest rate
and/or exchange rate exposure of a foreign currency denominated asset or
liability, the Company may enter into hedge transactions to counter movements
in the different currencies, as well as interest rates in those currencies.
These hedges may be in the form of currency and interest rate swaps, options,
and forwards, or combinations thereof. At December 31, 2001 and 2000, the
Company had no outstanding derivative instruments held for trading or hedging
purposes.

NOTE 12 - ARRANGEMENTS WITH SENIOR OFFICERS

The Company has entered into employment agreements with Andrew A.
Wiederhorn (as Chief Executive Officer), Lawrence A. Mendelsohn (as President),
and Robert G. Rosen (as Executive Vice President) (each an "Executive" and
collectively, the "Executives").

The employment agreements with Messrs. Wiederhorn and Mendelsohn were
amended and restated effective December 31, 2001. Each such employment agreement
provides for an initial three-year term commencing October 1, 2000, which is
automatically renewable for successive two-year terms unless either party gives
written notice of termination to the other at least 90 days prior to the
expiration of the then-current employment term.

Effective December 31, 2001, the employment agreements provide for an
annual base salary of $250,000 each for Mr. Wiederhorn and Mr. Mendelsohn. In
addition, Mr. Wiederhorn and Mr. Mendelsohn were awarded bonuses of $750,000
and $500,000 respectively for their services to the Company during 2001.
These bonuses are payable during the first quarter of 2002 and were accrued
for at December 31, 2001 and included in accounts payable and accrued
liabilities in the accompanying consolidated statement of financial condition
as of that date. The Compensation Committee may award other compensation from
time to time as it deems appropriate and reasonable. Prior to December 31,
2001, Mr. Wiederhorn and Mr. Mendelsohn earned annual base salaries of
$750,000 and $500,000 respectively, and had been entitled to share in a bonus
pool based upon the Company achieving certain performance goals.

The employment agreement with Mr. Rosen was amended and restated
effective October 1, 2001. The employment agreement provides for an initial
twelve month term commencing October 1, 2001 which may be extended for six
additional months if certain of the employment objectives have not been met
and either party gives written notice of extension to the other at least 30
days prior to the expiration of the employment term. The employment agreement
provides for an annual salary for Mr. Rosen of $250,000. In addition, if (i)
the Company sells its interest in the BSMSI Class B4, BSSP 2000-3 Class B and
BSSP 2000-5 Classes B1, B2 and B3 for total proceeds (net of certain related
borrowings) of at least $20.65 million, Mr. Rosen will be entitled to a bonus
payment equal to $350,000 plus 10% of the excess of proceeds (net of certain
related borrowings) over $20.65 million, and (ii) if the Company sells its
interest in the Cityscape Series 1997-A Class R1, Cityscape Series 1997-B
Class R and Cityscape Series 1997-C Classes RI and RII for total net proceeds
of at least $1.5 million, Mr. Rosen will be entitled to a bonus payment equal
to 2% of the Cityscape net proceeds. Unless Mr. Rosen is terminated for Cause
or voluntarily resigns prior to the expiration of the employment agreement,
he is entitled to deferred compensation, payable at the expiration of the
employment agreement, in the amount of $1.1 million.

The employment agreements with Messrs. Wiederhorn, Mendelsohn, and Rosen
provide for the Company to make a recourse loan to each executive up to a
maximum of $850,000, $50,000, and $843,000, respectively. The loans bear
interest at the prime rate. Interest is not paid in cash but payable in kind
on an annual basis (i.e., compounded annually). Upon termination of any such
executive, the executive's loans will become due and payable six months after
the date of termination (other than in the case of Mr. Rosen, whose loan
becomes due upon termination). At December 31, 2001, the Company had
outstanding loans including compounded interest to Messrs. Wiederhorn and
Mendelsohn of approximately $113,000 and $58,000, respectively, which were
included as deductions from stockholder's equity in the consolidated
statements of financial position. At December 31, 2001 the Company had
outstanding loans including compounded interest to Mr. Rosen of $906,000
which were included in other assets.

During the years ended December 31, 2001, 2000 and 1999, the Executives
were awarded bonuses in the aggregate amounts of $3.3 million, $1.4 million
and $0.3 million, respectively, which are included in compensation and
employee benefits in the consolidated statements of operations. These bonuses
were approved by the Board of Directors.

NOTE 13 - RELATIONSHIP WITH WFSG AND ITS AFFILIATES

Prior to September 1999, the Company and WFSG had the same senior
management team, though the Company had a different stockholder base and the
majority of its directors were independent, and the Company's business affairs
and day-to-day operations were managed by Wilshire Realty Services Corporation
("WRSC"), a wholly-owned subsidiary of WFSG, pursuant to a management agreement
("Management Agreement"). After September 1999, the Company's independent
directors decided that the Company should be internally managed and the Company
and WFSG ceased to have the same senior executives and no longer had any

F-17

common directors. Accordingly, the Company no longer views WFSG and its
subsidiaries as affiliated parties.

The Company's decision to become internally managed in the third quarter of
1999 resulted in disputes between the Company, on the one hand, and WFSG and
certain of its affiliates on the other. In connection with these disputes, the
Company recorded a reserve for potential resolution of disputes with WFSG and
its affiliates of $4.1 million in 1999. During the year ended December 31, 2000,
the Company settled all disputes with WFSG and its affiliates which resulted in
an additional provision of $0.2 million.

F-18

As of December 31, 2001, the Company continues to maintain certain business
relationships with WFSG and its affiliates which include the following:

- The Company owns approximately 18.1% of WFSG's outstanding common
stock.

- An affiliate of WFSG services loans underlying certain mortgage-backed
securities owned by the Company.

- The Company has a prepaid servicing fee credit with an affiliate of
WFSG to be utilized by servicing loans for the Company (exclusive of
mortgage-backed securities). Due to the specialized and illiquid
nature of the servicing credit, the Company recorded a $1.8 million
impairment loss during the fourth quarter of 2001, bringing the
carrying value of the asset to zero.

The following table sets forth the Company's balances with WFSG and its
affiliates as of December 31, 2001 and 2000.

----------
(1) WFSG's common stock currently trades on the OTC Bulletin Board and the
closing price as of December 31, 2001 and 2000 was $2.05 and $1.25 per
share, respectively.

The effect of the various transactions between the Company and WFSG and its
affiliates are summarized below for the years ended December 31:

----------
(1) Does not include interest income on Mortgage-backed securities
resulting from securitizations by WFSG or its affiliates.

NOTE 14 - STOCK OPTIONS AND RIGHTS

The Company adopted a non-qualified stock option plan ("the Option Plan")
which provides for options to purchase shares of the Company's common stock. The
maximum number of shares of common stock that may be issued pursuant to options
granted under the Option Plan is 3,500,000 shares.

In 1998, the Company granted options to WRSC and its independent directors
under the Option Plan, representing the right to acquire 1,150,000 shares of
common stock. Of these initial grants, 1,135,000 were granted to WRSC and 5,000
were granted to each of the Company's three independent directors. The initial
grants of options under the Option Plan to WRSC vest at a rate of 25% per year
for each of the first four anniversaries following the closing of the Initial
Public Offering ("Offering"), and expire on the tenth anniversary of the
Offering. The initial grants to the independent directors vest immediately and
expire ten years from the date of grant. In the future, newly elected directors
will receive 5,000 options on the day they join the Board at an exercise price
equivalent to the closing price on that day. In addition, except for the period
beginning October 1, 2000 through September 30, 2001, each independent director
received, on the last day of each quarter, an automatic non-statutory option
grant to purchase 1,500 shares of common stock at 110% of the fair market value
on that day. Automatic grants will vest one third on each of the first three
anniversaries of the grant date and expire on the tenth anniversary of the grant
date. Resigning directors have the right to exercise any options which are
vested at the date of resignation for a period of one year before they expire.

F-19

In conjunction with a partial settlement agreement with WFSG and certain of
its affiliates in 1999, the Company received 1,112,500 of the options issued to
WRSC at the initial public offering, which were subsequently cancelled.

A summary of the Company's stock options as of and for the year ended
December 31, 2001 is presented below:

A summary of the Company's stock options as of and for the period ended
December 31, 2000 is presented below:

F-19

The Company applies Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related Interpretations in
accounting for the Option Plan. Accordingly, no compensation expense has been
recognized in the Consolidated Statements of Operations for grants under the
Option Plan. Had compensation expense for the Company's Option Plan been
determined based on the fair value at the grant date consistent with the
methods of SFAS No. 123 "Accounting for Stock Based Compensation", the
Company's net loss and loss per share for the years ended December 31, 2001,
2000, and 1999 would have been increased to the pro forma amounts indicated
below:

There were no options granted with exercise prices below the market value
of the stock at the grant date. The weighted average fair value of options
granted during 2001, 2000, and 1999 was $0.74, $0.40, and $0.45, respectively,
for options with exercise prices exceeding the market price of the stock at the
grant date. Fair values were estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions used: 1% dividend yield,
expected volatility of 25%, risk-free interest rate of 5.0% and expected lives
of three to five years.

On December 15, 1999, the Company declared a distribution of one right (a
"Right") to purchase one one-tenth of a share of the Company's Common Stock for
each outstanding share of Common Stock, payable to the stockholders of record on
January 3, 2000. During 2001, the Company elected to redeem the Rights in order
to provide the flexibility to repurchase shares of the Company's common stock if
opportunities arose at attractive prices. The Company concluded that the value
of the potential opportunities created by redeeming the Rights, exceeded the
potential tax benefits of the protection from a change in ownership provided by
the Rights Plan. The Rights were redeemed by the Company on October 16, 2001.

F-20

NOTE 15 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

Estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

The methods and assumptions used to estimate the fair value of each class
of financial instrument for which it is practicable to estimate that value are
explained below:

CASH AND CASH EQUIVALENTS-The carrying amounts approximate fair values due
to the short-term nature of these instruments.

MORTGAGE-BACKED SECURITIES-The fair values of securities are determined by
discounting the anticipated cash flows using certain assumptions (e.g.
prepayment speeds, default rates, severity of losses, and discount rate).

LOANS-The fair value of the Company's sole major loan at December 31,
2001 is based upon the present value of the expected cash flows from the loan.

INVESTMENT IN WFSG AND AFFILIATES-The fair value of the investment in WFSG
is based upon the quoted closing price of the stock at the end of the year.
The Company owns 2.9 million shares of WFSG stock. The average daily trading
volume of the stock is significantly less than the amount of our holdings,
therefore, there can be no assurance that the Company could dispose of its
investment in WFSG at the market price in a timely manner.

BORROWINGS-The fair value of borrowings is estimated based on current
market rates for similar borrowings with similar characteristics.

The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 2001 and 2000,
respectively. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date, and therefore, current estimates of fair value may differ
significantly from the amounts presented herein.

F-21

NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

F-22

NOTE 17 - PARENT COMPANY INFORMATION

CONDENSED STATEMENTS OF FINANCIAL CONDITION

CONDENSED STATEMENTS OF OPERATIONS

F-23

CONDENSED STATEMENTS OF CASH FLOWS

NOTE 18 - SUBSEQUENT EVENTS (UNAUDITED)

In January 2002, the Company sold mortgage-backed securities with a basis
of $2.2 million for $2.6 million.

In February 2002, the Company purchased 100% of the outstanding senior
mortgage-backed securities of Bear Stearns Structured Products Series Trust
2000-3 ("BSSPT 2000-3") for a purchase price of $8.2 million. The Company had
previously acquired the subordinate mortgage-backed securities and, as a result
of this transaction, is now the beneficial owner of 100% of BSSPT 2000-3. The
Company may elect to liquidate BSSPT-2000-3 in order to take direct ownership of
the 67 underlying mortgage-backed securities owned by the trust. The acquisition
was financed with repurchase agreements in the amount of $7.4 million.

On March 5, 2002, Jordan D. Schnitzer resigned as a member of the Board of
Directors of the Company. The resignation was effective immediately.

F-24

On March 6, 2002, the Company purchased a total of 713,043 shares of its
common stock from entities affiliated with Jordan D. Schnitzer, a former member
of the Company's Board of Directors ("Schnitzer"). The shares were purchased in
exchange for a 46.60% participation interest in the unpaid principal balance (as
of December 31, 2001) of the French American International School Loan (the "FAS
Loan"), which is held by the Company. The parties valued the transaction at
approximately $2.175 million, or $3.05 per share. On March 6, 2002, the closing
price of the Company's stock as listed on NASDAQ was $2.57 per share.

The Company also granted an option (the "Stockholder Put Option") to
Schnitzer, which entitles Schnitzer to require the Company to purchase an
additional 713,042 shares of FCCG common stock for $3.05 per share, less any
dividends paid by the Company on the shares between March 6, 2002 and the option
closing date, plus interest accrued on the net option price at a rate equal to
10.00% per annum. The Stockholder Put Option is exercisable from September 1,
2002 through September 10, 2002. In the event the Stockholder Put Option is
exercised, payment for the shares will be made by delivery of an additional
46.60% participation interest in the FAS Loan, plus 46.60% of all principal
payments received by the Company on the FAS Loan since December 31, 2001, plus
interest on the net option price at a rate equal to 10.00% per annum, less any
dividends paid by the Company on the shares between March 6, 2002 and the option
closing date.

In the event Schnitzer exercises the Stockholder Put Option, Schnitzer will
also be required to purchase the remaining 6.80% participation interest in the
FAS Loan at a price of $317,544.63. Upon purchase of the remaining 6.80%
participation interest, Schnitzer will also receive 6.80% of all principal
payments received by the Company on the FAS Loan since December 31, 2001.

The Company was granted an option (the "Company Put Option") from
Schnitzer, which entitles the Company to require Schnitzer to purchase the
additional 46.60% participation interest in the FAS Loan at an exercise price
of $2.175 million, plus any cash dividends paid on 713,042 shares of FCCG
common stock owned by Schnitzer between March 6, 2002 and the option closing
date, less interest accrued on the net option price at a rate equal to 10.00%
per annum. The Company Put Option is exercisable from September 11, 2002
through September 20, 2002. In the event the Company Put Option is exercised,
Schnitzer will receive the additional 46.60% participation interest in the
FAS Loan, plus 46.60% of all principal payments received by the Company on
the FAS Loan since December 31, 2001.

In the event the Company exercises the Company Put Option, Schnitzer
will also be required to purchase the remaining 6.80% participation interest
in the FAS Loan at a price of $0.3 million. Upon purchase of the remaining
6.80% participation interest, Schnitzer will receive 6.80% of all principal
payments received by the Company on the FAS Loan since December 31, 2001.

The Company also granted an option (the "Stockholder Property Option")
to Schnitzer, which entitles Schnitzer to require the Company to purchase an
additional 727,235 shares of FCCG common stock for $0.3 million in cash, plus
delivery of the Company's interest in approximately 10.9 acres of land in
Wilsonville, Oregon, less any dividends paid by the Company on the shares
between March 6, 2002 and the option closing date. The Stockholder Property
Option is exercisable from January 2, 2003 through January 10, 2003.

The Company also received an option (the "Company Property Option") from
Schnitzer, which entitles the Company to require Schnitzer to purchase its
interest in approximately 10.9 acres of land in Wilsonville, Oregon, subject to
certain conditions, for $1.9 million, plus any cash dividends paid on 623,265
shares of FCCG common stock owned by Schnitzer. This option is exercisable
between January 11, 2003 and January 20, 2003.

The Company has secured its performance under the various options by
pledging 1,625,000 shares of common stock of Wilshire Financial Services Group
Inc. and granting trust deeds on approximately 10.9 acres of land in
Wilsonville, Oregon and certain property owned by the Company in Eugene, Oregon.

Schnitzer has secured his performance under the various options by pledging
1,440,277 shares of FCCG common stock.

F-25

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf on March 22, 2002 by the undersigned, thereunto duly authorized.

Fog Cutter Capital Group Inc.

By: /s/ Lawrence A. Mendelsohn
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Lawrence A. Mendelsohn
President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 22, 2002 by the following persons on
behalf of the Registrant and in the capacities indicated.

/s/ Andrew A. Wiederhorn
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Andrew A. Wiederhorn
Chairman of the Board, Chief Executive Officer, Secretary and
Treasurer

/s/ Lawrence A. Mendelsohn
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Lawrence A. Mendelsohn
President

/s/ R. Scott Stevenson
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R. Scott Stevenson
Senior Vice President and Chief Financial Officer

/s/ Don H. Coleman
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Don H. Coleman
Director

/s/ David Dale-Johnson
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David Dale-Johnson
Director

/s/ K. Kenneth Kotler
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K. Kenneth Kotler
Director

Exhibit Index