**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

(Mark one)

 
| x      |   | QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934  |
|--------|--------|------------------------------------------------------------------------------------------------------|
|   |   | For the quarterly  period ended March 31, 2008                                                  |
|   |   |                                                                                                 |
| 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 ofregistrant as specified in its charter)

 

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

 

**1410 SWJefferson Street**

**Portland,OR  97201**

(Address ofprincipal executive offices) (Zip Code)

 

**(503)721-6500**

(Registrant’stelephone number, including area code)

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.                    Yes  x     No  o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer”, “largeaccelerated filer”, and “smaller reporting company” in Rule 12b-2 of theExchange Act.  (Check one):

 

        

| Large  accelerated filer o                                                   | Accelerated  filer o         |
|------------------------------------------------------------------------------|------------------------------|
|                                                                         |                         |
| Non-accelerated  filer £  (do not check if a smaller reporting company) | Smaller  reporting company x |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).                                                                                                                                                              Yes o   No x

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

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

 
| **Class**                                  | ** ** | **Outstanding  at April 30, 2008** |
|--------------------------------------------|------------|-----------------------------------------|
| Common Stock,  par value $0.0001 per share |       | 7,954,928 shares                        |

 

 

 

 

----

 

 

FOGCUTTER CAPITAL GROUP INC.

 

FORM 10-Q

 

I N D E X

 
| ** **                                 | **Page No.**                                                                           |
|--------------------------------------------|---------------------------------------------------------------------------------------------|
| **PART I—FINANCIAL INFORMATION** | ** **                                                                                  |
|                                       |                                                                                        |
| Item 1.                                    | Interim Consolidated Financial Statements  (Unaudited):                                     |   |
|                                       |                                                                                        |   |
|                                       | Consolidated Statements of Financial Condition                                              | 3 |
|                                       |                                                                                        |   |
|                                       | Consolidated Statements of Operations                                                       | 4 |
|                                       |                                                                                        |   |
|                                       | Consolidated Statement of Stockholders’ Equity                                         | 5 |
|                                       |                                                                                        |   |
|                                       | Consolidated Statements of Cash Flows                                                       | 6 |
|                                       |                                                                                        |   |
|                                       | Notes to Consolidated Financial Statements                                                  | 7 |
|                                       |                                                                                        |   |
| Item 2.                                    | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 15 |
|                                       |                                                                                        |   |
| Item 3.                                    | Quantitative and Qualitative Disclosures about  Market Risk                                 | 24 |
|                                       |                                                                                        |   |
| Item 4.                                    | Controls and Procedures                                                                     | 24 |
|                                       |                                                                                        |
|                                       |                                                                                        |
| **PART II—OTHER INFORMATION**    | ** **                                                                                  |
|                                       |                                                                                        |
| Item 1.                                    | Legal Proceedings                                                                           | 26 |
|                                       |                                                                                        |   |
| Item 1A.                                   | Risk Factors                                                                                | 26 |
|                                       |                                                                                        |   |
| Item 2.                                    | Unregistered Sales of Equity Securities and Use of  Proceeds                                | 26 |
|                                       |                                                                                        |   |
| Item 3.                                    | Defaults Upon Senior Securities                                                             | 26 |
|                                       |                                                                                        |   |
| Item 4.                                    | Submission of Matters to a Vote of Security Holders                                         | 26 |
|                                       |                                                                                        |   |
| Item 5.                                    | Other Information                                                                           | 26 |
|                                       |                                                                                        |   |
| Item 6.                                    | Exhibits                                                                                    | 26 |
|                                       |                                                                                        |
| Signatures                                 | 28                                                                                          |

 

Available information

 

                Our website is www.fogcutter.com.  We make our annual report on Form 10-K,as well as other reports filed with the Securities and Exchange Commission,available through our website as soon as reasonably practicable after they arefiled.  A copy of these reports may alsobe obtained by writing to us at 1410 SW Jefferson Street, Portland, Oregon,97201, Attn:  Investor Reporting.

 

 

 

 

2

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**PART I — FINANCIALINFORMATION**

 

## **ITEM 1.  INTERIM CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

 

FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION

*(dollarsin thousands, except share data)*

 
|                                                                                                                                                                                                                               | ** ** | **March 31,  2008  (unaudited)** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| Assets                                                                                                                                                                                                                             |       |                                  |       |                        |       |
| Current Assets:                                                                                                                                                                                                                    |       |                                  |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                         |       | $                                     | 954        |                        | $          | 1,131 |   |
| Accounts  receivable                                                                                                                                                                                                               |       | 1,217                                 |       | 1,491                       |       |
| Notes  receivable, current portion                                                                                                                                                                                                 |       | 578                                   |       | 566                         |       |
| Loans to senior  executives                                                                                                                                                                                                        |       | —                                |       | 1,147                       |       |
| Inventories                                                                                                                                                                                                                        |       | 3,105                                 |       | 2,505                       |       |
| Investments in  real estate, held for sale, net                                                                                                                                                                                    |       | 9,005                                 |       | 19,658                      |       |
| Current assets  held for sale                                                                                                                                                                                                      |       | —                                |       | 66                          |       |
| Other current  assets                                                                                                                                                                                                              |       | 398                                   |       | 536                         |       |
| Total current  assets                                                                                                                                                                                                              |       | 15,257                                |       | 27,100                      |       |
|                                                                                                                                                                                                                               |       |                                  |       |                        |       |
| Notes receivable                                                                                                                                                                                                                   |       | 42                                    |       | 46                          |       |
| Property, plant  and equipment, net                                                                                                                                                                                                |       | 9,979                                 |       | 10,203                      |       |
| Investment in  equity investee                                                                                                                                                                                                     |       | 200                                   |       | —                      |       |
| Intangible  assets, net                                                                                                                                                                                                            |       | 4,917                                 |       | 4,986                       |       |
| Goodwill                                                                                                                                                                                                                           |       | 9,526                                 |       | 9,526                       |       |
| Other assets  held for sale                                                                                                                                                                                                        |       | —                                |       | 21                          |       |
| Other assets                                                                                                                                                                                                                       |       | 1,804                                 |       | 1,887                       |       |
| Total assets                                                                                                                                                                                                                       |       | $                                     | 41,725     |                        | $          | 53,769 |   |
|                                                                                                                                                                                                                               |       |                                  |       |                        |       |
| Liabilities and Stockholders’ Equity                                                                                                                                                                                          |       |                                  |       |                        |       |
| Liabilities:                                                                                                                                                                                                                       |       |                                  |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                                          |       | $                                     | 16,348     |                        | $          | 13,260 |   |
| Current  liabilities associated with assets held for sale                                                                                                                                                                          |       | —                                |       | 1,232                       |       |
| Obligations  under capital leases on real estate held for sale                                                                                                                                                                     |       | —                                |       | 9,994                       |       |
| Borrowings and  notes payable, current portion                                                                                                                                                                                     |       | 9,009                                 |       | 12,914                      |       |
| Obligations  under capital leases, current portion                                                                                                                                                                                 |       | 140                                   |       | 141                         |       |
| Total current  liabilities                                                                                                                                                                                                         |       | 25,497                                |       | 37,541                      |       |
|                                                                                                                                                                                                                               |       |                                  |       |                        |       |
| Borrowings and  notes payable                                                                                                                                                                                                      |       | 6,235                                 |       | 6,355                       |       |
| Obligations  under capital leases                                                                                                                                                                                                  |       | 1,917                                 |       | 1,929                       |       |
| Deferred income                                                                                                                                                                                                                    |       | 5,186                                 |       | 5,247                       |       |
| Total  liabilities                                                                                                                                                                                                                 |       | 38,835                                |       | 51,072                      |       |
|                                                                                                                                                                                                                               |       |                                  |       |                        |       |
| Commitments and  contingencies                                                                                                                                                                                                     |       |                                  |       |                        |       |
| Minority  interests in consolidated subsidiaries                                                                                                                                                                                   |       | 1,001                                 |       | 701                         |       |
|                                                                                                                                                                                                                               |       |                                  |       |                        |       |
| 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; 11,757,073 shares issued as  of March 31, 2008 and December 31, 2007; 7,954,928 shares  outstanding as of March 31, 2008 and December 31, 2007 |       | 171,286                               |       | 170,956                     |       |
| Accumulated  deficit                                                                                                                                                                                                               |       | (157,386                              | )          | (156,949                    | )          |
| Treasury stock,  3,802,145 common shares as of March 31, 2008 and December 31, 2007,  at cost                                                                                                                            |       | (12,011                               | )          | (12,011                     | )          |
| Total  stockholders’ equity                                                                                                                                                                                                   |       | 1,889                                 |       | 1,996                       |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                   |       | $                                     | 41,725     |                        | $          | 53,769 |   |

 

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

 

3

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FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

*(dollarsin thousands, except share data)*

 
| ** **                                                                                             | ** ** | **Quarter Ended**  | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                             | ** ** | **March 31,** | ** ** |
| ** **                                                                                             | ** ** | **2008**           | ** ** | **2007** | ** ** |
| Revenue:                                                                                               |       |               |       |   |   |
| Restaurant and  manufacturing sales                                                                    |       | $                  | 10,268     |   | $ | 9,919 |   |
| Restaurant  franchise and royalty fees                                                                 |       | 645                |       | 539 |   |
| Total revenue                                                                                          |       | 10,913             |       | 10,458 |   |
|                                                                                                   |       |               |       |   |   |
| Operating costs and expenses:                                                                          |       |               |       |   |   |
| Restaurant and  manufacturing cost of sales                                                            |       | 6,014              |       | 5,786 |   |
| Engineering and  development                                                                           |       | 361                |       | 386 |   |
| Depreciation and  amortization                                                                         |       | 480                |       | 476 |   |
| Total operating  costs and expenses                                                                    |       | 6,855              |       | 6,648 |   |
|                                                                                                   |       |               |       |   |   |
| General and administrative expenses:                                                                   |       |               |       |   |   |
| Compensation and  employee benefits                                                                    |       | 4,102              |       | 5,034 |   |
| Professional  fees                                                                                     |       | 885                |       | 654 |   |
| Other                                                                                                  |       | 3,986              |       | 4,006 |   |
| Total general  and administrative expenses                                                             |       | 8,973              |       | 9,694 |   |
|                                                                                                   |       |               |       |   |   |
| Non-operating income (expense):                                                                        |       |               |       |   |   |
| Interest income                                                                                        |       | 37                 |       | 43 |   |
| Interest expense                                                                                       |       | (733               | )          | (639 | ) |
| Other income,  net                                                                                     |       | 447                |       | 81 |   |
| Total  non-operating income (expense)                                                                  |       | (249               | )          | (515 | ) |
|                                                                                                   |       |               |       |   |   |
| Loss before  provision for income taxes, minority interests, and equity in income of  equity investees |       | (5,164             | )          | (6,399 | ) |
|                                                                                                   |       |               |       |   |   |
| Minority interest in earnings                                                                          |       | 83                 |       | 35 |   |
| Equity in income of equity investee                                                                    |       | 200                |       | — |   |
| Income tax benefit                                                                                     |       | 52                 |       | — |   |
| Loss from continuing operations                                                                        |       | (4,829             | )          | (6,364 | ) |
|                                                                                                   |       |               |       |   |   |
| Income from  discontinued operations (including gain on sale of $4,217 in 2008 and $2,492  in 2007)    |       | 4,392              |       | 2,713 |   |
| Net loss                                                                                               |       | $                  | (437       | ) | $ | (3,651 | ) |
|                                                                                                   |       |               |       |   |   |
| Basic loss per share from continuing operations                                                        |       | $                  | (0.60      | ) | $ | (0.80 | ) |
| Basic earnings per share from discontinued  operations                                                 |       | $                  | 0.55       |   | $ | 0.34 |   |
| Basic loss per share                                                                                   |       | $                  | (0.05      | ) | $ | (0.46 | ) |
| Basic weighted average shares outstanding                                                              |       | 7,954,928          |       | 7,957,428 |   |
|                                                                                                   |       |               |       |   |   |
| Dividends declared per share                                                                           |       | $                  | —     |   | $ | — |   |

 

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

 

4

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FOG CUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

*(dollarsin thousands, except share data)*

 
| ** **                         | ** ** | **Common Stock**  | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-------------------|------------|--------------------|------------|-----------------|------------|------------|------------|
| ** **                         | ** ** | **Shares****(1)** | ** ** | **Amount**         | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at January 1, 2008    |       | 7,954,928         |       | $                  | 170,956    |            | 3,802,145  |       | $          | (12,011 | ) | $ | (156,949 | ) | $ | 1,996 |   |
| Comprehensive income (loss):       |       |              |       |               |       |            |       |       |       |   |   |   |   |
| Net loss                           |       | —            |       | —             |       | —          |       | —     |       | (437 | ) | (437 | ) |
| Stock options expensed in net loss |       | —            |       | 330                |       | —          |       | —     |       | — |   | 330 |   |
| Balance at March 31, 2008     |       | 7,954,928         |       | $                  | 171,286    |            | 3,802,145  |       | $          | (12,011 | ) | $ | (157,386 | ) | $ | 1,889 |   |

----

(1)       Issued and outstanding

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

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FOG CUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

*(dollars in thousands)*

 
| ** **                                                                      | ** ** | **Quarter Ended**  | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                      | ** ** | **March 31,** | ** ** |
|                                                                            | ** ** | **2008**           | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                           |       |               |       |   |   |
| Net loss                                                                        |       | $                  | (437       | ) | $ | (3,651 | ) |
| Income from  discontinued operations                                            |       | (4,392             | )          | (2,713 | ) |
| Loss from  continuing operations                                                |       | (4,829             | )          | (6,364 | ) |
| Adjustments to  reconcile net loss to net operating cash flows:                 |       |               |       |   |   |
| Equity in income  of equity investees                                           |       | (200               | )          | — |   |
| Depreciation and  amortization                                                  |       | 716                |       | 721 |   |
| Foreign currency  gain                                                          |       | (580               | )          | (115 | ) |
| Share based  compensation                                                       |       | 330                |       | 426 |   |
| Market value  impairment reserve                                                |       | 153                |       | — |   |
| Other                                                                           |       | (48                | )          | 4 |   |
| Change in:                                                                      |       |               |       |   |   |
| Other assets                                                                    |       | (190               | )          | (252 | ) |
| Deferred income                                                                 |       | (61                | )          | 475 |   |
| Deferred income  taxes                                                          |       | —             |       | (11 | ) |
| Accounts payable  and accrued liabilities                                       |       | 66                 |       | 2,406 |   |
| Net cash used in operating activities                                           |       | (4,643             | )          | (2,710 | ) |
|                                                                            |       |               |       |   |   |
| Cash flows from investing activities:                                           |       |               |       |   |   |
| Principal  repayments on notes receivable, including loans to senior executives |       | 1,149              |       | 5 |   |
| Investment in  real estate                                                      |       | —             |       | (53 | ) |
| Investments in  property, plant, and equipment                                  |       | (396               | )          | (1,284 | ) |
| Other                                                                           |       | —             |       | (17 | ) |
| Net cash  provided by (used in) investing activities                            |       | 753                |       | (1,349 | ) |
|                                                                            |       |               |       |   |   |
| Cash flows from financing activities:                                           |       |               |       |   |   |
| Proceeds from  borrowings                                                       |       | 500                |       | 1,064 |   |
| Repayments on  borrowings                                                       |       | (4,653             | )          | (123 | ) |
| Repayments under  capital leases                                                |       | (13                | )          | (37 | ) |
| Investments by  minority interests, net                                         |       | 350                |       | 25 |   |
| Other, net                                                                      |       | —             |       | 38 |   |
| Net cash  provided by (used in) financing activities                            |       | (3,816             | )          | 967 |   |
|                                                                            |       |               |       |   |   |
| Net change in cash and cash equivalents from  continuing operations             |       | (7,706             | )          | (3,092 | ) |
|                                                                            |       |               |       |   |   |
| Net change in cash and cash equivalents from  discontinued operations:          |       |               |       |   |   |
| Net cash  provided by (used in) operating activities                            |       | (271               | )          | 414 |   |
| Net cash  provided by investing activities                                      |       | 7,879              |       | 2,860 |   |
| Net cash used in  financing activities                                          |       | (79                | )          | (387 | ) |
| Net change in cash and cash equivalents                                         |       | (177               | )          | (205 | ) |
| Cash and cash equivalents at beginning of period                                |       | 1,131              |       | 1,824 |   |
| Cash and cash equivalents at end of period                                      |       | $                  | 954        |   | $ | 1,619 |   |
|                                                                            |       |               |       |   |   |
| Supplemental disclosures of cash flow information:                              |       |               |       |   |   |
| Cash paid for  interest                                                         |       | $                  | 903        |   | $ | 789 |   |
|                                                                            |       |               |       |   |   |
| Non-cash financing and investing activities:                                    |       |               |       |   |   |
| Assets acquired  through capital lease                                          |       | $                  | —     |   | $ | 52 |   |

 

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

 

6

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Unaudited)**

 

**NOTE 1 — BASIS OF PRESENTATIONAND ACCOUNTING POLICIES**

 

The accompanying interim consolidated financial statements of FogCutter Capital Group Inc. and Subsidiaries (“FCCG” or the “Company”) are unauditedand have been prepared in conformity with the requirements of Regulation S-Xpromulgated under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), particularly Rule 10-01 thereof, which governs the presentation ofinterim financial statements. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  Theaccompanying interim consolidated financial statements should be read inconjunction with the Company’s Annual Report as of and for the year ended December 31,2007 on Form 10-K (“2007 Form 10-K”) and Form 10-K/A, aspreviously filed with the SEC on March 31, 2008 and April 25, 2008,respectively.  Except as described below,there have been no changes to the Company’s significant accounting policies asdescribed in Notes 2 and 3 to the consolidated financial statements in its 2007Form 10-K.

 

In the Company’s opinion,all adjustments, comprised of normal recurring accruals necessary for the fairpresentation of the interim financial statements, have been included in theaccompanying consolidated financial statements. Operating results for the three months ended March 31, 2008 are notnecessarily indicative of the results that may be expected for the year ending December 31,2008.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires the Company to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.  The Company’soperations and activities have become more focused on restaurant activities,and less focused on finance and real estate. As a result, certain reclassifications of the balances and modificationsto the presentation of the financial statements have been made, including thereclassification of certain investments in real estate as held for sale.  None of these changes in presentationaffected previously reported results of operations.

 

At March 31, 2008,certain Company officers and directors had, directly or indirectly, majorityvoting control of the Company.

 

In September 2006,the FASB issued FASB Statement of Financial Accounting Standards No. 157 (“SFAS157”) defining fair value, establishing a framework for using fair value tomeasure assets and liabilities, and expanding disclosures about fair valuemeasurements.  SFAS 157 is effective forfiscal years beginning after November 15, 2007.  The Company adopted the standard on January 1,2008 and there has been no material effect of this new standard on itsconsolidated financial position and results of operations.

 

**NOTE 2 —SIGNIFICANT TRANSACTIONS**

 

The following significantevents affected our operations for the three months ended March 31, 2008:

 

*Restaurant openings*

During the three monthsended March 31, 2008, Fatburger Holdings Inc. (“Fatburger”), the Company’srestaurant operations subsidiary, opened four additional franchiselocations.  In addition, two locationswere converted from franchise-owned to company-owned restaurants.

 

*Discontinued operations*

In February 2008,the Company sold a wholly-owned subsidiary Fog Cap Retail Investors LLC (“FCRI”),which held the Company’s leased real estate portfolio.  The sales price for the FCRImembership interests was $8.5 million and was paid in cash.  A portion of the proceeds were used to repay$4.2 million of existing debt.  TheCompany recorded a $4.2 million gain on sale as a result of the transaction.  The Company also entered into an optionagreement with the buyer that gives the Company the right, but not theobligation, to re-acquire all of the membership interests in FCRI.  The option period is for two years beginning February 15,2008.  Under certain circumstances after December 31,2008, the buyer may accelerate the termination of the option period upon thirtydays notice.  The exercise priceincreases over the option period from approximately $9.7 million currently to$11.3 million after February 28, 2010. The option commitment fee was $850,000 and is payable by the Company ininstallments over the option period.  TheCompany has determined that the option exercise prices are significantly higherthan the expected value during the option period.  Therefore, the option has been assigned novalue as it is not anticipated that it will provide a future economic benefitto the Company.  The $850,000 optioncommitment fee reduced that amount of the gain on sale.

 

*Repayment of notes payable*

In February 2008,the Company used part of the proceeds from the sale of FCRI to repay one notepayable in the amount of $4.2 million. The note had a carrying value of $4.0 million at December 31, 2007and was secured by the Company’s interest in FCRI.

 

 

 

7

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*Income from equity investee*

In December 2000,the Company organized and led a group of investors to purchase all of theoutstanding capital stock of Bourne End Properties Plc (“Bourne End”), aspecialist investor in retail property. The Company invested in 26% of Bourne End, which at the time of the acquisition hadapproximately GBP 169.6 million of assets and GBP 123.1 million ofdebt.  The real estate assets consistedof 1.7 million square feet in fifteen shopping centers located in the UnitedKingdom.  Bourne End sold all of theseproperties between the date of the acquisition and 2006 and distributed the netproceeds to the investors.  Since thesale of the last property in 2006, Bourne End has been proceeding toward finalliquidation.  In the first quarter of2008, Bourne End revised its estimates of accrued liabilities associated withits final liquidation, and the Company was notified that it had been allocatedan additional $0.2 million that is expected to be distributed in the secondquarter of 2008.  As a result, theCompany recognized $0.2 million in income from equity investees during thequarter ended March 31, 2008.

 

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

 

*Warlick complaints*

On October 16, 2006,Fatburger Holdings, Inc., Fatburger Corporation and Fatburger NorthAmerica, Inc. filed suit against Keith A. Warlick (“Warlick”) the formerChief Executive Officer of Fatburger Holdings, Inc. and FatburgerCorporation. Warlick’s employment with Fatburger was terminated on September 21,2006 by resolution of the board of directors of Fatburger Holdings, Inc.The Fatburger companies initiated the lawsuit to recover damages from Warlickarising from wrongful acts and conduct during and after his employment, and areasserting claims for:  breach ofcontract, breach of duty of loyalty, breach of fiduciary duty, conversion —embezzlement; fraud/commencement; intentional interference with contractualrelations, and equitable indemnity. Warlick filed an answer to the lawsuit denying the allegations andincluded a Cross-complaint against Fatburger Holdings, Inc., FatburgerCorporation, Fatburger North America, Inc., Fog Cutter Capital Group, Inc.,and Andrew Wiederhorn (“Cross-Defendants”), for breach of contract, employmentdiscrimination based on race and retaliation, wrongful termination anddefamation — slander without any specification of damages.  On a motion filed by the Cross-Defendants,the Court dismissed Warlick’s cross-claim for employment discrimination basedon race and retaliation.  In furtherresponse Warlick initiated a second lawsuit against the Company, variousFatburger companies, and members of the Fatburger board of directors, which isset out below. The defendants to the Cross-complaint filed by Warlick disputethe allegations of the cross-complaint and intend to vigorously defend againstthe cross-complaint.  The case currentlyhas a trial date of June 30, 2008, but that date is expected to becontinued into the future.

 

On February 6, 2007,Warlick, his wife, and a limited liability company controlled by Warlick, eachof whom is a minority shareholder of Fatburger Holdings, Inc., filed acomplaint against various Fatburger entities, the Company, Andrew Wiederhorn,and members of the Fatburger board of directors. The complaint alleges fraud,negligent misrepresentation against Wiederhorn and the Company, and breach ofcontract and breach of fiduciary duty against all the defendants, related tobusiness transactions which the plaintiff’s allege were not in the bestinterests of Fatburger Holdings, Inc., or the plaintiff minorityshareholders. The defendants dispute the allegations of the lawsuit and intendto vigorously defend against the claims. The case is in the early stages of discovery.

 

*Other litigation*

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

 

*Liquidity*

As of March 31,2008, borrowings related to the Company’s property holdings in Barcelona, Spainof $1.1 million were reflected as current liabilities in the accompanyingConsolidated Statements of Financial Condition due to management’s intention tosell these properties and repay the related debt at the time of sale.  The sale of real estate and other investmentsis considered to be a normal, recurring part of operations and managementexpects these transactions to generate adequate cash flow to meet the Company’sliquidity needs for the 2008 fiscal year.

 

*FatburgerDebt Covenant*

At December 31,2007, Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements, due toits failure to meet the prescribed fixed charge coverage ratio and theprescribed debt-coverage ratio in three notes payable.  As it has in the past, the lendersubsequently issued a waiver of the covenant violations at December 31,2007.  The next measurement date forcompliance with this covenant is December 31, 2008.

 

*Restrictedcash balance*

At March 31, 2008,$0.1 million of the Company’s cash balance was in a restricted certificate ofdeposit as security on an office lease.

 

 

 

8

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*Dividends*

The Company doesnot have a fixed dividend policy, and may declare and pay new dividends oncommon stock, subject to 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.  No dividends were declared in the quarterended March 31, 2008.

 

*Fatburger operations*

The Company expects that Fatburger will require capital resourcesand have negative cash flow in the near term while it pursues a growth strategythrough developing additional franchisee and Company-owned restaurants.  Fatburger development involves substantialrisks that the Company intends to manage; however, it cannot be assured thatpresent or future development will perform in accordance with the Company’sexpectations or that any restaurants will generate the Company’s expectedreturns on investment.  The Company’sinability to expand Fatburger in accordance with planned expansion or to managethat growth could have a material adverse effect on the Company’s operationsand financial condition.  In addition, ifFatburger or its franchisees are unsuccessful in obtaining capital sufficientto fund this expansion, the timing of restaurant openings may be delayed andFatburger’s results may be harmed.

 

*Centrisoftoperations*

The Company expects thatCentrisoft will require capital resources and have negative cash flow in thenear term.  There can be no assurancethat Centrisoft will be successful in attracting a significant customerbase.  Centrisoft is currently marketingits software to potential customers primarily through re-sellerrelationships.  There can be no assurancethat Centrisoft will be successful in generating sufficient cash flow tosupport its own operations in the near term.

 

*Other*

In order tofacilitate the development of franchise locations, as of March 31, 2008,Fatburger had guaranteed the annual minimum lease payments of two restaurantsites owned and operated by franchisees. The guarantees approximate $0.7 million plus certain contingent rentalpayments as defined in the respective leases. These leases expire at various times through 2015.  As of March 31, 2008, management was notaware of any event or demand that was likely to trigger the guarantee byFatburger.

 

Management may utilize awide variety of financial techniques to assist in the management of currencyrisk, including currency swaps, options, and forwards, or combinationsthereof.  No such currency hedgingtechniques were used in the three months ended March 31, 2008.

 

There were noother off balance sheet arrangements used in the three months ended March 31,2008.

 

**NOTE 4 —STOCK OPTIONS AND RIGHTS**

 

The Company has a stockoption plan (the “Option Plan”) which provides for options to purchase sharesof the Company’s common stock.  Themaximum number of shares of common stock that may be issued pursuant to optionsgranted under the Option Plan is 3,500,000. Newly elected independent directors automatically receive 5,000 optionson the day they join the Board of Directors. Additionally, each independent director receives, on the last day ofeach quarter, an automatic non-statutory option grant to purchase 1,500 sharesof common stock at 110% of the fair market value on that day.  Automatic grants vest one third on each ofthe first three anniversaries of the grant date and expire on the tenthanniversary of the grant date.  TheCompany granted a total of 4,500 options to its independent directors in thethree months ending March 31, 2008. The resignation of certain Managers (as defined by the Option Plan)resulted in the forfeiture of 50,000 unvested options in the three months endedMarch 31, 2008.

 

There were no optionsgranted with exercise prices below the market value of the stock at the grantdate.  Fair values for 2008 wereestimated using the Black-Scholes option-pricing model with the followingweighted average assumptions used: 0% dividend yield, expected volatility of116%, risk-free interest rate of 4.7% and expected lives of ten years.

 

A summary of our stockoptions activity for the three months ended March 31, 2008 is presentedbelow:

 

| ** **                          | ** ** | **Shares** | ** ** | **Weighted Average   Exercise  Price** | ** ** |
|-------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Outstanding at January 1, 2008 |       | 3,246,333  |       | $                                      | 1.57       |   |
| Granted                             |       | 4,500      |       | $                                      | 0.99       |   |
| Exercised                           |       | —     |       | $                                      | —     |   |
| Cancelled/forfeited                 |       | (50,000    | )          | $                                      | 2.20       |   |
| Outstanding at March 31, 2008  |       | 3,200,833  |       | $                                      | 1.56       |   |

 

 

 

 

9

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A summary of our stockoptions outstanding as of March 31, 2008 is presented below:

 

| **Range of  Exercise Prices** | ** ** | **Shares** | ** ** | **Weighted Average  Remaining  Life** | ** ** | **Weighted Average  Exercise  Price** | ** ** |
|-------------------------------|------------|------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| $1.00 – 2.00             |       | 2,626,500  |       | 8.8                                   |       | $                                     | 1.32       |   |
| $2.01 – 4.00             |       | 530,000    |       | 9.2                                   |       | $                                     | 2.48       |   |
| $4.01 – 8.00             |       | 44,333     |       | 6.2                                   |       | $                                     | 4.55       |   |
| Total                         |       | 3,200,833  |       | 8.8                                   |       | $                                     | 1.56       |   |

 

**NOTE 5 — VARIABLE INTEREST ENTITIES**

 

As of March 31,2008, the Company has loaned $10.3 million to two related Spanish entitiesformed to purchase, reposition and sell apartment buildings in Barcelona,Spain.  Under the terms of the loans, theinvestments meet the definition of a Variable Interest Entity (“VIE”) underFASB Interpretation No. 46 (“FIN 46”) and the Company is the primarybeneficiary of the VIE.  As a result, theassets, liabilities, and results of operations of the VIE have beenconsolidated into the accompanying consolidated financial statements.  Neither the creditors nor the otherbeneficial interest holders have recourse to the Company with regard to theseinvestments.

 

The VIE currently ownstwo apartment buildings, consisting of 33 residential units with a carryingvalue of approximately $9.0 million, including capital improvements andcarrying costs.  The two properties met the criteria to be classifiedas “held for sale” and were classified as such on the Statement of FinancialCondition at March 31, 2008.

 

The Company has recordeda market value impairment of $0.2 million on one of the properties in the threemonths ended March 31, 2008.  Thefair value of this property was estimated using significant observable inputsother than quoted prices (Level 2 inputs per SFAS 157), including prior saleoffers on the property, current sale negotiations for the property, and marketprices for similar properties in the Barcelona, Spain market.

 

Assetsand liabilities of the VIE included in the accompanying consolidated statementsof financial condition are summarized as follows:

 

| Investment in real estate, held for sale, net                                          |   | $         | 9,005,000 |   |
|----------------------------------------------------------------------------------------|--------|-----------|-----------|--------|
| Other assets                                                                           |   | 2,000     |      |
| Borrowings and notes payable (included in current  liabilities at March 31, 2008) |   | 1,079,000 |      |
| Accrued expenses and other liabilities                                                 |   | 20,000    |      |
| Minority interest                                                                      |   | 434,000   |      |

 

**NOTE 6 — LOANS TO SENIOR EXECUTIVES**

 

Prior to the passage ofthe Sarbanes-Oxley Act of 2002, the Company’s employment agreement with itsChief Executive Officer, Andrew Wiederhorn, allowed him to borrow a specifiedmaximum amount from the Company to purchase shares of common stock.  The loans were full recourse to the borrowerand bore interest at the prime rate.  Thetotal amount of loans receivable from Mr. Wiederhorn, including compoundedinterest, was $1.1 million at December 31, 2007.  The loans matured on February 21, 2007,and were repaid in full, including interest, on February 21, 2008.

 

**NOTE 7 — INVENTORIES**

 

Inventories relateprimarily to the Company’s DAC subsidiary and consist of the following:

 

| ** **        | ** **   | **March 31,   2008**   | ** **   | **December 31,   2007** | ** ** |
|-------------------|--------------|-----------------------------|--------------|------------------------------|------------|
| ** **        | *** *** | **(dollars  in thousands)** | *** *** |
|              |         |                        |         |                         |       |
| Raw materials     |         | $                           | 1,494        |                         | $          | 1,565 |   |
| Work in progress  |         | 1,412                       |         | 772                          |       |
| Finished goods    |         | 199                         |         | 168                          |       |
| Total inventories |         | $                           | 3,105        |                         | $          | 2,505 |   |

 

 

 

 

10

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**NOTE 8 —ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**

 

Accounts payable andaccrued liabilities consisted of the following:

 

| ** **                                   | ** ** | **March 31, 2008**    | ** ** | **December 31, 2007** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **(dollars in thousands)** | ** ** |
| Accounts payable                             |       | $                          | 9,310      |                       | $          | 9,075 |   |
| Sales deposits                               |       | 1,916                      |       | 1,478                      |       |
| Accrued wages, bonus and commissions         |       | 611                        |       | 626                        |       |
| Other                                        |       | 4,511                      |       | 2,081                      |       |
| Total accrued expenses and other liabilities |       | $                          | 16,348     |                       | $          | 13,260 |   |

 

At March 31, 2008,other accrued liabilities include the accrual of management fees ($1.7 million)and option commitment fee ($0.7 million), both associated with the sale ofFCRI.

 

**NOTE 9 — OPERATING SEGMENTS**

 

Operating segmentsconsist of (i) restaurant operations conducted through Fatburger, (ii) manufacturingactivities conducted through DAC International, (iii) real estate andfinancing activities, and (iv) software development and sales conductedthrough Centrisoft Corporation.  Eachsegment operates with its own management and personnel.  The Company allocates certain corporate expensesto Fatburger through a management fee to reflect management’s increasedinvolvement in the restaurant operations and to more closely represent the truecosts of restaurant operations in the appropriate segment reporting.  The management fee is eliminated uponconsolidation.  The following is asummary of each of the operating segments:

 

*Restaurantoperations*

As of March 31,2008, the Company owned approximately 82% of the voting control of Fatburger,which operates or franchises 96 hamburger restaurants located primarily in Californiaand Nevada, as well as 15 other states, Canada, and China.  Franchisees currently own and operate 55 ofthe Fatburger locations.  Four newfranchise restaurants were opened during the three months ended March 31,2008.  In the three months ended March 31,2008, Fatburger acquired the net assets of two franchise locations andconverted them to company-owned locations.

 

| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands)**            | ** ** |
|                                          |       |                                  |       |   |   |
| Company-owned restaurant sales                |       | $                                     | 7,933      |   | $ | 7,602 |   |
| Royalty revenue                               |       | 541                                   |       | 519 |   |
| Franchise fee revenue                         |       | 104                                   |       | 20 |   |
| Total revenue                                 |       | 8,578                                 |       | 8,141 |   |
|                                          |       |                                  |       |   |   |
| Cost of sales                                 |       | (4,687                                | )          | (4,411 | ) |
| Depreciation and amortization                 |       | (536                                  | )          | (534 | ) |
| Other general & administrative costs |       | (3,992                                | )          | (3,888 | ) |
| Interest expense                              |       | (196                                  | )          | (214 | ) |
| Management allocation                         |       | (526                                  | )          | (535 | ) |
| Minority interest in losses                   |       | 83                                    |       | 35 |   |
| Segment loss                                  |       | $                                     | (1,276     | ) | $ | (1,406 | ) |
|                                          |       |                                  |       |   |   |
| Capital expenditures                          |       | $                                     | 145        |   | $ | 244 |   |
| Segment assets                                |       | $                                     | 21,856     |   | $ | 22,219 |   |
| Minority interests                            |       | $                                     | 567        |   | $ | 68 |   |

 

*Manufacturingoperations*

The Company conductsmanufacturing activities through its wholly-owned subsidiary, DACInternational.  DAC is a supplier ofcomputer controlled lathes and milling machinery for the production ofeyeglass, contact, and intraocular lenses.

 

 

 

11

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| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands)**            | ** ** |
|                                          |       |                                  |       |   |   |
| Manufacturing sales                           |       | $2,233                                |       | $2,313 |   |
| Cost of sales                                 |       | (1,327                                | )          | (1,376 | ) |
| Engineering and development                   |       | (281                                  | )          | (235 | ) |
| Depreciation and amortization                 |       | (23                                   | )          | (24 | ) |
| Other general & administrative costs |       | (786                                  | )          | (622 | ) |
| Interest expense                              |       | (8                                    | )          | (3 | ) |
| Other non-operating income                    |       | 18                                    |       | 14 |   |
| Segment income (loss)                         |       | $(174                                 | )          | $67 |   |
|                                          |       |                                  |       |   |   |
| Capital expenditures                          |       | $                                     | 193        |   | $45 |   |
| Segment assets                                |       | $5,754                                |       | $5,480 |   |
|                                               |            |                                       |            |  |  |  |

 

*Real estate and financingoperations*

The Company owns variousinterests in real estate and notes receivable. At March 31, 2008, real estate is comprised of ownership twoapartment buildings located in Barcelona, Spain.  At March 31, 2008, notes receivable havea carrying value of $0.6 million and are primarily secured by real estate.

 

| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands)**            | ** ** |
|                                          |       |                                  |       |   |   |
| Rental income                                 |       | $                                     | —     |   | $ | — |   |
| Operating expenses                            |       | —                                |       | — |   |
| Depreciation and amortization                 |       | —                                |       | (3 | ) |
| Other general & administrative costs |       | (1                                    | )          | (19 | ) |
| Interest income                               |       | 32                                    |       | 43 |   |
| Interest expense                              |       | (527                                  | )          | (408 | ) |
| Other non-operating income                    |       | 587                                   |       | 67 |   |
| Market value impairment reserves              |       | (153                                  | )          | — |   |
| Equity in loss of equity investees            |       | 200                                   |       | — |   |
| Segment income (loss)                         |       | $                                     | 138        |   | $ | (320 | ) |
|                                          |       |                                  |       |   |   |
| Capital expenditures                          |       | $                                     | —     |   | $ | — |   |
| Segment assets                                |       | $                                     | 12,034     |   | $ | 16,115 |   |
| Investment in equity investees                |       | $                                     | 200        |   | $ | — |   |
| Minority interests                            |       | $                                     | 434        |   | $ | 367 |   |

 

Other non-operatingincome for the three months ended March 31, 2008 is primarily composed offoreign currency gains of $0.6 million, compared to foreign currency gains of$0.1 million for the three months ended March 31, 2007.

 

*Softwaredevelopment and sales operations*

The Company holds a 79%ownership interest in Centrisoft, which conducts software development and salesactivities.  Centrisoft develops andsells software that controls and enhances the productivity of enterprisenetworks and provides first level security against unauthorized applicationsand users.

 

| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands)**            | ** ** |
|                                          |       |                                  |       |   |   |
| Software sales                                |       | $                                     | 102        |   | $ | 4 |   |
| Engineering and development                   |       | (80                                   | )          | (151 | ) |
| Depreciation and amortization                 |       | (109                                  | )          | (112 | ) |
| Other general & administrative costs |       | (114                                  | )          | (221 | ) |
| Interest expense                              |       | (293                                  | )          | (268 | ) |
| Segment loss                                  |       | $                                     | (494       | ) | $ | (748 | ) |
|                                          |       |                                  |       |   |   |
| Capital expenditures                          |       | $                                     | —     |   | $ | — |   |
| Segment assets                                |       | $                                     | 2,081      |   | $ | 3,534 |   |

 

 

 

12

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*Reconciliationto total net loss*

 

| ** **                          | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)**            | ** ** |
|                                |       |                                  |       |   |   |
| Segment loss from operations        |       | $                                     | (1,806     | ) | $ | (2,407 | ) |
| Corporate expenses                  |       | (3,892                                | )          | (4,747 | ) |
| Elimination of intercompany charges |       | 818                                   |       | 790 |   |
| Income tax benefit                  |       | 51                                    |       | — |   |
| Income from discontinued operations |       | 4,392                                 |       | 2,713 |   |
| Net loss                            |       | $                                     | (437       | ) | $ | (3,651 | ) |

 

**NOTE 10 — DISCONTINUED OPERATIONS**

 

In February 2008,the Company sold FCRI, a wholly-owned subsidiary that held the Company’s leasedreal estate portfolio.  At the time ofsale, this portfolio was comprised of leasehold interests in 72 freestandingretail buildings located throughout the United States.  Prior to reclassification, the leased realestate portfolio was part of the Real Estate and Financing Operations segment.  The following represents the results ofoperations during the time of the Company’s ownership of FCRI:

 

| ** **                                           | ** **   | **Three months ended March 31,** | ** **   |
|------------------------------------------------------|--------------|---------------------------------------|--------------|
| ** **                                           | ** **   | **2008**                              | ** **   | **2007** | ** ** |
| ** **                                           | ** **   | **(dollars in thousands)**            | ** **   |
| *** ***                                         | *** *** | *** ***                          | *** *** |
| Operating revenue                                    |         | $                                     | 610          |   | $ | 935 |   |
| Operating expenses                                   |         | (240                                  | )            | (387 | ) |
| Depreciation and amortization                        |         | (39                                   | )            | (108 | ) |
| Operating margin                                     |         | 331                                   |         | 440 |   |
|                                                 |         |                                  |         |   |   |
| General and administrative expenses                  |         | (7                                    | )            | (32 | ) |
| Interest expense                                     |         | (157                                  | )            | (220 | ) |
| Other  non-operating income                          |         | 8                                     |         | 11 |   |
| Gain on sale of  discontinued real estate operations |         | 4,217                                 |         | — |   |
| Income from discontinued real estate operations      |         | $                                     | 4,392        |   | $ | 199 |   |
|                                                 |         |                                  |         |   |   |
| Capital expenditures                                 |         | $                                     | 20           |   | $ | 65 |   |
| Segment assets                                       |         | —                                |         | 11,725 |   |

 

Prior to February 2007,the Company held a 51% ownership interest in George Elkins, a Californiacommercial mortgage banking operation. In December 2006, the Company reached an agreement to sell GeorgeElkins to a third party and the sale closed in February 2007.  The Company received $2.9 million for itsportion of the proceeds and recorded a gain on sale of $2.5 million.  As such, results from operations of GeorgeElkins for the three months ended March 31, 2007 have been classified asdiscontinued operations.  Prior todisposal, George Elkins was a reportable segment of the Company’soperations.  The following represents theresults of operations during the time of the Company’s ownership of GeorgeElkins:

 

| ** **                                                | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                                | ** ** | **(dollars in thousands)**            | ** ** |
|                                                      |       |                                  |       |   |   |
| Loan brokerage fees                                       |       | $                                     | —     |   | $ | 1,673 |   |
| Loan servicing fees                                       |       | —                                |       | 134 |   |
| Total revenue                                             |       | —                                |       | 1,807 |   |
|                                                      |       |                                  |       |   |   |
| Depreciation and amortization                             |       | —                                |       | (4 | ) |
| Other general & administrative costs             |       | —                                |       | (1,811 | ) |
| Interest income                                           |       | —                                |       | 2 |   |
| Other non-operating income                                |       | —                                |       | 13 |   |
| Minority interest in earnings                             |       | —                                |       | 15 |   |
| Gain on sale of discontinued mortgage banking  operations |       | —                                |       | 2,492 |   |
| Income from discontinued mortgage banking operations      |       | $                                     | —     |   | $ | 2,514 |   |
|                                                      |       |                                  |       |   |   |
| Capital expenditures                                      |       | $                                     | —     |   | $ | — |   |
| Segment assets                                            |       | $                                     | —     |   | $ | — |   |
| Minority interests                                        |       | $                                     | —     |   | $ | — |   |

 

 

 

13

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**NOTE 11 — SUBSEQUENT EVENTS**

 

*Restaurant openings*

Subsequent to March 31,2008, Fatburger opened one additional franchise location.

 

*Borrowings on notes payable*

Subsequent to March 31,2008, the Company borrowed $2.0 million through a note payable securedprimarily by the Company’s interest in Fatburger.  The note bears interest at a fixed rate of24.0%, one half of which is due monthly in arrears, the other half being due atthe note’ scheduled maturity date.  Thenote is due on or before December 31, 2008.

 

 

 

 

14

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

 

*Certainstatements contained herein and certain statements contained in future filingsby the Company with the SEC may not be based on historical facts and are “Forward-LookingStatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended.  Forward-Looking Statementsare based on various assumptions and events (some of which are beyond theCompany’s control) and may be identified by reference to a future period orperiods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,”“expect,” “anticipate,” “continue,” or similar terms or variations on thoseterms, or the negative of those terms. Actual results could differ materially from those set forth inForward-Looking Statements due to a variety of factors, including, but notlimited to the Risk Factors identified herein and the following:*

* *

*·*                  economic factors, particularly in the market areas inwhich the Company operates;

*·*                  the financial and securities markets and theavailability of and costs associated with sources of liquidity;

*·*                  competitive products and pricing;

*·*                  the real estate market, including the residential realestate market in Barcelona, Spain;

*·*                  the ability to sell assets to maintain liquidity;

*·*                  fiscal and monetary policies of the U.S. Government;

*·*                  changes in prevailing interest rates;

*·*                  changes in currency exchange rates;

*·*                  acquisitions and the integration of acquiredbusinesses;

*·*                  performance of retail/consumer markets, includingconsumer preferences and concerns about diet;

*·*                  effective expansion of the Company’s restaurants innew and existing markets;

*·*                  profitability and success of franchisee restaurants;

*·*                  availability of quality real estate locations forrestaurant expansion;

*·*                  the market for Centrisoft’s software products;

*·*                  credit risk management; and

*·*                  asset/liability management

* *

*Exceptas may be required by law, the Company does not undertake, and specificallydisclaims any obligation, to publicly release the results of any revisions thatmay be made to any Forward-Looking Statements to reflect the occurrence ofanticipated or unanticipated events or circumstances after the date of suchstatements.*

* *

*Thefollowing discussion and analysis should be read in conjunction with theConsolidated Financial Statements of Fog Cutter Capital Group Inc. and thenotes thereto included elsewhere in this filing.  References in this filing to “the Company,” “we,”“our,” and “us” refer to Fog Cutter Capital Group Inc. and its subsidiariesunless the context indicates otherwise.*

* *

## **Executive Overview**

## ** **

*Business overview*

Fog Cutter Capital GroupInc. is primarily engaged in the operations of its Fatburger Holdings, Inc.(“Fatburger”) restaurant business.  Weacquired the controlling interest in Fatburger in August 2003 andcurrently own 82% voting control. Fatburger, “The Last Great Hamburger Stand”®, opened its firstrestaurant in Los Angeles in 1952.  As ofMarch 31, 2008, there were 96 Fatburger restaurants located in 15 statesand in Canada and China.  The restaurantsspecialize in fresh, made to order hamburgers and other specialty sandwiches.  French fries, homemade onion rings, hand-scoopedice cream shakes and soft drinks round out the menu.

 

We plan to openadditional Fatburger restaurants throughout the United States andinternationally, including Canada, China and the United Arab Emirates.  We intend to continue to open company-ownedrestaurants in strategic markets and increase the number of franchisedlocations in the U.S. and internationally. Franchisees currently own and operate 55 of the Fatburger locations andwe have agreements for approximately 245 new franchise locations.  Many factors affect our ability to open newfranchise locations and we expect that it will take several years for ourcurrent franchisees to open all of their restaurant locations.  As is typical for our industry, theidentification of qualified franchisees and quality locations has an impact onthe rate of growth in the number of our restaurants.

 

In addition to ourrestaurant operation, we also conduct manufacturing activities, softwaredevelopment and sales activities, and make real estate and other real estate-relatedinvestments through various controlled subsidiaries.

 

 

 

15

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*Operating segments*

Our operating segmentsare:

 

(i)             Restaurant operations — conducted throughour Fatburger subsidiary,

(ii)          Manufacturing operations — conductedthrough our wholly owned subsidiary, DAC International (“DAC”),

(iii)       Realestate and finance operations, and

(iv)      Software development and sales operations— conducted through our subsidiary, Centrisoft Corporation (“Centrisoft”).

 

Due to the varied natureof our operations, we do not utilize a standard array of key performanceindicators in evaluating our results of operations.  Our evaluation instead focuses on aninvestment-by-investment or asset-by-asset analysis within our operatingsegments.

 

*Significant events*

The following significantevents affected our operations for the three months ended March 31, 2008:

 

·                  Restaurant openings — During the threemonths ended March 31, 2008, Fatburger opened four additional franchise locations.  In addition, two locations were convertedfrom franchise-owned to company-owned restaurants.

 

·                  Discontinued operations — In February 2008,we sold a wholly-owned subsidiary, Fog Cap Retail Investors LLC (“FCRI”), whichheld our leased real estate portfolio.  The sales pricefor the FCRI membership interests was $8.5 million and was paid in cash.  A portion of the proceeds were used to repay$4.2 million of existing debt.  Werecorded a gain on sale of $4.2 million as a result of the transaction.  We also entered into an option agreement withthe buyer that gives us the right, but not the obligation, to re-acquire all ofthe membership interests in FCRI.  Theoption period is for two years beginning February 15, 2008.  Under certain circumstances after December 31,2008, the buyer may accelerate the termination of the option period upon thirtydays notice.  The exercise priceincreases over the option period from approximately $9.7 million currently to$11.3 million after February 28, 2010. The option commitment fee was $850,000 and is payable by us ininstallments over the option period. Management has determined that the option exercise prices aresignificantly higher than the expected value during the option period.  Therefore, the option has been assigned novalue as it is not anticipated that it will provide a future economic benefitto us.  The $850,000 option commitmentfee reduced the gain on sale.

 

·                  Repayment of notes payable — In February 2008,we used part of the proceeds from the sale of FCRI to repay one note payable inthe amount of $4.2 million.  The note hada carrying value of $4.0 million at December 31, 2007 and was secured byFCRI.

 

·                  Income from equity investee — In December 2000,we organized and led a group of investors to purchase all of the outstandingcapital stock of Bourne End Properties Plc (“Bourne End”), a specialistinvestor in retail property.  We investedin 26% of Bourne End, which at the timeof the acquisition had approximately GBP 169.6 million of assets and GBP123.1 million of debt.  The real estateassets consisted of 1.7 million square feet in fifteen shopping centers locatedin the United Kingdom.  Bourne End soldall of these properties between the date of the acquisition and 2006 anddistributed the net proceeds to the investors. Since the sale of the last property in 2006, Bourne End has beenproceeding toward final liquidation.  Inthe first quarter of 2008, Bourne End revised its estimates of accruedliabilities associated with its final liquidation, and we were notified that wehad been allocated an additional $0.2 million that is expected to bedistributed in the second quarter of 2008. As a result, we recognized $0.2 million in income from equity investeesduring the quarter ended March 31, 2008.

 

**Resultsof operations**

** **

We have incurred netlosses from continuing operations as follows:

 

| ** **         | ** ** | **Three months ended March 31,**             | ** ** |
|--------------------|------------|---------------------------------------------------|------------|
| ** **         | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **         | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| Net loss           |       | $                                                 | (4,829     | ) | $ | (6,364 | ) |
| Net loss per share |       | $                                                 | (0.60      | ) | $ | (0.80 | ) |

 

Our net loss fromcontinuing operations was $4.8 million (or $0.60 per share) for the threemonths ended March 31, 2008, compared to $6.4 million (or $0.80 per share)for the same period in the prior year. The loss is primarily due to operating expenses associated with ourmanagement infrastructure.  We have putin place a management structure which we believe will enable us tosignificantly expand our operations, notably our Fatburger subsidiary.  However, until the growth is realized, thecost of our management structure will be borne by our existing operations.

 

 

 

 

 

16

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The following sectionsdescribe the results of operations of our operating segments for the threemonths ended March 31, 2008 and 2007.

 

*Restaurantsegment operations*

The following table showsour operating margin for company-owned restaurants for the three months ended March 31,2008 and 2007:

 
| ** **                                     | ** ** | **Three months ended March 31,**      | ** **   |
|------------------------------------------------|------------|--------------------------------------------|--------------|
| ** **                                     | ** ** | **2008**                                   | ** **   | **2007** | ** ** |
| ** **                                     | ** ** | **(% to  Company-owned restaurant sales)** | *** *** |
| Restaurant sales:                              |       |                                       |         |   |   |
| Company-owned  restaurant sales                |       | 100.0                                      | %            | 100.0 | % |
| Cost of sales —  food, paper, merchandise |       | (25.3                                      | %)           | (24.0 | %) |
| Cost of sales —  wages and benefits       |       | (33.8                                      | %)           | (34.0 | %) |
| Restaurant  depreciation and amortization      |       | (6.0                                       | %)           | (6.2 | %) |
| Operating margin  (restaurant sales only)      |       | 34.9                                       | %            | 35.8 | % |
|                                                |            |                                            |              |  |  |  |

 

The followingtable shows our total operating results from the restaurant segment for thethree months ended March 31, 2008 and 2007:

 
| ** **                               | ** **   | **Three months ended March 31,** | ** **   |
|------------------------------------------|--------------|---------------------------------------|--------------|
| ** **                               | ** **   | **2008**                              | ** **   | **2007** | ** ** |
| *** ***                             | *** *** | **(% to total revenue)**              | *** *** |
| Total restaurant operations:             |         |                                  |         |   |   |
| Company-owned  restaurant sales          |         | 92.5                                  | %            | 93.4 | % |
| Royalty revenue                          |         | 6.3                                   | %            | 6.4 | % |
| Franchise fee  revenue                   |         | 1.2                                   | %            | 0.2 | % |
| Total revenue                            |         | 100.0                                 | %            | 100.0 | % |
|                                     |         |                                  |         |   |   |
| Cost of sales                            |         | (60.2                                 | %)           | (60.0 | %) |
| General &  administrative costs |         | (47.2                                 | %)           | (48.5 | %) |
| Interest expense                         |         | (2.3                                  | %)           | (2.6 | %) |
| Management  allocation                   |         | (6.2                                  | %)           | (6.6 | %) |
| Minority  interest in losses             |         | 1.0                                   | %            | 0.4 | % |
| Segment loss                             |         | (14.9                                 | %)           | (17.3 | %) |

 

For the threemonths ended March 31, 2008, company-owned restaurant sales increased 4.0%to $7.9 million from $7.6 million for the same period in 2007.  This increase was primarily the result of theaddition of four company-owned restaurants in the last half of 2007 and twomore stores in the first quarter of 2008. Same store sales for company-owned restaurants open during all of 2007decreased 8.5% for the first three months of 2008 compared to the same period in2007.  The operating margin as apercentage of sales for company-owned locations decreased to 34.9% in 2008 from35.8% in 2007 due to increased food and paper costs as a percentage of companyowned restaurant sales.

 

Royalty revenueremained stable at $0.5 million for the first three months of 2008 compared tothe same period in 2007.  We added fourfranchise location during the three months ended March 31, 2008, and twolocations were converted from franchise to company-owned restaurants.  The net increase in franchise locations wasoffset by a decrease of 13.2% in same store sales for franchise restaurants forthe first three months of 2008 compared to the same period in 2007.

 

System-wide samestore sales decreased 10.9% for stores open during all of 2007 during the firstthree months of 2008 compared to the same period in 2007.  Our loss from restaurant operations was 14.9%of total revenue for the three months ended March 31, 2008 compared to17.3% for the same period in 2007.  Thechange is due to decreased general and administrative expenses as we attempt tocontrol our costs while still expanding the Fatburger brand.

 

We plan to openadditional Fatburger restaurants throughout the United States andinternationally, including Canada, China and the United Arab Emirates.  We intend to continue to open company-ownedrestaurants in strategic markets and increase the number of franchisedlocations in the U.S. and internationally. Fatburger has opened a total of 47 restaurant locations since ouracquisition in 2003.  As is typical forour industry, the identification of qualified franchisees and quality locationshas an impact on the rate of growth in the number of our restaurants.

 

*Manufacturingsegment operations*
| ** **                  | ** **   | **Three months ended March 31,** | ** **   |
|-----------------------------|--------------|---------------------------------------|--------------|
| ** **                  | ** **   | **2008**                              | ** **   | **2007** | ** ** |
| *** ***                | *** *** | **(% to total revenue)**              | *** *** |
| Manufacturing sales         |         | 100.0                                 | %            | 100.0 | % |
| Manufacturing cost of sales |         | (59.4                                 | %)           | (59.5 | %) |
|                             |              |                                       |              |  |  |  |  |  |

 

17

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| Engineering and development |   | (12.6  | %)     | (10.2  | %)     |
|-----------------------------|--------|--------|--------|--------|--------|
| Operating margin            |   | 28.0   | %      | 30.3   | %      |
|                        |   |   |   |   |   |
| Compensation expense        |   | (25.1  | %)     | (18.1  | %)     |
| Depreciation expense        |   | (1.0   | %)     | (1.1   | %)     |
| Other operating expense     |   | (9.7   | %)     | (8.2   | %)     |
| Segment income (loss)       |   | (7.8   | %)     | 2.9    | %      |

 

Total revenue for thissegment was $2.2 million for the three months ended March 31, 2008,compared to $2.3 million for the same period in 2007.  Net loss for this segment was $0.2 millionfor the first three months of 2008, compared to $0.1 for the same period in2007.  In order to focus our efforts onour restaurant segment, we intend to sell our equity position in DAC for anamount higher than our net investment. If we were to sell this segment, it would decrease our net revenue.  There can be no assurance that we will beable to sell this segment for a profit.

 

*Real estate and finance segmentoperations*

 
| *Real estate operations:*           | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)**            | ** ** |
|                                |       |                                  |       |   |   |
| Operating revenue                   |       | $                                     | —     |   | $ | — |   |
| Operating expenses                  |       | —                                |       | — |   |
| Depreciation and amortization       |       | —                                |       | (3 | ) |
| Operating margin                    |       | —                                |       | (3 | ) |
|                                |       |                                  |       |   |   |
| General and administrative expenses |       | —                                |       | (6 | ) |
| Interest expense                    |       | (136                                  | )          | (119 | ) |
| Market value impairment reserve     |       | (153                                  | )          | — |   |
| Loss from real estate operations    |       | $                                     | (289       | ) | $ | (128 | ) |

 

In February 2008, wesold FCRI, our wholly-owned subsidiary that held our leased real estateportfolio.  The sales price was $8.5million and we recorded a gain on sale of $4.2 million.  Results of operations from FCRI for the threemonths ended March 31, 2007 (including the gain on sale) have beenreclassified as discontinued operations. Our remaining real estate investments consist of two apartment buildingsin Barcelona, Spain, which have been classified as held for sale.

 

*Interest income* – Our interest income for the firstquarter of both 2008 and 2007 was less than $0.1 million.

 

*Foreign exchange gains* – Changes in foreign currency exchangerates resulted in a net gain of approximately $0.6 million in this segment forthe three months ended March 31, 2008, compared to $0.1 million for thesame period in 2007.  At March 31,2008, approximately 20% of our total assets and 4% of our total liabilitieswere denominated in the euro.  See *Item 3 — Quantitative and Qualitative Disclosures about Market Risk*for further analysis.

 

*Other non-operating income*– In the three months ended March 31,2008, we had equity in income of equity investee of $0.2 million.  There was no comparable income from equityinvestees in 2007.

 

*Softwaredevelopment and sales segment operations*
| ** **                  | ** **   | **Three months ended March 31,** | ** ** |
|-----------------------------|--------------|---------------------------------------|------------|
| ** **                  | ** **   | **2008**                              | ** ** | **2007** | ** ** |
| *** ***                | *** *** | **(dollars in thousands)**            | ** ** |
| Software sales              |         | $                                     | 102        |   | $ | 4 |   |
| Engineering and development |         | (80                                   | )          | (151 | ) |
| Compensation expense        |         | (49                                   | )          | (108 | ) |
| Depreciation expense        |         | (109                                  | )          | (112 | ) |
| Other operating expense     |         | (65                                   | )          | (113 | ) |
| Interest expense            |         | (293                                  | )          | (268 | ) |
| Segment loss                |         | $                                     | (494       | ) | $ | (748 | ) |

 

Total revenue for thissegment was $0.1 million for each the three months ended March 31, 2008and less than $0.1 million for the same period of 2007.  Segment loss was approximately $0.5 millionfor the first quarter of 2008 and $0.8 million for the same period of2007.  Interest expense for this segmentis primarily due to Fog Cutter and is eliminated upon consolidation.  In order to focus our efforts on ourrestaurant segment, we intend to sell all, or a portion of, our equity positionin or the assets of Centrisoft.  If wewere to sell this segment, we 

 

18

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believe that it wouldhave a positive effect on our cash flow and decrease our net loss.  There can be no assurance that we will beable to sell this segment, in which case we may consider liquidating thesubsidiary and selling the rights to the Centrisoft software.

 

*Corporateexpenses*
| ** **                         | ** **   | **Three months ended March 31,** | ** ** |
|------------------------------------|--------------|---------------------------------------|------------|
| ** **                         | ** **   | **2008**                              | ** ** | **2007** | ** ** |
| *** ***                       | *** *** | **(dollars in thousands)**            | ** ** |
| Compensation and employee benefits |         | $                                     | 2,730      |   | $ | 3,564 |   |
| Professional fees                  |         | 448                                   |       | 292 |   |
| Travel and entertainment           |         | 350                                   |       | 429 |   |
| Insurance                          |         | 96                                    |       | 136 |   |
| Directors fees                     |         | 94                                    |       | 124 |   |
| Occupancy costs                    |         | 38                                    |       | 44 |   |
| Other expenses                     |         | 136                                   |       | 158 |   |
| Total operating expenses           |         | $                                     | 3,892      |   | $ | 4,747 |   |

 

For the three monthsended March 31, 2008, we incurred corporate operating expenses of $3.9million, compared to $4.7 million for the same period in 2006.  This decrease is primarily due to a decreasein compensation expenses.  Corporateexpenses for the first quarter of 2008 also include $0.3 million for sharebased payments accounted for under FAS 123R, compared to $0.4 million for thesame period in 2007.

 

*Managementallocation and other intercompany charges*

In 2006, as we focusedour efforts on the Fatburger segment we began allocating a portion of ourcorporate expenses to our restaurant segment to more accurately reflect theoperating results of that segment.  Thisallocation was $0.5 million for the three months ended March 31, 2008 and2007.  This allocation is eliminated uponconsolidation on the Consolidated Statements of Operations.  Other intercompany charges, includingintercompany interest expense, are eliminated upon consolidation, and totaled$0.3 million for the three months ended March 31, 2008 and 2007.

 

*Incometaxes*

During the three monthsended March 31, 2008 and 2007, a provision for income taxes was notrequired due to the net operating loss generated during the period.  We recorded a tax benefit of less than $0.1million to recognize tax refunds received in the first quarter of 2008 on priortaxes paid.

 

*Discontinuedoperations*

In February 2008,we sold our wholly-owned subsidiary, FCRI which held our leased real estateportfolio.  At the time of sale, thisportfolio was comprised of leasehold interests in 72 freestanding retailbuildings located throughout the United States. Prior to reclassification, the leased real estate portfolio was part ofour Real Estate and Financing Operations segment.  The following represents the results ofoperations during the time of our ownership of FCRI:

 
| ** **                                           | ** **   | **Three months ended March 31,** | ** **   |
|------------------------------------------------------|--------------|---------------------------------------|--------------|
| ** **                                           | ** **   | **2008**                              | ** **   | **2007** | ** ** |
| *** ***                                         | *** *** | **(dollars in thousands)**            | *** *** |
| Operating revenue                                    |         | $                                     | 610          |   | $ | 935 |   |
| Operating expenses                                   |         | (240                                  | )            | (387 | ) |
| Depreciation and amortization                        |         | (39                                   | )            | (108 | ) |
| Operating margin                                     |         | 331                                   |         | 440 |   |
|                                                 |         |                                  |         |   |   |
| General and administrative expenses                  |         | (7                                    | )            | (32 | ) |
| Interest expense                                     |         | (157                                  | )            | (220 | ) |
| Other  non-operating income                          |         | 8                                     |         | 11 |   |
| Gain on sale of  discontinued real estate operations |         | 4,217                                 |         | — |   |
| Income from discontinued real estate operations      |         | $                                     | 4,392        |   | $ | 199 |   |
|                                                 |         |                                  |         |   |   |
| Capital  expenditures                                |         | $                                     | 20           |   | $ | 65 |   |
| Segment assets                                       |         | —                                |         | 11,725 |   |

 

In December, we and our49% partners reached an agreement to sell our ownership interest in GeorgeElkins, a California commercial mortgage banking operation.  The sale closed in February 2007.  As such, results from operations of GeorgeElkins for the three months ended March 31, 2007 have been classified asdiscontinued operations.  Prior to thedecision to sell George Elkins, it was a reportable segment of ouroperations.  The following represents theresults of operations during the time of our ownership of George Elkins:

 

19

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| ** **                              | ** **   | **Three months ended March 31,** | ** **   |
|-----------------------------------------|--------------|---------------------------------------|--------------|
| ** **                              | ** **   | **2008**                              | ** **   | **2007** | ** ** |
| *** ***                            | *** *** | **(dollars in thousands)**            | *** *** |
| Total revenue                           |         | $                                     | —       |   | $ | 1,807 |   |
| Compensation expense                    |         | —                                |         | (1,534 | ) |
| Other operating expense                 |         | —                                |         | (281 | ) |
| Non-operating income                    |         | —                                |         | 17 |   |
| Gain on sale of discontinued operations |         | —                                |         | 2,492 |   |
| Minority interest in earnings           |         | —                                |         | 13 |   |
| Segment income                          |         | $                                     | —       |   | $ | 2,514 |   |

 

**Changes in financial condition**

 

Our assets, liabilitiesand stockholders’ equity can be summarized as follows:

 
| ** **                      | ** **   | **March 31,  2008**    | ** ** | **December 31,  2007** | ** ** |
|---------------------------------|--------------|-----------------------------|------------|-----------------------------|------------|
| *** ***                    | *** *** | **(dollars  in thousands)** | ** ** |
| Total assets                    |         | $                           | 41,725     |                        | $          | 53,769 |   |
| Total liabilities               |         | $                           | 38,835     |                        | 51,072     |   |
| Total minority interests        |         | $                           | 1,001      |                        | 701        |   |
| Total stockholders’ equity |         | $                           | 1,889      |                        | 1,996      |   |
|                                 |              |                             |            |                             |            |  |  |

 

The decrease in totalassets during the first three months of 2008 is primarily due to the disposalof our FCRI subsidiary, which was classified as held for sale at December 31,2007.  Total liabilities decreased overthe first three months of 2008 for the same reason.  The cash received from the disposal of FCRIwas used to repay one note payable and to support our operatingactivities.  Stockholders’ equitydecreased during the first quarter of 2008 by approximately $0.1 million,mainly resulting from our net loss of $0.4 million, partially offset by sharebased compensation of $0.3 million. These changes are described in more detail as follows:

 

*Cash*

Our cash decreased $0.2million from December 31, 2007 to March 31, 2008.  Significant sources and uses of cash duringthe quarter include:

·                  $4.7 million of cash used in operations –comprised primarily of our net loss from continuing operations of $4.8 millionadjusted for net non-cash items of $0.2 million;

·                  $0.8 million of cash provided byinvesting activities – comprised of $1.1 received on payments on notesreceivable, partially offset by $0.4 million invested in restaurant assets andother property, plant & equipment;

·                  $3.8 million of cash used in financingactivities – includes payments on borrowings of $4.7 million, partially offsetby proceeds from borrowings and capital leases of $0.5 million and $0.4 millioninvested by minority interests; and

·                  $7.5 million net cash inflow fromdiscontinued operations.

 

*Net investments in real estate,and related liabilities*

Our investments in realestate can be summarized as follows:

 
| ** **                                          | ** **   | **March 31, 2008**    | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| *** ***                                        | *** *** | **(dollars in thousands)** | ** ** |
| US based investments — held for sale (1):      |         |                       |       |                       |       |
| Purchase price /  improvements                      |         | $                          | —     |                       | $          | 13,338 |   |
| Accumulated  depreciation and amortization          |         | —                     |       | (2,143                     | )          |
| Net book value                                      |         | —                     |       | 11,195                     |       |
| Foreign-based investments — held for sale (2): |         |                       |       |                       |       |
| Purchase price /  improvements                      |         | 9,005                      |       | 8,463                      |       |
|                                                |         |                       |       |                       |       |
| Total investments in real estate, net               |         | $                          | 9,005      |                       | $          | 19,658 |   |

 

----

(1)                  Includes 32commercial properties under capital lease throughout the United States at December 31,2007.

(2)                  Includes 2apartment buildings in Barcelona, Spain at March 31, 2008 and December 31,2007.

 

20

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Borrowings related to ourinvestments in real estate were as follows:

 
| ** **                                     | ** **   | **March 31, 2008**    | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| *** ***                                   | *** *** | **(dollars in thousands)** | ** ** |
| Obligations on real estate under capital lease |         | $                          | —     |                       | $          | 9,994 |   |
| Borrowings on Barcelona properties             |         | 3,579                      |       | 3,505                      |       |
| Total borrowings related to real estate        |         | $                          | 3,579      |                       | $          | 13,499 |   |

 

Investments in propertiesunder capital lease (and the related capital lease obligations) decreased tozero at March 31, 2008 due to the sale of our FCRI subsidiary which heldour leased real estate portfolio.  Ourinvestment in apartment buildings in Barcelona, Spain increased $0.5 millionsince December 31, 2007.  This wasprimarily the result of increases in unrealized foreign currency translation of$0.6 million, partially offset by a market value impairment reserve ofapproximately $0.2 million.

 

*Net property, plant and equipment*

Net property, plant andequipment decreased $0.2 million at March 31, 2008 compared to December 31,2007, primarily due to scheduled monthly depreciation on those assets.  Obligations on property, plant, and equipmentunder capital lease remained stable at $0.1 million at March 31, 2008compared to December 31, 2007.

 

*Goodwill and net intangibleassets*
| ** **                              | ** **   | **March 31, 2008**    | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| *** ***                            | *** *** | **(dollars in thousands)** | ** ** |
| Goodwill — Fatburger               |         | $                          | 7,063      |                       | $          | 7,063 |   |
| Goodwill — Centrisoft              |         | 999                        |       | 999                        |       |
| Goodwill — DAC International       |         | 1,464                      |       | 1,464                      |       |
| Total goodwill                          |         | $                          | 9,526      |                       | 9,526      |   |
|                                    |         |                       |       |                       |       |
| Net intangible assets — Fatburger  |         | $                          | 4,709      |                       | 4,756      |   |
| Net intangible assets — Centrisoft |         | 208                        |       | 230                        |       |
| Total net intangible assets             |         | $                          | 4,917      |                       | 4,986      |   |
|                                         |              |                            |            |                            |            |  |  |

 

Net intangible assetsdecreased less than $0.1 million in the three months ended March 31, 2008due to monthly amortization of those assets. Net intangible assets at March 31, 2008 consists of trademarkrights of approximately $4.0 million, franchise agreements of approximately$0.4 million, re-seller contracts for Centrisoft of approximately $0.2 million,and other miscellaneous intangible assets of approximately $0.3 million.  We do not believe that there is any impairmentof goodwill or net intangible assets at March 31, 2008.

 

*Notes receivable*

As of March 31,2008, our notes receivable portfolio (excluding loans to senior executives)consists of three individual loans with a combined carrying value of $0.6million.  Two of the loans are secured byreal estate consisting of commercial property located in Texas and Arizona, andone loan is secured by stock in a restaurant business.  The loans have a weighted average interestrate (excluding fees and points) of 14.6% and a weighted average maturity ofsix months.

 

*Loans to senior executives*

As of December 31,2007, we had two loans to our Chairman and Chief Executive Officer, AndrewWiederhorn, for a total of $1.1 million. Both loans were made on February 21, 2002 (prior to the passage ofthe Sarbanes-Oxley Act of 2002).  Theloans matured on February 21, 2007, and bore interest at the prime rate,as published in the Wall Street Journal, which interest was added to theprincipal.  The loans were repaid infull, including interest, on February 21, 2008.

 

*Other assets*
|                        |     | **March 31,  2008**    | ** ** | **December 31,  2007** |   |
|-----------------------------|----------|-----------------------------|------------|-----------------------------|--------|
|                        | * * | **(dollars  in thousands)** |       |
| Trade receivables           |     | $                           | 1,217      |                        | $      | 1,491 |   |
|                        |     |                        |       |                        |   |
| Inventories                 |     | $                           | 3,105      |                        | $      | 2,505 |   |
|                        |     |                        |       |                        |   |
| Other current assets:       |     |                        |       |                        |   |
| Prepaid expenses            |     | $                           | 396        |                        | $      | 534 |   |
| Other                       |     | 2                           |       | 2                           |   |
| Total other  current assets |     | $                           | 398        |                        | $      | 536 |   |
|                        |     |                        |       |                        |   |
| Other assets:               |     |                        |       |                        |   |
| Software costs              |     | $                           | 795        |                        | $      | 879 |   |
| Security  deposits          |     | 660                         |       | 646                         |   |
| Capitalized  finance fees   |     | 260                         |       | 269                         |   |
| Other                       |     | 89                          |       | 93                          |   |
| Total other  assets         |     | $                           | 1,804      |                        | $      | 1,887 |   |

 

21

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| Assets held for sale:         |   |   |   |   |   |
|-------------------------------|--------|--------|--------|--------|--------|
| Current assets  held for sale |   | $      | — |   | $      | 66 |   |
| Other assets  held for sale   |   | — |   | 21     |   |
|                               |        |        |        |        |        |  |  |

 

Trade receivables andinventories at March 31, 2008 relate primarily to the operations of DAC.

 

*Deferredincome*

Our deferred incomerelating to the collection of unearned Fatburger franchise fees wassubstantially unchanged at $5.2 million at March 31, 2008, compared to December 31,2007.  This was the result of thecollection of $0.1 million in new franchise fees, offset by the recognition of$0.1 million in franchise revenue.  As ofMarch 31, 2008, nearly all of the deferred income was comprised of thenon-refundable franchise fee received by Fatburger for each future franchiselocation.  These initial fees generallyrepresent half of the total fee per location. The balance of the franchise fee (approximately an additional $5.2million) will be collected in the future when leases on these specificfranchise locations are signed.

 

*Notespayable*

As of March 31,2008, our notes payable (excluding borrowings on real estate) totaled $11.7million, including $7.1 million of debt held at Fatburger, $0.7 million atCentrisoft, and $0.5 million at DAC. This compares to $15.8 million at December 31, 2007.  The decrease was primarily due to therepayment of one note payable with a carrying value of $4.0 million at December 31,2007.

 

*Accountspayable and accrued liabilities*

Accounts payable andaccrued liabilities totaled $16.3 million at March 31, 2008, compared with$13.3 million at December 31, 2007, and consisted of the following:

 
| ** **                                                | ** **   | **March 31, 2008**    | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| *** ***                                              | *** *** | **(dollars in thousands)** | ** ** |
| Accounts payable                                          |         | $                          | 9,310      |                       | $          | 9,075 |   |
| Sales deposits                                            |         | 1,916                      |       | 1,478                      |       |
| Accrued wages,  bonus and commissions                     |         | 611                        |       | 626                        |       |
| Other                                                     |         | 4,511                      |       | 2,081                      |       |
| Total accrued  expenses and other liabilities             |         | $                          | 16,348     |                       | $          | 13,260 |   |
|                                                      |         |                       |       |                       |       |
| Current  liabilities associated with assets held for sale |         | $                          | —     |                       | $          | 1,232 |   |

 

The increase in otherpayables was primarily the result of the accrual of management fees and the optioncommitment fee associated with the sale of FCRI.

 

**Liquidityand Capital Resources**

 

Liquidity is ameasurement of our ability to meet potential cash requirements, includingongoing commitments to repay borrowings, fund business operations,acquisitions, and expansion (including growth of company-owned and franchisedrestaurant locations), engage in loan acquisition and lending activities andfor other general business purposes.  Inaddition to our cash on hand, our primary sources of funds for liquidity duringthe first three months of 2008 consisted of cash provided by proceeds from thesale of discontinued operations and the repayments to us from borrowers.  As of March 31, 2008, we had cash orcash equivalents of $1.0 million, which, together with projected borrowings andproceeds from the sales of assets, we believe will be sufficient to meet ourcurrent liquidity needs.

 

At March 31,2008, we had total consolidated secured indebtedness of $17.3 million, as wellas $21.5 million of other liabilities.  Ourconsolidated secured indebtedness consisted of:

·                  notes payable and other debt of Fatburgerof $7.1 million secured by the assets of Fatburger;

·                  $2.0 million in capital leases maturingon or before 2010 which are secured by an aircraft and various restaurantassets;

·                  notes payable of $3.6 million secured byour two Barcelona properties;

·                  $3.4 million of notes payable secured byvarious assets of the Company;

·                  $0.5 million of short-term borrowingssecured by the assets of DAC International; and

·                  $0.7 million of notes payable secured bythe assets of Centrisoft.

 

We consider thesale 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 currently generate sufficient cash to cover operatingexpenses.  We believe that our existingsources of funds will be adequate to meet our liquidity needs; however, therecan be no assurance that this will be the case.

 

22

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If our existing liquidityposition were to prove insufficient, and we were unable to repay, renew orreplace maturing indebtedness on terms reasonably satisfactory to us, we may berequired to sell (potentially on short notice) a portion of our assets, andcould incur losses as a result.  Specificrisks to our liquidity position include the following:

 

*Foreigncurrency exchange rate risk*

Our exposure to foreigncurrency fluctuations arises mainly from our investment in Barcelona realestate.  As of March 31, 2008,approximately 20% of our total assets and 4% of our total liabilities weredenominated in the euro.  We can utilizea wide variety of financial techniques to assist in the management of currencyrisk, including currency swaps, options, and forwards, or combinationsthereof.  No such currency hedgingtechniques were in use as of March 31, 2008.

 

*Interestrate risk*

Our borrowings andthe 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. Material increases in interest expense from variable-rate fundingsources, or material decreases in monthly cash receipts from operations,generally would negatively impact our liquidity.  On the other hand, material decreases ininterest expense from variable-rate funding sources would positively affect ourliquidity.  Fluctuations in interestrates will impact our net income to the extent our operations and our fixedrate assets are funded by variable rate debt. We may also be impacted to the extent that our variable rate assetsre-price on a different schedule or in relation to a different index than anyfloating rate debt.  See *Item 3 — Quantitative and Qualitative Disclosures about Market Risk*for further analysis.

 

*Fatburgerdebt covenant*

At December 31,2007, Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements, due toits failure to meet the prescribed fixed charge coverage ratio and theprescribed debt-coverage ratio in three notes payable.  As it has in the past, the lendersubsequently issued a waiver of the covenant violations at December 31,2007.  The next measurement date forcompliance with this covenant is December 31, 2008.

 

*Fatburgerexpansion*

Fatburger is involved ina nationwide expansion of franchise and company-owned locations, which willrequire significant liquidity.  If realestate locations of sufficient quality cannot be located and either leased orpurchased, the timing of restaurant openings may be delayed.  Additionally, if Fatburger or its franchiseescannot obtain capital sufficient to fund this expansion, the timing ofrestaurant openings may be delayed.

 

*Centrisoftoperations*

We expect that Centrisoftwill require capital resources and have negative cash flow for the nearterm.  Centrisoft is currently marketingits software to potential customers both directly and through re-sellerrelationships.  There can be no assurancethat Centrisoft will be successful in generating sufficient cash flow tosupport its own operations in the near term.

 

*Restrictedcash balance*

At March 31, 2008,$0.1 million of our cash balance was in a restricted certificate of deposit assecurity on an office lease.

 

*Dividends*

While we do not have afixed dividend policy, we may declare and pay new 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 mayconsider is the impact of dividends on our liquidity.  We have not declared or paid any dividends inthe first quarter of 2008.

 

*Over-the-counter stock listing*

Effective October 14,2004, our stock began trading in the over-the-counter (“OTC”) market.   Trading of our commonstock on the OTC market reduces the liquidity of our common stock compared toquotation on a national market.  Also, thecoverage of the Company by security analysts and media is reduced, which webelieve results in lower prices for our common stock than might otherwiseprevail and also results in increased spreads between the bid and ask pricesfor our common stock.  Additionally,certain investors will not purchase securities that are not quoted on anational market, which we believe impairs our ability to raise funds throughthe issuance of common stock or other securities convertible into common stock.

 

**Off Balance Sheet Arrangements**

 

In order tofacilitate the development of franchise locations, as of March 31, 2008,Fatburger had guaranteed the annual minimum lease payments of two restaurantsites owned and operated by franchisees. The guarantees approximate $0.7 million plus certain contingent rental 

 

23

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payments asdefined in the respective leases.  Theseleases expire at various times through 2015. The lease guarantees by Fatburger do not provide us with a materialsource of liquidity, capital resources or other benefits.  There are no revenues, expenses or cash flowsconnected with the lease guarantees other than the receipt of normal franchiseroyalties.  As of March 31, 2008, wewere not aware of any event or demand that was likely to trigger the guaranteeby Fatburger.

 

We have various operatingleases for office, manufacturing and retail space which expire through2017.  The leases provide for varyingminimum annual rental payments including rent increases and free rentperiods.  We have future minimum rentalpayments under non-cancelable operating leases with initial or remaining termsof one year or more of approximately $25.5 million as of March 31, 2008.

 

We did not have any otheroff-balance sheet arrangements in place as of March 31, 2008.

 

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

## ** **

Our market riskresults from instruments entered into other than for trading purposes andconsists primarily of exposure to loss resulting from changes in foreigncurrency exchange rates, interest rates and commodity prices.

 

*Foreigncurrency exchange rate risk*

Our exposure toforeign currency fluctuations arises mainly from our investment in Barcelonareal estate.  As of March 31, 2008,approximately 20% of our total assets and 4% of our total liabilities weredenominated in the euro.  The followingtable illustrates the projected effect on our net asset value as a result ofhypothetical changes in foreign currency rates as of March 31, 2008:

 
| **Change in foreign exchange rates (1)** | ** ** | **Projected  change in  net asset  fair value** | ** ** | **Projected  percentage  change in net asset  fair value** |   |
|------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------------|--------|
| Decrease 20%                             |       | $                                               | (1,364,000 | )                                                          | -47.2  | % |
| Decrease 10%                             |       | $                                               | (682,000   | )                                                          | -23.6  | % |
| No Change                                |       | $                                               | —     |                                                       | 0.0    | % |
| Increase 10%                             |       | $                                               | 682,000    |                                                       | 23.6   | % |
| Increase 20%                             |       | $                                               | 1,364,000  |                                                       | 47.2   | % |

 

----

(1)                  Assumes that uniform percentage changesoccur instantaneously in the euro.  Adecrease in the foreign exchange rate indicates a strengthening of the U.S.dollar against that currency.  An increasein the foreign exchange rate indicates a weakening of the U.S. dollar againstthat currency.

 

We can utilize a widevariety of financial techniques to assist in the management of currency risk,including currency swaps, options, and forwards, or combinations thereof.  No such currency hedging techniques were usedduring the three months ended March 31, 2008.

 

*Interestrate risk*

Changes ininterest rates can affect net income by increasing the cost associated withoperating 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 associated default rates), our payments on variable-interest rate debt, ourability to acquire loans and general levels of consumer spending.

 

*Other market risks*

Our restaurantoperations are exposed to the impact of commodity and utility pricefluctuations related to unpredictable factors such as weather and various othermarket conditions outside our control. Our ability to recover increased costs through higher prices is limitedby the competitive environment in which we operate.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

*Evaluation of disclosure controls and procedures*

Our Chief Executive Officer and our Chief Financial Officer, afterevaluating the effectiveness of the Company’s “disclosure controls andprocedures” (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and15d-15(e)) as of March 31, 2008, have concluded that our disclosurecontrols and procedures were effective and designed to ensure that materialinformation relating to us and our consolidated subsidiaries is accumulated andcommunicated to our management to allow timely decisions regarding requireddisclosure.

 

24

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The Company doesnot expect that its disclosure controls and procedures will prevent all errorand all fraud.  A control procedure, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control procedures are met.  Because of the inherent limitations in allcontrol procedures, no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within the Company havebeen detected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more people, or bymanagement override of the control.  TheCompany considered these limitations during the development of its disclosurecontrols and procedures, and will continually reevaluate them to ensure theyprovide reasonable assurance that such controls and procedures are effective.

 

*Changes in internal control over financial reporting*

There were no significant changes in our internal control overfinancial reporting in connection with an evaluation that occurred during ourfirst fiscal quarter of 2008 that have materially affected or are reasonablylikely to materially affect our internal control over financial reporting.

 

25

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## **PART II— OTHER INFORMATION**

## ** **

**ITEM1.  LEGAL PROCEEDINGS**

** **

*Warlick complaint*

**Fatburger Holdings, Inc., etal. v. Keith A. Warlick/ Warlick v. Fatburger, et al, Superior Court ofCalifornia for the County of Los Angeles, Case No. SC 091436.**** **On October 16,2006, Fatburger Holdings, Inc., Fatburger Corporation and Fatburger NorthAmerica, Inc. filed suit against Keith A. Warlick (“Warlick”) the formerChief Executive Officer of Fatburger Holdings, Inc. and FatburgerCorporation. Warlick’s employment with Fatburger was terminated on September 21,2006 by resolution of the board of directors of Fatburger Holdings, Inc.The Fatburger companies initiated the lawsuit to recover damages from Warlickarising from wrongful acts and conduct during and after his employment, and areasserting claims for:  breach ofcontract, breach of duty of loyalty, breach of fiduciary duty, conversion —embezzlement; fraud/commencement; intentional interference with contractualrelations, and equitable indemnity. Warlick filed an answer to the lawsuit denying the allegations andincluded a Cross-complaint against Fatburger Holdings, Inc., FatburgerCorporation, Fatburger North America, Inc., Fog Cutter Capital Group, Inc.,and Andrew Wiederhorn (“Cross-Defendants”), for breach of contract, employmentdiscrimination based on race and retaliation, wrongful termination anddefamation — slander without any specification of damages.  On a motion filed by the Cross-Defendants,the Court dismissed Warlick’s cross-claim for employment discrimination basedon race and retaliation.  In furtherresponse Warlick initiated a second lawsuit against the Company, variousFatburger companies, and members of the Fatburger board of directors, which isset out below. The defendants to the Cross-complaint filed by Warlick disputethe allegations of the cross-complaint and intend to vigorously defend againstthe cross-complaint.  The case currentlyhas a trial date of June 30, 2008, but that date is expected to becontinued into the future.

 

**Keith Warlick, et al. v. FogCutter Capital Group, et al., Superior Court of California for the County ofLos Angeles, Case No. 58365915.**** **On February 6, 2007, Warlick, his wife, and alimited liability company controlled by Warlick, each of whom is a minorityshareholder of Fatburger Holdings, Inc., filed a complaint against variousFatburger entities, the Company, Andrew Wiederhorn, and members of theFatburger board of directors. The complaint alleges fraud, negligentmisrepresentation against Wiederhorn and the Company, and breach of contractand breach of fiduciary duty against all the defendants, related to businesstransactions which the plaintiff’s allege were not in the best interests ofFatburger Holdings, Inc., or the plaintiff minority shareholders. Thedefendants dispute the allegations of the lawsuit and intend to vigorouslydefend against the claims.  The case isin the early stages of discovery.

 

**ITEM1A.  RISK FACTORS**

** **

There have been nomaterial changes in the risk factors set forth in *Part I,Item 1A — Risk Factors* of our Annual Report as of and for the yearended December 31, 2007 on Form 10-K, as previously filed with theSEC on March 31, 2008.

 

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

None.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

Not applicable.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

**None.**

** **

**ITEM5.  OTHER INFORMATION**

None.

 

**ITEM6.  EXHIBITS**

** **

| 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 (File No. 000-23911). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

26

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| 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    | Waiver, Release,  Delegation and Amendment to Stock Option and Voting Agreement among Andrew A.  Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany Wiederhorn, and  the Registrant, dated July 31, 2002, incorporated by reference to  Exhibit 2.1 to the Form 8-K dated August 8, 2002, as  previously filed with the SEC on August 15, 2002. |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    | 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.                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    | 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.                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.7    | 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.                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.8    | 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.                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.9    | 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.                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.10   | 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.                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 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.                                                                                                                                                                                                                 |

 

** **

27

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** **

**SIGNATURES**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
| FOG  CUTTER CAPITAL GROUP INC. |
|--------------------------------|
|                           |   |   |   |
|                           | By: | /s/ Andrew A.  Wiederhorn |   |
|                           | Andrew A. Wiederhorn |   |
|                           | Chief Executive Officer |   |
|                           |   |   |   |
|                           |   |   |   |
|                           | By: | /s/ R. Scott Stevenson |   |
|                           | R. Scott Stevenson |   |
|                           | Senior Vice President  and Chief Financial Officer |   |

 

Date:  May 15, 2008

 

 

28

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EXHIBIT INDEX

 

| 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 (File No. 000-23911).                                                                                                       |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 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    | Waiver, Release,  Delegation and Amendment to Stock Option and Voting Agreement among Andrew A.  Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany Wiederhorn, and  the Registrant, dated July 31, 2002, incorporated by reference to  Exhibit 2.1 to the Form 8-K dated August 8, 2002, as  previously filed with the SEC on August 15, 2002. |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    | 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.                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    | 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.                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.7    | 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.                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.8    | 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.                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.9    | 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.                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.10   | 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.                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                |
| 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.                                                                                                                                                                                                                 |

 

 

29

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