##### **SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

#### **FORM 10-Q**

 
| **(Mark one)** |
|----------------|
| ** **     | ** ** |
| **ý**     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |
| ** **     | **For the quarterly period ended March 31, 2005** |
|           |   |
| ** **     | **OR** |
|           |   |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File No. 0-23911**

 

**FogCutter Capital Group Inc.**

(Exact name of registrantas specified in its charter)

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

 

**1410 SW Jefferson Street**

**Portland, OR 97201**

(Address of principalexecutive offices) (Zip Code)

 

**(503) 721-6500**

** **(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.  Yes  ý    No  o.

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes  o    No  ý.

 

**APPLICABLE ONLY TO CORPORATEISSUERS:**

 

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

 
| **Class**                                  | ** ** | **Outstanding at March 31, 2005** |
|--------------------------------------------|------------|-----------------------------------|
| Common Stock, par value  $0.0001 per share |       | 7,957,428 shares                  |

 

 

----

 

FOG CUTTER CAPITAL GROUPINC.

 

FORM 10-Q

 

INDEX

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

 

Available information

 

Our website iswww.fccgi.com.  We make our annual reporton Form 10-K, as well as other reports filed with the Securities and ExchangeCommission, available through our website as soon as reasonably practicableafter they are filed.  A copy of thesereports may also be obtained by writing to us at 1410 SW Jefferson Street,Portland, Oregon 97201, Attn:  InvestorReporting.

 

2

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PART I —FINANCIAL INFORMATION

 

## **ITEM1**.  INTERIMFINANCIAL STATEMENTS

 

FOG CUTTER CAPITAL GROUPINC.

CONSOLIDATED STATEMENTSOF FINANCIAL CONDITION

(dollars in thousands,except share data)

 
| ** **                                                                                                                                                                                                                                       | ** ** | **March 31  2005** | ** ** | **December 31  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                       | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| Assets                                                                                                                                                                                                                                           |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                       |       | $                  | 8,569      |                  | $          | 11,948 |   |
| Loans                                                                                                                                                                                                                                            |       | 6,874              |       | 6,651                 |       |
| Investments in  real estate, net                                                                                                                                                                                                                 |       | 27,014             |       | 26,660                |       |
| Loans to senior  executives                                                                                                                                                                                                                      |       | 2,993              |       | 2,983                 |       |
| Investment in  Bourne End                                                                                                                                                                                                                        |       | 1,876              |       | 1,901                 |       |
| Restaurant  property, plant and equipment, net                                                                                                                                                                                                   |       | 5,969              |       | 6,228                 |       |
| Intangible  assets, net                                                                                                                                                                                                                          |       | 5,340              |       | 5,401                 |       |
| Goodwill                                                                                                                                                                                                                                         |       | 7,063              |       | 7,063                 |       |
| Other assets                                                                                                                                                                                                                                     |       | 3,687              |       | 5,063                 |       |
| Total assets                                                                                                                                                                                                                                     |       | $                  | 69,385     |                  | $          | 73,898 |   |
|                                                                                                                                                                                                                                             |       |               |       |                  |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                                                                                       |       |               |       |                  |       |
| Liabilities:                                                                                                                                                                                                                                     |       |               |       |                  |       |
| Borrowings and  notes payable                                                                                                                                                                                                                    |       | 9,412              |       | 7,977                 |       |
| Obligations  under capital leases                                                                                                                                                                                                                |       | 11,791             |       | 12,401                |       |
| Obligation under  leave of absence agreement                                                                                                                                                                                                     |       | 933                |       | 1,771                 |       |
| Deferred income                                                                                                                                                                                                                                  |       | 4,346              |       | 4,466                 |       |
| Deferred income  taxes                                                                                                                                                                                                                           |       | 5,780              |       | 5,782                 |       |
| Accrued expenses  and other liabilities                                                                                                                                                                                                          |       | 7,092              |       | 7,194                 |       |
| Total  liabilities                                                                                                                                                                                                                               |       | 39,354             |       | 39,591                |       |
|                                                                                                                                                                                                                                             |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                                   |       |               |       |                  |       |
|                                                                                                                                                                                                                                             |       |               |       |                  |       |
| Stockholders’  Equity:                                                                                                                                                                                                                      |       |               |       |                  |       |
| Preferred stock,  $.0001 par value; 25,000,000 shares authorized; no shares issued and  outstanding                                                                                                                                              |       | —             |       | —                |       |
| Common stock,  $.0001 par value; 200,000,000 shares authorized; 11,757,073shares issued as  of March 31, 2005 and December 31, 2004; 7,957,428 shares outstanding as of  March 31, 2005 and 8,380,673 shares outstanding as of December 31, 2004 |       | 168,214            |       | 168,214               |       |
| Accumulated  deficit                                                                                                                                                                                                                             |       | (126,560           | )          | (123,916              | )          |
| Option to purchase  common stock                                                                                                                                                                                                                 |       | —             |       | (593                  | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                                          |       | 386                |       | 329                   |       |
| Treasury stock,  3,799,645 common shares as of March 31, 2005 and 3,376,400 common shares as  of December 31, 2004, at cost                                                                                                                      |       | (12,009            | )          | (9,727                | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                 |       | 30,031             |       | 34,307                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                 |       | $                  | 69,385     |                  | $          | 73,898 |   |

 

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

 

3

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FOG CUTTER CAPITAL GROUPINC.

CONSOLIDATED STATEMENTSOF OPERATIONS

(Unaudited)

*(dollars in thousands, exceptshare data)*

 
| ** **                                           | ** ** | **Quarter Ended March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Net Interest  Income:                                |       |                        |       |   |   |
| Loans                                                |       | $                           | 223        |   | $ | 390 |   |
| Securities                                           |       | 1                           |       | 313 |   |
| Loans to senior  executives                          |       | 52                          |       | 36 |   |
| Other  investments                                   |       | 48                          |       | 47 |   |
| Total interest  income                               |       | 324                         |       | 786 |   |
| Interest expense                                     |       | —                      |       | (71 | ) |
| Net interest  income                                 |       | 324                         |       | 715 |   |
|                                                 |       |                        |       |   |   |
| Real Estate  Operations:                             |       |                        |       |   |   |
| Operating income                                     |       | 1,007                       |       | 954 |   |
| Operating  expense                                   |       | (423                        | )          | (456 | ) |
| Gain on sale of  real estate                         |       | 413                         |       | 3 |   |
| Interest expense                                     |       | (268                        | )          | (281 | ) |
| Depreciation                                         |       | (145                        | )          | (159 | ) |
| Total real  estate operations                        |       | 584                         |       | 61 |   |
|                                                 |       |                        |       |   |   |
| Restaurant  Operations:                              |       |                        |       |   |   |
| Operating  revenue                                   |       | 5,983                       |       | 5,284 |   |
| Cost of goods  sold                                  |       | (3,459                      | )          | (3,077 | ) |
| Franchise and  royalty fee                           |       | 521                         |       | 272 |   |
| General and  administrative cost                     |       | (2,671                      | )          | (2,715 | ) |
| Interest expense                                     |       | (154                        | )          | (165 | ) |
| Depreciation and  amortization                       |       | (368                        | )          | (352 | ) |
| Total restaurant  operations                         |       | (148                        | )          | (753 | ) |
|                                                 |       |                        |       |   |   |
| Other Operating  (Loss) Income:                      |       |                        |       |   |   |
| Gain on sale of  loans and securities                |       | —                      |       | 1,086 |   |
| Loan origination  income                             |       | 1,428                       |       | 1,126 |   |
| Other                                                |       | 73                          |       | 230 |   |
| Total other  operating (loss) income                 |       | 1,501                       |       | 2,442 |   |
|                                                 |       |                        |       |   |   |
| Operating  Expenses:                                 |       |                        |       |   |   |
| Compensation and  employee benefits                  |       | 2,067                       |       | 2,761 |   |
| Professional  fees                                   |       | 709                         |       | 241 |   |
| Other                                                |       | 1,040                       |       | 1,098 |   |
| Total operating  expenses                            |       | 3,816                       |       | 4,100 |   |
|                                                 |       |                        |       |   |   |
| Net income  (loss) before provision for income taxes |       | (1,555                      | )          | (1,635 | ) |
| Provision for  income taxes                          |       | —                      |       | — |   |
| Net income  (loss)                                   |       | $                           | (1,555     | ) | $ | (1,635 | ) |
|                                                 |       |                        |       |   |   |
| Basic income  (loss) per share                       |       | $                           | (0.19      | ) | $ | (0.19 | ) |
| Basic weighted  average shares outstanding           |       | 8,310,132                   |       | 8,673,950 |   |
| Diluted net  income (loss) per share                 |       | $                           | (0.19      | ) | $ | (0.19 | ) |
| Diluted weighted  average shares outstanding         |       | 8,310,132                   |       | 8,673,950 |   |
| Dividends  declared per share                        |       | $                           | 0.13       |   | $ | 0.13 |   |

 

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

 

4

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**FOGCUTTER CAPITAL GROUP INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

 

(Unaudited)

(dollarsin thousands)

 
| ** **                                                                                                        | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | **Option to  Purchase** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|--------------------|------------|-----------------|------------|-------------------------|------------|---------------------------------------|------------|------------------|------------|
| ** **                                                                                                        | ** ** | **Shares (1)**   | ** ** | **Amount**         | ** ** | **Shares**      | ** ** | **Amount**              | ** ** | **Deficit**                           | ** ** | **Common Stock** | ** ** | **Income** | ** ** | **Total** | ** ** |
| ** **                                                                                                        | ** ** | ** **       | ** ** | ** **         | ** ** | ** **      | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at January 1, 2005                                                                                        |       | 8,380,673        |       | $                  | 168,214    |            | 3,376,400  |                    | $          | (9,727                                | )          | $                | (123,916   | ) | $ | (593 | ) | $ | 329 |   | $ | 34,307 |   |
|                                                                                                              |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
| Comprehensive income (loss):                                                                                      |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
|                                                                                                              |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
| Net loss                                                                                                          |       | —           |       | —             |       | —          |       | —                  |       | (1,555                                | )          | —           |       | — |   | (1,555 | ) |
|                                                                                                              |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
| Other comprehensive income:                                                                                       |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
|                                                                                                              |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
| Foreign currency translation                                                                                      |       | —           |       | —             |       | —          |       | —                  |       | —                                |       | —           |       | (113 | ) | (113 | ) |
|                                                                                                              |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
| Reclassification adjustment for net losses on securities and foreign  currency translation included in net income |       | —           |       | —             |       | —          |       | —                  |       | —                                |       | —           |       | 170 |   | 170 |   |
|                                                                                                              |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
| Total comprehensive loss                                                                                          |       | —           |       | —             |       | —          |       | —                  |       | —                                |       | —           |       | — |   | (1,498 | ) |
|                                                                                                              |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
| Purchase of treasury stock                                                                                        |       | (423,245         | )          | —             |       | 423,245         |       | (2,282                  | )          | —                                |       | 593              |       | — |   | (1,689 | ) |
|                                                                                                              |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
| Dividends declared                                                                                                |       | —           |       | —             |       | —          |       | —                  |       | (1,089                                | )          | —           |       | — |   | (1,089 | ) |
|                                                                                                              |       |             |       |               |       |            |       |                    |       |                                  |       |             |       |   |   |   |   |
| Balance at March 31, 2005                                                                                         |       | 7,957,428        |       | $                  | 168,214    |            | 3,799,645  |                    | $          | (12,009                               | )          | $                | (126,560   | ) | $ | — |   | $ | 386 |   | $ | 30,031 |   |

 

----

(1)   Issued and outstanding

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

5

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FOG CUTTER CAPITAL GROUPINC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

*(dollars in thousands)*

 
| ** **                                                               | ** ** | **Quarter Ended March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                               | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                   |       |                        |       |   |   |
| Net income  (loss)                                                       |       | $                           | (1,555     | ) | $ | (1,635 | ) |
| Adjustments to  reconcile net income (loss) to net operating cash flows: |       |                        |       |   |   |
| Equity in  (income) losses of equity investees                           |       | —                      |       | (22 | ) |
| Depreciation and  amortization                                           |       | 526                         |       | 527 |   |
| Loss (gain) on  foreign currency translation                             |       | 171                         |       | (15 | ) |
| Gain on sale of  securities and loans                                    |       | —                      |       | (1,086 | ) |
| Gain on sale of  real estate                                             |       | (413                        | )          | (3 | ) |
| Other                                                                    |       | (132                        | )          | (360 | ) |
| Change in:                                                               |       |                        |       |   |   |
| Deferred income                                                          |       | (120                        | )          | 160 |   |
| Accrued interest  receivable                                             |       | (15                         | )          | (7 | ) |
| Other assets                                                             |       | 1,389                       |       | 144 |   |
| Accounts payable  and accrued liabilities                                |       | (688                        | )          | (20 | ) |
| Net cash used in  operating activities                                   |       | (837                        | )          | (2,317 | ) |
|                                                                     |       |                        |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                   |       |                        |       |   |   |
| Principal payments  on securities available for sale                     |       | —                      |       | 2,247 |   |
| Proceeds from  sale of securities available for sale                     |       | —                      |       | 1,300 |   |
| Proceeds from  sale of real estate                                       |       | 1,190                       |       | 172 |   |
| Investment in  loans and discounted loans                                |       | (90                         | )          | (4,223 | ) |
| Principal  repayments on loans and discounted loans                      |       | —                      |       | 40 |   |
| Proceeds from  sale of loans                                             |       | —                      |       | 30 |   |
| Investments in  real estate                                              |       | (1,948                      | )          | (1,061 | ) |
| Investments in  restaurant, property, plant and equipment                |       | (44                         | )          | (557 | ) |
| Other                                                                    |       | (4                          | )          | 6 |   |
| Net cash  provided by (used in) investing activities                     |       | (896                        | )          | (2,046 | ) |
|                                                                     |       |                        |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                   |       |                        |       |   |   |
| Proceeds from  borrowings                                                |       | 1,374                       |       | 2 |   |
| Repayments on  borrowings                                                |       | (82                         | )          | (1,263 | ) |
| Repayments under  capital leases                                         |       | (110                        | )          | (143 | ) |
| Purchase of  treasury stock                                              |       | (1,689                      | )          | — |   |
| Dividend payments  on common stock                                       |       | (1,089                      | )          | (2,247 | ) |
| Other                                                                    |       | —                      |       | 24 |   |
| Net cash (used  in) provided by financing activities                     |       | (1,596                      | )          | (3,627 | ) |
|                                                                     |       |                        |       |   |   |
| EFFECT OF  EXCHANGE RATE CHANGE ON CASH                                  |       | 50                          |       | 21 |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUVALENTS                     |       | (3,379                      | )          | (7,969 | ) |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                        |       | 11,948                      |       | 19,607 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                              |       | $                           | 8,569      |   | $ | 11,638 |   |
|                                                                     |       |                        |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                       |       |                        |       |   |   |
| Cash paid for  interest                                                  |       | 422                         |       | 508 |   |
| Cash paid for  taxes                                                     |       | 2                           |       | 4 |   |
|                                                                     |       |                        |       |   |   |
| NONCASH  FINANCING AND INVESTING ACTIVITIES                              |       |                        |       |   |   |
| Treasury stock  acquired through exercise of option                      |       | 593                         |       | — |   |

 

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

 

6

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**NOTE 1****- BASIS OFPRESENTATION**

 

The accompanying interim consolidated financialstatements of Fog Cutter Capital Group Inc. and Subsidiaries (“FCCG” or the “Company”)are unaudited and have been prepared in conformity with the requirements ofRegulation S-X promulgated under the Securities Exchange Act of 1934, asamended (the “Exchange Act”), particularly Rule 10-01 thereof, which governsthe presentation of interim financial statements.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The accompanying interim consolidatedfinancial statements should be read in conjunction with the Company’s 2004 AnnualReport on Form 10-K.  A summary of theCompany’s significant accounting policies is set forth in Note 2 to theconsolidated financial statements in the 2004 Annual Report on Form 10-K.

 

In the Company’s opinion, all adjustments, comprisedof normal recurring accruals necessary for the fair presentation of the interimfinancial statements, have been included in the accompanying consolidatedfinancial statements.  Operating resultsfor the three months ended March 31, 2005 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2005.

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requires theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosures of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.  Certain items in the previously reportedconsolidated financial statements were reclassified to conform to the March 31,2005 presentation, none of which affected previously reported results ofoperations.

 

At March 31, 2005, certain Company officers anddirectors had, directly or indirectly, majority voting control of the Company.

 

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

 

Dividends

 

On January 26, 2005, the Company’s Board of Directorsdeclared a $0.13 per share dividend for the first quarter of 2005.  The dividend was paid on February 10, 2005 toshareholders of record on February 4, 2005.

 

Sale of Real Estate

 

During January 2005, the Company sold two stand-aloneretail locations in separate transactions for an aggregate sales price of $1.2million in cash.  The Company recognizedgains on the sales totaling $0.4 million.

 

Investment in Variable Interest Entity

 

During January 2005, the Company funded a loantotaling $0.9 million and committed to fund an additional $0.4 million to aSpanish entity formed to purchase, reposition and sell an apartment building inBarcelona, Spain.  Under the terms of theloan, the Company receives a preferred 30% return on its investment, and, aftera similar return is paid to the minority investors, the Company receives an 80%share in additional profits generated by the investment.  The investment meets the definition of aVariable Interest Entity (“VIE”)  underFASB Interpretation 46 (“FIN 46”) and the Company is considered the primarybeneficiary of the VIE.

 

The VIE purchased the apartment building for $1.5million.  The purchase was funded withbank loans totaling $0.5 million, the Company’s $0.9 million investment and a$0.1 million contribution from the project managers.  Neither the creditors nor the otherbeneficial interest holders have recourse to the Company with regard to thisinvestment and, as a result, the maximum limit of the Company’s exposure toloss on this investment is $1.3 million.

 

7

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Call Option

 

On March 14, 2005, the Companyexercised an option (the “Call Option”) to acquire 423,245 shares of theCompany’s Common Stock from Andrew Wiederhorn, the Company’s former ChiefExecutive Officer and current Chief Strategic Officer for an exercise price of$3.99 per share.  The original purchaseprice for the Call Option in April 2004 was $750,000, resulting in an “all-in”cost to the Company on exercise of approximately $5.76 per share.

 

** NOTE 3 – COMMITMENTS, CONTINGENCIES &OFF-BALANCE SHEET RISK**

 

CCL Investigation

 

OnJune 3, 2004, the Company announced that then Chief Executive Officerand Chairman of the Board, Andrew Wiederhorn, had entered into a settlement(the “Settlement”) with the United States Attorney’s Office for the District ofOregon (“USAODO”) regarding its investigation into the failure of CapitalConsultants, L.L.C (“CCL”) and would take a leave of absence from his corporatepositions at the Company.  Under theSettlement terms, Mr. Wiederhorn pled guilty on June 3, 2004 to two federalcounts and was sentenced to 18-months incarceration and fined $2.0million.  The charges to which Mr.Wiederhorn has pled guilty pursuant to the Settlement are not based upon anyacts or omissions involving the Company or of Mr. Wiederhorn in his capacity asan officer or director of the Company.

 

On June 2, 2004, the Company and Mr. Wiederhornentered into a leave of absence agreement. In entering into the leave of absence agreement, the Board of Directorsconsidered the nature of the statutes to which Mr. Wiederhorn pled and the factthat he relied on the advice of expert legal counsel and a national accountingfirm.  The Board also believed it wasimportant to assure Mr. Wiederhorn’s return to active involvement with theCompany because of his expertise and knowledge of the Company’s business andinvestments.

 

Mr. Wiederhorn began his leave of absence on August 2,2004 and is expected to remain in that status for approximately 14 months.Under the terms of the leave of absence agreement, Mr. Wiederhorn will continueto receive his regular salary and bonus pursuant to and as set forth in hisemployment agreement.  All of thecompensation costs associated with the leave of absence agreement were chargedto earnings during the year ended December 31, 2004.

 

Shareholder Derivative Complaint

 

On July 6, 2004,Jeff Allan McCoon, derivatively on behalf of the Company, filed a lawsuit inthe Circuit Court for the State of Oregon (Multnomah County) which named the Company andall of its directorsas defendants.  The lawsuit alleges thatmembers of the Company’s Board of Directors breached their duties to theCompany by entering into the Leave of Absence Agreement with AndrewWiederhorn.  The lawsuit generally seeks the recovery of all payments madeor to be made to Mr. Wiederhorn under the Leave of Absence Agreement plusattorney fees and costs.  The individual defendants have indemnityagreements with the Company and have asserted the right to indemnification fromthe Company under those indemnity agreements. The Company has incurred expenses under the indemnity agreements andalso may derive benefits if the plaintiff’s claims are successful. At thisstage of the case it is too early to predict the outcome with any certainty.

 

Other 

 

The Company is involvedin various other legal proceedings occurring in the ordinary course of businesswhich the Company believes will not have a material adverse effect on theconsolidated financial condition or operations of the Company.

 

8

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The Company may utilize awide variety of off-balance sheet financial techniques to manage its risk.  In hedging the interest rate or foreigncurrency exchange rate exposure, the Company may enter into hedge transactionsto counter movements in interest rates and foreign currencies.  These hedges may be in the form of currencyand interest rate swaps, options, and forwards or combinations thereof.

 

At March 31, 2005, theCompany had no outstanding derivative instruments held for trading or hedgingpurposes.

 

The Company has operating leases for office and retailspace which expire through 2012.  Theleases provide for varying minimum annual rental payments including rentincreases and free rent periods.

 

Future minimum rental payments, by year and in theaggregate, under noncancelable operating leases with initial or remaining termsof one year or more, consisted approximately of the following at March 31, 2005(dollars in thousands): 

 
| 2005                          |   | $     | 2,437  |   |
|-------------------------------|--------|-------|--------|--------|
| 2006                          |   | 2,887 |   |
| 2007                          |   | 2,261 |   |
| 2008                          |   | 1,730 |   |
| 2009                          |   | 1,169 |   |
| Thereafter                    |   | 3,690 |   |
| Total minimum  lease payments |   | $     | 14,174 |   |

 

In order to facilitate the development of franchiselocations, as of March 31, 2005, Fatburger had guaranteed the annual minimumlease payments of three restaurant sites owned and operated byfranchisees.  The amount of theguarantees total approximately $1.9 million plus certain contingent rentalpayments as defined in the respective leases. These leases expire at various times through 2008.

 

The Company did not have any other off balance sheetarrangements in place as of March 31, 2005.

 

**NOTE 4 -GOODWILL AND OTHER INTANGIBLE ASSETS**

 

Primarily due to the acquisition of Fatburger, theCompany has goodwill in the amount of $7.1 million and other intangible assetsin the amount of $5.3 million. In accordance with the Financial AccountingStandards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill and Other Intangible Assets”, goodwill is not amortized, but issubject to an annual impairment test.  Sincethe acquisition of Fatburger by the Company, Fatburger has experiencedoperating losses and has funded its operations and expansion with limitedliquidity.  The Company believes thatthese conditions are temporary in nature, however, should these conditions notbe corrected, the Company may be required to recognize impairment losses on itsrecorded goodwill.  As of March 31, 2005,the Company was not aware of any events or changes in circumstances that wouldrequire the impairment of the recorded goodwill.

 

9

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Summarized information for the Company’s acquiredintangible assets as of March 31, 2005 is as follows (dollars in thousands):

 

Amortized intangibleassets:

 
| Franchise  Agreements              |   | $      | 906    |   |
|------------------------------------|--------|--------|--------|--------|
| Other                              |   | 464    |   |
| Total amortized  intangible assets |   | $      | 1,370  |   |
|                               |   |   |   |
| Unamortized  intangible assets:    |   |   |   |
|                               |   |   |   |
| Trademarks                         |   | $      | 3,970  |   |

 

Trademarks, which haveindefinite lives, are not subject to amortization.  All other intangible assets are amortizedusing the straight-line method over the estimated useful lives of the assets offive to fifteen years.  Estimatedamortization expense for the remainder of 2005 and the five succeeding years isas follows (dollars in thousands):

 
| 2005 |   | $   | 187    |   |
|------|--------|-----|--------|--------|
| 2006 |   | 191 |   |
| 2007 |   | 188 |   |
| 2008 |   | 181 |   |
| 2009 |   | 164 |   |
| 2010 |   | 164 |   |

 

The recorded values of goodwill and other intangibleassets may become impaired in the future. The determination of the value ofsuch intangible assets requires management to make estimates and assumptionsthat affect the consolidated financial statements.  Potential impairments to intangible assetsare assessed when there is evidence that events or changes in circumstancesindicate that the carrying amount of an asset may not be recovered.  This assessment is based on the operationalperformance of acquired businesses, market conditions and other factorsincluding future events.   Any resultingimpairment loss could have an adverse impact on the results of operations ofthe Company.

 

**NOTE 5 –RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In December 2004, the FASB issued SFAS No. 123R,Share-Based Payment (“FAS 123R”), which requires that the cost resulting forall share-based payment transactions be recognized in the financial statements.This Statement requires a public entity to measure the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award (with limited exceptions). That cost will berecognized over the period during which an employee is required to provideservice in exchange for the award—the requisite service period (usually thevesting period). No compensation cost is recognized for equity instruments forwhich employees do not render the requisite service. The provisions of FAS 123Rare effective as of the beginning of the first interim or annual reportingperiod that begins after December 31, 2005. The Company has not yet determinedthe effect of this new standard on its consolidated financial position andresults of operations.

 

**NOTE 6 – STOCK OPTIONS AND RIGHTS**

 

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

 

10

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The Companyapplies Accounting Principles Board Opinion No. 25, *“Accountingfor Stock Issued to Employees,”*and related interpretations in accountingfor the Option Plan. Accordingly, no compensation expense has been recognizedin the Consolidated Statements of Operations for grants under the OptionPlan.  Had compensation expense for theCompany’s Option Plan been determined based on the fair value at the grant dateconsistent with the methods of FASB Statement No. 123 “*Accountingfor Stock Based Compensation,*” the Company’s net income and incomeper share for the three months ended March 31, 2005 and 2004 would have beendecreased to the pro forma amounts indicated below:

 
| ** **                                                                | ** ** | **Three months ended March 31,**              | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **(dollars in thousands, except share data)** | ** ** |
| Net income  (loss):                                                       |       |                                          |       |   |   |
| As reported                                                               |       | $                                             | (1,555     | ) | $ | (1,635 | ) |
| Pro forma  compensation expense from stock based compensation, net of tax |       | (73                                           | )          | (6 | ) |
| Pro forma net  income (loss)                                              |       | $                                             | (1,628     | ) | $ | (1,641 | ) |
| Net income  (loss) per common and common share equivalent:                |       |                                          |       |   |   |
| Basic income per  share:                                                  |       |                                          |       |   |   |
| As reported                                                               |       | $                                             | (0.19      | ) | $ | (0.19 | ) |
| Pro forma                                                                 |       | $                                             | (0.20      | ) | $ | (0.19 | ) |
| Diluted income  per share:                                                |       |                                          |       |   |   |
| As reported                                                               |       | $                                             | (0.19      | ) | $ | (0.19 | ) |
| Pro forma                                                                 |       | $                                             | (0.20      | ) | $ | (0.19 | ) |

 

There were no options granted with exercise pricesbelow the market value of the stock at the grant date. Fair values for 2005were estimated using the Black-Scholes option-pricing model with the followingweighted average assumptions used: 10% dividend yield, expected volatility of 86%,risk-free interest rate of 2.5% and expected lives of five years.

 

**NOTE 7 – VARIABLE INTEREST ENTITIES**

 

The Company has funded three loans totaling $3.2million to related Spanish entities formed to purchase, reposition and sell threeapartment buildings in Barcelona, Spain. Under the terms of the loans, the Company receives a preferred 30%return on its investment, and, after a similar return is paid to the majorityinvestors, the Company receives an 80% share in additional profits generated bythe investment.  The investment meets thedefinition of a Variable Interest Entity (“VIE”)  under FASB Interpretation 46 (“FIN 46”) andthe Company is the primary beneficiary of the VIE.  As a result, the assets and liabilities ofthe VIE have been consolidated into the accompanying consolidated financialstatements as of March 31, 2005.

 

The VIE purchased the apartment buildings for $5.7million.  The purchase was funded withbank loans totaling $1.9 million, the Company’s $3.2 million investment and a $0.5million contribution from the project managers. The Company has agreed to fund additional advances of $0.4 million tothe VIE.  Neither the creditors nor theother beneficial interest holders have recourse to the Company with regard tothis investment and, as a result, the maximum limit of the Company’s exposureto loss on this investment is $3.6 million.

 

11

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As of March 31, 2005, the following assets andliabilities of the VIE were included in the Company’s accompanying consolidatedstatements of financial condition:

 
| Investment in  real estate, net        |   | $         | 6,357,000 |   |
|----------------------------------------|--------|-----------|-----------|--------|
| Other assets                           |   | 307,000   |      |
| Borrowings and  notes payable          |   | 3,134,000 |      |
| Accrued expense  and other liabilities |   | 64,000    |      |
| Minority  interest                     |   | 372,000   |      |

 

**NOTE 8 – OPERATING SEGMENTS**

 

Operating segments consist of (i) restaurantoperations conducted through Fatburger Holdings, Inc. (“Fatburger”), (ii) commercialreal estate mortgage brokerage activities conducted through George ElkinsMortgage Banking Company (“George Elkins”) and (iii) real estate, merchantbanking and financing activities.  Thefollowing is a summary of each of the operating segments:

 

**Restaurant Operations**

 

The Company ownsapproximately 71% of the voting control of Fatburger.  As of March 31, 2005, Fatburger operates orfranchises 65 hamburger restaurants located primarily in California andNevada.  Fatburger has plans to openadditional restaurants, primarily through franchise operations, throughout theUnited States.  Franchisees currently ownand operate approximately 39 of the Fatburger locations.  During the three months ended March 31, 2005,franchise rights to open 1 individual Fatburger restaurant were sold and threenew franchise restaurants were opened.  Royaltyrevenues were approximately $0.4 million for the three months ended March 31,2005.

 

**Commercial Real Estate Mortgage BrokerageOperations**

 

The Company holdsa 51% ownership interest in George Elkins, a California mortgage bankingoperation, which provides brokerage services related to the production of over$700 million per year in commercial real estate mortgages. George Elkins isheadquartered in Los Angeles, with satellite offices throughout the southernCalifornia area.  The mortgage brokerageoperation also manages a commercial loan servicing portfolio in excess of $700million for various investors.

 

**Real Estate, Merchant Banking and FinancingOperations**

 

The Company invests in real estate and other finance relatedassets.  The merchant banking andfinancing operations focus on the acquisition of controlling interests inbusinesses in the process of restructuring. This can take the form of assisting in a management buy-out, refinancingcorporate debt or acquiring the “non-core” assets of a business.

 

Each of the segments operates with its own managementand personnel.  There are no indirectallocations of overhead or other costs. Minority interests in earnings, which were immaterial for the periods presented,are included in other income (loss) in the following segment financial results.

 

12

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Segmentdata for the three months ended March 31, 2005, and 2004 are as follows (dollarsin thousands):

 
| ** **                                           | ** ** | **Merchant Banking,**       | ** ** | ** **             | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                           | ** ** | **Real Estate and Finance** | ** ** | **Mortgage Brokerage** | ** ** | **Restaurant** | ** ** | **Total**  | ** ** |
| ** **                                           | ** ** | **2005**                    | ** ** | **2004**               | ** ** | **2005**       | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2004** | ** ** |
| Net Interest  Income:                                |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Loans                                                |       | $                           | 275        |                   | $          | 426            |       | $          | —     |       | $          | —     |       | $          | —     |   | $ | — |   | $ | 275 |   | $ | 426 |   |
| Securities                                           |       | 1                           |       | 313                    |       | —         |       | —     |       | —     |       | —     |       | 1          |       | 313 |   |
| Other  investments                                   |       | 47                          |       | 47                     |       | 1              |       | —     |       | —     |       | —     |       | 48         |       | 47 |   |
| Total interest  income                               |       | 323                         |       | 786                    |       | 1              |       | —     |       | —     |       | —     |       | 324        |       | 786 |   |
| Interest expense                                     |       | —                      |       | 71                     |       | —         |       | —     |       | —     |       | —     |       | —     |       | (71 | ) |
| Net interest  income                                 |       | 323                         |       | 715                    |       | 1              |       | —     |       | —     |       | —     |       | 324        |       | 715 |   |
|                                                 |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Real estate  operations:                             |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Operating  revenue                                   |       | 1,007                       |       | 954                    |       | —         |       | —     |       | —     |       | —     |       | 1,007      |       | 954 |   |
| Operating  expense                                   |       | (423                        | )          | (456                   | )          | —         |       | —     |       | —     |       | —     |       | (423       | )          | (456 | ) |
| Gain on sale of  real estate                         |       | 413                         |       | 3                      |       | —         |       | —     |       | —     |       | —     |       | 413        |       | 3 |   |
| Interest expense                                     |       | (268                        | )          | (281                   | )          | —         |       | —     |       | —     |       | —     |       | (268       | )          | (281 | ) |
| Depreciation                                         |       | (145                        | )          | (159                   | )          | —         |       | —     |       | —     |       | —     |       | (145       | )          | (159 | ) |
| Total real  estate operations                        |       | 584                         |       | 61                     |       | —         |       | —     |       | —     |       | —     |       | 584        |       | 61 |   |
|                                                 |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Restaurant  operations:                              |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Operating income                                     |       | —                      |       | —                 |       | —         |       | —     |       | 5,983      |       | 5,284      |       | 5,983      |       | 5,284 |   |
| Cost of goods  sold                                  |       | —                      |       | —                 |       | —         |       | —     |       | (3,459     | )          | (3,077     | )          | (3,459     | )          | (3,077 | ) |
| Franchise and  advertising fees                      |       | —                      |       | —                 |       | —         |       | —     |       | 521        |       | 272        |       | 521        |       | 272 |   |
| General and  administrative costs                    |       | —                      |       | —                 |       | —         |       | —     |       | (2,671     | )          | (2,715     | )          | (2,671     | )          | (2,715 | ) |
| Interest Expense                                     |       | —                      |       | —                 |       | —         |       | —     |       | (154       | )          | (165       | )          | (154       | )          | (165 | ) |
| Depreciation and  amortization                       |       | —                      |       | —                 |       | —         |       | —     |       | (368       | )          | (352       | )          | (368       | )          | (352 | ) |
| Total restaurant  operations                         |       | —                      |       | —                 |       | —         |       | —     |       | (148       | )          | (753       | )          | (148       | )          | (753 | ) |
|                                                 |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Other operating  income:                             |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Gain on sale of  loans and securities                |       | —                      |       | 1,086                  |       | —         |       | —     |       | —     |       | —     |       | —     |       | 1,086 |   |
| Loan brokerage  fees                                 |       | —                      |       | —                 |       | 1,428          |       | 1,126      |       | —     |       | —     |       | 1,428      |       | 1,126 |   |
| Other revenue  (loss)                                |       | (72                         | )          | 77                     |       | 145            |       | 153        |       | —     |       | —     |       | 73         |       | 230 |   |
| Total other  operating income                        |       | (72                         | )          | 1,163                  |       | 1,573          |       | 1,279      |       | —     |       | —     |       | 1,501      |       | 2,442 |   |
|                                                 |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Operating  expenses:                                 |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Compensation and  employee benefits                  |       | 704                         |       | 1,650                  |       | 1,363          |       | 1,111      |       | —     |       | —     |       | 2,067      |       | 2,761 |   |
| Professional  fees                                   |       | 700                         |       | 234                    |       | 9              |       | 7          |       | —     |       | —     |       | 709        |       | 241 |   |
| Other                                                |       | 812                         |       | 872                    |       | 228            |       | 226        |       | —     |       | —     |       | 1,040      |       | 1,098 |   |
| Total operating  expenses                            |       | 2,216                       |       | 2,756                  |       | 1,600          |       | 1,344      |       | —     |       | —     |       | 3,816      |       | 4,100 |   |
|                                                 |       |                        |       |                   |       |           |       |       |       |       |       |       |       |       |       |   |   |
| Net income  (loss) before provision for income taxes |       | (1,381                      | )          | (817                   | )          | (26            | )          | (65        | )          | (148       | )          | (753       | )          | (1,555     | )          | $ | (1,635 | ) |
| Provision for  income taxes                          |       | —                      |       | —                 |       | —         |       | —     |       | —     |       | —     |       | —     |       | — |   |
| Net income  (loss)                                   |       | $                           | (1,381     | )                      | $          | (817           | )          | $          | (26        | )          | $          | (65        | )          | $          | (148       | ) | $ | (753 | ) | $ | (1,555 | ) | $ | (1,635 | ) |
| Segment assets                                       |       | $                           | 57,440     |                   | $          | 81,282         |       | $          | 605        |       | $          | 2,083      |       | $          | 11,340     |   | $ | 19,592 |   | $ | 69,385 |   | $ | 102,957 |   |

 

13

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**NOTE 9– INCOME TAXES**

 

As of March 31, 2005, theCompany had, for U.S. Federal tax purposes, a net operating loss (“NOL”) carryforward of approximately $76.1 million, including $11.5 million relating toFatburger. The Company’s NOL begins to expire in 2018. Fatburger’s NOL began toexpire in 2004 and is generally subject to an annual limitation under theInternal Revenue Code of 1986, Section 382, *Limitation on NetOperating Loss Carryovers and Certain Built-In Losses Following Change inControl*.  In addition, to theextent the Fatburger NOL is utilized, the recognition of the related taxbenefits would first reduce goodwill related to the Fatburger acquisition, thenother non-current intangible assets related to that acquisition, and thenincome tax expense in accordance with Statement on Financial AccountingStandards No. 109, *Accounting for IncomeTaxes.*

 

United States taxregulations impose limitations on the use of NOL carry forwards followingcertain changes in ownership.  If such achange were to occur with respect to the Company, the limitation couldsignificantly reduce the amount of benefits that would be available to offsetfuture taxable income each year, starting with the year of ownershipchange.  To reduce the likelihood of suchownership changes, the Company established a Shareholder Rights Plan dated asof October 18, 2002, which discourages, under certain circumstances, ownershipchanges which would trigger the NOL limitations.

 

During the three months ended March 31, 2005 and 2004 aprovision for income taxes was not required due to the tax net operating lossgenerated during the period.

 

**NOTE 10 – SUBSEQUENT EVENTS**

 

Dividends

 

On April 27, 2005, the Board of Directors declared a$0.13 per share dividend for the second quarter of 2005.  The dividend is payable on June 1, 2005 toshareholders of record on May 20, 2005.

 

Sale of Real Estate

 

Subsequent to March 31, 2005, the Company sold three stand-aloneretail locations for a combined sale price of $1.2 million.  The proceeds from these sales consisted of $1.1million in cash and a note receivable of $0.1 million.  The aggregate gain on the sale of theproperties was $0.3 million.

 

Restaurant Openings

 

Subsequent to March 31, 2005, three Fatburgerfranchise restaurants were opened.  Thisresulted in the recognition of franchise fees totaling $0.1 million.

 

14

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**ITEM 2****.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Thefollowing discussion and analysis should be read in conjunction with theInterim Consolidated Financial Statements of Fog Cutter Capital Group Inc. andthe notes thereto included elsewhere in this filing.  References in this filing to “Fog CutterCapital Group Inc.,” “we,” “our,” and “us” refer to Fog Cutter Capital GroupInc. and its subsidiaries unless the context indicates otherwise.*

* *

## **GENERAL**

 

Fog Cutter Capital Group Inc. (“FCCG” or the “Company”)focuses on the acquisition of assets where its expertise in intensive assetmanagement and financial structuring can create value.

 

Our business strategy consists of developing,strengthening and expanding our restaurant and commercial real estate mortgagebrokerage operations and continuing to identify and acquire real estateinvestments with favorable risk-adjusted returns. We also seek to identify andacquire controlling interests in other operating businesses in which we feel wecan add value.

 

During 2003 and 2004, we redeployed a large portion ofthe capital generated through our sale of mortgage-backed securities and fromcash distributions from our Bourne End subsidiary.  We used a portion of this capital to acquirevoting control of Fatburger Holdings Inc. in August 2003 and further increasedour investment in Fatburger in May 2004. The expansion and success of Fatburger is currently one of our primaryfocuses.  Since our acquisition,Fatburger has opened 19 additional restaurant locations and currently hasagreements for approximately 217 new franchise restaurants.

 

Due to the varied nature of our operations, managementdoes not utilize a standard array of key performance indicators in evaluatingthe progress of the Company.  Management’sevaluation, instead, focuses on an asset-by-asset analysis within the Company’soperating segments.

 

**CriticalAccounting Policies**

** **

**Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Management bases its estimates and judgmentson historical experience and on various other factors that are believed to be reasonableunder the circumstances.  Actual resultsmay differ from these estimates under different assumptions or conditions.  Management believes the following criticalaccounting policies, affect its more significant judgments and estimates usedin the preparation of its financial statements.**

** **

***Accounting For Equity Investees***

** **

The equity method of accounting is used forinvestments in associated companies which are not unilaterally controlled bythe Company and in which the Company’s interest is generally between 20% and50% of the outstanding voting rights. The Company’s share of earnings or losses of associated companies inwhich at least 20% of the voting securities is owned, is included in theconsolidated statement of operations.

 

15

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*Valuation*

 

At March 31, 2005, ourlargest asset consisted of our portfolio of real estate.  We value our real estate holdings either byindependent appraisal or through internally generated analysis using comparablemarket data.

 

*SaleRecognition*

 

**Our accounting policy calls for therecognition of sales of financial instruments only when we have irrevocablysurrendered control over these assets. We do not retain any recourse or performance obligations with respect toour sales of assets.**

** **

**We recognize gain on sales of realestate under the full accrual method when (1) a sale is consummated, (2) thebuyer’s initial and continuing investments are adequate to demonstrate acommitment to pay for the property, (3) any receivable from the buyer is notsubject to future subordination and (4) the usual risks and rewards ofownership of the property have been transferred to the buyer.  If any of these conditions are not met, ouraccounting policy requires that gain on sale be deferred until all of theconditions have been satisfied.**

** **

***Fatburger Restaurant and FranchiseRevenue***

** **

**Revenue from the operation ofFatburger company-owned restaurants are recognized when sales occur.**

** **

**Franchise fee revenue from the saleof individual Fatburger franchises is recognized only when all materialservices or conditions relating to the sales have been substantially performedor satisfied.  The completion of trainingand the opening of a location by the franchisee constitute substantialperformance on the part of Fatburger. Nonrefundable deposits collected in relation to the sale of franchisesare recorded as deferred franchise fees until the completion of training andthe opening of the restaurant, at which time the franchise fee revenue isrecognized.**

** **

**In addition to franchise feerevenue, Fatburger collects a royalty ranging from 5% to 6% of gross sales fromrestaurants operated by franchisees. Fatburger recognizes royalty fees as the related sales are made by thefranchisees.  Costs relating tocontinuing franchise support are expensed as incurred.**

** **

***Goodwill and Other IntangibleAssets***

** **

**Goodwillrepresents the excess of the purchase price and other acquisition related costsover the estimated fair value of the net tangible and intangible assetsacquired.  We do not amortize goodwill.  Intangible assets are stated at the estimatedvalue at the date of acquisition and include trademarks, operating manuals,franchise agreements and leasehold interests. Trademarks, which have indefinite lives, are not subject toamortization.  All other intangibleassets are amortized over their estimated useful lives, which range from fiveto fifteen years.**

 

We assess potential impairments to intangible assetsat least annually, or when there is evidence that events or changes incircumstances indicate that the carrying amount of an asset may not berecovered. Our judgments regarding the existence of impairment indicators andfuture cash flows related to intangible assets are based on operationalperformance of our acquired businesses, market conditions and other factors.Future events could cause us to conclude that impairment indicators exist andthat goodwill or other intangible assets associated with our acquiredbusinesses are impaired. Any resulting impairment loss could have an adverseimpact on our results of operations.

 

16

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**RESULTS OF OPERATIONS**3⁄4THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31,2004

 

NET INCOME. Our net loss for the three months ended March 31, 2005, was $1.6million, or $0.19 per share, compared with a net loss of $1.6 million, or $0.19per share, for the three months ended March 31, 2004.  The net loss for the quarter ended March 31,2005 was primarily the result of losses from our restaurant operations of $0.1million and other operating expenses of $3.8 million, partially offset by gainson sales of real estate of $0.4 million. The net loss for the quarter ended March 31, 2004 was primarily theresult of losses from our restaurant operations of $0.8 million and otheroperating expenses of $4.1 million, partially offset by gains on sales ofmortgage-backed securities of $1.1 million.

 

The following sections describe the resultsof operations of our operating segments for the three months ended March 31,2005 and 2004:

 

**Restaurant Segment Operations**

 

During the three months ending March 31, 2005, werecognized a net loss from our restaurant segment of $0.1 million, compared toa net loss of $0.8 million for the three months ending March 31,2004.  The 2005 results were primarilydue to a gross margin (sales net of cost of goods sold) of $2.5 million andfranchise and royalty revenue of $0.5 million, offset by general andadministrative costs of $2.7 million, interest expense of $0.1 million, anddepreciation and amortization of $0.3 million. The Company’s primary strategy with respect to Fatburger is to increasethe number of franchises, thus increasing the franchise fees and future royaltyincome to the operation.  Since thecompany acquired its interest in Fatburger in August 2003, Fatburger hasadded 19 new restaurants.  While theCompany seeks to expand the number of existing restaurants, the identificationof qualified franchisees and quality locations has an impact on the rate ofgrowth in the number of our restaurants.

 

The 2004 results were primarily due to a gross marginof $2.2 million and franchise and royalty revenue of $0.3 million, offset bygeneral and administrative costs of $2.7 million, interest expense of $0.2million, and depreciation and amortization of $0.4 million.

 

**Commercial Real Estate Mortgage BrokerageSegment Operations**

 

Our net loss from the commercial real estatebrokerage segment was less than $0.1 million for the three months ended March 31,2005, compared to a net loss of $0.1 million during the 2004 period.  During the 2005 period, we recognized loan brokeragefees of $1.4 million, loan servicing and other revenue of $0.1 million, whichwas offset by compensation expense of $1.4 million and other operating expenseof $0.2 million.

 

During the 2004 period, we recognized loanbrokerage fees of $1.1 million, loan servicing and other revenue of $0.2million, which was offset by compensation expense of $1.1 million and otheroperating expense of $0.2 million.

 

**Merchant Banking, Real Estate and FinanceSegment Operations**

 

NET INTEREST INCOME.  Our net interest income for the three monthsended March 31, 2005, was $0.3 million, compared with $0.7 million for thethree months ended March 31, 2004. The decrease is primarily attributable to a net reduction of assets(reflecting our sales of mortgage-backed securities and paydowns of the relateddebt facilities).  These changes resultedin decreases in interest income on securities of $0.3 million and a decrease ininterest income on loans of $0.2 million, partially offset by a decrease ininterest expense of $0.1 million.  Thefollowing tables set forth information regarding the total amount of incomefrom interest-earning assets and expense from interest-bearing liabilities andthe resulting average yields and rates:

 

17

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| ** **                                     | ** **   | **For the Three Months Ended March 31,  2005** | ** **   |
|------------------------------------------------|--------------|-----------------------------------------------------|--------------|
| ** **                                     | ** **   | **Average**                                         | ** **   | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** **   | **Balance**                                         | ** **   | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| *** ***                                   | *** *** | **(dollars in thousands)**                          | *** *** |
| Interest-Earning  Assets:                      |         |                                                |         |   |   |   |   |
|                                           |         |                                                |         |   |   |   |   |
| Loan  portfolios (1)                           |         | $                                                   | 9,749        |   | $ | 275 |   | 11.3 | % |
| Mortgage-backed  securities available for sale |         | 8                                                   |         | 1 |   | 50.0 |   |
| Cash  deposits and other investments           |         | 10,575                                              |         | 48 |   | 1.8 |   |
| Total  interest-earning assets                 |         | $                                                   | 20,332       |   | 324 |   | 6.4 | % |
|                                           |         |                                                |         |   |   |   |   |
| Interest-Bearing  Liabilities:                 |         |                                                |         |   |   |   |   |
|                                           |         |                                                |         |   |   |   |   |
| Borrowings  (2)                                |         | $                                                   | —       |   | — |   | 0.0 | % |
| Total  interest-bearing liabilities            |         | $                                                   | —       |   | — |   | 0.0 | % |
|                                           |         |                                                |         |   |   |   |   |
| Net interest  income (3)                       |         |                                                |         | $ | 324 |   | 6.4 | % |
| Net interest  margin (4)                       |         |                                                |         |   |   | 6.4 | % |

 

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(1)                Includesloans to senior officers.

(2)                Excludesborrowings related to investments in real estate.

(3)                Netinterest spread represents the difference between the average rate oninterest-earning assets and the average cost of interest-bearing liabilities.

(4)                Netinterest margin represents net interest income divided by averageinterest-earning assets.

 
| ** **                                     | ** **   | **For the Three Months Ended March 31,  2004** | ** **   |
|------------------------------------------------|--------------|-----------------------------------------------------|--------------|
| ** **                                     | ** **   | **Average**                                         | ** **   | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** **   | **Balance**                                         | ** **   | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| *** ***                                   | *** *** | **(dollars in thousands)**                          | *** *** |
| Interest-Earning  Assets:                      |         |                                                |         |   |   |   |   |
|                                           |         |                                                |         |   |   |   |   |
| Loan  portfolios (1)                           |         | $                                                   | 8,137        |   | $ | 426 |   | 20.9 | % |
| Mortgage-backed  securities available for sale |         | 33,883                                              |         | 313 |   | 3.7 | % |
| Other  investments                             |         | 15,758                                              |         | 47 |   | 1.2 | % |
| Total  interest-earning assets                 |         | $                                                   | 57,778       |   | 786 |   | 5.4 | % |
|                                           |         |                                                |         |   |   |   |   |
| Interest-Bearing  Liabilities:                 |         |                                                |         |   |   |   |   |
|                                           |         |                                                |         |   |   |   |   |
| Borrowings  (2)                                |         | $                                                   | 24,642       |   | (71 | ) | 1.2 | % |
| Total  interest-bearing liabilities            |         | $                                                   | 24,642       |   | (71 | ) | 1.2 | % |
|                                           |         |                                                |         |   |   |   |   |
| Net interest  income (3)                       |         |                                                |         | $ | 715 |   | 4.2 | % |
| Net interest  margin (4)                       |         |                                                |         |   |   | 5.0 | % |

 

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(1)          Includes loans to senior officers.

(2)          Excludes borrowings related to investments inreal estate.

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

(4)          Net interest margin represents net interestincome divided by average interest-earning assets.

 

18

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REAL ESTATE OPERATIONS.  Our real estate operations represent activityfrom our investment in 15 commercial properties located in Oregon, Texas,Arizona, Oklahoma, Mississippi Arkansas, Louisiana, Missouri and Michigan, aswell as the operations of our leasehold interests in 79 freestanding retailbuildings located throughout the United States. During the three months ended March 31, 2005, we realized netincome from real estate operations of approximately $0.6 million, compared withnet income of $0.1 million for the three months ended March 31, 2004.  The increase in net income from real estatewas primarily the result of gains recognized on sales of $0.4 million duringthe 2005 period.  Our strategy withregard to our real estate investments is to position each property to enhancelease values for long-term income or for sale.

 

EQUITY INEARNINGS OF EQUITY INVESTEES.   At March 31,2005, our sole equity investee was Bourne End Properties Plc. (“Bourne End”).We own approximately 26% of Bourne End, which operates a shopping center in theUnited Kingdom.  At the time of ouroriginal investment in 2001, Bourne End owned 15 shopping centers in Europe.  Fourteen of these centers have now been sold,generating net income to us totaling $ 9.7 million since the acquisition.  During the three months ended March 31,2005 and 2004 we recognized income of less than $0.1 million from equityinvestees.

 

GAIN ON SALE OF LOANS AND SECURITIES.  During the three months ended March 31,2005, we did not recognize any gains on sales of loans or securities.  This compares to gains of $1.1 million,primarily from the sale of mortgage-backed securities, during the three monthsended March 31, 2004.  Because wehave sold substantially all of our subordinate mortgage-backed securitiesportfolio, we expect that gain on sale of securities will contribute less tofuture income than it has in recent years.

 

OPERATING EXPENSES.  During the three months ended March 31,2005, we incurred segment operating expenses from merchant banking, real estateand finance operations of $2.2 million, compared to $2.8 million during thecomparable period in 2004.  Operatingexpenses for the 2005 period include compensation costs of $0.7 million,professional fees of $0.7 million and other costs of $0.8 million. Operatingexpenses for the 2004 period include compensation costs of $1.7 million,professional fees of $0.2 million and other costs of $0.9 million.

 

**CHANGES IN FINANCIAL CONDITION**

 

GENERAL. Total assets decreased from approximately $73.9 million at December 31,2004 to approximately $69.4 million at March 31, 2005.  Total liabilities decreased slightly fromapproximately $39.6 million at December 31, 2004 to approximately $39.4million at March 31, 2005. Stockholders’ equity decreased during the three months ended March 31,2005 by approximately $4.3 million resulting primarily from our net loss of$1.6 million, dividends declared of $1.1 million and the purchase of treasurystock of $1.7 million

 

INVESTMENTS IN REAL ESTATE.  Investments in real estate increased by $0.3million during the three months ended March 31, 2005.  The increase was primarily due to thepurchase of an apartment building in Barcelona, Spain for $1.5 million, and capitalimprovements of $0.4 million, partially offset by depreciation of $0.1 million,a decrease in carrying value due to changes in foreign currency of $0.2million, the sale of two retail properties with a net book value of $0.8million, and the disposal of two properties subject to capital leases with acarrying value of $0.5 million.

 

LOAN PORTFOLIO.  We invest in special situation loans,generally secured by real estate.  Theseloans are typically short-term, with maturities ranging from 6 to 24 months.  Due to the unique circumstances relating tothe loans, the interest rate charged the borrower is significantly higher thanconventional real estate lending.  As of March 31,2005, our special situation loan portfolio consisted of five individual loans witha combined carrying value of $6.9 million. Three of the five loans are secured by real estate consisting ofcommercial or single-family properties located in California, Texas, andNevada.  One loan is secured by all ofthe stock and assets of a commercial manufacturing business, and one loan issecured by stock in a software company. The loans have a weighted average interest rate (including the effectsof $2.2 million in impaired loans on non-accrued status and excluding fees andpoints) of 8.0% and a weighted average maturity of 2 months.

 

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During the three months ended March 31,2005, our loan portfolio increased by approximately $0.2 million.  This was primarily the result of amortizationof deferred loan fees.  As of March 31,2005, two of the Company’s loans totaling $2.2 million had been restructured toprovide additional time for repayment by the borrowers in exchange for variousextension fees or other new terms.  As aresult, these loans were considered impaired for accounting purposes, however,no impairment reserves were required on these loans due to management’sexpectation that the carrying amounts will be collected.

 

LOANS TO SENIOR EXECUTIVES.  On February 21, 2002 (prior to thepassage of the Sarbanes-Oxley Act of 2002), we loaned Mr. Wiederhorn $175,000to finance the purchase of Common Stock. This loan is full recourse to Mr. Wiederhorn and is secured by all ofMr. Wiederhorn’s rights under his employment agreement.  At Mr. Wiederhorn’s direction (in accordancewith the terms of his employment agreement), on February 21, 2002, weloaned a limited partnership (the “LP”) controlled by Mr. Wiederhorn’s spouse$687,000 to finance the purchase of Common Stock.  The loan is secured by the membershipinterests of two limited liability companies owned by the LP.  The limited liability companies each own aparcel of real property in Oregon and have no liabilities.  At the time of the loan, the real propertieshad an appraised value of $725,000.  Theloan is also guaranteed by Mr. Wiederhorn. The Common Stock purchased with the proceeds of these loans does notserve as security for the loans.  Theloans are due on February 21, 2007, and bear interest at the prime rate,as published in the Wall Street Journal, which interest is added to theprincipal annually.

 

On July 9, 2002 (prior to the passage ofthe Sarbanes-Oxley Act of 2002), we loaned Mr. Wiederhorn $2.0 million.  This loan is full recourse to Mr. Wiederhornand his spouse and is secured by trust deeds on two residences located inOregon.  The loan is due on August 1,2007 and bears interest at 8.5% per annum, payable monthly.

 

Further information on these loans toexecutives is included in our proxy statements for 2004 and prior years’ AnnualMeeting of Stockholders.

 

INVESTMENT INBOURNE END.  Our investment in Bourne Endremained unchanged at $1.9 million during the three months ended March 31,2005.

 

RESTAURANT PROPERTY, PLANT AND EQUIPMENT,NET.  Our investment in restaurantproperty, plant and equipment, net of depreciation, decreased $0.3 millionduring the three months ended March 31, 2005 to a balance of $6.0million.  The decrease was primarily theresult of depreciation expense of approximately $0.3 million during the period.

 

INTANGIBLE ASSETS, NET.  Primarily as a result of the acquisition andconsolidation of Fatburger, as of March 31, 2005 we had intangible assets,net of amortization, of $5.3 million. This consisted of trademark rights of approximately $4.0 million,franchise agreements of approximately $0.9 million and other miscellaneousintangible assets of approximately $0.4 million.  Intangible assets decreased $0.1 millionduring the three months ended March 31, 2005 primarily as the result ofamortization expense.

 

GOODWILL. Primarily as a result of the acquisition and consolidation of Fatburger,we had recorded goodwill of $7.1 million as of March 31, 2005.  Goodwill did not change during the threemonths ended March 31, 2005.

 

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OTHER ASSETS. At March 31, 2005, the Company’s other assets consisted of thefollowing: (dollars in thousands)

 
| Capitalized  deferred compensation |   | $     | 786    |   |
|------------------------------------|--------|-------|--------|--------|
| Prepaid  expenses                  |   | 115   |   |
| Trade  receivables                 |   | 472   |   |
| Investment  in operating leases    |   | 267   |   |
| Mortgage  servicing rights         |   | 248   |   |
| Restaurant  assets                 |   | 778   |   |
| Other                              |   | 1,021 |   |
| Total                              |   | $     | 3,687  |   |

 

The capitalized deferred compensationincluded in other assets relates to the acquisition of George Elkins.  In conjunction with the acquisition, certainemployees of George Elkins entered into long-term employment agreements.  These employees received payments totaling$1.9 million which we capitalized as deferred compensation.  The employees are obligated to perform underthe employment agreements and must repay any unearned deferred compensationpayments upon early termination.  Thedeferred compensation is earned ratably over the terms of the employmentagreements, and we are amortizing the $1.9 million investment over the contractterms.  At March 31, 2005, theremaining contract terms range from 2 to 26 months.

 

BORROWINGS ANDNOTES PAYABLE.  Our borrowings and notespayable increased $1.4 million during the three months ended March 31,2005 to an ending balance of $9.4 million. This was primarily the result of borrowings to finance the purchase ofan apartment building in Barcelona, Spain.

 

OBLIGATIONSUNDER CAPITAL LEASES.  Obligations undercapital leases decreased approximately $0.6 million during the three monthsended March 31, 2005.  This decreasewas primarily the result of the scheduled amortization of the obligations.

 

DEFERRED INCOME.  Franchise fee revenue from the sales ofindividual Fatburger franchises is recognized only when all material servicesor conditions relating to the sales have been substantially performed orsatisfied.  The completion of trainingand the opening of a location by the franchisee constitute substantialperformance.  Fatburger charges $40,000per location in franchise fees.  One-halfof the fees are collected in cash at the time the franchise rights are grantedand the balance is collected at the time the lease for the location isexecuted. Nonrefundable deposits collected in relation to the sale offranchises are recorded as deferred franchise fees until the completion oftraining and the opening of the restaurant, at which time the franchise feerevenue is recognized.  As of March 31,2005, our deferred income relating to the collection of unearned Fatburgerfranchise fees was $4.4 million, a decrease of $0.1 million from December 31,2004.  As of March 31, 2005, nearlyall of the deferred income was comprised of the initial $20,000 non-refundabledeposit received per location and the balance of the franchise fee will becollected in cash as leases on these locations are signed.

 

DEFERREDINCOME TAXES.  Our deferred income taxesremained unchanged at $5.8 million at March 31, 2005.  As of March 31, 2005, we had, for U.S.Federal tax purposes, a net operating loss (“NOL”) carryforward ofapproximately $77.6 million, including $13.5 million relating toFatburger.  The NOL carryforward mayreduce the future cash payment of the deferred income tax liability.  Our NOL begins to expire in 2018.  Fatburger’s NOL began to expire in 2004 andis generally subject to an annual limitation under the Internal Revenue Code of1986, Section 382, Limitation on Net Operating Loss Carryovers and CertainBuilt-In Losses Following Change in Control. In addition, to the extent the Fatburger NOL is utilized, therecognition of the related tax benefits would first reduce goodwill related tothe Fatburger acquisition, then other non-current intangible assets related tothat acquisition, and then income tax expense in accordance with Statement onFinancial Accounting Standards No. 109, Accounting for Income Taxes.

 

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United Statestax regulations impose limitations on the use of NOL carry forwards followingcertain changes in ownership.  If such achange were to occur with respect to the Company, the limitation couldsignificantly reduce the amount of benefits that would be available to offsetfuture taxable income each year, starting with the year of ownershipchange.  To reduce the likelihood of suchownership changes, we established a Shareholder Rights Plan dated as of October 18,2002, which discourages, under certain circumstances, ownership changes whichwould trigger the NOL limitations.

 

STOCKHOLDERS’ EQUITY.  Stockholders’ equity decreased byapproximately $4.3 million resulting primarily from our net loss of $1.6million, purchase of treasury stock of $1.7 million and dividends declared of$1.1 million.

 

In April 2004 we purchased a three yearcall option (the “Call Option”) from Andrew A. Wiederhorn, the Company’s formerChairman and Chief Executive Officer and current Chief Strategic Officer.  The Call Option gave us the right, but notthe obligation, to purchase 423,245 of the Company’s outstanding common stock(the “Option Shares”) from Mr. Wiederhorn for a purchase price of $3.99 pershare.  We paid $750,000 ($1.77 peroption share) for the Call Option.  TheCall Option was exercised on March 14, 2005 for $1.7 million and we placed423,245 shares in treasury.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Liquidity is ameasurement of our ability to meet potential cash requirements, includingongoing commitments to repay borrowings, fund business operations andacquisitions, engage in loan acquisition and lending activities and for othergeneral business purposes.  The primarysources of funds for liquidity during the three months ended March 31,2005 consisted of net cash provided by investing activities, including proceedson the sale of real estate.  As of March 31,2005, we had cash or cash equivalents of $8.6 million which we believe will besufficient to meet our current liquidity needs.

 

Our borrowingsand the availability of further borrowings are substantially affected by, amongother things, changes in interest rates, changes in market spreads or decreasesin credit quality of our assets.

 

Fluctuationsin interest rates will impact our net income to the extent our operations andour fixed rate assets are funded by variable rate debt.  We may also be impacted to the extent thatour variable rate assets reprice on a different schedule or in relation toa different index than any floating rate debt. See “Item 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.”

 

At March 31,2005, we had total consolidated secured indebtedness of $21.2 million, as wellas $18.2 million of other liabilities. The consolidated secured indebtednessconsisted of (i) $11.8 million outstanding of capital leases maturing between2010 and 2040 which are secured by real estate, (ii) mortgage notes payable of$3.1 million secured by real estate and (iii) notes payable and other debt ofFatburger of $6.3 million secured by the assets of Fatburger.

 

If ourexisting liquidity position were to prove insufficient, and we were unable torepay, renew or replace maturing indebtedness on terms reasonably satisfactoryto us, we may be required to sell (potentially on short notice) a portion ofour assets, and could incur losses as a result. Also, Fatburger is involved in a nationwide expansion of franchise andFatburger owned locations, which will require significant liquidity.  If Fatburger or its franchisees areunsuccessful in obtaining credit lines sufficient to fund this expansion, thetiming of restaurant openings may be delayed. Similarly, our special situation lending business requires liquidity tofund new investments or extend existing loans.

 

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We considerthe sale of assets to be a normal, recurring part of our operations and we arecurrently generating adequate cash flow as a result of these transactions.  However, excluding the sale of assets fromtime to time, we are currently operating with negative cash flow, since many ofour assets do not generate current cash sufficient to cover current operatingexpenses.  We believe that our existingsources of funds will be adequate for purposes of meeting our liquidity needs;however, there can be no assurance that this will be the case.  Material increases in interest expense fromvariable-rate funding sources, or material decreases in monthly cash receiptsfrom operations, generally would negatively impact our liquidity.  On the other hand, material decreases ininterest expense from variable-rate funding sources would positively affect ourliquidity.

 

Duringthe year ended December 31, 2004, we declared four quarterly cash distributionsof $0.13 per share each, totaling $0.52 per share ($4.4 million).  Through May 9, 2005, we have declared twoquarterly cash dividends of $0.13 per share each.  The Company does not have a fixed dividendpolicy and may declare and pay new quarterly dividends on our commonstock, subject to our financial condition, results of operations, capitalrequirements and other factors deemed relevant by the Board of Directors.  One factor the Board of Directors may consideris the impact of dividends on the Company’s liquidity.

 

EffectiveOctober 14, 2004, the Company’s Common Stock began trading in theover-the-counter (“OTC”) market on the OTC “pink sheets.”  Prior to that, the Company’s Common Stock wasquoted on the Nasdaq National Market.  OnJuly 20, 2004, the Company was notified by Nasdaq of a staff determinationto delist the Company’s Common Stock effective July 29, 2004.  The Company challenged the staffdetermination and requested an oral hearing by a Listing Qualifications Panelto review the staff’s conclusions.  Ahearing was held on September 9, 2004, and, on October 12, 2004, theCompany was notified by Nasdaq that the Listing Qualifications Panel upheld thestaff determination and the Company’s Common Stock was delisted from the NasdaqNational Market on October 14, 2004. The Company requested a review of the Listing Qualifications Panel’sdecision by Nasdaq’s Listing and Hearing Review Council.  On February 16, 2005, the Companyreceived notice that the Nasdaq Listing and Hearing Review Council had upheldthe Panel’s decision.  On April 21,2005, the Board of Governors of Nasdaq approved the decision of the NasdaqListing and Hearing Review Council and the Nasdaq decision became final.  The Company is considering whether to appealthe decision to the Securities and Exchange Commission. There can be noassurance that an appeal will be successful.

 

Trading of our Common Stock on the OTCpink sheets may reduce the liquidity of our Common Stock compared to quotationon the Nasdaq National Market.  Also, thecoverage of the Company by security analysts and media could be reduced, whichcould result in lower prices for our Common Stock than might otherwise prevailand could also result in increased spreads between the bid and ask prices forthe our Common Stock.  Additionally,certain investors will not purchase securities that are not quoted on theNasdaq Stock Market, which could materially impair our ability to raise fundsthrough the issuance of Common Stock or other securities convertible into CommonStock.

 

In addition, if the trading price of ourCommon Stock is less than $5.00 per share, trading in our Common Stock couldalso be subject to the requirements of Rule 15g-9 promulgated under theSecurities Exchange Act of 1934, as amended. Under that Rule, brokers and dealers who recommend such low pricedsecurities to persons other than established customers and accredited investorsmust satisfy special sales practice requirements, including a requirement thatthey make an individualized written suitability determination for the purchaserand receive the purchaser’s written consent prior to any transaction.  The Securities Enforcement Remedies and PennyStock Reform Act of 1990 also requires additional disclosure in connection withany trades involving a stock defined as a penny stock (generally, according toregulations adopted by the SEC, any equity security not traded on an exchangeor quoted on Nasdaq that has a market price of less than $5.00 per share,subject to certain exceptions), including the delivery, prior to any pennystock transaction, of a disclosure schedule explaining the penny stockmarket and the risks associated therewith. Such requirements could severely limit the market liquidity of ourCommon Stock.  There can be no assurancethat our Common Stock will not become treated as penny stock.

 

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**OFF BALANCE SHEET ARRANGEMENTS**

 

In order tofacilitate the development of franchise locations, as of March 31, 2005,Fatburger had guaranteed the annual minimum lease payments of three restaurantsites owned and operated by franchisees. The guarantees approximate $1.9 million plus certain contingent rentalpayments as defined in the respective leases. These leases expire at various times through 2008.

 

The lease guarantees by Fatburger do notprovide a material source of liquidity, capital resources or other benefits tothe Company.  There are no revenues,expenses or cash flows connected with the lease guarantees other than thereceipt of normal franchise royalties. As of March 31, 2005, there was no known event, demand, trend oruncertainty that was likely to trigger the guarantee by Fatburger.

 

We did nothave any other off balance sheet arrangements in place as of March 31,2005.

 

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## **ITEM 3**.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

Our marketrisk is primarily the exposure to loss resulting from changes in foreigncurrency exchange rates, interest rates and commodity prices.  Our exposure to foreign currency fluctuationsarises from our UK investment in BEP and our investment in Barcelona realestate as of March 31, 2005, approximately 22% of the Company’s equity iscurrently invested in net assets located outside of the United States Theseinvestments are primarily denominated in British pounds or the Euro.

 

The following table illustrates the projectedeffect on our net asset value as a result of hypothetical changes in foreigncurrency rates as of March 31, 2005:

 
| **Change in Foreign  Exchange Rates (1)** | ** ** | **Projected Change in  Net Asset Value** | ** ** | **Projected  Percentage Change  in Net Asset Value** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|
|                                      |       |                                     |       |                                                 |       |
| Decrease 10%                              |       | $                                        | (651,000   | )                                                    | -2.2       | % |
| Decrease 20%                              |       | $                                        | (1,303,000 | )                                                    | -4.3       | % |
| No Change                                 |       | $                                        | —     |                                                 | 0.0        | % |
| Increase 10%                              |       | $                                        | 651,000    |                                                 | 2.2        | % |
| Increase 20%                              |       | $                                        | 1,303,000  |                                                 | 4.3        | % |

 

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(1) Assumes that uniform percentage changes occur instantaneously in boththe Great Britain pound and the euro.  Adecrease in the foreign exchange rate indicates a strengthening of the U.S.dollar against that currency.  Anincrease in the foreign exchange rate indicates a weakening of the U.S. dollaragainst that currency.

 

We can utilizea wide variety of financial techniques to assist in the management of currencyrisk.  For example, in hedging theexchange rate exposure of a foreign currency denominated asset or liability, wemay enter into hedge transactions to counter movements in the differentcurrencies.  These hedges may be in theform of currency swaps, options, and forwards, or combinations thereof.  No such currency hedging techniques were inuse as of March 31, 2005.

 

Interest rate riskhas historically been our primary market risk. A large percentage of our assetsare generally funded by equity or by fixed-rate liabilities.  This change in asset mix has resulted in asignificant decrease in interest rate risk, which resulted from the sale of theremainder of the mortgage-backed securities portfolio and the repayment of theassociated repurchase agreements during 2004.

 

Changes ininterest rates can affect net income by affecting the spread between ourinterest-earning assets and our interest-bearing liabilities and by increasingthe cost associated with operating and expanding our restaurant operation.  Changes in the level of interest rates canalso affect, among other things, the value of our interest-earning assets (andthe default rates associated therewith), our ability to acquire loans andgeneral levels of consumer spending.

 

The followingtable quantifies the potential changes in net interest income and net portfoliovalue as of March 31, 2005 should interest rates go up or down (shocked)by 100 or 200 basis points. Net portfolio value is calculated as the sum of thevalue of off-balance sheet instruments and the present value of cash in-flowsgenerated from interest-earning assets net of cash out-flows in respect ofinterest-bearing liabilities.  The tableassumes that changes in interest rates occur instantaneously.  Actual results could differ significantlyfrom those estimated in the table.

 

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| **Projected Percent Change In**   | ** ** |
|-----------------------------------|------------|
| **Change in Interest  Rates (1)** | ** ** | **Net Interest  Income** | ** ** | **Net Portfolio  Value** | ** ** | **Change in Annual  Net  Interest Income** | ** ** | **Change in Net  Portfolio  Value** | ** ** |
| -200 Basis  Points                |       | 10.4 | % | -4.3 | % | $ | 73,000 |   | $ | (1,299,000 | ) |
| -100 Basis  Points                |       | 1.3 | % | -2.1 | % | $ | 9,000 |   | $ | (621,000 | ) |
| 0 Basis  Points                   |       | 0.0 | % | 0.0 | % | $ | — |   | $ | — |   |
| 100 Basis  Points                 |       | 0.2 | % | 1.9 | % | $ | 1,000 |   | $ | 569,000 |   |
| 200 Basis  Points                 |       | 0.3 | % | 3.6 | % | $ | 2,000 |   | $ | 1,091,000 |   |

 

----

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

 

The following table provides information as to the type of funding usedto finance our assets as of March 31, 2005.

 

Assets and Liabilities

As of March 31, 2005

(dollars in thousands)

 
| ** **                                | ** ** | **Basis Amount** | ** ** | **Coupon Type** | ** ** | **Liability** | ** ** | **Type** | ** ** |
|-------------------------------------------|------------|------------------|------------|-----------------|------------|---------------|------------|----------|------------|
| Interest-Bearing Assets                   |       |             |       |            |       |          |       |     |       |
| Fixed-rate  assets, no financing          |       | $                | 7,194      |            | Fixed      |          | $          | —   |       | None |   |
| Variable-rate  assets, no financing       |       | 2,673            |       | Prime           |       | —        |       | None     |       |
| Cash and  cash equivalents                |       | 8,569            |       | N/A             |       | —        |       | None     |       |
| Subtotal                                  |       | 18,436           |       |            |       | —        |       |     |       |
|                                      |       |             |       |            |       |          |       |     |       |
| Other Assets                              |       |             |       |            |       |          |       |     |       |
| Investments  in real estate               |       | 27,014           |       | N/A             |       | 14,925        |       | Fixed    |       |
| Investment  in BEP                        |       | 1,876            |       | N/A             |       | —        |       | None     |       |
| Restaurant  property, plant and equipment |       | 5,969            |       | N/A             |       | 6,278         |       | LIBOR    |       |
| Intangible  assets, net                   |       | 5,340            |       | N/A             |       | —        |       | None     |       |
| Goodwill                                  |       | 7,063            |       | N/A             |       | —        |       | None     |       |
| Other                                     |       | 3,687            |       | N/A             |       | —        |       | None     |       |
| Subtotal                                  |       | 50,949           |       |            |       | 21,203        |       |     |       |
|                                      |       |             |       |            |       |          |       |     |       |
| Liability  Only                           |       |             |       |            |       |          |       |     |       |
| Deferred  income                          |       | —           |       |            |       | 4,346         |       | None     |       |
| Deferred  income taxes                    |       | —           |       |            |       | 5,780         |       | None     |       |
| Other                                     |       | —           |       |            |       | 8,025         |       | None     |       |
| Total                                     |       | $                | 69,385     |            |       |          | $          | 39,354   |       |   |   |

 

Our restaurant operations are also exposed tothe impact of commodity and utility price fluctuations related to unpredictablefactors such as weather and various other market conditions outside ourcontrol. Our ability to recover increased costs through higher prices islimited by the competitive environment in which we operate.

 

26

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**ITEM 4****.  CONTROLS AND PROCEDURES**

 

**(A)  Evaluation of disclosure controls andprocedures**.  Our Chief Executive Officer and our ChiefFinancial Officer, after evaluating the effectiveness of the Company’s “disclosurecontrols and procedures” (as defined in the Securities and Exchange Act of 1934Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by thisreport, have concluded that our disclosure controls and procedures were effectiveand designed to ensure that material information relating to us and ourconsolidated subsidiaries would be made known to us by others within theseentities.

 

**(B)  Changes in internal control over financialreporting**. There were no significant changes in our internal control over financialreporting in connection with an evaluation that occurred during our firstfiscal quarter of 2005 that have materially affected or are reasonably likelyto materially affect our internal control over financial reporting.

 

27

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FORWARD-LOOKING STATEMENTS

 

CERTAIN STATEMENTS CONTAINED HEREIN ANDCERTAIN STATEMENTS CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SEC MAYNOT BE BASED ON HISTORICAL FACTS AND ARE “FORWARD-LOOKING STATEMENTS” WITHINTHE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21EOF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.  FORWARD-LOOKING STATEMENTS WHICH ARE BASED ONVARIOUS ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY’S CONTROL) MAY BEIDENTIFIED BY REFERENCE TO A FUTURE PERIOD OR PERIODS, OR BY THE USE OFFORWARD-LOOKING TERMINOLOGY, SUCH AS “MAY,” “WILL,” “BELIEVE,” “EXPECT,” “ANTICIPATE,”“CONTINUE,” OR SIMILAR TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OFTHOSE TERMS.  ACTUAL RESULTS COULD DIFFERMATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETYOF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE RELATED TO THE ECONOMICENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH THE COMPANY OPERATES,THE FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY OF AND COSTSASSOCIATED WITH SOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND PRICING, THEREAL ESTATE MARKET, FISCAL AND MONETARY POLICIES OF THE U.S.  GOVERNMENT, CHANGES IN PREVAILING INTERESTRATES, ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, PERFORMANCE OFRETAIL/CONSUMER MARKETS, DETERIORATION IN CONSUMER CREDIT, CREDIT RISKMANAGEMENT, ASSET/LIABILITY MANAGEMENT, THE IMPACT OF ONGOING LITIGATION, ANDTHE IMPACT OF THE SETTLEMENT OF THE INVESTIGATION OF THE COMPANY’S CHIEFEXECUTIVE OFFICER.  EXCEPT AS MAY BEREQUIRED BY LAW, THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANYOBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BE MADETO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED ORUNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.

 

28

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## **PART II**–OTHER INFORMATION

 

**Item 1**.           Legal Proceedings.

 

Capital Consultants LLC

 

As the Companyhas previously disclosed, the Company’s former Chief Executive Officer andcurrent Chief Strategic Officer, Andrew Wiederhorn, and former President,Lawrence Mendelsohn, received letters from the United States Attorney’s Officefor the District of Oregon (“USAODO”) in March 2001 advising them thatthey were targets of a grand jury investigation (the “CCL Investigation”) intothe failure of Capital Consultants, L.L.C (“CCL”).  CCL was a lender to Wilshire CreditCorporation (“WCC”) and related and affiliated companies. WCC was a mortgageloan servicing company owned by Mr. Wiederhorn and Mr. Mendelsohn that providedmortgage loan servicing for Wilshire Financial Services Group Inc., a publiccompany for which Mr. Wiederhorn acted as CEO and Mr. Mendelsohn acted asPresident and which was principally engaged in banking, loan pool purchasing,and investing in mortgage-backed securities. As a result of the liquidity crisis in the financial markets in the fallof 1998, Wilshire Financial Services Group Inc. experienced significant lossesand filed for bankruptcy, which in turn had a significant impact on itsaffiliates, including WCC, which could not repay the amounts borrowed from CCL.  At the time, Wilshire Financial ServicesGroup Inc. owned approximately 8.6% of the Company’s common stock and managedthe Company’s investments under a management agreement.

 

In August 2002,Mr. Mendelsohn resigned as President and Director of the Company. In November 2003,Mr. Mendelsohn entered into an agreement with the USAODO pursuant to which hepled guilty to filing a false 1998 personal tax return and agreed to cooperatein the CCL Investigation.

 

On June 3, 2004 the Company announcedthat Chief Executive Officer and Chairman of the Board Andrew Wiederhorn hadentered into a settlement with the USAODO regarding its investigation into CCL(the “Settlement”) and would take a leave of absence from his corporatepositions at the Company.

 

Under the Settlement terms, Mr. Wiederhornpled guilty on June 3, 2004 to two federal counts and was sentenced to 18months incarceration and fined $2.0 million. The first count, a violation of an ERISA provision, involved a federallaw that required no criminal intent and for which his reliance on the adviceof counsel was not a defense. The second count related to a violation involvinga deduction on a personal tax return. The deduction was structured and approved by Mr. Wiederhorn’s taxadvisors and did not reduce Mr. Wiederhorn’s tax liability or reduce thegovernment’s tax collections.  Thecharges to which Mr. Wiederhorn has pled guilty pursuant to the Settlement arenot based upon any acts or omissions involving the Company or Mr. Wiederhorn inhis capacity as an officer or director of the Company.

 

In entering into Mr. Wiederhorn’s leave ofabsence agreement, the Company’s Board of Directors considered the nature ofthe statutes to which Mr. Wiederhorn pled and the fact that he relied on theadvice of expert legal counsel and a national accounting firm.  The Board also believed it was important toassure Mr. Wiederhorn’s return to active involvement with the Company becauseof his expertise and knowledge and to preserve a significant businessrelationship and the value of the Company’s investments.

 

Under the terms of the leave of absenceagreement, Mr. Wiederhorn will continue to receive his regular salary and bonuspursuant to and as set forth in his employment agreement.  In addition, in consideration of Mr. Wiederhorn’sgood will, cooperation, and continuing assistance, and in recognition of Mr.Wiederhorn’s past service to the Company, to help avoid litigation and for theother reasons stated in the agreement, the Company made a leave of absencepayment to Mr. Wiederhorn in the amount of $2.0 million on June 2, 2004.

 

29

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Mr. Wiederhorn began his leave of absence on August 2,2004 and is expected to remain in that status until October  2005.  On August 13, 2004, the Board ofDirectors adopted a resolution changing the role of Andrew Wiederhorn fromCo-Chief Executive to Chief Strategic Officer during the leave of absenceperiod.  All other provisions of theLeave of Absence Agreement and employment agreement with Mr. Wiederhorn remainin force.  On August 13, 2004,Donald J. Berchtold became the sole Chief Executive Officer of the Company.

 

Nasdaq Delisting

 

Effective October 14,2004, the Company’s Common Stock began trading in the over-the-counter market on the OTC “pinksheets.”  Prior to that, the Company’sCommon Stock was quoted on the Nasdaq National Market.  On July 20, 2004, the Company wasnotified by Nasdaq of a staff determination to delist the Company’s CommonStock effective July 29, 2004.  TheCompany challenged the staff determination and requested an oral hearing by aListing Qualifications Panel to review the staff’s conclusions.  A hearing was held on September 9, 2004,and, on October 12, 2004, theCompany was notified by Nasdaq that the Listing Qualifications Panel upheld thestaff determination and the Company’s Common Stock was delisted from the NasdaqNational Market on October 14, 2004.  The Company requested a review of the ListingQualifications Panel’s decision by Nasdaq’s Listing and Hearing ReviewCouncil.  On February 16, 2005, theCompany received notice that the Nasdaq Listing and Hearing Review Council hadupheld the Panel’s decision.  On April 21, 2005, the Boardof Governors of Nasdaq approved the decision of the Nasdaq Listing and HearingReview Council and the Nasdaq decision became final.  The Company is considering whether to appealthe decision to the Securities and Exchange Commission.  There can be no assurance thatan appeal will be successful.

 

Shareholder Derivative Complaint

 

On July 6, 2004, Jeff Allan McCoon, derivativelyon behalf of the Company, filed a lawsuit in the Circuit Court for the State ofOregon (Multnomah County) which named the Company and all of its directors as defendants.  The lawsuit alleges that members of theCompany’s Board of Directors breached their duties to the Company by enteringinto the Leave of Absence Agreement with Andrew Wiederhorn.  The lawsuitgenerally seeks the recovery of all payments made or to be made to Mr.Wiederhorn under the Leave of Absence Agreement plus attorney fees andcosts.  The individual defendants have indemnity agreements with theCompany and have asserted the right to indemnification from the Company underthose indemnity agreements.  The Companyhas incurred expenses under the indemnity agreements and also may derivebenefits if the plaintiff’s claims are successful. At this stage of the case itis too early to predict the outcome with any certainty.

 

Other Legal Proceedings

 

The Company isinvolved in various other legal proceedings occurring in the ordinary course ofbusiness which the Company believes will not have a material adverse effect onthe consolidated financial condition or operations of the Company.

 

30

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**Item 2**.           Unregistered Sales ofEquity Securities and Use of Proceeds.

 

On March 14, 2005, the Company exercisedan option (the “Call Option”) to acquire 423,245 shares of the Company’s CommonStock from Mr. Wiederhorn, the Company’s former Chief Executive Officer andcurrent Chief Strategic Officer for an exercise price of $3.99 per share.  The original purchase price for the CallOption was $750,000, resulting in an “all-in” cost to the Company on exerciseof approximately $5.76 per share.  Theaggregate price to the Company on exercise of $5.76 per share represented apremium to the Company’s book value per share and market price per share at thetime the option was purchased.  Thestrike price for the shares was less than the Company’s book value per shareand approximated the recent trading range of the stock in the marketplace.   At the time the Call Option was purchased,the Company and its directors considered the following factors:  (1) the potentially negative impact on theCompany’s share price if the Option Shares were disposed of publicly; (2) theCompany’s favorable liquidity position; (3) the potential reduction in the riskthat shares are transferred in a transaction which would have an adverse impacton its NOL position; and (4) the reduction in the future expenditure of cash dividendsby the Company once the Company exercises the Call Option.  The Audit Committee of the Board of Directorsreviewed the transaction to confirm that the transaction was in the bestinterest of the Company and its other stockholders.

 

 
| **Period**                                           | ** ** | **(a) Total  Number of   Shares (or  Units)  Purchased** | ** ** | **(b) Average Price  Paid per Share (or  Unit)** | ** ** | **(c) Total Number  of Shares (or  Units) Purchased  as Part of  Publicity  Announced Plans  or Programs** | ** ** | **(d) Maximum  Number (or  Approximate Dollar  Value) of Shares (or  Units) that May Yet  Be Purchased Under  the Plans or  Programs** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1,  2005 – January 31, 2005   |       | —                                                   |       | —                                           |       | —                                                                                                     |       | —                                                                                                                                 |       |
| February 1,  2005 – February 28, 2005 |       | —                                                   |       | —                                           |       | —                                                                                                     |       | —                                                                                                                                 |       |
| March 1,  2005 – March 31, 2005       |       | 423,245                                                  |       | $                                                | 3.99       | (1)                                                                                                        | 423,245    |                                                                                                                                   | N/A        |   |
|                                                      |            |                                                          |            |                                                  |            |                                                                                                            |            |                                                                                                                                        |            |  |

 

----

(1)                                  Excludes$1.77 per share option cost for an option to purchase these shares.  The option was acquired in April 2004.

 
| **Item 3**. | ** ** | **Defaults Upon Senior  Securities.**                     |
|-------------|------------|-----------------------------------------------------------|
| ** **  | ** ** | ** **                                                |
|        |       | Not applicable.                                           |
|        |       |                                                      |
| **Item 4**. | ** ** | **Submission of Matters  to a Vote of Security Holders.** |
| ** **  | ** ** | ** **                                                |
| ** **  | ** ** | **None.**                                                 |
| ** **  | ** ** | ** **                                                |
| **Item 5**. | ** ** | **Other Information.**                                    |
| ** **  | ** ** | ** **                                                |
|        |       | None.                                                     |

** **

**Item 6**.           Exhibits

 
| 2.1    |   | Interim Finance and Stock Purchase  Agreement, by and between the entities listed therein and the Registrant,  dated as of August 15, 2003, incorporated by reference to Exhibit 2.5 to  the Form 10-Q for the period ended September 30, 2003, as previously  filed with the SEC on November 13, 2003. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 2.2    |   | Fatburger Holdings Inc. Preferred Stock Purchase Agreement, by  and between the entities listed therein and the Registrant, dated as of January 12,  2004 as previously filed with the SEC on March 19, 2004.                                                                                                |

 

31

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| 2.3    |   | March 2004 Supplemental Agreement, by and between Fatburger  Holdings, Inc. and the Registrant, dated as of March 10, 2004 as  previously filed with the SEC on March 19, 2004.                                                                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                               |
| 3.1    |   | Amended and Restated Articles of  Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to  the Form 10-Q for the period ended September 30, 1999, as previously  filed with the SEC on November 22, 1999.                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 3.2    |   | Bylaws of the Registrant, incorporated by  reference to Exhibit 3.2 to Amendment No. 3 to the Registration Statement  (Registration No. 333-39035) on Form S-11, as previously filed with the SEC  on March 30, 1998.                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.1    |   | Common Stock Certificate Specimen,  incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the  Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.2    |   | Form of Registration Rights Agreement,  incorporated by reference to Exhibit 10.8 to Amendment No. 3 to the  Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.3    |   | Form of Stock Option Plan, incorporated by  reference to Exhibit 10.3 to Amendment No. 3 to the Registration Statement  (Registration No. 333-39035) on Form S-11, as previously filed with the SEC  on March 30, 1998.                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.4    |   | Summary of Rights to Purchase Shares,  incorporated by reference to Exhibit 99.1 to the Form 8-K dated October 18,  2002, as previously filed with the SEC on October 18, 2002.                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.5    |   | Rights Agreement dated as of October 18,  2002 between the Registrant and The Bank of New York, incorporated by  reference to Exhibit 1 to Form 8-A, as previously filed with the SEC on October 29,  2002.                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.6    |   | Amendment to the Rights Agreement, dated as  of May 1, 2004, by and between the Registrant and The Bank of New York as  previously filed with the SEC on March 30, 2005.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.7    |   | Long Term Vesting Trust Agreement among the  Registrant and Lawrence Mendelsohn, Andrew Wiederhorn and David Egelhoff,  dated October 1, 2000, incorporated by reference to Exhibit 4.4 to the  Form 10-K for the year ended December 31, 2002, as previously filed with  the SEC on March 3, 2003. |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.8    |   | Amendment Number 1 to the Long Term Vesting  Trust Agreement dated as of September 19, 2002, by and between the  Registrant and Andrew Wiederhorn, Don Coleman, and David Dale-Johnson as  previously filed with the SEC on March 30, 2005.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 4.9    |   | Amendment Number 2 to the Long Term Vesting  Trust Agreement, dated as of May 26, 2004, by and between the Registrant and  Andrew Wiederhorn, Don Coleman, and David Dale-Johnson as previously filed  with the SEC on March 30, 2005.                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.1   |   | Amended and restated Employment Agreement  between the Registrant and Andrew A. Wiederhorn, incorporated by reference to  Exhibit 10.3 to the Form 8-K dated August 13, 2003, as previously filed  with the SEC on August 13, 2003.                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.2   |   | Employment Agreement between the Registrant  and R. Scott Stevenson dated as of June 30, 2003, incorporated by  reference to Exhibit 10.5 to the Form 8-K dated August 13, 2003, as  previously filed with the SEC on August 13, 2003.                                                              |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 11.1   |   | Computation of Per Share Earnings.                                                                                                                                                                                                                                                                                 |

 

32

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| 31.1   |   | Certification of Chief Executive Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                |
| 31.2   |   | Certification of Chief Financial Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                          |
|   |   |                                                                                                                                                                |
| 32.1   |   | Certification of the Chief Executive  Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                |
| 32.2   |   | Certification of the Chief Financial  Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

33

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

FOG CUTTER CAPITAL GROUP INC.

 
|   | By: /s/ Donald J. Berchtold                        |   |
|--------|----------------------------------------------------|--------|
|   | Donald J. Berchtold                                |
|   | Chief Executive Officer                            |
|   |                                               |
|   |                                               |
|   | By: /s/ R. Scott Stevenson                         |   |
|   | R. Scott Stevenson                                 |
|   | Senior Vice President and Chief Financial  Officer |

 

Date:  May 12, 2005

 

34

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EXHIBIT INDEX

 
| 2.1    |   | Interim Finance and Stock Purchase  Agreement, by and between the entities listed therein and the Registrant,  dated as of August 15, 2003, incorporated by reference to Exhibit 2.5 to  the Form 10-Q for the period ended September 30, 2003, as previously  filed with the SEC on November 13, 2003. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 2.2    |   | Fatburger Holdings Inc. Preferred Stock Purchase Agreement, by  and between the entities listed therein and the Registrant, dated as of January 12,  2004 as previously filed with the SEC on March 19, 2004.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 2.3    |   | March 2004 Supplemental Agreement, by and between Fatburger  Holdings, Inc. and the Registrant, dated as of March 10, 2004 as  previously filed with the SEC on March 19, 2004.                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 3.1    |   | Amended and Restated Articles of  Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to  the Form 10-Q for the period ended September 30, 1999, as previously  filed with the SEC on November 22, 1999.                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 3.2    |   | Bylaws of the Registrant, incorporated by  reference to Exhibit 3.2 to Amendment No. 3 to the Registration Statement  (Registration No. 333-39035) on Form S-11, as previously filed with the SEC  on March 30, 1998.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 4.1    |   | Common Stock Certificate Specimen,  incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the  Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 4.2    |   | Form of Registration Rights Agreement,  incorporated by reference to Exhibit 10.8 to Amendment No. 3 to the  Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 4.3    |   | Form of Stock Option Plan, incorporated by  reference to Exhibit 10.3 to Amendment No. 3 to the Registration Statement  (Registration No. 333-39035) on Form S-11, as previously filed with the SEC  on March 30, 1998.                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 4.4    |   | Summary of Rights to Purchase Shares,  incorporated by reference to Exhibit 99.1 to the Form 8-K dated October 18,  2002, as previously filed with the SEC on October 18, 2002.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 4.5    |   | Rights Agreement dated as of October 18,  2002 between the Registrant and The Bank of New York, incorporated by  reference to Exhibit 1 to Form 8-A, as previously filed with the SEC on October 29,  2002.                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 4.6    |   | Amendment to the Rights Agreement, dated as  of May 1, 2004, by and between the Registrant and The Bank of New York as  previously filed with the SEC on March 30, 2005.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 4.7    |   | Long Term Vesting Trust Agreement among the  Registrant and Lawrence Mendelsohn, Andrew Wiederhorn and David Egelhoff,  dated October 1, 2000, incorporated by reference to Exhibit 4.4 to the  Form 10-K for the year ended December 31, 2002, as previously filed with  the SEC on March 3, 2003.     |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 4.8    |   | Amendment Number 1 to the Long Term Vesting  Trust Agreement dated as of September 19, 2002, by and between the  Registrant and Andrew Wiederhorn, Don Coleman, and David Dale-Johnson as  previously filed with the SEC on March 30, 2005.                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                   |
| 4.9    |   | Amendment Number 2 to the Long Term Vesting  Trust Agreement, dated as of May 26, 2004, by and between the Registrant and  Andrew Wiederhorn, Don Coleman, and David Dale-Johnson as previously filed  with the SEC on March 30, 2005.                                                                            |

 

35

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| 10.1   |   | Amended and restated Employment Agreement  between the Registrant and Andrew A. Wiederhorn, incorporated by reference to  Exhibit 10.3 to the Form 8-K dated August 13, 2003, as previously filed  with the SEC on August 13, 2003.         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                  |
| 10.2   |   | Employment Agreement between the Registrant  and R. Scott Stevenson dated as of June 30, 2003, incorporated by  reference to Exhibit 10.5 to the Form 8-K dated August 13, 2003, as  previously filed with the SEC on August 13, 2003. |
|   |   |                                                                                                                                                                                                                                                  |
| 11.1   |   | Computation of Per Share Earnings.                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                  |
| 31.1   |   | Certification of Chief Executive Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                  |
| 31.2   |   | Certification of Chief Financial Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                  |
| 32.1   |   | Certification of the Chief Executive  Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                   |
|   |   |                                                                                                                                                                                                                                                  |
| 32.2   |   | Certification of the Chief Financial  Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                   |

 

36

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