##### **SECURITIESAND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

#### **FORM10-Q**

 

**(Mark one)**

 
| **ý** | ** **                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|--------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|       |                                                   |                                                                                          |
|       | **For the quarterly period ended  September 30, 2005** |
|       |                                                   |                                                                                          |
| **OR**     |
|       |                                                   |                                                                                          |
| **o**      | ** **                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile 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’s telephonenumber, including area code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.  Yes ý  No o.

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).Yes o  No ý.

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o  No ý.

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

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

 

 

----

 

FOG CUTTER CAPITALGROUP INC.

 

FORM 10-Q

 

I N D E X

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

 

Available information

 

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

 

----

 

PART I — FINANCIAL INFORMATION

 

## **ITEM1.  INTERIM FINANCIAL STATEMENTS(Unaudited)**

 

FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION

(Unaudited)

(dollars inthousands, except share data)

 
| ** **                                                                                                                                                                                                                                                 | ** ** | **September 30  2005** | ** ** | **December 31  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                 | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| Assets:                                                                                                                                                                                                                                                    |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                 |       | $                      | 5,262      |                  | $          | 11,948 |   |
| Loans                                                                                                                                                                                                                                                      |       | 2,634                  |       | 6,651                 |       |
| Investments in  real estate, net                                                                                                                                                                                                                           |       | 24,761                 |       | 26,660                |       |
| Loans to senior  executives                                                                                                                                                                                                                                |       | 3,017                  |       | 2,983                 |       |
| Investment in  Bourne End                                                                                                                                                                                                                                  |       | 1,753                  |       | 1,901                 |       |
| Restaurant  property, plant and equipment, net                                                                                                                                                                                                             |       | 5,308                  |       | 6,228                 |       |
| Intangible  assets, net                                                                                                                                                                                                                                    |       | 5,714                  |       | 5,401                 |       |
| Goodwill                                                                                                                                                                                                                                                   |       | 9,081                  |       | 7,063                 |       |
| Other assets                                                                                                                                                                                                                                               |       | 6,732                  |       | 5,063                 |       |
| Total assets                                                                                                                                                                                                                                               |       | $                      | 64,262     |                  | $          | 73,898 |   |
|                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Liabilities:                                                                                                                                                                                                                                               |       |                   |       |                  |       |
| Borrowings and  notes payable                                                                                                                                                                                                                              |       | 10,120                 |       | 7,977                 |       |
| Obligations  under capital leases                                                                                                                                                                                                                          |       | 11,166                 |       | 12,401                |       |
| Obligation under  leave of absence agreement                                                                                                                                                                                                               |       | 8                      |       | 1,771                 |       |
| Deferred income                                                                                                                                                                                                                                            |       | 4,168                  |       | 4,466                 |       |
| Deferred income  taxes                                                                                                                                                                                                                                     |       | 5,744                  |       | 5,782                 |       |
| Accrued expenses  and other liabilities                                                                                                                                                                                                                    |       | 7,562                  |       | 7,194                 |       |
| Total  liabilities                                                                                                                                                                                                                                         |       | 38,768                 |       | 39,591                |       |
|                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                                             |       |                   |       |                  |       |
|                                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| Stockholders’  Equity:                                                                                                                                                                                                                                |       |                   |       |                  |       |
| Preferred stock,  $.0001 par value; 25,000,000 shares authorized; no shares issued and  outstanding                                                                                                                                                        |       | —                 |       | —                |       |
| Common stock,  $.0001 par value; 200,000,000 shares authorized; 11,757,073 shares issued as  of September 30, 2005 and December 31, 2004; 7,957,428 shares outstanding as  of September 30, 2005 and 8,380,673 shares outstanding as of December 31,  2004 |       | 168,214                |       | 168,214               |       |
| Accumulated  deficit                                                                                                                                                                                                                                       |       | (131,018               | )          | (123,916              | )          |
| Option to  purchase common stock                                                                                                                                                                                                                           |       | —                 |       | (593                  | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                                                    |       | 307                    |       | 329                   |       |
| Treasury stock,  3,799,645 common shares as of September 30, 2005 and 3,376,400 common shares  as of December 31, 2004, at cost                                                                                                                            |       | (12,009                | )          | (9,727                | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                           |       | 25,494                 |       | 34,307                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                           |       | $                      | 64,262     |                  | $          | 73,898 |   |

 

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

 

3

----

 

FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

* (dollars in thousands, except share data)*

* *
| ** **                                           | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **September 30,** | ** ** | **September 30,**     | ** ** |
| ** **                                           | ** ** | **2005**          | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Interest  Income:                                |       |              |       |                  |       |   |   |   |   |
| Loans                                                |       | $                 | 47         |                  | $          | 456 |   | $ | 820 |   | $ | 1,431 |   |
| Securities                                           |       | 1                 |       | 11                    |       | 7 |   | 616 |   |
| Loans to senior  executives                          |       | 54                |       | 51                    |       | 161 |   | 138 |   |
| Other  investments                                   |       | 56                |       | 14                    |       | 150 |   | 85 |   |
| Total interest  income                               |       | 158               |       | 532                   |       | 1,138 |   | 2,270 |   |
| Interest expense                                     |       | —            |       | —                |       | — |   | 112 |   |
| Net interest  income                                 |       | 158               |       | 532                   |       | 1,138 |   | 2,158 |   |
|                                                 |       |              |       |                  |       |   |   |   |   |
| Real Estate  Operations:                             |       |              |       |                  |       |   |   |   |   |
| Operating income                                     |       | 1,031             |       | 1,106                 |       | 3,199 |   | 3,083 |   |
| Operating  expense                                   |       | (391              | )          | (454                  | )          | (1,231 | ) | (1,330 | ) |
| Gain on sale of  real estate                         |       | 195               |       | 154                   |       | 1,784 |   | 159 |   |
| Interest expense                                     |       | (255              | )          | (281                  | )          | (783 | ) | (843 | ) |
| Depreciation                                         |       | (123              | )          | (166                  | )          | (396 | ) | (489 | ) |
| Total real  estate operations                        |       | 457               |       | 359                   |       | 2,573 |   | 580 |   |
|                                                 |       |              |       |                  |       |   |   |   |   |
| Restaurant  Operations:                              |       |              |       |                  |       |   |   |   |   |
| Operating  revenue                                   |       | 6,003             |       | 5,673                 |       | 18,041 |   | 16,424 |   |
| Cost of goods  sold                                  |       | (3,469            | )          | (3,274                | )          | (10,532 | ) | (9,812 | ) |
| Franchise and  royalty fee                           |       | 721               |       | 349                   |       | 1,743 |   | 998 |   |
| General and  administrative costs                    |       | (3,032            | )          | (2,530                | )          | (8,646 | ) | (7,946 | ) |
| Interest expense                                     |       | (161              | )          | (97                   | )          | (471 | ) | (442 | ) |
| Depreciation and  amortization                       |       | (337              | )          | (377                  | )          | (1,048 | ) | (1,121 | ) |
| Total restaurant  operations                         |       | (275              | )          | (256                  | )          | (913 | ) | (1,899 | ) |
|                                                 |       |              |       |                  |       |   |   |   |   |
| Other Operating  Income:                             |       |              |       |                  |       |   |   |   |   |
| Gain on sale of  loans and securities                |       | —            |       | —                |       | — |   | 2,099 |   |
| Loan brokerage  fees                                 |       | 2,825             |       | 1,839                 |       | 5,255 |   | 4,213 |   |
| Gain on sale of  prepaid servicing credit            |       | —            |       | —                |       | — |   | 1,530 |   |
| Equity in  earnings of equity investees              |       | (415              | )          | 2,719                 |       | 26 |   | 4,231 |   |
| Other                                                |       | 35                |       | 476                   |       | 143 |   | 1,349 |   |
| Total other  operating income                        |       | 2,445             |       | 5,034                 |       | 5,424 |   | 13,422 |   |
|                                                 |       |              |       |                  |       |   |   |   |   |
| Operating  Expenses:                                 |       |              |       |                  |       |   |   |   |   |
| Compensation and  employee benefits                  |       | 3,347             |       | 2,443                 |       | 7,045 |   | 7,966 |   |
| Leave of absence  expense                            |       | —            |       | —                |       | — |   | 4,750 |   |
| Professional  fees                                   |       | 661               |       | 794                   |       | 1,866 |   | 1,963 |   |
| Other                                                |       | 1,258             |       | 1,541                 |       | 3,255 |   | 4,464 |   |
| Total operating  expenses                            |       | 5,266             |       | 4,778                 |       | 12,166 |   | 19,143 |   |
|                                                 |       |              |       |                  |       |   |   |   |   |
| Net income  (loss) before provision for income taxes |       | (2,481            | )          | 891                   |       | (3,944 | ) | (4,882 | ) |
| Provision for  income taxes                          |       | —            |       | —                |       | — |   | — |   |
| Net Income  (Loss)                                   |       | $                 | (2,481     | )                     | $          | 891 |   | $ | (3,944 | ) | $ | (4,882 | ) |
|                                                 |       |              |       |                  |       |   |   |   |   |
| Basic income  (loss) per share                       |       | $                 | (0.31      | )                     | $          | 0.11 |   | $ | (0.49 | ) | $ | (0.57 | ) |
| Basic weighted  average shares outstanding           |       | 7,957,428         |       | 8,380,173             |       | 8,089,692 |   | 8,490,376 |   |
| Diluted net  income (loss) per share                 |       | $                 | (0.31      | )                     | $          | 0.11 |   | $ | (0.49 | ) | $ | (0.57 | ) |
| Diluted weighted  average shares outstanding         |       | 7,957,428         |       | 8,385,146             |       | 8,089,692 |   | 8,490,376 |   |
| Dividends  declared per share                        |       | $                 | 0.13       |                  | $          | 0.13 |   | $ | 0.39 |   | $ | 0.39 |   |

 

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

 

4

----

 

**FOG CUTTER CAPITAL GROUP INC.**

**CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

 

**(Unaudited)(dollars in thousands)**

 
| ** **                                                                                                         | ** ** | ** **        | ** ** | ** **          | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|-----------------|------------|--------------|------------|-------------------|------------|-------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                         | ** ** | ** **        | ** ** | ** **          | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | **Option  to**    | ** ** | **Other**       | ** ** | ** ** | ** ** |
| ** **                                                                                                         | ** ** | **Common  Stock** | ** ** | **Treasury  Stock** | ** ** | **Accumulated** | ** ** | **Purchase** | ** ** | **Comprehensive** | ** ** | ** **        | ** ** |
| ** **                                                                                                         | ** ** | **Shares  (1)**   | ** ** | **Amount**          | ** ** | **Shares**      | ** ** | **Amount**   | ** ** | **Deficit**       | ** ** | **Common  Stock** | ** ** | **Income**      | ** ** | **Total**  | ** ** |
| ** **                                                                                                         | ** ** | ** **        | ** ** | ** **          | ** ** | ** **      | ** ** | ** **   | ** ** | ** **        | ** ** | ** **        | ** ** | ** **      | ** ** | ** ** | ** ** |
| Balance at  January 1, 2005                                                                                        |       | 8,380,673         |       | $                   | 168,214    |            | 3,376,400  |         | $          | (9,727            | )          | $                 | (123,916   | )               | $          | (593       | )          | $ | 329 |   | $ | 34,307 |   |
|                                                                                                               |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
| Comprehensive  income (loss):                                                                                      |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
|                                                                                                               |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
| Net loss                                                                                                           |       | —            |       | —              |       | —          |       | —       |       | (3,944            | )          | —            |       | —          |       | (3,944     | )          |
|                                                                                                               |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
| Other  comprehensive income:                                                                                       |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
|                                                                                                               |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
| Foreign currency  translation                                                                                      |       | —            |       | —              |       | —          |       | —       |       | —            |       | —            |       | (473            | )          | (473       | )          |
|                                                                                                               |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
| Reclassification  adjustment for net losses on securities and foreign currency translation  included in net income |       | —            |       | —              |       | —          |       | —       |       | —            |       | —            |       | 451             |       | 451        |       |
|                                                                                                               |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
| Total  comprehensive loss                                                                                          |       | —            |       | —              |       | —          |       | —       |       | —            |       | —            |       | —          |       | (3,966     | )          |
|                                                                                                               |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
| Purchase of  treasury stock                                                                                        |       | (423,245          | )          | —              |       | 423,245         |       | (2,282       | )          | —            |       | 593               |       | —          |       | (1,689     | )          |
|                                                                                                               |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
| Dividends  declared                                                                                                |       | —            |       | —              |       | —          |       | —       |       | (3,158            | )          | —            |       | —          |       | (3,158     | )          |
|                                                                                                               |       |              |       |                |       |            |       |         |       |              |       |              |       |            |       |       |       |
| Balance at  September 30, 2005                                                                                     |       | 7,957,428         |       | $                   | 168,214    |            | 3,799,645  |         | $          | (12,009           | )          | $                 | (131,018   | )               | $          | —     |       | $ | 307 |   | $ | 25,494 |   |

 

----

(1)   Issuedand outstanding

 

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

 

5

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FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 *(dollars in thousands)*

 
| ** **                                                               | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **September 30,** | ** ** | **September 30,**     | ** ** |
| ** **                                                               | ** ** | **2005**          | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                   |       |              |       |                  |       |   |   |   |   |
| Net income  (loss)                                                       |       | $                 | (2,481     | )                     | $          | 891 |   | $ | (3,944 | ) | $ | (4,882 | ) |
| Adjustments to  reconcile net income (loss) to net operating cash flows: |       |              |       |                  |       |   |   |   |   |
| Equity in  (income) losses of equity investees                           |       | 415               |       | (2,719                | )          | (26 | ) | (4,231 | ) |
| Depreciation and  amortization                                           |       | 543               |       | 509                   |       | 1,639 |   | 1,611 |   |
| Loss (gain) on  foreign currency translation                             |       | 34                |       | (31                   | )          | 454 |   | (51 | ) |
| Gain on sale of  securities and loans                                    |       | —            |       | —                |       | — |   | (2,099 | ) |
| Gain on sale of  real estate                                             |       | (195              | )          | (154                  | )          | (1,784 | ) | (159 | ) |
| Gain on sale of  prepaid servicing credit                                |       | —            |       | —                |       | — |   | (1,530 | ) |
| Other                                                                    |       | 146               |       | (237                  | )          | 32 |   | (882 | ) |
| Change in:                                                               |       |              |       |                  |       |   |   |   |   |
| Deferred income                                                          |       | (202              | )          | 417                   |       | (297 | ) | 726 |   |
| Other assets                                                             |       | 99                |       | 1,673                 |       | 221 |   | 520 |   |
| Accounts payable  and accrued liabilities                                |       | (2,474            | )          | (436                  | )          | (3,297 | ) | 2,616 |   |
| Net cash used in  operating activities                                   |       | (4,115            | )          | (87                   | )          | (7,002 | ) | (8,361 | ) |
|                                                                     |       |              |       |                  |       |   |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                   |       |              |       |                  |       |   |   |   |   |
| Principal  payments on securities available for sale                     |       | —            |       | —                |       | — |   | 6,818 |   |
| Proceeds from  sale of securities available for sale                     |       | —            |       | —                |       | — |   | 29,090 |   |
| Proceeds from  sale of real estate                                       |       | 476               |       | 362                   |       | 3,796 |   | 536 |   |
| Proceeds from  sale of prepaid servicing credit                          |       | —            |       | —                |       | — |   | 1,530 |   |
| Investment in  loans and discounted loans                                |       | (824              | )          | (935                  | )          | (2,259 | ) | (8,008 | ) |
| Proceeds from  investments in and loans to equity investees              |       | —            |       | 4,429                 |       | — |   | 4,429 |   |
| Principal  repayments on loans and discounted loans                      |       | 3,145             |       | 115                   |       | 4,254 |   | 1,169 |   |
| Investment in  real estate                                               |       | (132              | )          | (2,400                | )          | (2,258 | ) | (4,662 | ) |
| Investments in  restaurant property, plant, and equipment                |       | (49               | )          | (293                  | )          | (69 | ) | (1,077 | ) |
| Other                                                                    |       | (12               | )          | (9                    | )          | (28 | ) | 18 |   |
| Net cash  provided by investing activities                               |       | 2,604             |       | 1,269                 |       | 3,436 |   | 29,843 |   |
|                                                                     |       |              |       |                  |       |   |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                   |       |              |       |                  |       |   |   |   |   |
| Proceeds from  borrowings                                                |       | 56                |       | —                |       | 2,348 |   | — |   |
| Repayments on  borrowings                                                |       | (78               | )          | (1,324                | )          | (160 | ) | (27,136 | ) |
| Repayments under  capital leases                                         |       | (135              | )          | (117                  | )          | (380 | ) | (378 | ) |
| Purchase of  treasury stock                                              |       | —            |       | —                |       | (1,689 | ) | (1,710 | ) |
| Investment in  option to purchase stock                                  |       | —            |       | —                |       | — |   | (592 | ) |
| Dividend  payments on common stock                                       |       | (998              | )          | (1,080                | )          | (3,149 | ) | (4,480 | ) |
| Other                                                                    |       | —            |       | 206                   |       | — |   | 294 |   |
| Net cash used in  financing activities                                   |       | (1,155            | )          | (2,315                | )          | (3,030 | ) | (34,002 | ) |
|                                                                     |       |              |       |                  |       |   |   |   |   |
| EFFECT OF  EXCHANGE RATE CHANGE ON CASH                                  |       | 8                 |       | (1                    | )          | (90 | ) | 16 |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                               |       | (2,658            | )          | (1,134                | )          | (6,686 | ) | (12,504 | ) |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                        |       | 7,920             |       | 8,237                 |       | 11,948 |   | 19,607 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                              |       | $                 | 5,262      |                  | $          | 7,103 |   | $ | 5,262 |   | $ | 7,103 |   |
|                                                                     |       |              |       |                  |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                       |       |              |       |                  |       |   |   |   |   |
| Cash paid for  interest                                                  |       | $                 | 424        |                  | $          | 380 |   | $ | 1,266 |   | $ | 1,355 |   |
| Cash paid for  income taxes                                              |       | $                 | 12         |                  | $          | 71 |   | $ | 34 |   | $ | 203 |   |
|                                                                     |       |              |       |                  |       |   |   |   |   |
| NONCASH  FINANCING AND INVESTING ACTIVITIES                              |       |              |       |                  |       |   |   |   |   |
| Treasury stock  acquired through exercise of option                      |       | $                 | —     |                  | $          | — |   | $ | 593 |   | $ | — |   |

 

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 PRESENTATION**

 

The accompanying interim consolidated financialstatements of Fog Cutter Capital Group Inc. and Subsidiaries (“FCCG” or the“Company”) are unaudited and have been prepared in conformity with therequirements of Regulation S-X promulgated under the Securities Exchange Act of1934, as amended (the “Exchange Act”), particularly Rule 10-01 thereof, whichgoverns the presentation of interim financial statements.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The accompanying interim consolidatedfinancial statements should be read in conjunction with the Company’s amended2004 Annual Report on Form 10-K/A.  Asummary of the Company’s significant accounting policies is set forth in Note 2to the consolidated financial statements in the amended 2004 Annual Report onForm 10-K/A.

 

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 nine months ended September 30, 2005 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2005.

 

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.  Certainitems in the previously reported consolidated financial statements werereclassified to conform to the September 30, 2005 presentation, none of whichaffected previously reported results of operations.

 

At September 30, 2005,certain Company officers and directors had, directly or indirectly, majorityvoting control of the Company.

 

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

 

Sale of Real Estate

 

During the nine monthsended September 30, 2005, the Company sold eight stand-alone retail locations(including one location subject to a capital lease) in separate transactionsfor an aggregate sales price of $4.1 million in cash and notes receivable of $0.4million.  The Company used $0.4 millionof the proceeds to retire an associated capital lease obligation and recognizedgains on the sales totaling $1.8 million.

 

Investment in VariableInterest Entity

 

During the nine monthsended September 30, 2005, the Company funded loans totaling $1.7 million to aSpanish corporation formed to purchase, reposition and sell apartment buildingsin Barcelona, Spain.  At September 30,2005 the Company was also committed to fund an additional $0.2 million in loansto this entity.  During 2004, the Companyhad funded $2.3 million to two related Spanish entities.  Under the terms of these loans, the Companyreceives a preferred 30% return on its investment, and, after a similar returnis paid to the minority investors, the Company receives an 80% share inadditional profits generated by the investment. These investments meet the definition of a Variable Interest Entity (“VIE”)  under FASB Interpretation 46 (“FIN 46”) andthe Company is considered the primary beneficiary of the VIE.  As a result, the assets and liabilities ofthe VIE have been consolidated into the accompanying consolidated financialstatements as of September 30, 2005.

 

During the nine months endedSeptember 30, 2005, the VIE paid $1.8 million for the purchase and improvement ofan apartment building and paid $0.8 million for the option to purchase anadditional building.  These twotransactions have been funded with bank loans totaling $0.7 million, theCompany’s $1.7 investment, and a $0.1 million investment from the projectmanagers.  Neither the creditors nor the

 

7

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other beneficial interest holder have recourse to the Company withregard to this investment.  As a result, asof September 30, 2005, the maximum limit of the Company’s exposure to loss onthis investment was $4.2 million.

 

In October 2005, the VIEexercised the option to purchase the additional apartment building inBarcelona, Spain.  The purchase price wasapproximately $5.4 million and the transaction closed on October 25, 2005.  The purchase involved an additional investmentof approximately $2.8 million from the Company and a commitment to fund $0.5million in the future.  This increasedthe Company’s maximum exposure to loss on these investments to $7.5 million.  The VIE currently owns four apartmentbuildings totaling 58 units.

 

Centrisoft Acquisition

 

In July 2005, the Companyacquired a 51% controlling interest in Centrisoft Corporation (“Centrisoft”).  Centrisoft develops and sells businesssoftware that controls and enhances the productivity of application users asthey interrelate with enterprise networks. The software provides first level security against unauthorizedapplications and users.  In addition, thesoftware enables the network to recognize and enforce application prioritiesand measure response times and bandwidth usage.

 

The Company’s investmentin Centrisoft included loans and loan commitments totaling $2.9 million.  In addition to fees and interest, the Companyreceived preferred stock in Centrisoft that is convertible into 51% of thefully diluted common stock at the time of conversion.  As a result of this investment, the Companybegan consolidating Centrisoft in its financial statements in July 2005.  The consolidated assets of Centrisoft areless than 10% of the Company’s total assets and include capitalized softwarecosts of $1.6 million, intangible assets of $0.5 million and goodwill of $2.0million.

 

Call Option

 

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

 

Dividends

 

TheCompany has declared and paid a $0.13 per share dividend for each quarter of 2005to date.  The first quarter dividend wasdeclared on January 26, 2005 and was paid on February 10, 2005 tostockholders of record on February 4, 2005. The second quarter dividend was declared on April 27, 2005 and was paidon June 1, 2005 to stockholders of record on May 20, 2005.  The third quarter dividend was declared onAugust 2, 2005 and was paid on September 1, 2005 to stockholders of record onAugust 22, 2005.

 

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

 

CCL Investigation

 

On June 3, 2004, theCompany announced that then Chief Executive Officer and Chairman of the Board,Andrew Wiederhorn, had entered into a settlement (the “Settlement”) with theUnited States Attorney’s Office for the District of Oregon (“USAODO”) regardingits investigation into the failure of Capital Consultants, L.L.C (“CCL”) andwould take a leave of absence from his corporate positions at the Company.  Under the Settlement terms, Mr. Wiederhornpled guilty on June 3, 2004 to two federal counts and was sentenced to18-months incarceration and fined $2.0 million. The charges to which Mr. Wiederhorn has pled guilty pursuant to theSettlement are not based upon any acts or omissions involving the Company or ofMr. Wiederhorn in his capacity as an officer or director of the Company.

 

8

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On June 2, 2004, theCompany and Mr. Wiederhorn entered into a leave of absence agreement.  In entering into the leave of absenceagreement, the Board of Directors considered the nature of the statutes towhich Mr. Wiederhorn pled and the fact that he relied on the advice of expertlegal counsel and a national accounting firm. The Board also believed it was important to assure Mr. Wiederhorn’sreturn to active involvement with the Company because of his expertise andknowledge of the Company’s business and investments.  Under the terms of the leave of absence agreement,Mr. Wiederhorn continued to receive his regular salary and bonus pursuant toand as set forth in his employment agreement. All of the compensation costs associated with the leave of absenceagreement were charged to earnings during the year ended December 31, 2004.

 

Mr. Wiederhorn began hisleave of absence on August 2, 2004 and returned to active service with the Companyon October 12, 2005 as Chief Strategic Officer. On or about November 22, 2005, Mr. Wiederhorn is expected to resume hisrole as Chairman and Chief Executive Officer.

 

Shareholder Derivative Complaint

 

On July 6, 2004, Jeff Allan McCoon, derivatively on behalf ofthe Company, filed a lawsuit in the Circuit Court for the State of Oregon(Multnomah County) which named the Company and all of its directors asdefendants. The lawsuit as amended alleges that the Company’s Boardof Directors breached their duties to the Company in a number of ways includingby: (a) entering into the Leave of Absence Agreement with Andrew Wiederhorn;(b) purchasing and exercising a Call Option agreementwith Andrew Wiederhorn for the purchase as Treasury Stock of 423,245shares of the Company’s common stock; (c) purchasing as Treasury Stock330,500 shares of the Company’s common stock from Clarence Coleman; (d)authorizing and/or allowing the Company to incur various expenses (includingalleged excessive compensation and fringe benefits to employees ofthe Company and the directors themselves).  The lawsuit generally seeksthe recovery of all payments made or to be made to Mr. Wiederhorn under theLeave of Absence Agreement (claimed to be $6.6 million), and unspecifieddamages as a result of the other transactions alleged above,plus attorney fees and costs.  The lawsuit also asks that the directorsimplement changes in corporate governance. The Company’s directors haveindemnity agreements with the Company and have asserted the right toindemnification from the Company under those indemnity agreements for theexpenses incurred in connection with the lawsuit. The Company has incurredexpenses under the indemnity agreements and also may derive benefits if theplaintiff’s claims are successful. At this stage of the case it is too early topredict the outcome with any certainty.

 

Other 

 

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

 

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

 

At September 30, 2005,the Company had no outstanding derivative instruments held for trading orhedging purposes.

 

The Company has operatingleases for office and retail space which expire through 2012.  The leases provide for varying minimum annualrental payments including rent increases and free rent periods.

 

9

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Future minimum rentalpayments, by year and in the aggregate, under non-cancelable operating leaseswith initial or remaining terms of one year or more, consisted approximately ofthe following at September 30, 2005 (dollars in thousands):

 
| 2005                         |   | $     | 823    |   |
|------------------------------|--------|-------|--------|--------|
| 2006                         |   | 3,004 |   |
| 2007                         |   | 2,259 |   |
| 2008                         |   | 1,730 |   |
| 2009                         |   | 1,169 |   |
| Thereafter                   |   | 3,690 |   |
| Total minimum lease payments |   | $     | 12,675 |   |

 

In order to facilitatethe development of franchise locations, as of September 30, 2005, Fatburger hadguaranteed the annual minimum lease payments of three restaurant sites ownedand operated by franchisees.  The amountof the guarantees total approximately $1.8 million plus certain contingentrental payments as defined in the respective leases.  These leases expire at various times through 2015.

 

The Company did not haveany other off balance sheet arrangements in place as of September 30, 2005.

 

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

 

Due to the acquisitions of Fatburger and Centrisoft,the Company has goodwill in the amount of $9.1 million and other intangibleassets in the amount of $5.7 million. In accordance with the FinancialAccounting Standards Board (“FASB”) Statement of Financial Accounting Standards(“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, goodwill is notamortized, but is subject to an annual impairment test.  Since the acquisitions of Fatburger andCentrisoft by the Company, both operations have experienced operating losses andhave funded their operations with limited liquidity.  The Company believes that these conditionsare temporary in nature, however, should these conditions not be corrected, theCompany may be required to recognize impairment losses on its recorded goodwill.  As of September 30, 2005, the Company was notaware of any events or changes in circumstances that would require theimpairment of the recorded goodwill.

 

Summarized information for the Company’s acquiredintangible assets as of September 30, 2005 is as follows (dollars inthousands):

 
| Amortized  intangible assets:     |   |   |   |
|-----------------------------------|--------|--------|--------|
|                              |   |   |   |
| Franchise Agreements              |   | $      | 844    |   |
| Other                             |   | 900    |   |
| Total amortized intangible assets |   | $      | 1,744  |   |
|                              |   |   |   |
| Unamortized intangible assets:    |   |   |   |
|                              |   |   |   |
| Trademarks                        |   | $      | 3,970  |   |

 

Trademarks, which have indefinite lives, are notsubject to amortization.  All otherintangible assets are amortized using the straight-line method over theestimated useful lives of the assets of five to fifteen years.  Estimated amortization expense for theremainder of 2005 and the five succeeding years is as follows (dollars inthousands):

 
| 2005 |   | $   | 87     |   |
|------|--------|-----|--------|--------|
| 2006 |   | 290 |   |
| 2007 |   | 287 |   |
| 2008 |   | 279 |   |
| 2009 |   | 263 |   |
| 2010 |   | 222 |   |

 

10

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

 

**NOTE 5 – RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In December 2004, theFASB issued SFAS No. 123R, Share-Based Payment (“FAS 123R”), which requiresthat the cost resulting for all share-based payment transactions be recognizedin the financial statements. This Statement requires a public entity to measurethe cost of employee services received in exchange for an award of equity instrumentsbased on the grant-date fair value of the award (with limited exceptions). Thatcost will be recognized over the period during which an employee is required toprovide service in exchange for the award—the requisite service period (usuallythe vesting period). No compensation cost is recognized for equity instrumentsfor which employees do not render the requisite service. The provisions of FAS123R are effective as of the beginning of the first interim or annual reportingperiod that begins after December 31, 2005. The Company has not yet determinedthe effect of this new standard on its consolidated financial position andresults of operations.

 

**NOTE 6 – STOCK OPTIONS AND RIGHTS**

 

The Company has adopted anon-qualified stock option plan (the “Option Plan”) which provides for optionsto purchase shares of the Company’s common stock.  The maximum number of shares of common stockthat may be issued pursuant to options granted under the Option Plan is3,500,000 shares.

 

The Company appliesAccounting Principles Board Opinion No. 25, *“Accounting for StockIssued to Employees,”*and related interpretations in accounting forthe Option Plan. Accordingly, no compensation expense has been recognized inthe Consolidated Statements of Operations for grants under the OptionPlan.  Had compensation expense for theCompany’s Option Plan been determined based on the fair value at the grant dateconsistent with the methods of FASB Statement No. 123 “*Accountingfor Stock Based Compensation,*” the Company’s net income and incomeper share for the nine months ended September 30, 2005 and 2004 would have beendecreased to the pro forma amounts indicated below:

 
| ** **                                                                | ** ** | **Nine months ended September 30,**           | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **(dollars in thousands, except share data)** | ** ** |
| Net loss:                                                                 |       |                                          |       |   |   |
| As reported                                                               |       | $                                             | (3,944     | ) | $ | (4,882 | ) |
| Pro forma  compensation expense from stock based compensation, net of tax |       | (219                                          | )          | (278 | ) |
| Pro forma net  loss                                                       |       | $                                             | (4,163     | ) | $ | (5,160 | ) |
| Net loss per  common and common share equivalent:                         |       |                                          |       |   |   |
| Basic loss per  share:                                                    |       |                                          |       |   |   |
| As reported                                                               |       | $                                             | (0.49      | ) | $ | (0.57 | ) |
| Pro forma                                                                 |       | $                                             | (0.51      | ) | $ | (0.61 | ) |
| Diluted loss per  share:                                                  |       |                                          |       |   |   |
| As reported                                                               |       | $                                             | (0.49      | ) | $ | (0.57 | ) |
| Pro forma                                                                 |       | $                                             | (0.51      | ) | $ | (0.61 | ) |

 

There were no optionsgranted with exercise prices below the market value of the stock at the grantdate. Fair values for 2005 were estimated using the Black-Scholesoption-pricing model with the following weighted average assumptions used: 10%dividend yield, expected volatility of 86%, risk-free interest rate of 2.5% andexpected lives of five years.

 

11

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**NOTE 7 – VARIABLE INTERESTENTITIES**

 

As of September 30, 2005,the Company had funded loans totaling $4.0 million to three related Spanishentities formed to purchase, reposition and sell apartment buildings inBarcelona, Spain.  Under the terms of theloans, the Company receives a preferred 30% return on its investment, and,after a similar return is paid to the majority investors, the Company receivesan 80% share in additional profits generated by the investment.  The investment meets the definition of aVariable Interest Entity (“VIE”) under FASB Interpretation 46 (“FIN 46”) andthe Company is the primary beneficiary of the VIE.  As a result, the assets and liabilities ofthe VIE have been consolidated into the accompanying consolidated financialstatements as of September 30, 2005.

 

The VIE has purchased threeapartment buildings for $6.2 million, including capital improvements.  In addition, the VIE acquired an option topurchase a fourth building.  The purchaseprice for the option was $0.8 million and gives the VIE the right to acquirethe 24 unit apartment building for an additional payment of approximately $5.4million in October 2005.  These acquisitionsby the VIE were funded with bank loans totaling $3.1 million, the Company’s $4.0million investment and a $0.4 million contribution from the projectmanagers.  As of September 30, 2005, theCompany had committed to fund additional advances of $0.2 million to the VIE.  In October 2005, the VIE exercised the optionto purchase the fourth building for approximately $5.4 million.  The transaction closed on October 25, 2005 andinvolved an additional investment of approximately $2.8 million from theCompany.  Neither the creditors nor theother beneficial interest holders have recourse to the Company with regard tothese investments and, as a result, the maximum limit of the Company’s exposureto loss on this investment was $4.2 million as of September 30, 2005, or $7.5million after the subsequent purchase of the fourth building.

 

As of September 30, 2005,the following assets and liabilities of the VIE were included in the Company’s accompanyingconsolidated statements of financial condition:

 
| Investment in  real estate, net        |   | $         | 6,236,000 |   |
|----------------------------------------|--------|-----------|-----------|--------|
| Other assets                           |   | 935,000   |      |
| Borrowings and notes payable           |   | 3,140,000 |      |
| Accrued expenses and other liabilities |   | 32,000    |      |
| Minority interest                      |   | 355,000   |      |

 

**NOTE 8 – OPERATING SEGMENTS**

 

Operating segmentsconsist of (i) restaurant operations conducted through Fatburger Holdings, Inc.(“Fatburger”), (ii) commercial real estate mortgage brokerage activitiesconducted through George Elkins Mortgage Banking Company (“George Elkins”) and(iii) real estate, merchant banking and financing activities.  The following is a summary of each of theoperating segments:

 

**Restaurant Operations**

 

The Company owns approximately 71% of the votingcontrol of Fatburger.  As of September 30,2005, Fatburger operated or franchised 77 hamburger restaurants locatedprimarily in California and Nevada.  Fatburgerhas plans to open additional restaurants, primarily through franchiseoperations, throughout the United States and Canada.  As of September 30, 2005, franchisees ownedand operated approximately 51 of the Fatburger locations.  During the nine months ended September 30,2005, franchise rights to open 7 individual Fatburger restaurants were sold and15 new franchise restaurants were opened. Franchise and royalty revenues were approximately $1.7 million for the ninemonths ended September 30, 2005.

 

**Commercial Real Estate MortgageBrokerage Operations**

 

The Company holds a 51% ownership interest in GeorgeElkins, a California mortgage banking operation, which provides brokerageservices related to the production of over $800 million per year in commercialreal estate mortgages. George Elkins is headquartered in Los Angeles, withsatellite offices

 

12

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throughout thesouthern California area.  The mortgagebrokerage operation also manages a commercial loan servicing portfolio ofnearly $900 million for various investors.

 

**Real Estate, Merchant Banking andFinancing Operations**

 

The Company invests inreal estate and other finance related assets. The merchant banking and financing operations focus on the acquisitionof controlling interests in businesses in the process of restructuring.  This can take the form of assisting in amanagement buy-out, refinancing corporate debt or acquiring the “non-core”assets of a business.

 

Each of the segmentsoperates with its own management and personnel. There are no indirect allocations of overhead or other costs.  Minority interests in earnings, which wereimmaterial for the periods presented, are included in other income (loss) inthe following segment financial results.

 

13

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Segment data for the nine months ended September 30, 2005, and 2004 areas follows (dollars in thousands):

 
| ** **                                           | ** ** | **Real Estate,  Merchant Banking  and Finance** | ** ** | **Mortgage Brokerage** | ** ** | **Restaurant** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------|------------|----------------|------------|-----------|------------|
| ** **                                           | ** ** | **2005**                                        | ** ** | **2004**               | ** ** | **2005**       | ** ** | **2004**  | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Interest  Income:                                |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Loans                                                |       | $                                               | 981        |                   | $          | 1,569          |       | $         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 981 |   | $ | 1,569 |   |
| Securities                                           |       | 7                                               |       | 616                    |       | —         |       | —    |       | — |   | — |   | 7 |   | 616 |   |
| Other  investments                                   |       | 146                                             |       | 83                     |       | 4              |       | 2         |       | — |   | — |   | 150 |   | 85 |   |
| Total interest  income                               |       | 1,134                                           |       | 2,268                  |       | 4              |       | 2         |       | — |   | — |   | 1,138 |   | 2,270 |   |
| Interest expense                                     |       | —                                          |       | 112                    |       | —         |       | —    |       | — |   | — |   | — |   | 112 |   |
| Net interest  income                                 |       | 1,134                                           |       | 2,156                  |       | 4              |       | 2         |       | — |   | — |   | 1,138 |   | 2,158 |   |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Real estate operations:                              |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating  revenue                                   |       | 3,199                                           |       | 3,083                  |       | —         |       | —    |       | — |   | — |   | 3,199 |   | 3,083 |   |
| Operating  expense                                   |       | (1,231                                          | )          | (1,330                 | )          | —         |       | —    |       | — |   | — |   | (1,231 | ) | (1,330 | ) |
| Gain on sale of  real estate                         |       | 1,784                                           |       | 159                    |       | —         |       | —    |       | — |   | — |   | 1,784 |   | 159 |   |
| Interest expense                                     |       | (783                                            | )          | (843                   | )          | —         |       | —    |       | — |   | — |   | (783 | ) | (843 | ) |
| Depreciation                                         |       | (396                                            | )          | (489                   | )          | —         |       | —    |       | — |   | — |   | (396 | ) | (489 | ) |
| Total real  estate operations                        |       | 2,573                                           |       | 580                    |       | —         |       | —    |       | — |   | — |   | 2,573 |   | 580 |   |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Restaurant  operations:                              |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating income                                     |       | —                                          |       | —                 |       | —         |       | —    |       | 18,041 |   | 16,424 |   | 18,041 |   | 16,424 |   |
| Cost of goods  sold                                  |       | —                                          |       | —                 |       | —         |       | —    |       | (10,532 | ) | (9,812 | ) | (10,532 | ) | (9812 | ) |
| Franchise and  royalty fees                          |       | —                                          |       | —                 |       | —         |       | —    |       | 1,743 |   | 998 |   | 1,743 |   | 998 |   |
| General and  administrative costs                    |       | —                                          |       | —                 |       | —         |       | —    |       | (8,646 | ) | (7,946 | ) | (8,646 | ) | (7,946 | ) |
| Interest Expense                                     |       | —                                          |       | —                 |       | —         |       | —    |       | (471 | ) | (442 | ) | (471 | ) | (442 | ) |
| Depreciation and  amortization                       |       | —                                          |       | —                 |       | —         |       | —    |       | (1,048 | ) | (1,121 | ) | (1,048 | ) | (1,121 | ) |
| Total restaurant  operations                         |       | —                                          |       | —                 |       | —         |       | —    |       | (913 | ) | (1,899 | ) | (913 | ) | (1,899 | ) |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Other operating  income (loss):                      |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Gain on sale of  loans and securities                |       | —                                          |       | 2,099                  |       | —         |       | —    |       | — |   | — |   | — |   | 2,099 |   |
| Loan brokerage  fees                                 |       | —                                          |       | —                 |       | 5,255          |       | 4,213     |       | — |   | — |   | 5,255 |   | 4,213 |   |
| Gain on sale of  prepaid servicing credit            |       | —                                          |       | 1,530                  |       | —         |       | —    |       | — |   | — |   | — |   | 1,530 |   |
| Equity in  earnings of equity investees              |       | 26                                              |       | 4,231                  |       | —         |       | —    |       | — |   | — |   | 26 |   | 4,231 |   |
| Other income  (loss)                                 |       | (342                                            | )          | 1,088                  |       | 485            |       | 261       |       | — |   | — |   | 143 |   | 1,349 |   |
| Total other operating  income (loss)                 |       | (316                                            | )          | 8,948                  |       | 5,740          |       | 4,474     |       | — |   | — |   | 5,424 |   | 13,422 |   |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating  expenses:                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Compensation and  employee benefits                  |       | 2,206                                           |       | 8,935                  |       | 4,839          |       | 3,781     |       | — |   | — |   | 7,045 |   | 12,716 |   |
| Professional  fees                                   |       | 1,821                                           |       | 1,934                  |       | 45             |       | 29        |       | — |   | — |   | 1,866 |   | 1,963 |   |
| Other                                                |       | 2,581                                           |       | 3,807                  |       | 674            |       | 657       |       | — |   | — |   | 3,255 |   | 4,464 |   |
| Total operating  expenses                            |       | 6,608                                           |       | 14,676                 |       | 5,558          |       | 4,467     |       | — |   | — |   | 12,166 |   | 19,143 |   |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Net income  (loss) before provision for income taxes |       | (3,217                                          | )          | (2,992                 | )          | 186            |       | 9         |       | (913 | ) | (1,899 | ) | (3,944 | ) | $ | (4,882 | ) |
| Provision for  income taxes                          |       | —                                          |       | —                 |       | —         |       | —    |       | — |   | — |   | — |   | — |   |
| Net income  (loss)                                   |       | $                                               | (3,217     | )                      | $          | (2,992         | )          | $         | 186        |   | $ | 9 |   | $ | (913 | ) | $ | (1,899 | ) | $ | (3,944 | ) | $ | (4,882 | ) |
| Segment assets                                       |       | $                                               | 43,410     |                   | $          | 51,204         |       | $         | 1,732      |   | $ | 1,778 |   | $ | 19,120 |   | $ | 20,494 |   | $ | 64,262 |   | $ | 73,746 |   |

 

14

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Segment data for the three months ended September 30, 2005, and 2004are as follows (dollars in thousands):

 
| ** **                                           | ** ** | **Real Estate,  Merchant Banking  and Finance** | ** ** | **Mortgage Brokerage** | ** ** | **Restaurant** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------|------------|----------------|------------|-----------|------------|
| ** **                                           | ** ** | **2005**                                        | ** ** | **2004**               | ** ** | **2005**       | ** ** | **2004**  | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Interest  Income:                                |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Loans                                                |       | $                                               | 101        |                   | $          | 507            |       | $         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 101 |   | $ | 507 |   |
| Securities                                           |       | 1                                               |       | 11                     |       | —         |       | —    |       | — |   | — |   | 1 |   | 11 |   |
| Other  investments                                   |       | 54                                              |       | 13                     |       | 2              |       | 1         |       | — |   | — |   | 56 |   | 14 |   |
| Total interest  income                               |       | 156                                             |       | 531                    |       | 2              |       | 1         |       | — |   | — |   | 158 |   | 532 |   |
| Interest expense                                     |       | —                                          |       | —                 |       | —         |       | —    |       | — |   | — |   | — |   | — |   |
| Net interest  income                                 |       | 156                                             |       | 531                    |       | 2              |       | 1         |       | — |   | — |   | 158 |   | 532 |   |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Real estate  operations:                             |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating  revenue                                   |       | 1,031                                           |       | 1,106                  |       | —         |       | —    |       | — |   | — |   | 1,031 |   | 1,106 |   |
| Operating  expense                                   |       | (391                                            | )          | (454                   | )          | —         |       | —    |       | — |   | — |   | (391 | ) | (454 | ) |
| Gain on sale of  real estate                         |       | 195                                             |       | 154                    |       | —         |       | —    |       | — |   | — |   | 195 |   | 154 |   |
| Interest expense                                     |       | (255                                            | )          | (281                   | )          | —         |       | —    |       | — |   | — |   | (255 | ) | (281 | ) |
| Depreciation                                         |       | (123                                            | )          | (166                   | )          | —         |       | —    |       | — |   | — |   | (123 | ) | (166 | ) |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Total real  estate operations                        |       | 457                                             |       | 359                    |       | —         |       | —    |       | — |   | — |   | 457 |   | 359 |   |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Restaurant  operations:                              |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating income                                     |       | —                                          |       | —                 |       | —         |       | —    |       | 6,003 |   | 5,673 |   | 6,003 |   | 5,673 |   |
| Cost of goods  sold                                  |       | —                                          |       | —                 |       | —         |       | —    |       | (3,469 | ) | (3,274 | ) | (3,469 | ) | (3,274 | ) |
| Franchise and  royalty fees                          |       | —                                          |       | —                 |       | —         |       | —    |       | 721 |   | 349 |   | 721 |   | 349 |   |
| General and  administrative costs                    |       | —                                          |       | —                 |       | —         |       | —    |       | (3,032 | ) | (2,530 | ) | (3,032 | ) | (2,530 | ) |
| Interest Expense                                     |       | —                                          |       | —                 |       | —         |       | —    |       | (161 | ) | (97 | ) | (161 | ) | (97 | ) |
| Depreciation and  amortization                       |       | —                                          |       | —                 |       | —         |       | —    |       | (337 | ) | (377 | ) | (337 | ) | (377 | ) |
| Total restaurant  operations                         |       | —                                          |       | —                 |       | —         |       | —    |       | (275 | ) | (256 | ) | (275 | ) | (256 | ) |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Other operating  income (loss):                      |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Loan brokerage  fees                                 |       | —                                          |       | —                 |       | 2,825          |       | 1,839     |       | — |   | — |   | 2,825 |   | 1,839 |   |
| Equity in  earnings (loss) of equity investees       |       | (415                                            | )          | 2,719                  |       | —         |       | —    |       | — |   | — |   | (415 | ) | 2,719 |   |
| Other income  (loss)                                 |       | (22                                             | )          | 462                    |       | 57             |       | 14        |       | — |   | — |   | 35 |   | 476 |   |
| Total other  operating income (loss)                 |       | (437                                            | )          | 3,181                  |       | 2,882          |       | 1,853     |       | — |   | — |   | 2,445 |   | 5,034 |   |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating  expenses:                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Compensation and  employee benefits                  |       | 959                                             |       | 907                    |       | 2,388          |       | 1,536     |       | — |   | — |   | 3,347 |   | 2,443 |   |
| Professional  fees                                   |       | 637                                             |       | 779                    |       | 24             |       | 15        |       | — |   | — |   | 661 |   | 794 |   |
| Other                                                |       | 1,018                                           |       | 1,309                  |       | 240            |       | 232       |       | — |   | — |   | 1,258 |   | 1,541 |   |
| Total operating  expenses                            |       | 2,614                                           |       | 2,995                  |       | 2,652          |       | 1,783     |       | — |   | — |   | 5,266 |   | 4,778 |   |
|                                                 |       |                                            |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Net income  (loss) before provision for income taxes |       | (2,438                                          | )          | 1,076                  |       | 232            |       | 71        |       | (275 | ) | (256 | ) | (2,481 | ) | 891 |   |
| Provision for  income taxes                          |       | —                                          |       | —                 |       | —         |       | —    |       | — |   | — |   | — |   | — |   |
| Net income  (loss)                                   |       | $                                               | (2,438     | )                      | $          | 1,076          |       | $         | 232        |   | $ | 71 |   | $ | (275 | ) | $ | (256 | ) | $ | (2,481 | ) | $ | 891 |   |
| Segment assets                                       |       | $                                               | 43,410     |                   | $          | 51,204         |       | $         | 1,732      |   | $ | 1,778 |   | $ | 19,120 |   | $ | 20,494 |   | $ | 64,262 |   | $ | 73,476 |   |

 

15

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**NOTE 9 – INCOME TAXES**

 

As of September 30, 2005,the Company had, for U.S. Federal tax purposes, a net operating loss (“NOL”)carry forward of approximately $70.1 million, including $6.0 million relatingto Fatburger. The Company’s NOL begins to expire in 2018. Fatburger’s NOL beganto expire in 2004 and is generally subject to an annual limitation under theInternal Revenue Code of 1986, Section 382, *Limitation on NetOperating Loss Carryovers and Certain Built-In Losses Following Change in Control*.  In addition, to the extent the Fatburger NOLis utilized, the recognition of the related tax benefits would first reducegoodwill related to the Fatburger acquisition, then other non-currentintangible assets related to that acquisition, and then income tax expense inaccordance with Statement on Financial Accounting Standards No. 109, *Accounting for Income Taxes.*

 

United States taxregulations impose limitations on the use of NOL carry forwards followingcertain changes in ownership.  If such achange were to occur with respect to the Company, the limitation couldsignificantly reduce the amount of benefits that would be available to offsetfuture taxable income each year, starting with the year of ownership change.  To reduce the likelihood of such ownershipchanges, the Company established a Shareholder Rights Plan dated as of October18, 2002, which discourages, under certain circumstances, ownership changeswhich would trigger the NOL limitations.

 

During the nine monthsended September 30, 2005 and 2004 a provision for income taxes was not requireddue to the tax net operating loss generated during the period.

 

**NOTE 10 – SUBSEQUENT EVENTS**

 

Sale of Real Estate

 

During the third quarterof 2005, the Company entered into an agreement to sell eight stand-alone retaillocations for a total cash sales price of $4.1 million.  The transaction is expected to generate anexpected gain on sale of approximately $0.5 million.  The sale is scheduled to close in December2005.

 

Purchase of Real Estate

 

Subsequent to September30, 2005, the Company’s VIE exercised its option to purchase a fourth apartmentbuilding in Barcelona, Spain.  The totalacquisition and budgeted improvement cost on this transaction is $8.1 million,of which the Company funded $3.6 million and agreed to provide $0.5 million inadditional financing.  The VIE assumed bankloans totaling $3.4 million in connection with the transaction.  The purchase was completed on October 25,2005.

 

Restaurant Openings

 

Subsequent to September 30,2005, one Fatburger franchise restaurant was opened, which is owned by a franchisee.  This resulted in the recognition of franchisefees totaling $40,000.

 

16

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

 

*The following discussion and analysis should be readin conjunction with the Interim Consolidated Financial Statements of Fog CutterCapital Group Inc. and the notes thereto included elsewhere in thisfiling.  References in this filing to “FogCutter Capital Group Inc.,” “we,” “our,” and “us” refer to Fog Cutter CapitalGroup Inc. and its subsidiaries unless the context indicates otherwise.*

* *

## **GENERAL**

 

Fog Cutter Capital Group Inc. (“FCCG” or the “Company”)focuses on developing, strengthening and expanding our restaurant andcommercial real estate mortgage brokerage operations and continuing to identifyand acquire real estate investments and finance related opportunities withfavorable risk-adjusted returns. We may also seek from time to time to identifyand acquire controlling interests in other operating businesses in which wefeel we can add value.

 

During 2003 and 2004, we redeployed a large portion ofthe capital generated through our sale of mortgage-backed securities and fromcash distributions from our Bourne End subsidiary.  We used a portion of this capital in August2003 to acquire voting control of Fatburger Holdings Inc. and further increasedour investment in Fatburger in May 2004. The expansion and success of Fatburger is currently one of our primaryfocuses.  Since our acquisition,Fatburger has opened 27 additional restaurant locations and currently hasagreements for approximately 205 new franchise restaurants.

 

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

 

**Critical Accounting Policies**

** **

**Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Management bases its estimates and judgmentson historical experience and on various other factors that are believed to bereasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.  Managementbelieves the following critical accounting policies, affect its moresignificant judgments and estimates used in the preparation of its financialstatements.**

** **

***Accounting For Equity Investees***

** **

The equity method ofaccounting is used for investments in associated companies which are notunilaterally controlled by the Company and in which the Company’s interest isgenerally between 20% and 50% of the outstanding voting rights.  The Company’s share of earnings or losses ofassociated companies in which at least 20% of the voting securities is owned,is included in the consolidated statement of operations.

 

*Valuation*

 

At September 30, 2005,our largest asset consisted of our portfolio of real estate.  We value our real estate holdings either byindependent appraisal or through internally generated analysis using comparablemarket data.

 

17

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*Sale Recognition*

 

**Ouraccounting policy calls for the recognition of sales of financial instrumentsonly when we have irrevocably surrendered control over these assets.  We do not retain any recourse or performanceobligations with respect to our sales of assets.**

 

**Werecognize gain on sales of real estate under the full accrual method when (1) asale is consummated, (2) the buyer’s initial and continuing investments areadequate to demonstrate a commitment to pay for the property, (3) anyreceivable from the buyer is not subject to future subordination and (4) theusual risks and rewards of ownership of the property have been transferred tothe buyer.  If any of these conditionsare not met, our accounting policy requires that gain on sale be deferred untilall of the conditions have been satisfied.**

 

***Fatburger Restaurant and Franchise Revenue***

 

**Revenuefrom the operation of Fatburger company-owned restaurants is recognized whensales occur.**

 

**Franchisefee revenue from the sale of individual Fatburger franchises is recognized onlywhen all material services or conditions relating to the sales have beensubstantially performed or satisfied. The completion of training and the opening of a location by thefranchisee constitute substantial performance on the part of Fatburger.  Nonrefundable deposits collected in relationto the sale of franchises are recorded as deferred franchise fees until thecompletion of training and the opening of the restaurant, at which time thefranchise fee revenue is recognized.**

 

**Inaddition to franchise fee revenue, Fatburger collects a royalty ranging from 5%to 6% of gross sales from restaurants operated by franchisees.  Fatburger recognizes royalty fees as therelated sales are made by the franchisees. Costs relating to continuing franchise support are expensed as incurred.**

 

***Goodwill and Other Intangible Assets***

 

**Goodwill represents the excess of the purchaseprice and other acquisition related costs over the estimated fair value of thenet tangible and intangible assets acquired. We do not amortize goodwill. Intangible assets are stated at the estimated value at the date ofacquisition and include trademarks, operating manuals, franchise agreements andleasehold interests.  Trademarks, whichhave indefinite lives, are not subject to amortization.  All other intangible assets are amortizedover their estimated useful lives, which range from five to fifteen years.**

 

We assess potentialimpairments to intangible assets at least annually, or when there is evidencethat events or changes in circumstances indicate that the carrying amount of anasset may not be recovered. Our judgments regarding the existence of impairmentindicators and future cash flows related to intangible assets are based onoperational performance of our acquired businesses, market conditions and otherfactors. Future events could cause us to conclude that impairment indicatorsexist and that goodwill or other intangible assets associated with our acquiredbusinesses are impaired. Any resulting impairment loss could have an adverseimpact on our results of operations.

** **

**RESULTS OF OPERATIONS**3⁄4NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,2004

 

NET INCOME.  Our net loss for the nine months ended September30, 2005, was $3.9 million, or $0.49 per share, compared with a net loss of $4.9million, or $0.57 per share, for the nine months ended September 30, 2004.  The net loss for the nine months ended September30, 2005 was primarily the result of losses from our restaurant operations of $0.9million and other operating expenses of $12.2 million, partially offset bygains on sales of real estate of $1.8 million, loan brokerage fees of $5.3million, and net interest income of $1.1 million.  The net loss for the nine months ended September30, 2004 was primarily attributable to operating expenses of $19.1 million andlosses from restaurant operations of $1.9 million, partially offset by netinterest income of $2.2 million, gain on sale of loans and securities of $2.1million,

 

18

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loan brokerage fees of $4.2 million, equity in earnings of equityinvestees of $4.2 million, and gain on sale of a prepaid servicing credit of$1.5 million.

 

The following sectionsdescribe the results of operations of our operating segments for the nine monthsended September 30, 2005 and 2004:

 

**Restaurant Segment Operations**

 

During the nine months ended September 30, 2005, werecognized a net loss from our restaurant segment of $0.9 million, compared toa net loss of $1.9 million for the nine months ended September 30, 2004.  The 2005 results were primarily due to agross margin (sales net of cost of goods sold) of $7.5 million and franchiseand royalty revenue of $1.7 million, offset by general and administrative costsof $8.6 million, interest expense of $0.5 million, and depreciation andamortization of $1.0 million.  TheCompany’s primary strategy with respect to Fatburger is to increase the numberof franchises, thus increasing the franchise fees and future royalty income tothe operation.  Since the Companyacquired its interest in Fatburger in August 2003, Fatburger has added 27 newrestaurants.  While the Company seeks toexpand the number of existing restaurants, the identification of qualified franchiseesand quality locations has an impact on the rate of growth in the number of ourrestaurants.

 

The 2004 results were primarily due to a gross margin of$6.6 million and franchise and royalty revenue of $1.0 million, offset bygeneral and administrative costs of $7.9 million, interest expense of $0.4million, and depreciation and amortization of $1.1 million.

 

**Commercial Real Estate MortgageBrokerage Segment Operations**

 

                Our net income from the commercial realestate brokerage segment was $0.2 million for the nine months ended September 30,2005, compared to break even operations during the 2004 period.  During the 2005 period, we recognized loanbrokerage fees of $5.3 million, loan servicing and other revenue of $0.5million, which was substantially offset by compensation expense of $4.8 millionand other operating expense of $0.8 million.

 

During the 2004 period,we recognized loan brokerage fees of $4.2 million, loan servicing and otherrevenue of $0.3 million, which was offset by compensation expense of $3.8million and other operating expenses of $0.7 million.

 

**Real Estate, Merchant Banking andFinance Segment Operations**

 

NET INTEREST INCOME.  Our net interest income for the nine monthsended September 30, 2005 was $1.1 million, compared with $2.2 million for the ninemonths ended September 30, 2004.  Thedecrease is primarily attributable to a net reduction of assets (reflecting oursales of mortgage-backed securities and paydowns of the related debtfacilities).  These changes resulted indecreases in interest income on securities of $0.6 million and a decrease ininterest income on loans of $0.6 million, partially offset by a decrease ininterest expense of $0.1 million.  Thefollowing tables set forth information regarding the total amount of incomefrom interest-earning assets and expense from interest-bearing liabilities andthe resulting average yields and rates:

 

19

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| ** **                                     | ** **   | **For the Nine Months Ended September 30, 2005** | ** **   |
|------------------------------------------------|--------------|--------------------------------------------------|--------------|
| ** **                                     | ** **   | **Average**                                      | ** **   | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** **   | **Balance**                                      | ** **   | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| *** ***                                   | *** *** | **(dollars in thousands)**                       | *** *** |
| Interest-Earning  Assets:                      |         |                                             |         |   |   |   |   |
|                                           |         |                                             |         |   |   |   |   |
| Loan portfolios  (1)                           |         | $                                                | 8,575        |   | $ | 981 |   | 15.3 | % |
| Mortgage-backed  securities available for sale |         | 5                                                |         | 7 |   | 186.7 | % |
| Cash deposits  and other investments           |         | 8,804                                            |         | 146 |   | 2.2 | % |
| Total  interest-earning assets                 |         | $                                                | 17,384       |   | 1,134 |   | 8.7 | % |
|                                           |         |                                             |         |   |   |   |   |
| Interest-Bearing  Liabilities:                 |         |                                             |         |   |   |   |   |
|                                           |         |                                             |         |   |   |   |   |
| Borrowings (2)                                 |         | $                                                | —       |   | — |   | 0.0 | % |
| Total  interest-bearing liabilities            |         | $                                                | —       |   | — |   | 0.0 | % |
|                                           |         |                                             |         |   |   |   |   |
| Net interest  income (3)                       |         |                                             |         | $ | 1,134 |   | 8.7 | % |
| Net interest  margin (4)                       |         |                                             |         |   |   | 8.7 | % |

 

----

(1)   Includesloans to senior officers.

(2)   Excludesborrowings related to investments in real estate.

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

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

 
| ** **                                     | ** **   | **For the Nine Months Ended September 30, 2004** | ** **   |
|------------------------------------------------|--------------|--------------------------------------------------|--------------|
| ** **                                     | ** **   | **Average**                                      | ** **   | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** **   | **Balance**                                      | ** **   | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| *** ***                                   | *** *** | **(dollars in thousands)**                       | *** *** |
| Interest-Earning  Assets:                      |         |                                             |         |   |   |   |   |
|                                           |         |                                             |         |   |   |   |   |
| Loan portfolios  (1)                           |         | $                                                | 10,718       |   | $ | 1,569 |   | 19.5 | % |
| Mortgage-backed  securities available for sale |         | 16,677                                           |         | 616 |   | 4.9 | % |
| Other  investments                             |         | 11,503                                           |         | 83 |   | 1.0 | % |
| Total  interest-earning assets                 |         | $                                                | 38,898       |   | $ | 2,268 |   | 7.8 | % |
|                                           |         |                                             |         |   |   |   |   |
| Interest-Bearing  Liabilities:                 |         |                                             |         |   |   |   |   |
|                                           |         |                                             |         |   |   |   |   |
| Borrowings (2)                                 |         | $                                                | 12,335       |   | $ | (112 | ) | 1.2 | % |
| Total  interest-bearing liabilities            |         | $                                                | 12,335       |   | $ | (112 | ) | 1.2 | % |
|                                           |         |                                             |         |   |   |   |   |
| Net interest  income (3)                       |         |                                             |         | $ | 2,156 |   | 6.6 | % |
| Net interest  margin (4)                       |         |                                             |         |   |   | 7.4 | % |

 

----

(1)   Includesloans to senior officers.

(2)   Excludesborrowings related to investments in real estate.

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

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

 

20

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REAL ESTATEOPERATIONS.  Our real estate operationsrepresent activity from our investment in 10 commercial properties located inOregon, Texas, Alabama, Arkansas, Louisiana, Missouri and Michigan, as well asthe operations of our leasehold interests in 77 freestanding retail buildingslocated throughout the United States. During the nine months ended September 30, 2005, we realized net incomefrom real estate operations of approximately $2.6 million, compared with net incomeof $0.6 million for the nine months ended September 30, 2004.  The increase in net income from real estatewas primarily the result of gains recognized on sales of $1.8 million duringthe 2005 period.  Our strategy withregard to our real estate investments is to position each property to enhancelease values for long-term income or for sale.

 

EQUITY IN EARNINGS OF EQUITY INVESTEES.   At September 30, 2005, our sole equityinvestee was Bourne End Properties Plc. (“Bourne End”). We own approximately 26%of Bourne End, which operates a shopping center in the United Kingdom.  At the time of our original investment in2001, Bourne End owned 15 shopping centers in Europe.  Fourteen of these centers were sold in prioryears generating net income to us totaling $9.7 million since our original investment.  During the nine months ended September 30,2005 we recognized less than $0.1 million income from equity investees,compared to $4.2 million for the nine months ended September 30, 2004.  The decrease was due to the sale of shoppingcenters in the prior year.

 

GAIN ON SALE OF LOANS ANDSECURITIES.  During the nine months endedSeptember 30, 2005, we did not recognize any gains on sales of loans orsecurities.  This compares to gains of $2.1million, primarily from the sale of mortgage-backed securities, during the ninemonths ended September 30, 2004.  Becausewe have sold substantially all of our subordinate mortgage-backed securitiesportfolio, we expect that gain on sale of securities will no longer contributeto future income.

 

PREPAID LOAN SERVICINGCREDIT*. *Duringthe nine months ended September 30, 2004, we sold our Wilshire CreditCorporation (“WCC”) prepaid loan servicing credit (the “Loan Servicing Credit”)for $1.7 million in cash.  The LoanServicing Credit was originally acquired by us in 1998, when we were anaffiliate of WCC.  The Loan ServicingCredit may be used, subject to certain limitations, to pay for loan portfolioservicing activities performed by WCC. As a result of the sale, we recognized a gain in the amount of $1.5million in 2004.

 

OPERATING EXPENSES.  During the nine months ended September 30,2005, we incurred segment operating expenses from real estate, merchant bankingand finance operations of $6.6 million, compared to $14.7 million during thecomparable period in 2004.  Operatingexpenses for the 2005 period is comprised of compensation costs of $2.2million, professional fees of $1.8 million and other costs of $2.6 million.  Operating expenses for the 2005 periodinclude Centrisoft operating expenses incurred since its acquisition by theCompany in July 2005 of $0.5 million.  Operatingexpenses for the 2004 period include compensation costs of $9.0 million,professional fees of $1.9 million and other costs of $3.8 million.  Compensation costs during the 2004 period included$4.8 million in accruals under the Leave of Absence Agreement with Mr.Wiederhorn.

 

**RESULTS OF OPERATIONS**3⁄4QUARTER ENDED SEPTEMBER 30, 2005 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2004

 

NET INCOME.  Our net loss for the quarter ended September 30,2005, was $2.5 million, or $0.31 per share, compared with net income of $0.9million, or $0.11 per share, for the quarter ended September 30, 2004.  The net loss for the quarter ended September 30,2005 was primarily the result of net income from real estate operations of $0.5million and loan brokerage fees of $2.8 million, offset by losses from ourrestaurant operations of $0.3 million and other operating expenses of $5.3million.  The net income for the quarterended September 30, 2004 was primarily attributable to net interest income of$0.5 million; equity in earnings of equity investees of $2.7 million, and loanbrokerage fees of $1.8 million, partially offset by operating expenses of $4.8million.

 

The following sectionsdescribe the results of operations of our operating segments for the quarterended September 30, 2005 and 2004:

 

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**Restaurant Segment Operations**

 

During the quarter ended September 30, 2005, werecognized a net loss from our restaurant segment of $0.3 million, compared toa net loss of $0.3 million for the quarter ended September 30, 2004.  The 2005 results were primarily due to agross margin (sales net of cost of goods sold) of $2.5 million and franchiseand royalty revenue of $0.7 million, offset by general and administrative costsof $3.0 million, interest expense of $0.2 million, and depreciation andamortization of $0.3 million.

 

The 2004 results were primarily due to a gross marginof $2.4 million and franchise and royalty revenue of $0.3 million, offset bygeneral and administrative costs of $2.5 million, interest expense of $0.1 million,and depreciation and amortization of $0.4 million.

 

**Commercial Real Estate MortgageBrokerage Segment Operations**

 

Our net income from the commercial real estatebrokerage segment was $0.2 million for the quarter ended September 30, 2005,compared to net income of $0.1 million for the quarter ended September 30,2004.  During the 2005 period, werecognized loan brokerage fees of $2.8 million, loan servicing and otherrevenue of $0.1 million, which was substantially offset by compensation expenseof $2.4 million and other operating expense of $0.3 million.

 

During the 2004 period,we recognized loan brokerage fees of $1.8 million, partially offset bycompensation expense of $1.5 million and other operating expenses of $0.2million.

 

**Real Estate, Merchant Banking andFinance Segment Operations**

 

NET INTEREST INCOME.  Our net interest income for the quarter endedSeptember 30, 2005, was $0.2 million, compared with $0.5 million for the quarterended September 30, 2004.  The decreaseis primarily attributable to a net reduction of assets.  The following tables set forth informationregarding the total amount of income from interest-earning assets and expensefrom interest-bearing liabilities and the resulting average yields and rates:

 
| ** **                                     | ** **   | **For the Quarter Ended September 30, 2005** | ** **   |
|------------------------------------------------|--------------|----------------------------------------------|--------------|
| ** **                                     | ** **   | **Average**                                  | ** **   | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** **   | **Balance**                                  | ** **   | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| *** ***                                   | *** *** | **(dollars in thousands)**                   | *** *** |
| Interest-Earning Assets:                       |         |                                         |         |   |   |   |   |
|                                           |         |                                         |         |   |   |   |   |
| Loan portfolios  (1)                           |         | $                                            | 6,700        |   | $ | 101 |   | 6.0 | % |
| Mortgage-backed  securities available for sale |         | 2                                            |         | 1 |   | 200.0 | % |
| Cash deposits  and other investments           |         | 7,659                                        |         | 54 |   | 2.8 | % |
| Total  interest-earning assets                 |         | $                                            | 14,361       |   | 156 |   | 4.3 | % |
|                                           |         |                                         |         |   |   |   |   |
| Interest-Bearing Liabilities:                  |         |                                         |         |   |   |   |   |
|                                           |         |                                         |         |   |   |   |   |
| Borrowings (2)                                 |         | $                                            | —       |   | — |   | 0.0 | % |
| Total  interest-bearing liabilities            |         | $                                            | —       |   | — |   | 0.0 | % |
|                                           |         |                                         |         |   |   |   |   |
| Net interest  income (3)                       |         |                                         |         | $ | 156 |   | 4.3 | % |
| Net interest  margin (4)                       |         |                                         |         |   |   | 4.3 | % |

 

----

(1)   Includesloans to senior officers.

(2)   Excludesborrowings related to investments in real estate.

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

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

 

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| ** **                                     | ** **   | **For the Quarter Ended September 30, 2004** | ** **   |
|------------------------------------------------|--------------|----------------------------------------------|--------------|
| ** **                                     | ** **   | **Average**                                  | ** **   | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** **   | **Balance**                                  | ** **   | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| *** ***                                   | *** *** | **(dollars in thousands)**                   | *** *** |
| Interest-Earning Assets:                       |         |                                         |         |   |   |   |   |
|                                           |         |                                         |         |   |   |   |   |
| Loan portfolios  (1)                           |         | $                                            | 13,017       |   | $ | 507 |   | 15.6 | % |
| Mortgage-backed  securities available for sale |         | 29                                           |         | 11 |   | 151.7 | % |
| Other  investments                             |         | 7,241                                        |         | 13 |   | 0.7 | % |
| Total  interest-earning assets                 |         | $                                            | 20,287       |   | $ | 531 |   | 10.5 | % |
|                                           |         |                                         |         |   |   |   |   |
| Interest-Bearing Liabilities:                  |         |                                         |         |   |   |   |   |
|                                           |         |                                         |         |   |   |   |   |
| Borrowings (2)                                 |         | $                                            | —       |   | $ | — |   | 0.0 | % |
| Total  interest-bearing liabilities            |         | $                                            | —       |   | $ | — |   | 0.0 | % |
|                                           |         |                                         |         |   |   |   |   |
| Net interest  income (3)                       |         |                                         |         | $ | 531 |   | 10.5 | % |
| Net interest  margin (4)                       |         |                                         |         |   |   | 10.5 | % |

 

----

(1)   Includesloans to senior officers.

(2)   Excludesborrowings related to investments in real estate.

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

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

 

REAL ESTATEOPERATIONS.  During the quarter ended September30, 2005, we realized net income from real estate operations of approximately $0.5million, compared with net income of $0.4 million for the quarter ended September30, 2004.

 

EQUITY IN EARNINGS OF EQUITY INVESTEES.   At September 30, 2005, our sole equityinvestee was Bourne End Properties Plc. (“Bourne End”). We recognized our shareof the loss of equity investees in the amount of $0.4 million during the threemonths ended September 30, 2005.  Thiscompares to earnings of $2.7 million, which resulted from the sale of ashopping center, during the 2004 period.

 

GAIN ON SALE OF LOANS ANDSECURITIES.  We did not recognize anygains on sales of loans or securities in the quarters ended September 30, 2005and September 30, 2004.  Because we havesold substantially all of our subordinate mortgage-backed securities portfolio,we expect that gain on sale of securities will not contribute to future income.

 

OPERATING EXPENSES.  During the three months ended September 30,2005, we incurred segment operating expenses from real estate, merchant bankingand finance operations of $2.6 million, compared to $3.0 million during thecomparable period in 2004.  Operatingexpenses for the 2005 period include compensation costs of $1.0 million,professional fees of $0.6 million and other costs of $1.0 million.  Operating expenses for the 2005 periodinclude Centrisoft operating expenses incurred since its acquisition by theCompany in July 2005 of $0.5 million.  Operating expenses for the 2004 period includecompensation costs of $0.9 million, professional fees of $0.8 million and othercosts of $1.3 million.

 

**CHANGES IN FINANCIAL CONDITION**

 

GENERAL.  Total assets decreased from approximately $73.9million at December 31, 2004 to approximately $64.3 million at September 30,2005.  Total liabilities decreased slightlyfrom approximately $39.6 million at December 31, 2004 to approximately $38.8million at September 30, 2005.  Stockholders’equity decreased during the nine months ended September 30, 2005 byapproximately $8.8 million resulting from our net loss of $3.9 million, dividendsdeclared of $3.2 million and the purchase of treasury stock of $1.7 million.

 

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CENTRISOFTACQUISITION.  In July 2005, we acquired a51% controlling interest in Centrisoft Corporation (“Centrisoft”).  Centrisoft develops and sells businesssoftware that controls and enhances the productivity of application users asthey interrelate with enterprise networks. The software provides first level security against unauthorizedapplications and users.  In addition, thesoftware enables the network to recognize and enforce application prioritiesand measure response times and bandwidth usage.

 

Our investment inCentrisoft included loans and loan commitments totaling $2.9 million.  In addition to fees and interest, we receivedpreferred stock in Centrisoft that is convertible into 51% of the fully dilutedcommon stock at the time of conversion. As a result of this investment, we began consolidating Centrisoft in outfinancial statements in July 2005.  Theconsolidated assets of Centrisoft are less than 10% of our total assets andincluded capitalized software costs of $1.6 million, intangible assets of $0.5million and goodwill of $2.0 million.

 

INVESTMENTS IN REALESTATE.  Investments in real estate decreasedby $1.9 million during the nine months ended September 30, 2005.  The decrease was primarily due to the sale ofeight retail properties with a net book value of $2.7 million, including onesubject to capital lease with a carrying value of $0.4 million, the disposal oftwo additional properties subject to capital leases with a carrying value of$0.5 million and depreciation of $0.4 million, offset by the purchase of anapartment building in Barcelona, Spain for $1.5 million.

 

LOAN PORTFOLIO.  We make loans from time to time, to borrowerswho, due to their particular circumstances, may not have access totraditional lending sources.  As a result, these transactions can providegood returns to the Company, but they also come with a higher relative degreeof risk.  These lending opportunities can arise in a variety ofcircumstances, but generally involve situations in which the borrower needsfurther financing to maintain or develop its business and other financingsources are not available.

 

As we negotiate theseloans, we generally seek to obtain significant brokerage fees and interestrates, as well as opportunities to take equity positions in the borrower. These loans are typically short-term, with maturities ranging from 6 to 24months.  While the Company will seeksecurity (including real estate) for any loan it makes, in some cases the valueof the assets pledged may not exceed the amount of theloan.   While the Company believes that these loans provide goodreturns to the Company, there can be no assurance that these loans willcontinue to perform in the future.

 

As of September 30, 2005,our special situation loan portfolio consisted of three individual loans with acombined carrying value of $2.6 million. One loan is secured by real estate consisting of commercial property locatedin Texas.  One loan is secured by all ofthe stock and assets of a commercial manufacturing business, and one loan issecured by stock in a restaurant company. The loans have a weighted average interest rate (including the effectsof $2.2 million in impaired loans on non-accrued status and excluding fees andpoints) of 10.6% and a weighted average maturity of 2 months.

 

During the nine monthsended September 30, 2005, our loan portfolio decreased by approximately $4.0million.  This was primarily the resultof the repayment of two loans during the period.  As of September 30, 2005, two of the Company’sloans totaling $2.2 million had been restructured to provide additional timefor repayment by the borrowers in exchange for various extension fees or othernew terms.  As a result, these loans wereconsidered impaired for accounting purposes, however, no impairment reserveswere required on these loans due to management’s expectation that the carryingamounts will be collected.

 

LOANS TO SENIOR EXECUTIVES.  On February 21, 2002 (prior to the passage ofthe Sarbanes-Oxley Act of 2002), we loaned Mr. Wiederhorn $175,000 to financethe purchase of Common Stock.  This loanis full recourse to Mr. Wiederhorn and is secured by all of Mr. Wiederhorn’srights under his employment agreement. At Mr. Wiederhorn’s direction (in accordance with the terms of hisemployment agreement), on February 21, 2002, we loaned a limited partnership(the “LP”) controlled by Mr. Wiederhorn’s spouse $687,000 to finance thepurchase of Common Stock.  The loan issecured by the membership interests of two limited liability companies owned bythe LP.  The limited liability companies

 

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each own a parcel of real property in Oregon and have noliabilities.  At the time of the loan,the real properties had an appraised value of $725,000.  The loan is also guaranteed by Mr.Wiederhorn.  The Common Stock purchasedwith the proceeds of these loans does not serve as security for the loans.  The loans are due on February 21, 2007, andbear interest at the prime rate, as published in the Wall Street Journal, whichinterest is added to the principal annually.

 

On July 9, 2002 (prior tothe passage of the Sarbanes-Oxley Act of 2002), we loaned Mr. Wiederhorn $2.0million.  This loan is full recourse toMr. Wiederhorn and his spouse and is secured by trust deeds on two residenceslocated in Oregon.  The loan is due onAugust 1, 2007 and bears interest at 8.5% per annum, payable monthly.

 

Further information onthese loans to executives is included in our proxy statements for 2005 andprior years’ Annual Meeting of Stockholders.

 

INVESTMENTIN BOURNE END.  Our investment in BourneEnd decreased by $0.1 million from $1.9 million at December 31, 2004 to approximately$1.8 million at September 30, 2005, due primarily to changes in foreignexchange rates.

 

RESTAURANT PROPERTY,PLANT AND EQUIPMENT, NET.  Our investmentin restaurant property, plant and equipment, net of depreciation, decreased $0.9million during the nine months ended September 30, 2005 to a balance of $5.3million.  The decrease was primarily theresult of depreciation expense.

 

INTANGIBLE ASSETS,NET.  As a result of the acquisition andconsolidation of Fatburger and Centrisoft, as of September 30, 2005 we hadintangible assets, net of amortization, of $5.7 million.  This consisted of trademark rights ofapproximately $4.0 million, franchise agreements of approximately $0.8 millionand other miscellaneous intangible assets of approximately $0.9 million.  Intangible assets increased $0.3 millionduring the nine months ended September 30, 2005 primarily as the result of theacquisition and consolidation of Centrisoft.

 

GOODWILL.  As a result of the acquisition andconsolidation of Fatburger and Centrisoft, we had recorded goodwill of $7.1million and $2.5 million, respectively, as of September 30, 2005.  Goodwill increased $2.5 million during the ninemonths ended September 30, 2005 due to the acquisition and consolidation ofCentrisoft.

 

OTHER ASSETS.  At September 30, 2005, the Company’s otherassets consisted of the following (dollars in thousands):

 

| Capitalized  deferred compensation |   | $     | 600    |   |
|------------------------------------|--------|-------|--------|--------|
| Prepaid expenses                   |   | 638   |   |
| Trade receivables                  |   | 509   |   |
| Investment in operating leases     |   | 213   |   |
| Mortgage servicing rights          |   | 238   |   |
| Real estate purchase option        |   | 842   |   |
| Restaurant assets                  |   | 737   |   |
| Centrisoft software                |   | 1,561 |   |
| Other                              |   | 1,394 |   |
| Total                              |   | $     | 6,732  |   |

 

The capitalized deferredcompensation included in other assets relates to the acquisition of GeorgeElkins.  In conjunction with theacquisition, certain employees of George Elkins entered into long-termemployment agreements.  These employeesreceived payments totaling $1.9 million which we capitalized as deferredcompensation.  The employees areobligated to perform under the employment agreements and must repay anyunearned deferred compensation payments upon early termination.  The deferred compensation is earned ratablyover the terms of the employment agreements, and we are amortizing the

 

25

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$1.9 million investment over the contract terms.  At September 30, 2005, the remaining contractsexpire within the next 20 months.

 

BORROWINGS AND NOTESPAYABLE.  Our borrowings and notespayable increased $2.1 million during the nine months ended September 30, 2005to an ending balance of $10.1 million. This was primarily the result of borrowings to finance the purchase ofan apartment building in Barcelona, Spain.

 

OBLIGATIONS UNDER CAPITALLEASES.  Obligations under capital leasesdecreased approximately $1.2 million during the nine months ended September 30,2005.  This decrease was primarily theresult of the disposal of three properties subject to capital leases with acarrying value of $0.9 million.

 

DEFERRED INCOME.  Franchise fee revenue from the sales ofindividual Fatburger franchises is recognized only when all material servicesor conditions relating to the sales have been substantially performed orsatisfied.  The completion of trainingand the opening of a location by the franchisee constitute substantialperformance.  Currently, Fatburgercharges $50,000 per location in franchise fees. One-half of the fees are collected in cash at the time the franchiserights are granted and the balance is collected at the time the lease for thelocation is executed. Nonrefundable deposits collected in relation to the saleof franchises are recorded as deferred franchise fees until the completion oftraining and the opening of the restaurant, at which time the franchise fee revenueis recognized.  As of September 30, 2005,our deferred income relating to the collection of unearned Fatburger franchisefees was $4.2 million, a decrease of $0.3 million from December 31, 2004.  As of September 30, 2005, nearly all of thedeferred income was comprised of the initial one-half non-refundable depositreceived per location and the balance of the franchise fee (approximately anadditional $4.2 million) will be collected in cash as leases on these locationsare signed.

 

DEFERRED INCOME TAXES.  Our deferred income taxes remained unchangedat $5.8 million at September 30, 2005. As of September 30, 2005, we had, for U.S. Federal tax purposes, a netoperating loss (“NOL”) carryforward of approximately $70.1 million, including $6.0million relating to Fatburger.  The NOLcarryforward may reduce the future cash payment of the deferred income taxliability.  Our NOL begins to expire in2018.  Fatburger’s NOL began to expire in2004 and is generally subject to an annual limitation under the InternalRevenue Code of 1986, Section 382, Limitation on Net Operating Loss Carryoversand Certain Built-In Losses Following Change in Control.  In addition, to the extent the Fatburger NOLis utilized, the recognition of the related tax benefits would first reducegoodwill related to the Fatburger acquisition, then other non-currentintangible assets related to that acquisition, and then income tax expense inaccordance with Statement on Financial Accounting Standards No. 109, Accountingfor Income Taxes.

 

United States tax regulations impose limitations onthe use of NOL carry forwards following certain changes in ownership.  If such a change were to occur with respectto the Company, the limitation could significantly reduce the amount ofbenefits that would be available to offset future taxable income each year,starting with the year of ownership change. To reduce the likelihood of such ownership changes, we established aShareholder Rights Plan dated as of October 18, 2002, which discourages, undercertain circumstances, ownership changes which would trigger the NOLlimitations.

 

STOCKHOLDERS’EQUITY.  Stockholders’ equity decreasedby approximately $8.8 million in the nine months ended September 30, 2005, resultingfrom our net loss of $3.9 million, purchase of treasury stock of $1.7 millionand dividends declared of $3.2 million.

 

In April 2004 wepurchased a three year call option (the “Call Option”) from Andrew A.Wiederhorn, the Company’s former Chairman and Chief Executive Officer andcurrent Chief Strategic Officer.  TheCall Option gave us the right, but not the obligation, to purchase 423,245 ofthe Company’s outstanding common stock (the “Option Shares”) from Mr.Wiederhorn for a purchase price of $3.99 per share.  We paid $750,000 ($1.77 per Option Share) forthe Call Option.  The Call Option wasexercised on March 14, 2005 for $1.7 million and we placed Option Shares intreasury.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Liquidity is ameasurement of our ability to meet potential cash requirements, includingongoing commitments to repay borrowings, fund business operations andacquisitions, engage in loan acquisition and lending activities and for othergeneral business purposes.  The primarysources of funds for liquidity during the nine months ended September 30, 2005consisted of net cash provided by investing activities, including proceeds fromthe sale of real estate.  As of September30, 2005, we had cash or cash equivalents of $5.3 million which we believe willbe sufficient to meet our current liquidity needs.

 

Our borrowings and the availability of furtherborrowings are substantially affected by, among other things, changes ininterest rates, changes in market spreads or decreases in credit quality of ourassets.

 

Fluctuations in interest rates will impact our netincome to the extent our operations and our fixed rate assets are funded byvariable rate debt.  We may also beimpacted to the extent that our variable rate assets reprice on a different scheduleor in relation to a different index than any floating rate debt.  See “Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.”

 

At September 30, 2005, wehad total consolidated secured indebtedness of $21.3 million, as well as $17.5 millionof other liabilities. The consolidated secured indebtedness consisted of (i) $11.2million outstanding of capital leases maturing between 2010 and 2040 which aresecured by real estate, (ii) mortgage notes payable of $3.1 million secured byreal estate and (iii) notes payable and other debt of Fatburger of $7.0 millionsecured by the assets of Fatburger.

 

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.  Also,Fatburger is involved in a nationwide expansion of franchise and Fatburgerowned locations, which will require significant liquidity.  If Fatburger or its franchisees areunsuccessful in obtaining credit lines sufficient to fund this expansion, thetiming of restaurant openings may be delayed. We also expect that Centrisoft will require liquidity and have negativecash flow for the near term.  Centrisoftis currently marketing its software to potential customers both directly andthrough re-seller relationships.  Therecan be no assurance that Centrisoft will be successful in generating sufficientcash flow to support its own operations in the near term.  Similarly, our special situation lendingbusiness requires liquidity to fund new investments or extend existing loans.

 

We consider the sale of assets to be a normal,recurring part of our operations and we are currently generating adequate cashflow as a result of these transactions. However, excluding the sale of assets from time to time, we arecurrently operating with negative cash flow, since many of our assets do not currentlygenerate sufficient cash to cover operating expenses.  We believe that our existing sources of fundswill be adequate for purposes of meeting our liquidity needs; however, therecan be no assurance that this will be the case. 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.

 

During the year ended December 31, 2004, we declared fourquarterly cash distributions of $0.13 per share each, totaling $0.52 per share($4.4 million).  Through November 14, 2005,we have declared three quarterly cash dividends of $0.13 per share each.  The Company does not have a fixed dividendpolicy and may declare and pay new quarterly dividends on our commonstock, subject to our financial condition, results of operations, capitalrequirements and other factors deemed relevant by the Board of Directors.  One factor the Board of Directors mayconsider is the impact of dividends on the Company’s liquidity.

 

Effective October 14, 2004, the Company’s Common Stock begantrading in the over-the-counter (“OTC”) market.  Prior to that, the Company’s Common Stock wasquoted on the NASDAQ National Market.  OnJuly 20, 2004, the Company was notified by NASDAQ of a staff determination todelist the Company’s Common Stock effective July 29, 2004.  The Company challenged the staffdetermination and requested an oral hearing by a Listing Qualifications Panelto review the staff’s conclusions.  Ahearing was held on September 9, 2004, and, on October 12, 2004, the Companywas notified by NASDAQ that the Listing Qualifications Panel upheld the staffdetermination and the Company’s Common Stock was delisted from the NASDAQNational Market on October 14, 2004.  TheCompany requested a review of the Listing

 

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Qualifications Panel’s decision by NASDAQ’sListing and Hearing Review Council.  OnFebruary 16, 2005, the Company received notice that the NASDAQ Listing andHearing Review Council had upheld the Panel’s decision.  On April 21, 2005, the Board of Governors of NASDAQapproved the decision of the NASDAQ Listing and Hearing Review Council and the NASDAQdecision became final.  The Company hasappealed the decision to the Securities and Exchange Commission. There can beno assurance that the appeal will be successful.

 

Trading of our Common Stock on the OTC market may reduce theliquidity of our Common Stock compared to quotation on the NASDAQ NationalMarket.  Also, the coverage of theCompany by security analysts and media could be reduced, which could result inlower prices for our Common Stock than might otherwise prevail and could alsoresult in increased spreads between the bid and ask prices for our CommonStock.  Additionally, certain investorswill not purchase securities that are not quoted on the NASDAQ Stock Market,which could materially impair our ability to raise funds through the issuanceof Common Stock or other securities convertible into Common Stock.

 

In addition, if the trading price of our Common Stock is less than$5.00 per share, trading in our Common Stock could also be subject to therequirements of Rule 15g-9 promulgated under the Securities Exchange Act of1934, as amended.  Under that Rule,brokers and dealers who recommend such low priced securities to persons otherthan established customers and accredited investors must satisfy special salespractice requirements, including a requirement that they make an individualizedwritten suitability determination for the purchaser and receive the purchaser’swritten consent prior to any transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990also requires additional disclosure in connection with any trades involving astock defined as a penny stock (generally, according to regulations adopted bythe SEC, any equity security not traded on an exchange or quoted on NASDAQ thathas a market price of less than $5.00 per share, subject to certainexceptions), including the delivery, prior to any penny stock transaction, of adisclosure schedule explaining the penny stock market and the risks associatedtherewith.  Such requirements couldseverely limit the market liquidity of our Common Stock.  There can be no assurance that our CommonStock will not become treated as penny stock.

 

**OFF BALANCE SHEET ARRANGEMENTS**

 

In order to facilitate the development of franchiselocations, as of September 30, 2005, Fatburger had guaranteed the annualminimum lease payments of three restaurant sites owned and operated byfranchisees.  The guarantees approximate$1.8 million plus certain contingent rental payments as defined in therespective leases.  These leases expireat various times through 2015.

 

The lease guarantees byFatburger do not provide a material source of liquidity, capital resources orother benefits to the Company.  There areno revenues, expenses or cash flows connected with the lease guarantees otherthan the receipt of normal franchise royalties. As of September 30, 2005, there was no known event, demand, trend oruncertainty that was likely to trigger the guarantee by Fatburger.

 

We did not have any other off balance sheet arrangementsin place as of September 30, 2005.

 

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## **ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our market risk isprimarily the exposure to loss resulting from changes in foreign currencyexchange rates, interest rates and commodity prices.  Our exposure to foreign currency fluctuationsarises from our UK investment in BEP and our investment in Barcelona realestate as of September 30, 2005, approximately 26% of the Company’s equity iscurrently invested in net assets located outside of the United States.  These investments are primarily denominated inBritish pounds or the Euro.

 

The following tableillustrates the projected effect on our net asset value as a result ofhypothetical changes in foreign currency rates as of September 30, 2005:

 
| **Change in Foreign  Exchange Rates (1)** | ** ** | **Projected Change in  Net Asset  Fair Value** | ** ** | **Projected  Percentage Change  in Net Asset  Fair Value** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                      |       |                                           |       |                                                       |       |
| Decrease 10%                              |       | $                                              | (653,000   | )                                                          | -2.6       | % |
| Decrease 20%                              |       | $                                              | (1,305,000 | )                                                          | -5.1       | % |
| No Change                                 |       | $                                              | —     |                                                       | 0.0        | % |
| Increase 10%                              |       | $                                              | 653,000    |                                                       | 2.6        | % |
| Increase 20%                              |       | $                                              | 1,305,000  |                                                       | 5.1        | % |
|                                           |            |                                                |            |                                                            |            |  |  |

 

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(1)           Assumes that uniformpercentage changes occur instantaneously in both the Great Britain pound andthe euro.  A decrease in the foreignexchange rate indicates a strengthening of the U.S. dollar against thatcurrency.  An increase in the foreignexchange rate indicates a weakening of the U.S. dollar against that currency.

 

We can utilize a wide variety of financial techniquesto assist in the management of currency risk. For example, in hedging the exchange rate exposure of a foreign currencydenominated asset or liability, we may enter into hedge transactions to countermovements in the different currencies. These hedges may be in the form of currency swaps, options, andforwards, or combinations thereof.  Nosuch currency hedging techniques were in use as of September 30, 2005.

 

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

 

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

 

The following table quantifies the potential changesin net interest income and net portfolio value as of September 30, 2005 shouldinterest rates go up or down (shocked) by 100 or 200 basis points. Netportfolio value is calculated as the sum of the value of off-balance sheetinstruments and the present value of cash in-flows generated frominterest-earning assets net of cash out-flows in respect of interest-bearingliabilities.  The table assumes thatchanges in interest rates occur instantaneously.  Actual results could differ significantlyfrom those estimated in the table.

 

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| **Projected Percent Change In**   | ** ** |
|-----------------------------------|------------|
| **Change in Interest  Rates (1)** | ** ** | **Net Interest  Income** | ** ** | **Net Portfolio  Fair Value** | ** ** | **Change in Annual  Net  Interest Income** | ** ** | **Change in Net  Portfolio  Fair Value** | ** ** |
| -200 Basis Points                 |       | 18.6 | % | -4.3 | % | $ | 112,000 |   | $ | (1,094,000 | ) |
| -100 Basis Points                 |       | 6.8 | % | -2.1 | % | $ | 41,000 |   | $ | (526,000 | ) |
|  0 Basis Points              |       | 0.0 | % | 0.0 | % | $ | — |   | $ | — |   |
| 100 Basis Points                  |       | -6.4 | % | 1.9 | % | $ | (39,000 | ) | $ | 487,000 |   |
| 200 Basis Points                  |       | -12.9 | % | 3.7 | % | $ | (78,000 | ) | $ | 938,000 |   |
|                                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Assumes that uniformchanges occur instantaneously in both the yield on 10-year U.S. Treasury notesand the interest rate applicable to U.S. dollar deposits in the London interbankmarket.

 

Thefollowing table provides information as to the type of funding used to financeour assets as of September 30, 2005.

 

Assets andLiabilitiesAs of September 30, 2005(dollars in thousands)

 
| **Interest-Bearing Assets**              | ** ** | **Basis Amount** | ** ** | **Coupon Type** | ** ** | **Liability** | ** ** | **Type** | ** ** |
|------------------------------------------|------------|------------------|------------|-----------------|------------|---------------|------------|----------|------------|
| Fixed-rate assets, no financing          |       | $                | 3,020      |            | Fixed      |          | $          | —   |       | None |   |
| Variable-rate assets, no financing       |       | 2,631            |       | Prime           |       | —        |       | None     |       |
| Cash and cash equivalents                |       | 5,262            |       | N/A             |       | —        |       | None     |       |
| Subtotal                                 |       | 10,913           |       |            |       | —        |       |     |       |
|                                     |       |             |       |            |       |          |       |     |       |
| Other Assets                             |       |             |       |            |       |          |       |     |       |
|                                     |       |             |       |            |       |          |       |     |       |
| Investments in real estate               |       | 24,761           |       | N/A             |       | 14,306        |       | Fixed    |       |
| Investment in BEP                        |       | 1,753            |       | N/A             |       | —        |       | None     |       |
| Restaurant property, plant and equipment |       | 5,308            |       | N/A             |       | 6,981         |       | LIBOR    |       |
| Intangible assets, net                   |       | 5,714            |       | N/A             |       | —        |       | None     |       |
| Goodwill                                 |       | 9,081            |       | N/A             |       | —        |       | None     |       |
| Other                                    |       | 6,732            |       | N/A             |       | —        |       | None     |       |
| Subtotal                                 |       | 53,349           |       |            |       | 21,287        |       |     |       |
|                                     |       |             |       |            |       |          |       |     |       |
| Liability Only                           |       |             |       |            |       |          |       |     |       |
|                                     |       |             |       |            |       |          |       |     |       |
| Deferred income                          |       | —           |       |            |       | 4,168         |       | None     |       |
| Deferred income taxes                    |       | —           |       |            |       | 5,744         |       | None     |       |
| Other                                    |       | —           |       |            |       | 7,569         |       | None     |       |
| Total                                    |       | $                | 64,262     |            |       |          | $          | 38,768   |       |   |   |

 

Our restaurant operationsare also exposed to the impact of commodity and utility price fluctuationsrelated to unpredictable factors such as weather and various other marketconditions outside our control. Our ability to recover increased costs throughhigher prices is limited by the competitive environment in which we operate.

 

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**ITEM 4.  CONTROLS AND PROCEDURES**

 

**(A)  Evaluation of disclosure controls andprocedures**.  Our ChiefExecutive Officer and our Chief Financial Officer, after evaluating theeffectiveness of the Company’s “disclosure controls and procedures” (as definedin the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as ofthe end of the period covered by this report, have concluded that ourdisclosure controls and procedures were effective and designed to ensure thatmaterial information relating to us and our consolidated subsidiaries would bemade known to us by others within these entities.

 

**(B)  Changes in internal control over financialreporting**.  There wereno significant changes in our internal control over financial reporting inconnection with an evaluation that occurred during our third fiscal quarter of2005 that have materially affected or are reasonably likely to materiallyaffect our internal control over financial reporting.

 

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FORWARD-LOOKING STATEMENTS

 

CERTAIN STATEMENTSCONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE FILINGS BY THECOMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE “FORWARD-LOOKINGSTATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, ASAMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, ASAMENDED.  FORWARD-LOOKING STATEMENTSWHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY’SCONTROL) MAY BE IDENTIFIED BY REFERENCE TO A FUTURE PERIOD OR PERIODS, OR BYTHE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS “MAY,” “WILL,” “BELIEVE,” “EXPECT,”“ANTICIPATE,” “CONTINUE,” OR SIMILAR TERMS OR VARIATIONS ON THOSE TERMS, OR THENEGATIVE OF THOSE TERMS.  ACTUAL RESULTSCOULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING STATEMENTS DUETO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE RELATED TO THEECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH THE COMPANYOPERATES, THE FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY OF ANDCOSTS ASSOCIATED WITH SOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND PRICING,THE REAL ESTATE MARKET, FISCAL AND MONETARY POLICIES OF THE U.S.  GOVERNMENT, CHANGES IN PREVAILING INTERESTRATES, CHANGES IN CURRENCY EXCHANGE RATES, ACQUISITIONS AND THE INTEGRATION OFACQUIRED BUSINESSES, PERFORMANCE OF RETAIL/CONSUMER MARKETS, DETERIORATION INCONSUMER CREDIT, THE MARKET FOR CENTRISOFT’S SOFTWARE PRODUCTS, CREDIT RISKMANAGEMENT, ASSET/LIABILITY MANAGEMENT, THE IMPACT OF ONGOING LITIGATION, ANDTHE IMPACT OF THE SETTLEMENT OF THE INVESTIGATION OF THE COMPANY’S FORMER CHIEFEXECUTIVE OFFICER (CURRENT CHIEF STRATEGIC OFFICER).  EXCEPT AS MAY BE REQUIRED BY LAW, THE COMPANYDOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLYRELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKINGSTATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS ORCIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.

 

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## **PART II – OTHERINFORMATION**

 

**Item 1.**    LegalProceedings.

 

Capital Consultants LLC

 

As the Company has previously disclosed, the Company’sformer Chief Executive Officer and current Chief Strategic Officer, AndrewWiederhorn, and former President, Lawrence Mendelsohn, received letters fromthe United States Attorney’s Office for the District of Oregon (“USAODO”) inMarch 2001 advising them that they were targets of a grand jury investigation(the “CCL Investigation”) into the failure of Capital Consultants, L.L.C (“CCL”).  CCL was a lender to Wilshire Credit Corporation(“WCC”) and related and affiliated companies. WCC was a mortgage loan servicingcompany owned by Mr. Wiederhorn and Mr. Mendelsohn that provided mortgage loanservicing for Wilshire Financial Services Group Inc., a public company forwhich Mr. Wiederhorn acted as CEO and Mr. Mendelsohn acted as President andwhich was principally engaged in banking, loan pool purchasing, and investingin mortgage-backed securities.  As aresult of the liquidity crisis in the financial markets in the fall of 1998,Wilshire Financial Services Group Inc. experienced significant losses and filedfor bankruptcy, which in turn had a significant impact on its affiliates,including WCC, which could not repay the amounts borrowed from CCL.  At the time, Wilshire Financial ServicesGroup Inc. owned approximately 8.6% of the Company’s common stock and managedthe Company’s investments under a management agreement.

 

In August 2002, Mr. Mendelsohn resigned as Presidentand Director of the Company. In November 2003, Mr. Mendelsohn entered into anagreement with the USAODO pursuant to which he pled guilty to filing a false1998 personal tax return and agreed to cooperate in the CCL Investigation.

 

On June 3, 2004 theCompany announced that Chief Executive Officer and Chairman of the Board AndrewWiederhorn had entered into a settlement with the USAODO regarding itsinvestigation into CCL (the “Settlement”) and would take a leave of absencefrom his corporate positions at the Company.

 

Under the Settlementterms, Mr. Wiederhorn pled guilty on June 3, 2004 to two federal counts and wassentenced to 18 months incarceration and fined $2.0 million.  The first count, a violation of an ERISAprovision, involved a federal law that required no criminal intent and forwhich his reliance on the advice of counsel was not a defense. The second countrelated to a violation involving a deduction on a personal tax return.  The deduction was structured and approved byMr. Wiederhorn’s tax advisors and did not reduce Mr. Wiederhorn’s tax liabilityor reduce the government’s tax collections. The charges to which Mr. Wiederhorn has pled guilty pursuant to theSettlement are not based upon any acts or omissions involving the Company orMr. Wiederhorn in his capacity as an officer or director of the Company.

 

On June 2, 2004, theCompany and Mr. Wiederhorn entered into a leave of absence agreement.  In entering into Mr. Wiederhorn’s leave ofabsence agreement, the Company’s Board of Directors considered the nature ofthe statutes to which Mr. Wiederhorn pled and the fact that he relied on theadvice of expert legal counsel and a national accounting firm.  The Board also believed it was important toassure Mr. Wiederhorn’s return to active involvement with the Company becauseof his expertise and knowledge and to preserve a significant businessrelationship and the value of the Company’s investments.

 

Under the terms of theleave of absence agreement, Mr. Wiederhorn continued to receive his regularsalary and bonus pursuant to and as set forth in his employment agreement.  In addition, in consideration of Mr.Wiederhorn’s good will, cooperation, and continuing assistance, and inrecognition of Mr. Wiederhorn’s past service to the Company, to help avoidlitigation and for the other reasons stated in the agreement, the Company madea leave of absence payment to Mr. Wiederhorn in the amount of $2.0 million onJune 2, 2004.

 

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Mr. Wiederhorn began hisleave of absence on August 2, 2004 and returned to the Company on October 12,2005 where he currently serves as Chief Strategic Officer.  On or about November 22, 2005, Mr. Wiederhornis expected to resume his role as Chairman and Chief Executive Officer.

 

NASDAQ Delisting

 

EffectiveOctober 14, 2004, the Company’s Common Stock began trading in the over-the-counter market.  Prior to that, the Company’s Common Stock wasquoted on the NASDAQ National Market.  OnJuly 20, 2004, the Company was notified by NASDAQ of a staff determination todelist the Company’s Common Stock effective July 29, 2004.  The Company challenged the staffdetermination and requested an oral hearing by a Listing Qualifications Panelto review the staff’s conclusions.  Ahearing was held on September 9, 2004, and, on October 12, 2004, the Company was notified by NASDAQ that the ListingQualifications Panel upheld the staff determination and the Company’s CommonStock was delisted from the NASDAQ National Market on October 14, 2004.  The Company requested a review of the ListingQualifications Panel’s decision by NASDAQ’s Listing and Hearing ReviewCouncil.  On February 16, 2005, theCompany received notice that the NASDAQ Listing and Hearing Review Council hadupheld the Panel’s decision.  On April 21, 2005, the Board ofGovernors of NASDAQ approved the decision of the NASDAQ Listing and HearingReview Council and the NASDAQ decision became final.  The Company is appealing the decision to theSecurities and Exchange Commission.  There can be no assurance that an appeal will be successful.

 

Shareholder Derivative Complaint

 

On July 6, 2004, Jeff Allan McCoon, derivatively on behalf ofthe Company, filed a lawsuit in the Circuit Court for the State of Oregon(Multnomah County) which named the Company and all of its directors asdefendants. The lawsuit as amended alleges that the Company’s Boardof Directors breached their duties to the Company in a number of ways includingby: (a) entering into the Leave of Absence Agreement with Andrew Wiederhorn;(b) purchasing and exercising a Call Option agreementwith Andrew Wiederhorn for the purchase as Treasury Stock of 423,245shares of the Company’s common stock; (c) purchasing as Treasury Stock330,500 shares of the Company’s common stock from Clarence Coleman; (d)authorizing and/or allowing the Company to incur various expenses (includingalleged excessive compensation and fringe benefits to employees ofthe Company and the directors themselves).  The lawsuit generally seeksthe recovery of all payments made or to be made to Mr. Wiederhorn under the Leaveof Absence Agreement (claimed to be $6.6 million), and unspecified damages as aresult of the other transactions alleged above, plus attorneyfees and costs.  The lawsuit also asks that the directors implementchanges in corporate governance. The Company’s directors have indemnityagreements with the Company and have asserted the right to indemnification fromthe Company under those indemnity agreements for the expenses incurred inconnection with the lawsuit. The Company has incurred expenses under theindemnity agreements and also may derive benefits if the plaintiff’s claims aresuccessful. At this stage of the case it is too early to predict the outcomewith any certainty.

 

Other Legal Proceedings

 

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

** **

**Item 2.**    UnregisteredSales of Equity Securities and Use of Proceeds.

** **

None.

 

**Item 3.**    DefaultsUpon Senior Securities.

 

Not applicable.

** **

**34**

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** **

**Item 4.**    Submissionof Matters to a Vote of Security Holders.

** **

**None.**

** **

**Item 5.**    OtherInformation.

 

None.

** **

**Item6.**    Exhibits

 

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

 

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

 

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

 

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

 

4.3           Formof Stock Option Plan, incorporated by reference to Exhibit 10.3 to AmendmentNo. 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           Summaryof Rights to Purchase Shares, incorporated by reference to Exhibit 99.1 to theForm 8-K dated October 18, 2002, as previously filed with the SEC on October18, 2002.

 

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

 

4.6           Amendmentto the Rights Agreement, dated as of May 1, 2004, by and between the Registrantand The Bank of New York as previously filed with the SEC on March 30, 2005.

 

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

 

4.8           AmendmentNumber 1 to the Long Term Vesting Trust Agreement dated as of September 19,2002, by and between the Registrant and Andrew Wiederhorn, Don Coleman, andDavid Dale-Johnson as previously filed with the SEC on March 30, 2005.

 

4.9           AmendmentNumber 2 to the Long Term Vesting Trust Agreement, dated as of May 26, 2004, byand between the Registrant and Andrew Wiederhorn, Don Coleman, and DavidDale-Johnson as previously filed with the SEC on March 30, 2005.

 

11.1         Computationof Per Share Earnings.

 

31.1         Certificationof Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

35

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31.2         Certificationof Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

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

 

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

 

36

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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/ Donald J.  Berchtold                       |   |
|                    | Donald J. Berchtold                                |
|                    | Chief Executive Officer                            |
|                    |                                               |
|                    |                                               |
|                    | By: /s/ R. Scott  Stevenson                        |   |
|                    | R. Scott Stevenson                                 |
|                    | Senior Vice President  and Chief Financial Officer |
|                    |                                               |
| Date: November 14, 2005 |
|                         |                                                    |  |  |

 

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EXHIBIT INDEX

 

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

 

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

 

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

 

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

 

4.3           Formof Stock Option Plan, incorporated by reference to Exhibit 10.3 to AmendmentNo. 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           Summaryof Rights to Purchase Shares, incorporated by reference to Exhibit 99.1 to theForm 8-K dated October 18, 2002, as previously filed with the SEC on October18, 2002.

 

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

 

4.6           Amendmentto the Rights Agreement, dated as of May 1, 2004, by and between the Registrantand The Bank of New York as previously filed with the SEC on March 30, 2005.

 

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

 

4.8           AmendmentNumber 1 to the Long Term Vesting Trust Agreement dated as of September 19,2002, by and between the Registrant and Andrew Wiederhorn, Don Coleman, andDavid Dale-Johnson as previously filed with the SEC on March 30, 2005.

 

4.9           AmendmentNumber 2 to the Long Term Vesting Trust Agreement, dated as of May 26, 2004, byand between the Registrant and Andrew Wiederhorn, Don Coleman, and DavidDale-Johnson as previously filed with the SEC on March 30, 2005.

 

11.1         Computationof Per Share Earnings.

 

31.1         Certificationof Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

31.2         Certificationof Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

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

 

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

 

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