Table of Contents

 

 

##### ** **

##### **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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

#### ** **

**(Mark one)**

 
| **x**  |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|--------|--------------------------------------------------------------------------------------------------------|
|   |   | **For the quarterly period ended  June 30, 2008**                                                 |

 

**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 telephone number, including area code)

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.                                             Yesx  Noo

 

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

Large accelerated filer o                     Accelerated filer o

   Non-acceleratedfiler £ (do not check if a smaller reportingcompany)                Smaller reporting company x

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yeso Nox

 

**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 July 31, 2008** |
|--------------------------------------------|------------|----------------------------------------|
| Common Stock,  par value $0.0001 per share |       | 7,954,928 shares                       |

 

 

 

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Table of Contents

 

FOGCUTTER CAPITAL GROUP INC.

 

FORM 10-Q

 

INDEX

 
| ** **                                 | ** **                                                                                  | **Page No.** |
|--------------------------------------------|---------------------------------------------------------------------------------------------|-------------------|
|                                       |                                                                                        |              |
| **PART I—FINANCIAL INFORMATION** | ** **                                                                                  | ** **        |
| ** **                                 | ** **                                                                                  | ** **        |
| Item 1.                                    | Interim Consolidated  Financial Statements (Unaudited):                                     |              |
|                                       |                                                                                        |              |
|                                       | Consolidated Statements of  Financial Condition                                             | 3                 |
|                                       |                                                                                        |              |
|                                       | Consolidated  Statements of Operations                                                      | 4                 |
|                                       |                                                                                        |              |
|                                       | Consolidated  Statement of Stockholders’ Equity (Deficit)                              | 5                 |
|                                       |                                                                                        |              |
|                                       | Consolidated Statements of  Cash Flows                                                      | 6                 |
|                                       |                                                                                        |              |
|                                       | Notes to Consolidated Financial Statements                                                  | 7                 |
|                                       |                                                                                        |              |
| Item 2.                                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 15                |
|                                       |                                                                                        |              |
| Item 3.                                    | Quantitative  and Qualitative Disclosures about Market Risk                                 | 24                |
|                                       |                                                                                        |              |
| Item 4.                                    | Controls and  Procedures                                                                    | 24                |
|                                       |                                                                                        |
| **PART II—OTHER  INFORMATION**   | ** **                                                                                  |
| ** **                                 | ** **                                                                                  | ** **        |
| Item 1.                                    | Legal Proceedings                                                                           | 25                |
|                                       |                                                                                        |              |
| Item 1A.                                   | Risk Factors                                                                                | 25                |
|                                       |                                                                                        |              |
| Item 2.                                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 25                |
|                                       |                                                                                        |              |
| Item 3.                                    | Defaults Upon  Senior Securities                                                            | 25                |
|                                       |                                                                                        |              |
| Item 4.                                    | Submission of  Matters to a Vote of Security Holders                                        | 25                |
|                                       |                                                                                        |              |
| Item 5.                                    | Other Information                                                                           | 25                |
|                                       |                                                                                        |              |
| Item 6.                                    | Exhibits                                                                                    | 25                |
|                                       |                                                                                        |              |
| Signatures                                 | 27                                                                                          |
|                                            |                                                                                             |                   |  |

 

Available information

 

Our website iswww.fogcutter.com.  We make our annualreport on Form 10-K, as well as other reports filed with the Securitiesand Exchange Commission, available through our website as soon as reasonablypracticable after they are filed.  A copyof these reports may also be obtained by writing to us at 1410 SW JeffersonStreet, Portland, Oregon, 97201, Attn: Investor Reporting.

 

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Table of Contents

 

**PART I— FINANCIAL INFORMATION**

 

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

 

FOG CUTTER CAPITALGROUP INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

*(dollarsin thousands, except share data)*

 
| ** **                                                                                                                                                                                                                       | ** ** | **June 30, 2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **(unaudited)**             | ** ** | ** **                  | ** ** |
| Assets                                                                                                                                                                                                                           |       |                        |       |                        |       |
| Current Assets:                                                                                                                                                                                                                  |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                       |       | $                           | 488        |                        | $          | 1,131 |   |
| Accounts  receivable                                                                                                                                                                                                             |       | 1,329                       |       | 1,479                       |       |
| Notes  receivable, current portion                                                                                                                                                                                               |       | 536                         |       | 566                         |       |
| Loans to senior  executives                                                                                                                                                                                                      |       | —                      |       | 1,147                       |       |
| Inventories                                                                                                                                                                                                                      |       | 4,039                       |       | 2,505                       |       |
| Investments in  real estate, held for sale, net                                                                                                                                                                                  |       | 8,566                       |       | 19,658                      |       |
| Current assets  held for sale                                                                                                                                                                                                    |       | —                      |       | 86                          |       |
| Other current  assets                                                                                                                                                                                                            |       | 472                         |       | 528                         |       |
| Total current  assets                                                                                                                                                                                                            |       | 15,430                      |       | 27,100                      |       |
|                                                                                                                                                                                                                             |       |                        |       |                        |       |
| Notes receivable                                                                                                                                                                                                                 |       | 37                          |       | 46                          |       |
| Property, plant  and equipment, net                                                                                                                                                                                              |       | 9,746                       |       | 10,184                      |       |
| Intangible  assets, net                                                                                                                                                                                                          |       | 4,662                       |       | 4,756                       |       |
| Goodwill                                                                                                                                                                                                                         |       | 8,528                       |       | 8,528                       |       |
| Other assets  held for sale                                                                                                                                                                                                      |       | —                      |       | 2,147                       |       |
| Other assets                                                                                                                                                                                                                     |       | 1,579                       |       | 1,008                       |       |
| Total assets                                                                                                                                                                                                                     |       | $                           | 39,982     |                        | $          | 53,769 |   |
|                                                                                                                                                                                                                             |       |                        |       |                        |       |
| Liabilities and  Stockholders’ Equity (Deficit)                                                                                                                                                                             |       |                        |       |                        |       |
| Liabilities:                                                                                                                                                                                                                     |       |                        |       |                        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                                                        |       | $                           | 17,382     |                        | $          | 12,645 |   |
| Current  liabilities associated with assets held for sale                                                                                                                                                                        |       | —                      |       | 2,565                       |       |
| Obligations  under capital leases on real estate held for sale                                                                                                                                                                   |       | —                      |       | 9,994                       |       |
| Borrowings and  notes payable, current portion                                                                                                                                                                                   |       | 10,479                      |       | 12,256                      |       |
| Obligations  under capital leases, current portion                                                                                                                                                                               |       | 139                         |       | 141                         |       |
| Total current  liabilities                                                                                                                                                                                                       |       | 28,000                      |       | 37,601                      |       |
|                                                                                                                                                                                                                             |       |                        |       |                        |       |
| Borrowings and  notes payable                                                                                                                                                                                                    |       | 6,151                       |       | 6,355                       |       |
| Obligations  under capital leases                                                                                                                                                                                                |       | 1,941                       |       | 1,929                       |       |
| Deferred income                                                                                                                                                                                                                  |       | 5,207                       |       | 5,187                       |       |
| Total  liabilities                                                                                                                                                                                                               |       | 41,299                      |       | 51,072                      |       |
|                                                                                                                                                                                                                             |       |                        |       |                        |       |
| Commitments and  contingencies                                                                                                                                                                                                   |       |                        |       |                        |       |
| Minority  interests in consolidated subsidiaries                                                                                                                                                                                 |       | 881                         |       | 701                         |       |
|                                                                                                                                                                                                                             |       |                        |       |                        |       |
| Stockholders’  Equity (Deficit):                                                                                                                                                                                            |       |                        |       |                        |       |
| 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 June 30, 2008 and December 31, 2007; 7,954,928 shares  outstanding as of June 30, 2008 and December 31, 2007 |       | 171,582                     |       | 170,956                     |       |
| Accumulated  deficit                                                                                                                                                                                                             |       | (161,769                    | )          | (156,949                    | )     |
| Treasury stock,  3,802,145 common shares as of June 30, 2008 and December 31, 2007,  at cost                                                                                                                           |       | (12,011                     | )          | (12,011                     | )     |
| Total  stockholders’ equity (deficit)                                                                                                                                                                                       |       | (2,198                      | )          | 1,996                       |       |
| Total  liabilities and stockholders’ equity (deficit)                                                                                                                                                                       |       | $                           | 39,982     |                        | $          | 53,769 |   |

 

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

 

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FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

*(dollarsin thousands, except share data)*

 
| ** **                                                                                                 | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                                                                 | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                 | ** ** | **2008**               | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue:                                                                                                   |       |                   |       |                           |       |   |   |   |   |
| Restaurant and  manufacturing sales                                                                        |       | $                      | 11,015     |                           | $          | 9,675 |   | $ | 21,181 |   | $ | 19,590 |   |
| Restaurant  franchise and royalty fees                                                                     |       | 659                    |       | 567                            |       | 1,304 |   | 1,107 |   |
| Total revenue                                                                                              |       | 11,674                 |       | 10,242                         |       | 22,485 |   | 20,697 |   |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| Operating costs  and expenses:                                                                             |       |                   |       |                           |       |   |   |   |   |
| Restaurant and  manufacturing cost of sales                                                                |       | 6,530                  |       | 5,515                          |       | 12,544 |   | 11,302 |   |
| Engineering and  development                                                                               |       | 299                    |       | 233                            |       | 580 |   | 469 |   |
| Depreciation and  amortization                                                                             |       | 509                    |       | 441                            |       | 1,006 |   | 916 |   |
| Total operating  costs and expenses                                                                        |       | 7,338                  |       | 6,189                          |       | 14,130 |   | 12,687 |   |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| General and  administrative expenses:                                                                      |       |                   |       |                           |       |   |   |   |   |
| Compensation and  employee benefits                                                                        |       | 2,493                  |       | 2,377                          |       | 6,547 |   | 7,304 |   |
| Professional  fees                                                                                         |       | 851                    |       | 894                            |       | 1,710 |   | 1,523 |   |
| Other                                                                                                      |       | 4,236                  |       | 3,975                          |       | 8,055 |   | 7,781 |   |
| Total general  and administrative expenses                                                                 |       | 7,580                  |       | 7,246                          |       | 16,312 |   | 16,608 |   |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| Non-operating  income (expense):                                                                           |       |                   |       |                           |       |   |   |   |   |
| Interest income                                                                                            |       | 34                     |       | 46                             |       | 71 |   | 40 |   |
| Interest expense                                                                                           |       | (419                   | )          | (320                           | )          | (859 | ) | (691 | ) |
| Other income (expense),  net                                                                               |       | (468                   | )          | 22                             |       | (21 | ) | 152 |   |
| Total  non-operating income (expense)                                                                      |       | (853                   | )          | (252                           | )          | (809 | ) | (499 | ) |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| Loss before  provision for income taxes, minority interests, and equity in income of  equity investees     |       | (4,097                 | )          | (3,445                         | )          | (8,766 | ) | (9,097 | ) |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| Minority  interest in earnings                                                                             |       | 120                    |       | 449                            |       | 204 |   | 485 |   |
| Equity in income  of equity investee                                                                       |       | 17                     |       | —                         |       | 217 |   | — |   |
| Income tax  benefit                                                                                        |       | 1                      |       | —                         |       | 52 |   | — |   |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| Loss from  continuing operations                                                                           |       | (3,959                 | )          | (2,996                         | )          | (8,293 | ) | (8,612 | ) |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| Income (loss)  from discontinued operations (including gain on sale of $4,217 in 2008 and  $2,492 in 2007) |       | (424                   | )          | (409                           | )          | 3,473 |   | 1,556 |   |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| Net loss                                                                                                   |       | $                      | (4,383     | )                              | $          | (3,405 | ) | $ | (4,820 | ) | $ | (7,056 | ) |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| Basic loss per  share from continuing operations                                                           |       | $                      | (0.50      | )                              | $          | (0.38 | ) | $ | (1.04 | ) | $ | (1.08 | ) |
| Basic earnings  per share from discontinued operations                                                     |       | $                      | (0.05      | )                              | $          | (0.05 | ) | $ | 0.44 |   | $ | 0.20 |   |
| Basic loss per  share                                                                                      |       | $                      | (0.55      | )                              | $          | (0.43 | ) | $ | (0.60 | ) | $ | (0.88 | ) |
| Basic weighted average  shares outstanding                                                                 |       | 7,954,928              |       | 7,957,428                      |       | 7,954,928 |   | 7,957,428 |   |
|                                                                                                       |       |                   |       |                           |       |   |   |   |   |
| Dividends  declared per share                                                                              |       | $                      | —     |                           | $          | — |   | $ | — |   | $ | — |   |

 

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

 

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FOG CUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

*(dollarsin thousands, except share data)*

 
| ** **                          | ** ** | **Common Stock**   | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------|------------|------------|------------|
| ** **                          | ** ** | **Shares ****(1)** | ** ** | **Amount**              | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at  January 1, 2008    |       | 7,954,928               |       | $                       | 170,956    |            | 3,802,145  |       | $          | (12,011 | ) | $ | (156,949 | ) | $ | 1,996 |   |
| Comprehensive  income (loss):       |       |                    |       |                    |       |            |       |       |       |   |   |   |   |
| Net loss                            |       | —                  |       | —                  |       | —          |       | —     |       | (4,820 | ) | (4,820 | ) |
| Stock options  expensed in net loss |       | —                  |       | 626                     |       | —          |       | —     |       | — |   | 626 |   |
| Balance at  June 30, 2008      |       | 7,954,928               |       | $                       | 171,582    |            | 3,802,145  |       | $          | (12,011 | ) | $ | (161,769 | ) | $ | (2,198 | ) |

 

----

(1)  Issuedand outstanding

 

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

 

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FOG CUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENTS OFCASH FLOWS

(Unaudited)

*(dollars in thousands)*

 
| ** **                                                                      | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **June 30,**      | ** ** | **June 30,**              | ** ** |
| ** **                                                                      | ** ** | **2008**               | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                           |       |                   |       |                           |       |   |   |   |   |   |   |   |   |
| Net loss                                                                        |       | $                      | (4,383     | )                              | $          | (3,405 | ) | $ | (4,820 | ) | $ | (7,056 | ) |
| (Income) loss  from discontinued operations                                     |       | 424                    |       | 409                            |       | (3,473 | ) | (1,556 | ) |
| Loss from  continuing operations                                                |       | (3,959                 | )          | (2,996                         | )          | (8,293 | ) | (8,612 | ) |
| Adjustments to  reconcile net loss to net operating cash flows:                 |       |                   |       |                           |       |   |   |   |   |
| Equity in income  of equity investees                                           |       | (17                    | )          | —                         |       | (217 | ) | — |   |
| Depreciation and  amortization                                                  |       | 622                    |       | 574                            |       | 1,228 |   | 1,183 |   |
| Foreign currency  (gain) loss                                                   |       | 44                     |       | (138                           | )          | (536 | ) | (253 | ) |
| Share based  compensation                                                       |       | 296                    |       | 480                            |       | 626 |   | 906 |   |
| Market value  impairment reserve                                                |       | 446                    |       | 1,109                          |       | 599 |   | 1,109 |   |
| Other                                                                           |       | (81                    | )          | (409                           | )          | (129 | ) | (404 | ) |
| Change in:                                                                      |       |                   |       |                           |       |   |   |   |   |
| Other assets                                                                    |       | (1,159                 | )          | (528                           | )          | (1,308 | ) | (781 | ) |
| Deferred income                                                                 |       | 35                     |       | 255                            |       | 20 |   | 730 |   |
| Deferred income  taxes                                                          |       | —                 |       | —                         |       | — |   | (11 | ) |
| Accounts payable  and accrued liabilities                                       |       | 1,955                  |       | (216                           | )          | 1,981 |   | 2,226 |   |
| Net cash used in  operating activities                                          |       | (1,818                 | )          | (1,869                         | )          | (6,029 | ) | (3,907 | ) |
|                                                                            |       |                   |       |                           |       |   |   |   |   |
| Cash flows from  investing activities:                                          |       |                   |       |                           |       |   |   |   |   |
| Principal  repayments on notes receivable, including loans to senior executives |       | 55                     |       | 5                              |       | 1,204 |   | 10 |   |
| Investment in  real estate                                                      |       | (26                    | )          | (35                            | )          | (26 | ) | (89 | ) |
| Investments in  property, plant, and equipment                                  |       | (618                   | )          | (424                           | )          | (1,014 | ) | (1,707 | ) |
| Other                                                                           |       | 217                    |       | (17                            | )          | 218 |   | (35 | ) |
| Net cash  provided by (used in) investing activities                            |       | (372                   | )          | (471                           | )          | 382 |   | (1,821 | ) |
|                                                                            |       |                   |       |                           |       |   |   |   |   |
| Cash flows from  financing activities:                                          |       |                   |       |                           |       |   |   |   |   |
| Proceeds from  borrowings                                                       |       | 2,250                  |       | 1,052                          |       | 2,750 |   | 2,116 |   |
| Repayments on  borrowings                                                       |       | (254                   | )          | (33                            | )          | (4,908 | ) | (155 | ) |
| Repayments under  capital leases                                                |       | (18                    | )          | (23                            | )          | (50 | ) | (48 | ) |
| Investments by  minority interests, net                                         |       | —                 |       | 1,075                          |       | 350 |   | 1,100 |   |
| Other, net                                                                      |       | 19                     |       | 39                             |       | 38 |   | 64 |   |
| Net cash  provided by (used in) financing activities                            |       | 1,997                  |       | 2,110                          |       | (1,820 | ) | 3,077 |   |
|                                                                            |       |                   |       |                           |       |   |   |   |   |
| Effect of  exchange rate change on cash                                         |       | (22                    | )          | (2                             | )          | (22 | ) | (2 | ) |
| Net change in  cash and cash equivalents from continuing operations             |       | (215                   | )          | (232                           | )          | (7,489 | ) | (2,653 | ) |
|                                                                            |       |                   |       |                           |       |   |   |   |   |
| Net change in  cash and cash equivalents from discontinued operations:          |       |                   |       |                           |       |   |   |   |   |
| Net cash used in  operating activities                                          |       | (251                   | )          | (11                            | )          | (954 | ) | (268 | ) |
| Net cash  provided by (used in) investing activities                            |       | —                 |       | (1                             | )          | 7,879 |   | 2,859 |   |
| Net cash used in  financing activities                                          |       | —                 |       | (113                           | )          | (79 | ) | (500 | ) |
| Net change in  cash and cash equivalents                                        |       | (466                   | )          | (357                           | )          | (643 | ) | (562 | ) |
| Cash and cash equivalents at beginning of period                                |       | 954                    |       | 1,619                          |       | 1,131 |   | 1,824 |   |
| Cash and cash equivalents at end of period                                      |       | $                      | 488        |                           | $          | 1,262 |   | $ | 488 |   | $ | 1,262 |   |
|                                                                            |       |                   |       |                           |       |   |   |   |   |
| Supplemental  disclosures of cash flow information:                             |       |                   |       |                           |       |   |   |   |   |
| Cash paid for  interest                                                         |       | $                      | 520        |                           | $          | 758 |   | $ | 1,423 |   | $ | 1,547 |   |
|                                                                            |       |                   |       |                           |       |   |   |   |   |
| Non-cash  financing and investing activities:                                   |       |                   |       |                           |       |   |   |   |   |
| Assets acquired  through capital lease                                          |       | $                      | —     |                           | $          | — |   | $ | — |   | $ | 52 |   |

 

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

 

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

**NOTE 1****-BASIS OF PRESENTATION AND ACCOUNTING POLICIES**

 

The accompanying interimconsolidated financial statements of Fog Cutter Capital Group Inc. andSubsidiaries (“FCCG” or the “Company”) are unaudited and have been prepared inconformity with the requirements of Regulation S-X promulgated under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), particularly Rule 10-01thereof, which governs 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 AnnualReport as of and for the year ended December 31, 2007 on Form 10-K(“2007 Form 10-K”) and Form 10-K/A, as previously filed with the SECon March 31, 2008 and April 25, 2008, respectively.  Except as described below, there have been nochanges to the Company’s significant accounting policies as described in Notes2 and 3 to the consolidated financial statements in its 2007 Form 10-K.

 

In the Company’s opinion,all adjustments, comprised of normal recurring accruals necessary for the fairpresentation of the interim financial statements, have been included in theaccompanying consolidated financial statements. Operating results for the six months ended June 30, 2008 are notnecessarily indicative of the results that may be expected for the year ending December 31,2008.

 

The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States requires the Company to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  The Company’s operations andactivities have become more focused on restaurant activities, and less focusedon finance and real estate.  As a result,certain reclassifications of the balances and modifications to the presentationof the financial statements have been made, including the reclassification ofcertain investments in real estate as held for sale.  None of these changes in presentation affectedpreviously reported results of operations.

 

At June 30, 2008,certain Company officers and directors had, directly or indirectly, majorityvoting control of the Company.

 

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

 

The following significantevents affected our operations for the six months ended June 30, 2008:

 

*Restaurant openings*

 

During the six monthsended June 30, 2008, Fatburger Holdings Inc. (“Fatburger”), the Company’srestaurant operations subsidiary, opened six additional franchiselocations.  In addition, two locationswere converted from franchise-owned to company-owned restaurants and onefranchise location and one company-owned location were closed.

 

*Discontinued operations*

 

In February 2008,the Company sold a wholly-owned subsidiary Fog Cap Retail Investors LLC(“FCRI”), which held the Company’s leased real estate portfolio.  The sales price for the FCRI membership interests was $8.5 million andwas paid in cash.  A portion of theproceeds were used to repay $4.2 million of existing debt.  The Company recorded a $4.2 million gain onsale as a result of the transaction.  TheCompany also entered into an option agreement with the buyer that gives theCompany the right, but not the obligation, to re-acquire all of the membershipinterests in FCRI.  The option period isfor two years beginning February 15, 2008. Under certain circumstances after December 31, 2008, the buyer mayaccelerate the termination of the option period upon thirty days notice.  The exercise price increases over the optionperiod from approximately $9.7 million currently to $11.3 million after February 28,2010.  The option commitment fee was$850,000 and is payable by the Company in installments over the optionperiod.  The Company has determined thatthe option exercise prices are significantly higher than the expected valueduring the option period.  Therefore, theoption has been assigned no value as it is not anticipated that it will providea future economic benefit to the Company. The $850,000 option commitment fee reduced the amount of the gain onsale.

 

In June 2008, theCompany exercised its rights under a loan security agreement on loans to aconsolidated subsidiary, Centrisoft Corporation (“Centrisoft”).  Pursuant to the security agreement, thecollateral assets of Centrisoft were transferred to the Company in satisfactionof the loans.  Centrisoft has sinceceased operations.  As of June 30, 2008, the Company no longerincludes Centrisoft as a consolidated subsidiary.  The Company will continue to service existingcustomers of Centrisoft using the assets acquired through the securityagreement and will seek to sell the Centrisoft technology and assets to a thirdparty.

 

*Repayment of notes payable*

 

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

 

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*Borrowings on notes payable*

 

In May 2008, theCompany borrowed $2.0 million through a note payable secured by certain assetsof the Company.  The note bears interestat a fixed rate of 24.0%, one half of which is due monthly in arrears, theother half being due at the note’ scheduled maturity date.  The note is due on or before December 31,2008.

 

*Income from equity investee*

 

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

 

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

 

*Warlick complaints*

 

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

 

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

 

*Other litigation*

 

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

 

*Liquidity*

 

As of June 30,2008, borrowings related to the Company’s property holdings in Barcelona, Spainof $1.0 million were reflected as current liabilities in the accompanyingConsolidated Statements of Financial Condition due to management’s intention tosell these properties and repay the related debt at the time of sale.  The sale of real estate and other investmentsis considered to be a normal, recurring part of operations and managementexpects these transactions to generate adequate cash flow to meet the Company’sliquidity needs for the 2008 fiscal year.

 

*FatburgerDebt Covenant*

 

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

 

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*Restrictedcash balance*

 

At June 30, 2008,$0.2 million of the Company’s cash balance was restricted to secure certainobligations.

 

*Dividends*

 

The Company doesnot have a fixed dividend policy, and may declare and pay new dividends oncommon stock, subject to financial condition, results of operations, capitalrequirements and other factors deemed relevant by the Board of Directors.  One factor the Board of Directors mayconsider is the impact of dividends on the Company’s liquidity.  No dividends were declared in the six monthsended June 30, 2008.

 

*Fatburger operations*

 

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

 

*Other*

 

In order tofacilitate the development of franchise locations, as of June 30, 2008,Fatburger had guaranteed the annual minimum lease payments of two restaurantsites owned and operated by franchisees. The guarantees approximate $0.7 million plus certain contingent rentalpayments as defined in the respective leases. One lease expires in August 2008, and another in July 2015.  As of June 30, 2008, management was notaware of any event or demand that was likely to trigger the guarantee byFatburger.

 

Management may utilize awide variety of financial techniques to assist in the management of currencyrisk, including currency swaps, options, and forwards, or combinationsthereof.  No such currency hedgingtechniques were used in the six months ended June 30, 2008.

 

There were noother off-balance sheet arrangements used in the six months ended June 30,2008.

 

**NOTE 4 –STOCK OPTIONS AND RIGHTS**

 

The Company has a stockoption plan (the “Option Plan”) that provides for options to purchase shares ofthe Company’s common stock.  The maximumnumber of shares of common stock that may be issued pursuant to options grantedunder the Option Plan is 3,500,000. Newly elected independent directors automatically receive 5,000 optionson the day they join the Board of Directors. Additionally, each independent director receives, on the last day ofeach quarter, an automatic qualified grant of non-qualified options to purchase1,500 shares of common stock at 110% of the fair market value on that day.  Automatic grants vest one third on each ofthe first three anniversaries of the grant date and expire on the tenthanniversary of the grant date.  TheCompany granted a total of 9,000 options to its independent directors in thesix months ending June 30, 2008. The resignation of certain Managers (as defined by the Option Plan)resulted in the forfeiture of 96,833 unvested options in the six months ended June 30,2008.

 

There were no optionsgranted with exercise prices below the market value of the stock at the grantdate.  Fair values for the second quarterof 2008 were estimated using the Black-Scholes option-pricing model with thefollowing weighted average assumptions used: 0% dividend yield, expectedvolatility of 109%, risk-free interest rate of 4.7% and expected lives of tenyears.

 

A summary of our stockoptions activity for the six months ended June 30, 2008 is presentedbelow:

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted Average  Exercise  Price** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------------------------|------------|
| Outstanding at  January 1, 2008 |       | 3,246,333  |       | $                                          | 1.57       |   |
| Granted                              |       | 9,000      |       | $                                          | 0.80       |   |
| Exercised                            |       | —     |       | $                                          | —     |   |
| Cancelled/forfeited                  |       | (96,833    | )          | $                                          | 3.31       |   |
| Outstanding at  June 30, 2008   |       | 3,158,500  |       | $                                          | 1.52       |   |

 

A summary of our stockoptions outstanding as of June 30, 2008 is presented below:

 

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| **Range of  Exercise Prices** | ** ** | **Shares** | ** ** | **Weighted Average  Remaining  Life** | ** ** | **Weighted Average  Exercise  Price** | ** ** |
|-----------------------------------------|------------|------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| $1.00 – 2.00                       |       | 2,631,000  |       | 8.5                                        |       | $                                          | 1.32       |   |
| $2.01 – 4.00                       |       | 527,500    |       | 9.0                                        |       | $                                          | 2.48       |   |
| $4.01 – 8.00                       |       | —     |       | —                                     |       | $                                          | —     |   |
| Total                                   |       | 3,158,500  |       | 8.6                                        |       | $                                          | 1.52       |   |

 

**NOTE 5 – VARIABLE INTERESTENTITIES**

 

As of June 30, 2008,the Company has loaned $10.4 million to two related Spanish entities formed topurchase, reposition and sell apartment buildings in Barcelona, Spain.  Under the terms of the loans, the investmentsmeet the definition of a Variable Interest Entity (“VIE”) under FASBInterpretation No. 46 (“FIN 46”) and the Company is the primarybeneficiary of the VIE.  As a result, theassets, liabilities, and results of operations of the VIE have beenconsolidated into the accompanying consolidated financial statements.  Neither the creditors nor the otherbeneficial interest holders have recourse to the Company with regard to theseinvestments.

 

The VIE currently ownstwo apartment buildings, consisting of 33 residential units with a carryingvalue of approximately $8.6 million, including capital improvements andcarrying costs.  The two properties met the criteria to be classifiedas “held for sale” and were classified as such on the Statement of FinancialCondition at June 30, 2008.

 

In June 2008, theVIE entered into an agreement to sell one of the two buildings for a salesprice of approximately $5.2 million. Based upon this sale agreement, the Company has recorded a market valueimpairment of $0.6 million on this property in the six months ended June 30,2008.  The fair value of both propertieswas estimated using significant observable inputs other than quoted prices(Level 2 inputs per SFAS 157), including prior sale offers on the property,current sale negotiations for the property, and market prices for similarproperties in the Barcelona, Spain market.

 

Assetsand liabilities of the VIE included in the accompanying consolidated statementsof financial condition as of June 30, 2008 are summarized as follows:

 
| Investment in  real estate, held for sale, net                                        |   | $         | 8,566,000 |   |
|---------------------------------------------------------------------------------------|--------|-----------|-----------|--------|
| Other assets                                                                          |   | 3,000     |      |
| Borrowings and  notes payable (included in current liabilities at June 30, 2008) |   | 1,043,000 |      |
| Accrued expenses  and other liabilities                                               |   | 540,000   |      |
| Minority  interest                                                                    |   | 434,000   |      |

 

**NOTE 6 – LOANS TO SENIOR EXECUTIVES**

 

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

 

**NOTE 7 – INVENTORIES**

 

Inventories relateprimarily to the Company’s manufacturing subsidiary, DAC International (“DAC”),and consist of the following:

 
| ** **         | ** ** | **June 30, 2008**          | ** ** | **December 31, 2007** | ** ** |
|--------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **(dollars in thousands)** | ** ** |
|               |       |                                 |       |                            |       |
| Raw materials      |       | $                                    | 1,831      |                            | $          | 1,565 |   |
| Work in progress   |       | 1,849                                |       | 772                             |       |
| Finished goods     |       | 359                                  |       | 168                             |       |
| Total  inventories |       | $                                    | 4,039      |                            | $          | 2,505 |   |

 

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

 

Accounts payable andaccrued liabilities consisted of the following:

 
| ** **                                    | ** ** | **June 30, 2008**          | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **(dollars in thousands)** | ** ** |
| Accounts payable                              |       | $                                    | 7,197      |                            | $          | 8,872 |   |
| Sales deposits                                |       | 2,606                                |       | 1,478                           |       |
| Accrued wages,  bonus and commissions         |       | 1,152                                |       | 708                             |       |
| Other                                         |       | 6,427                                |       | 1,587                           |       |
| Total accrued  expenses and other liabilities |       | $                                    | 17,382     |                            | $          | 12,645 |   |

 

At June 30, 2008,other accrued liabilities include the accrual of management fees ($1.7 million)and option commitment fee ($0.6 million), both associated with the sale ofFCRI.

 

**NOTE 9 – OPERATING SEGMENTS**

 

Operating segmentsconsist of (i) restaurant operations conducted through Fatburger, (ii) manufacturingactivities conducted through DAC International, and (iii) real estate andfinancing activities.  Each segmentoperates with its own management and personnel. The Company allocates certain corporate expenses to Fatburger through amanagement fee to reflect management’s increased involvement in the restaurantoperations and to more closely represent the true costs of restaurantoperations in the appropriate segment reporting.  The management fee is eliminated uponconsolidation.  The following is asummary of each of the operating segments:

 

*Restaurantoperations*

 

As of June 30,2008, the Company owned approximately 82% of the voting control of Fatburger,which operates or franchises 96 hamburger restaurants located primarily inCalifornia and Nevada, as well as 13 other states, Canada, and China.  Franchisees currently own and operate 56 ofthe Fatburger locations.  Six newfranchise restaurants were opened during the six months ended June 30,2008.  In the six months ended June 30,2008, Fatburger acquired the net assets of two franchise locations andconverted them to company-owned locations, and one franchise location and onecompany-owned location were closed.

 
| ** **                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**                | ** ** |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Company-owned  restaurant sales                |       | $                                                   | 7,954      |                                              | $          | 7,147 |   | $ | 15,887 |   | $ | 14,749 |   |
| Royalty revenue                                |       | 595                                                 |       | 528                                               |       | 1,136 |   | 1,046 |   |
| Franchise fee  revenue                         |       | 64                                                  |       | 40                                                |       | 168 |   | 61 |   |
| Total revenue                                  |       | 8,613                                               |       | 7,715                                             |       | 17,191 |   | 15,856 |   |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Cost of sales                                  |       | (4,795                                              | )          | (4,196                                            | )          | (9,482 | ) | (8,607 | ) |
| Depreciation and  amortization                 |       | (538                                                | )          | (498                                              | )          | (1,074 | ) | (1,032 | ) |
| Other  general & administrative costs |       | (4,281                                              | )          | (3,663                                            | )          | (8,273 | ) | (7,551 | ) |
| Interest expense                               |       | (162                                                | )          | (166                                              | )          | (358 | ) | (381 | ) |
| Management  allocation                         |       | (526                                                | )          | (536                                              | )          | (1,053 | ) | (1,072 | ) |
| Minority  interest in losses                   |       | 120                                                 |       | 449                                               |       | 204 |   | 485 |   |
| Segment loss                                   |       | $                                                   | (1,569     | )                                                 | $          | (895 | ) | $ | (2,845 | ) | $ | (2,302 | ) |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                          |       | $                                                   | 123        |                                              | $          | 264 |   | $ | 268 |   | $ | 507 |   |
| Segment assets                                 |       |                                                |       |                                              |       | $ | 21,280 |   | $ | 22,065 |   |
| Minority  interests                            |       |                                                |       |                                              |       | $ | 446 |   | $ | 694 |   |

 

*Manufacturingoperations*

 

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

 
| ** **                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**                | ** ** |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Manufacturing  sales                           |       | $                                                   | 3,061      |                                              | $          | 2,527 |   | $ | 5,294 |   | $ | 4,841 |   |
| Cost of sales                                  |       | (1,735                                              | )          | (1,319                                            | )          | (3,062 | ) | (2,695 | ) |
| Engineering and  development                   |       | (299                                                | )          | (233                                              | )          | (580 | ) | (469 | ) |
| Depreciation and  amortization                 |       | (36                                                 | )          | (22                                               | )          | (58 | ) | (47 | ) |
| Other  general & administrative costs |       | (799                                                | )          | (643                                              | )          | (1,585 | ) | (1,265 | ) |
| Interest expense                               |       | (12                                                 | )          | (12                                               | )          | (21 | ) | (14 | ) |
| Other  non-operating income                    |       | 8                                                   |       | 2                                                 |       | 26 |   | 17 |   |
| Segment income                                 |       | $                                                   | 188        |                                              | $          | 300 |   | $ | 14 |   | $ | 368 |   |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                          |       | $                                                   | 228        |                                              | $          | 24 |   | $ | 421 |   | $ | 69 |   |
| Segment assets                                 |       |                                                |       |                                              |       | $ | 6,879 |   | $ | 5,940 |   |

 

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*Real estate and financingoperations*

 

The Company owns variousinterests in real estate and notes receivable. At June 30, 2008, real estate is comprised of ownership of twoapartment buildings located in Barcelona, Spain and notes receivable with acarrying value of $0.6 million are primarily secured by real estate.

 
| ** **                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**                | ** ** |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Rental income                                  |       | $                                                   | —     |                                              | $          | — |   | $ | — |   | $ | — |   |
| Operating  expenses                            |       | —                                              |       | —                                            |       | — |   | — |   |
| Depreciation and  amortization                 |       | —                                              |       | (3                                                | )          | — |   | (5 | ) |
| Other  general & administrative costs |       | (13                                                 | )          | (27                                               | )          | (13 | ) | (45 | ) |
| Interest income                                |       | 31                                                  |       | 46                                                |       | 63 |   | 40 |   |
| Interest expense                               |       | (452                                                | )          | (422                                              | )          | (979 | ) | (830 | ) |
| Other non-operating  income (loss)             |       | (28                                                 | )          | 1,129                                             |       | 560 |   | 1,244 |   |
| Market value  impairment reserves              |       | (446                                                | )          | (1,109                                            | )          | (599 | ) | (1,109 | ) |
| Equity in income  of equity investees          |       | 17                                                  |       | —                                            |       | 217 |   | — |   |
| Segment loss                                   |       | $                                                   | (891       | )                                                 | $          | (386 | ) | $ | (751 | ) | $ | (705 | ) |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Capital expenditures                           |       | $                                                   | 26         |                                              | $          | 35 |   | $ | 26 |   | $ | 88 |   |
| Segment assets                                 |       |                                                |       |                                              |       | $ | 11,823 |   | $ | 10,821 |   |
| Minority  interests                            |       |                                                |       |                                              |       | $ | 434 |   | $ | 372 |   |

 

Other non-operatingincome for the six months ended June 30, 2008 is primarily composed offoreign currency gains of $0.5 million, compared to foreign currency gains of$0.3 million, commission and other non-operating revenue of $0.3 million, and aforfeited deposit on the sale of one Barcelona property of $0.7 million for thesix months ended June 30, 2007.

 

*Reconciliationto total net loss*

 
| ** **                                  | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** |       |
|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands)**                | ** ** |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Segment loss  from operations               |       | $                                                   | (2,272     | )                                                 | $          | (981 | ) | $ | (3,582 | ) | $ | (2,639 | ) |
| Corporate  expenses                         |       | (2,421                                              | )          | (2,831                                            | )          | (6,314 | ) | (7,579 | ) |
| Elimination of  intercompany charges        |       | 733                                                 |       | 816                                               |       | 1,551 |   | 1,606 |   |
| Income tax  benefit                         |       | 1                                                   |       | —                                            |       | 52 |   | — |   |
| Income (loss)  from discontinued operations |       | (424                                                | )          | (409                                              | )          | 3,473 |   | 1,556 |   |
| Net loss                                    |       | $                                                   | (4,383     | )                                                 | $          | (3,405 | ) | $ | (4,820 | ) | $ | (7,056 | ) |

 

**NOTE 10 – DISCONTINUED OPERATIONS**

 

*Leasedreal estate portfolio*

 

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

 

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| ** **                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** |       |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(dollars in thousands)**                | ** ** |
| ** **                                          | ** ** | ** **                                          | ** ** |
| Operating  revenue                                  |       | $                                                   | —     |                                              | $          | 944 |   | $ | 610 |   | $ | 1,879 |   |
| Operating  expenses                                 |       | —                                              |       | (322                                              | )          | (240 | ) | (709 | ) |
| Depreciation and  amortization                      |       | —                                              |       | (111                                              | )          | (39 | ) | (219 | ) |
| Operating margin                                    |       | —                                              |       | 511                                               |       | 331 |   | 951 |   |
|                                                |       |                                                |       |                                              |       |   |   |   |   |
| General and  administrative expenses                |       | —                                              |       | (32                                               | )          | (7 | ) | (64 | ) |
| Interest expense                                    |       | —                                              |       | (242                                              | )          | (157 | ) | (462 | ) |
| Other non-operating income                          |       | —                                              |       | 2                                                 |       | 8 |   | 13 |   |
| Gain on sale of discontinued real estate operations |       | —                                              |       | —                                            |       | 4,217 |   | — |   |
| Income from  discontinued real estate operations    |       | $                                                   | —     |                                              | $          | 239 |   | $ | 4,392 |   | $ | 438 |   |
|                                                |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                               |       | $                                                   | —     |                                              | $          | 1 |   | $ | 20 |   | $ | 66 |   |
| Segment assets                                      |       |                                                |       |                                              |       | — |   | $ | 11,544 |   |

 

*Softwaredevelopment and sales operations*

 

InJune 2008, the Company exercised its rights under a loan security agreementon loans to Centrisoft, a consolidated subsidiary.  Pursuant to the security agreement,the collateral assets of Centrisoft were transferred to the Company insatisfaction of the loans.  Centrisofthas since ceased operations.  As of June 30, 2008, the Company nolonger includes Centrisoft as a consolidated subsidiary.  The Company will continue to service existingcustomers of Centrisoft using the assets acquired through the securityagreement and will seek to sell the Centrisoft technology and assets to a thirdparty.  Prior to discontinuation ofoperations, Centrisoft was a reportable segment of the Company’s operationsthat developed and sold network productivity and security software.  The following represents the results ofoperations during the time of the Company’s ownership of Centrisoft:

 
| ** **                                     | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**                | ** ** |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Software sales                                 |       | $                                                   | 26         |                                              | $          | 9 |   | $ | 128 |   | $ | 13 |   |
| Engineering and  development                   |       | (78                                                 | )          | (111                                              | )          | (158 | ) | (262 | ) |
| Depreciation and  amortization                 |       | (73                                                 | )          | (112                                              | )          | (182 | ) | (224 | ) |
| Other  general & administrative costs |       | (100                                                | )          | (151                                              | )          | (215 | ) | (372 | ) |
| Interest expense                               |       | (199                                                | )          | (283                                              | )          | (492 | ) | (551 | ) |
| Segment loss                                   |       | $                                                   | (424       | )                                                 | $          | (648 | ) | $ | (919 | ) | $ | (1,396 | ) |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                          |       | $                                                   | —     |                                              | $          | — |   | $ | — |   | $ | — |   |
| Segment assets                                 |       |                                                |       |                                              |       | $ | — |   | $ | 3,399 |   |

 

*Mortgagebanking operations*

 

Prior to February 2007,the Company held a 51% ownership interest in George Elkins Mortgage BankingCompany (“George Elkins”), a California commercial mortgage bankingoperation.  In December 2006, theCompany reached an agreement to sell George Elkins to a third party and thesale closed in February 2007.  Priorto disposal, George Elkins was a reportable segment of the Company’s operations.  The following represents the results ofoperations during the time of the Company’s ownership of George Elkins:

 
| ** **                                                | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                | ** ** | **(dollars in thousands)**                | ** ** |
|                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Loan brokerage  fees                                      |       | $                                                   | —     |                                              | $          | — |   | $ | — |   | $ | 1,673 |   |
| Loan servicing  fees                                      |       | —                                              |       | —                                            |       | — |   | 134 |   |
| Total revenue                                             |       | —                                              |       | —                                            |       | — |   | 1,807 |   |
|                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Depreciation and  amortization                            |       | —                                              |       | —                                            |       | — |   | (4 | ) |
| Other  general & administrative costs            |       | —                                              |       | —                                            |       | — |   | (1,811 | ) |
| Interest income                                           |       | —                                              |       | —                                            |       | — |   | 2 |   |
| Other  non-operating income                               |       | —                                              |       | —                                            |       | — |   | 15 |   |
| Minority  interest in earnings                            |       | —                                              |       | —                                            |       | — |   | 13 |   |
| Gain on sale of  discontinued mortgage banking operations |       | —                                              |       | —                                            |       | — |   | 2,492 |   |
| Income from  discontinued mortgage banking operations     |       | $                                                   | —     |                                              | $          | — |   | $ | — |   | $ | 2,514 |   |
|                                                      |       |                                                |       |                                              |       |   |   |   |   |
| Capital  expenditures                                     |       | $                                                   | —     |                                              | $          | — |   | $ | — |   | $ | — |   |
| Segment assets                                            |       |                                                |       |                                              |       | $ | — |   | $ | — |   |
| Minority  interests                                       |       |                                                |       |                                              |       | $ | — |   | $ | — |   |

 

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**NOTE 11 – SUBSEQUENT EVENTS**

 

*Restaurant closure*

 

Subsequent to June 30,2008, Fatburger closed one company-owned restaurant location.

 

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

 

*Certainstatements contained herein and certain statements contained in future filingsby the Company with the SEC may not be based on historical facts and are “Forward-LookingStatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934, asamended.  Forward-Looking Statements arebased on various assumptions and events (some of which are beyond the Company’scontrol) and may be identified by reference to a future period or periods, orby the 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 the Risk Factorsidentified herein and the following:*

* *

*·*                  economicfactors, particularly in the market areas in which the Company operates;

*·*                  the financialand securities markets and the availability of and costs associated withsources of liquidity;

*·*                  competitiveproducts and pricing;

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

*·*                  the ability tosell assets to maintain liquidity;

*·*                  fiscal andmonetary policies of the U.S. Government;

*·*                  changes inprevailing interest rates;

*·*                  changes incurrency exchange rates;

*·*                  acquisitions andthe integration of acquired businesses;

*·*                  performance ofretail/consumer markets, including consumer preferences and concerns aboutdiet;

*·*                  effective expansionof the Company’s restaurants in new and existing markets;

*·*                  profitabilityand success of franchisee restaurants;

*·*                  availability ofquality real estate locations for restaurant expansion;

*·*                  the market forCentrisoft’s software products;

*·*                  credit risk management;and

*·*                  asset/liabilitymanagement

* *

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

* *

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

* *

## **Executive Overview**

## ** **

*Business overview*

 

Fog Cutter Capital GroupInc. is primarily engaged in the operations of its Fatburger Holdings, Inc.(“Fatburger”) restaurant business.  Weacquired the controlling interest in Fatburger in August 2003 andcurrently own 82% voting control.  Fatburger,“The Last Great Hamburger Stand”®, opened its first restaurant in Los Angelesin 1952.  As of June 30, 2008, therewere 96 Fatburger restaurants located in 15 states and in Canada andChina.  The restaurants specialize infresh, made-to-order hamburgers and other specialty sandwiches.  French fries, homemade-style onion rings,hand-scooped ice cream shakes and soft drinks round out the menu.

 

We plan to openadditional Fatburger restaurants throughout the United States andinternationally, including Canada, China, Saudi Arabia, Indonesia, Kuwait, andthe United Arab Emirates.  We intend tocontinue to open company-owned restaurants in strategic markets and increasethe number of franchised locations in the U.S. and internationally.  Franchisees currently own and operate 56 ofthe Fatburger locations and we have agreements for approximately 244 newfranchise locations.  Many factors affectour ability to open new franchise locations and we expect that it will takeseveral years for our current franchisees to open all of their restaurantlocations.  As is typical for ourindustry, the identification of qualified franchisees and quality locations hasan impact on the rate of growth in the number of our restaurants.

 

In addition to ourrestaurant operation, we also conduct manufacturing activities and make realestate and other real estate-related investments through various controlledsubsidiaries.

 

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*Operating segments*

 

Our operating segmentsare:

 

(i)             Restaurantoperations – conducted through our Fatburger subsidiary,

(ii)          Manufacturingoperations – conducted through our wholly owned subsidiary, DAC International (“DAC”),and

(iii)       Real estate and finance operations.

 

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

 

*Significant events*

 

The following significantevents affected our operations for the six months ended June 30, 2008:

 

·                  Restaurantopenings – During the six months ended June 30 2008, Fatburger opened sixadditional franchise locations.  Inaddition, two locations were converted from franchise-owned to company-ownedrestaurants, and one franchise location and one company-owned location wereclosed.

 

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

 

·                  Discontinued operations – In June 2008,we exercised our rights under a security agreement on loans to a consolidatedsubsidiary, Centrisoft Corporation (“Centrisoft”).  Pursuant to the security agreement, thecollateral assets of Centrisoft were transferred to us in satisfaction of theloans.  Centrisoft has since ceasedoperations.  As of June 30, 2008, we no longer include Centrisoft asa consolidated subsidiary.  We willcontinue to service existing customers of Centrisoft using the assets acquiredthrough the security agreement and will seek to sell the Centrisoft technologyand assets to a third party.

 

·                  Repaymentof notes payable – In February 2008, we used part of the proceeds from thesale of FCRI to repay one note payable in the amount of $4.2 million.  The note had a carrying value of $4.0 millionat December 31, 2007 and was secured by FCRI.

 

·                  Borrowingon notes payable – In May 2008, we borrowed $2.0 million through a notepayable secured by certain assets of the Company.  The note bears interest at a fixed rate of24.0%, one half of which is due monthly in arrears, the other half being due atthe note’s scheduled maturity date.  Thenote is due on or before December 31, 2008.

 

·                  Incomefrom equity investee – In December 2000, we organized and led a group ofinvestors to purchase all of the outstanding capital stock of Bourne EndProperties Plc (“Bourne End”), a specialist investor in retail property.  We invested in 26% of Bourne End, which at the time of the acquisition hadapproximately GBP 169.6 million of assets and GBP 123.1 million ofdebt.  The real estate assets consistedof 1.7 million square feet in fifteen shopping centers located in the UnitedKingdom.  Bourne End sold all of theseproperties between the date of the acquisition and 2006 and distributed the netproceeds to the investors.  Since thesale of the last property in 2006, Bourne End has been proceeding toward finalliquidation.  In the first quarter of2008, Bourne End revised its estimates of accrued liabilities associated withits final liquidation, and we were notified that we had been allocated anadditional $0.2 million that was distributed in the second quarter of 2008.

 

**Resultsof operations**

** **

We have incurred netlosses from continuing operations as follows:

 
| ** **          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **          | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| *** ***        | ** ** | **(dollars  in thousands, except per share data)**  | ** ** |
| Net loss            |       | $                                                   | (3,959     | )                                                 | $          | (2,996 | ) | $ | (8,293 | ) | $ | (8,612 | ) |
| Net loss per  share |       | $                                                   | (0.50      | )                                                 | $          | (0.38 | ) | $ | (1.04 | ) | $ | (1.08 | ) |

 

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Our net loss fromcontinuing operations was $8.3 million (or $1.04 per share) for the six monthsended June 30, 2008 and $4.0 million (or $0.50 per share) for the threemonths then ended.  This compares to $8.6million (or $1.08 per share) for the six months ended June 30, 2007 and$3.0 million (or $0.38 per share) for the three months then ended.  The loss is primarily due to operatingexpenses associated with our management infrastructure.  We have put in place a management structurethat we believe will enable us to significantly expand our operations, notablyour Fatburger subsidiary.  However, untilthe growth is realized, the cost of our management structure will be borne byour existing operations.

 

The following sectionsdescribe the results of operations of our operating segments for the three andsix months ended June 30, 2008 and 2007.

 

*Restaurantsegment operations*

 

The following table showsour operating margin for company-owned restaurants for the three and six monthsended June 30, 2008 and 2007:

 
| ** **                                     | ** ** | **Three months ended June 30,**           | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                                      | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(% to Company-owned restaurant sales)** | ** ** |
| Restaurant  sales:                             |       |                                                          |       |                                              |       |   |   |   |   |
| Company-owned  restaurant sales                |       | 100.0                                                         | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
| Cost of sales –  food, paper, merchandise |       | (26.4                                                         | )%         | (25.1                                             | )%         | (25.8 | )% | (24.5 | )% |
| Cost of sales –  wages and benefits       |       | (33.9                                                         | )%         | (33.6                                             | )%         | (33.9 | )% | (33.8 | )% |
| Restaurant  depreciation and amortization      |       | (6.1                                                          | )%         | (6.1                                              | )%         | (6.0 | )% | (6.2 | )% |
| Operating margin  (restaurant sales only)      |       | 33.6                                                          | %          | 35.2                                              | %          | 34.3 | % | 35.5 | % |

 

For the six monthsended June 30, 2008, company-owned restaurant sales increased 8.2% to$15.9 million from $14.7 million for the same period in 2007.  For the three months ended June 30,2008, company-owned restaurant sales increased 12.7% to $8.0 million from $7.1million for the same period in 2007. This increase was primarily the result of the addition of fourcompany-owned restaurants in the last half of 2007 and two more stores in thefirst quarter of 2008.  Same store salesfor company-owned restaurants open during all of 2007 decreased 5.6% for thefirst six months of 2008 and 2.5% in the second quarter compared to the sameperiods in 2007.  The operating margin asa percentage of sales for company-owned locations decreased to 34.3% in thefirst half of 2008 (33.6% in the second quarter) from 35.5% in 2007 (35.2% inthe second quarter) primarily due to rising food and paper costs as apercentage of company owned restaurant sales.

 

The followingtable shows our total operating results from the restaurant segment for thethree and six months ended June 30, 2008 and 2007:

 
| ** **                               | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                               | ** ** | **(% to total revenue)**             | ** ** |
| Total restaurant  operations:            |       |                                                |       |                                              |       |   |   |   |   |
| Company-owned  restaurant sales          |       | 92.4                                                | %          | 92.6                                              | %          | 92.4 | % | 93.0 | % |
| Royalty revenue                          |       | 6.9                                                 | %          | 6.9                                               | %          | 6.6 | % | 6.6 | % |
| Franchise fee  revenue                   |       | 0.7                                                 | %          | 0.5                                               | %          | 1.0 | % | 0.4 | % |
| Total revenue                            |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
|                                     |       |                                                |       |                                              |       |   |   |   |   |
| Cost of sales                            |       | (61.3                                               | )%         | (60.1                                             | )%         | (60.8 | )% | (60.0 | )% |
| General &  administrative costs |       | (50.3                                               | )%         | (48.3                                             | )%         | (48.8 | )% | (48.4 | )% |
| Interest expense                         |       | (1.9                                                | )%         | (2.1                                              | )%         | (2.1 | )% | (2.4 | )% |
| Management  allocation                   |       | (6.1                                                | )%         | (6.9                                              | )%         | (6.1 | )% | (6.8 | )% |
| Minority  interest in losses             |       | 1.4                                                 | %          | 5.8                                               | %          | 1.2 | % | 3.1 | % |
| Segment loss                             |       | (18.2                                               | )%         | (11.6                                             | )%         | (16.6 | )% | (14.5 | )% |

 

Royalty revenueincreased to $1.1 million for the first six months of 2008 compared to $1.0million for the same period in 2007 and increased to $0.6 million for the threemonths ended June 30, 2008 compared to $0.5 million for the same period in2007.  We added six franchise locationsduring the six months ended June 30, 2008, two of these in the secondquarter.  This increase was partiallyoffset by two locations being converted from franchise to company-ownedrestaurants in January 2008 and the closure of one franchise restaurant inthe second quarter of 2008.  The netincrease in franchise locations was offset by a decrease of 4.9% in same storesales for franchise restaurants for the first half of 2008 (3.1% decrease inthe second quarter) compared to the same period in 2007.

 

System-wide samestore sales decreased 5.3% for stores open during all of 2007 during the firstsix months of 2008 compared to the same period in 2007, and decreased 2.8% inthe second quarter of 2008 compared to the same period in 2007.  Our loss from restaurant operations was 16.6%of total revenue for the six months ended June 30, 2008 (18.2% for thesecond quarter) compared to 14.5% for the same six months of 2007 (11.6% forthe second quarter).

 

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We plan to openadditional Fatburger restaurants throughout the United States andinternationally, including Canada, China, Saudi Arabia, Indonesia, Kuwait, andthe United Arab Emirates.  We intend tocontinue to open company-owned restaurants in strategic markets and increasethe number of franchised locations in the U.S. and internationally.  Fatburger has opened a total of 47 restaurantlocations since our acquisition in 2003. As is typical for our industry, the identification of qualifiedfranchisees and quality locations has an impact on the rate of growth in thenumber of our restaurants.

 

*Manufacturingsegment operations*

 

The following tablesummarizes the operating results of our manufacturing segment for the three andsix months ended June 30, 2008 and 2007:

* *
| ** **                   | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(% to total revenue)**             | ** ** |
| Manufacturing  sales         |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
| Manufacturing  cost of sales |       | (56.7                                               | )%         | (52.2                                             | )%         | (57.8 | )% | (55.7 | )% |
| Engineering and  development |       | (9.8                                                | )%         | (9.2                                              | )%         | (11.0 | )% | (9.7 | )% |
| Operating margin             |       | 33.5                                                | %          | 38.6                                              | %          | 31.2 | % | 34.6 | % |
|                         |       |                                                |       |                                              |       |   |   |   |   |
| Compensation  expense        |       | (14.0                                               | )%         | (14.7                                             | )%         | (18.7 | )% | (16.3 | )% |
| Depreciation  expense        |       | (1.2                                                | )%         | (0.9                                              | )%         | (1.1 | )% | (1.0 | )% |
| Other operating  expense     |       | (12.2                                               | )%         | (11.1                                             | )%         | (11.1 | )% | (9.7 | )% |
| Segment income               |       | 6.1                                                 | %          | 11.9                                              | %          | 0.3 | % | 7.6 | % |

 

Total revenue for thissegment was $5.3 million for the six months ended June 30, 2008 ($3.1million for the second quarter), compared to $4.8 million for the same sixmonths ($2.5 million for the second quarter) in 2007.  Net income for this segment was less than$0.1 million for the six months ended June 30, 2008 ($0.2 million for thesecond quarter), compared to $0.4 million for the same six months ($0.3 millionfor the second quarter) in 2007.  Inorder to focus our efforts on our restaurant segment, we intend to sell ourequity position in DAC for an amount higher than our net investment.  If we were to sell this segment, it woulddecrease our net revenue.  There can beno assurance that we will be able to sell this segment for a profit.

 

*Real estate and finance segmentoperations*

 

In February 2008, wesold FCRI, our wholly-owned subsidiary that held our leased real estateportfolio.  The sales price was $8.5million and we recorded a gain on sale of $4.2 million.  Results of operations from FCRI (includingthe gain on sale in 2008) have been classified as discontinued operations.  Our remaining real estate investments consistof two apartment buildings in Barcelona, Spain, which have been classified asheld for sale.

 

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

 

*Interest expense*– Interest expense for the first half of 2008 was $1.0 million ($0.5 millionfor the second quarter) compared to $0.8 million for the first half of 2007($0.4 million for the second quarter).

 

*Foreign exchange gains*– Changes in foreign currency exchange rates resulted in a net gain ofapproximately $0.5 million in this segment for the six months ended June 30,2008 (net loss of less than $0.1 million in the second quarter), compared to$0.3 million for the first half of 2007 ($0.1 million in the secondquarter).  At June 30, 2008,approximately 20% of our total assets and 5% of our total liabilities weredenominated in the euro.

 

*Market value impairment reserves*– We recognized a market value impairment reserve of $0.6 million on oneproperty in Barcelona, Spain in the first half of 2008 ($0.4 million in thesecond quarter).  This compares to animpairment of $1.1 million in the first half 2007 for the same property.

 

*Other non-operating income –*In the six months ended June 30, 2008, we had equity in income of equity investeeof $0.2 million.  In the same six monthsof 2007, we had commission and other non-operating revenue of $0.3 million, anda forfeited deposit on the sale of one Barcelona property of $0.7 million.

 

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*Corporateexpenses*

 
| ** **                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)**                | ** ** |
| Compensation and  employee benefits |       | $                                                   | 1,306      |                                              | $          | 1,273 |   | $ | 4,036 |   | $ | 4,836 |   |
| Professional  fees                  |       | 296                                                 |       | 434                                               |       | 744 |   | 726 |   |
| Travel and  entertainment           |       | 499                                                 |       | 612                                               |       | 848 |   | 1,041 |   |
| Insurance                           |       | 42                                                  |       | 116                                               |       | 138 |   | 252 |   |
| Directors fees                      |       | 94                                                  |       | 143                                               |       | 189 |   | 267 |   |
| Occupancy costs                     |       | 32                                                  |       | 32                                                |       | 70 |   | 77 |   |
| Other expenses                      |       | 152                                                 |       | 221                                               |       | 289 |   | 380 |   |
| Total operating  expenses           |       | $                                                   | 2,421      |                                              | $          | 2,831 |   | $ | 6,314 |   | $ | 7,579 |   |

 

For the six months ended June 30,2008, we incurred corporate operating expenses of $6.3 million ($2.4 millionfor the second quarter), compared to $7.6 million for the same six months ($2.8million for the second quarter) in 2007. This decrease is primarily due to a decrease in compensation expensesand directors fees.  Corporate expensesfor the first half of 2008 include $0.6 million ($0.3 million for the secondquarter) for share based payments accounted for under FAS 123R, compared to$0.9 million for the same six months ($0.5 million for the second quarter) in2007.

 

*Managementallocation and other intercompany charges*

 

In 2006, as we focusedour efforts on the Fatburger segment we began allocating a portion of ourcorporate expenses to our restaurant segment to more accurately reflect theoperating results of that segment.  Thisallocation was $1.1 million for the six months ended June 30, 2008 and2007 ($0.5 million for the second quarter in each year).  This allocation is eliminated uponconsolidation on the Consolidated Statements of Operations.  Other intercompany charges, includingintercompany interest expense, are eliminated upon consolidation, and totaled$0.5 million for the six months ended June 30, 2008 and 2007 ($0.2 millionfor the second quarter of 2008, $0.3 million for the second quarter of 2007).

 

*Incometaxes*

 

During the six monthsended June 30, 2008 and 2007, a provision for income taxes was notrequired due to the net operating loss generated during the period.  We recorded a tax benefit of less than $0.1million to recognize tax refunds received in the first quarter of 2008 on priortaxes paid.

 

*Discontinuedoperations*

 

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

 
| ** **                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(dollars in thousands)**                | ** ** |
| Operating  revenue                                  |       | $                                                   | —     |                                              | $          | 944 |   | $ | 610 |   | $ | 1,879 |   |
| Operating  expenses                                 |       | —                                              |       | (322                                              | )          | (240 | ) | (709 | ) |
| Depreciation and  amortization                      |       | —                                              |       | (111                                              | )          | (39 | ) | (219 | ) |
| Operating margin                                    |       | —                                              |       | 511                                               |       | 331 |   | 951 |   |
|                                                |       |                                                |       |                                              |       |   |   |   |   |
| General and  administrative expenses                |       | —                                              |       | (32                                               | )          | (7 | ) | (64 | ) |
| Interest expense                                    |       | —                                              |       | (242                                              | )          | (157 | ) | (462 | ) |
| Other non-operating income                          |       | —                                              |       | 2                                                 |       | 8 |   | 13 |   |
| Gain on sale of discontinued real estate operations |       | —                                              |       | —                                            |       | 4,217 |   | — |   |
| Income from  discontinued real estate operations    |       | $                                                   | —     |                                              | $          | 239 |   | $ | 4,392 |   | $ | 438 |   |

 

*Softwaredevelopment and sales operations –*In June 2008, we exercised our rights under a security agreementon loans to Centrisoft, a consolidated subsidiary.  Pursuant to the security agreement,the collateral assets of Centrisoft were transferred to us in satisfaction ofthe loans.  Centrisoft has since ceasedoperations.  As of June 30, 2008, we no longer include Centrisoft asa consolidated subsidiary.  We willcontinue to service existing customers of Centrisoft using the assets acquiredthrough the security agreement and will seek to sell the Centrisoft technologyand assets to a third party.  Prior todiscontinuation of operations, Centrisoft was a reportable segment of ouroperations that developed and sold network productivity and securitysoftware.  The following represents theresults of operations during the time of the Company’s ownership of Centrisoft:

 

19

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| ** **                   | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                   | ** ** | **(dollars in thousands)**                | ** ** |
| Software sales               |       | $                                                   | 26         |                                              | $          | 9 |   | $ | 128 |   | $ | 13 |   |
| Engineering and  development |       | (78                                                 | )          | (111                                              | )          | (158 | ) | (262 | ) |
| Compensation  expense        |       | (43                                                 | )          | (49                                               | )          | (92 | ) | (157 | ) |
| Depreciation  expense        |       | (73                                                 | )          | (112                                              | )          | (182 | ) | (224 | ) |
| Other operating  expense     |       | (57                                                 | )          | (102                                              | )          | (123 | ) | (215 | ) |
| Interest expense             |       | (199                                                | )          | (283                                              | )          | (492 | ) | (551 | ) |
| Segment loss                 |       | $                                                   | (424       | )                                                 | $          | (648 | ) | $ | (919 | ) | $ | (1,396 | ) |

 

*Mortgagebanking operations –*In December, we and our 49% partnersreached an agreement to sell our ownership interest in George Elkins MortgageBanking Company (“George Elkins”), a California commercial mortgage bankingoperation.  The sale closed in February 2007.  Prior to the decision to sell George Elkins,it was a reportable segment of our operations. The following represents the results of operations during the time ofour ownership of George Elkins:

 
| ** **                               | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                               | ** ** | **(dollars in thousands)**                | ** ** |
| Total revenue                            |       | $                                                   | —     |                                              | $          | — |   | $ | — |   | $ | 1,807 |   |
| Compensation  expense                    |       | —                                              |       | —                                            |       | — |   | (1,534 | ) |
| Other operating  expense                 |       | —                                              |       | —                                            |       | — |   | (281 | ) |
| Non-operating  income                    |       | —                                              |       | —                                            |       | — |   | 17 |   |
| Gain on sale of  discontinued operations |       | —                                              |       | —                                            |       | — |   | 2,492 |   |
| Minority  interest in earnings           |       | —                                              |       | —                                            |       | — |   | 13 |   |
| Segment income                           |       | $                                                   | —     |                                              | $          | — |   | $ | — |   | $ | 2,514 |   |

 

**Changes in financial condition**

 

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

 
| ** **                                 | ** ** | **June 30, 2008**          | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **(dollars in thousands)** | ** ** |
| Total assets                               |       | $                                    | 39,982     |                            | $          | 53,769 |   |
| Total  liabilities                         |       | $                                    | 41,299     |                            | 51,072     |   |
| Total minority  interests                  |       | $                                    | 881        |                            | 701        |   |
| Total stockholders’  equity (deficit) |       | $                                    | (2,198     | )                               | 1,996      |   |
|                                            |            |                                      |            |                                 |            |  |  |

 

The decrease in totalassets during the first six months of 2008 is primarily due to the disposal ofour FCRI subsidiary, which was classified as held for sale at December 31,2007.  Total liabilities decreased overthe first six months of 2008 for the same reason.  The cash received from the disposal of FCRIwas used to repay one note payable and to support our operatingactivities.  Stockholders’ equitydecreased during the first half of 2008 by approximately $4.2 million, mainlyresulting from our net loss of $4.8 million, partially offset by share basedcompensation of $0.6 million.  Thesechanges are described in more detail as follows:

 

*Cash*

 

Our cash decreased $0.6million from December 31, 2007 to June 30, 2008.  Significant sources and uses of cash duringthe quarter include:

 

·                  $6.0 millionof cash used in operations – comprised primarily of our net loss fromcontinuing operations of $8.3 million adjusted for net non-cash items of$2.3 million;

·                  $0.4 millionof cash provided by investing activities – comprised of $1.2 million receivedon payments on notes receivable and $0.2 million distributed from equityinvestees, partially offset by $1.0 million invested in restaurant assetsand other property, plant & equipment;

·                  $1.8 million ofcash used in financing activities – includes payments on borrowings and capitalleases of $5.0 million, partially offset by proceeds from borrowings of$2.8 million and $0.4 million invested by minority interests; and

·                  $6.8 millionnet cash inflow from discontinued operations.

 

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*Net investments in real estate,and related liabilities*

 

Our investments in realestate can be summarized as follows:

 
| ** **                                           | ** ** | **June 30, 2008**          | ** ** | **December 31, 2007** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **(dollars in thousands)** | ** ** |
| US based  investments – held for sale (1):      |       |                                 |       |                            |       |
| Purchase price /  improvements                       |       | $                                    | —     |                            | $          | 13,338 |   |
| Accumulated  depreciation and amortization           |       | —                               |       | (2,143                          | )          |
| Net book value                                       |       | —                               |       | 11,195                          |       |
| Foreign-based  investments – held for sale (2): |       |                                 |       |                            |       |
| Purchase price /  improvements                       |       | 8,566                                |       | 8,463                           |       |
|                                                 |       |                                 |       |                            |       |
| Total  investments in real estate, net               |       | $                                    | 8,566      |                            | $          | 19,658 |   |

 

----

(1)   Includes32 commercial properties under capital lease throughout the United States at December 31,2007.

(2)   Includes2 apartment buildings in Barcelona, Spain at June 30, 2008 and December 31,2007.

 

Borrowings related to ourinvestments in real estate were as follows:

 
| ** **                                      | ** ** | **June 30, 2008**          | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **(dollars in thousands)** | ** ** |
| Obligations on  real estate under capital lease |       | $                                    | —     |                            | $          | 9,994 |   |
| Borrowings on  Barcelona properties             |       | 3,543                                |       | 3,505                           |       |
| Total borrowings  related to real estate        |       | $                                    | 3,543      |                            | $          | 13,499 |   |

 

Investments in propertiesunder capital lease (and the related capital lease obligations) decreased tozero at June 30, 2008 due to the sale of our FCRI subsidiary which heldour leased real estate portfolio.  Ourinvestment in apartment buildings in Barcelona, Spain increased $0.1 millionsince December 31, 2007.  This wasprimarily the result of increases in unrealized foreign currency translation of$0.7 million, partially offset by a market value impairment reserve ofapproximately $0.6 million.

 

*Net property, plant and equipment*

 

Net property, plant andequipment decreased $0.4 million at June 30, 2008 compared to December 31,2007, primarily due to scheduled monthly depreciation on those assets.  Obligations on property, plant, and equipmentunder capital lease remained stable at $0.1 million at June 30, 2008compared to December 31, 2007.

 

*Goodwill and net intangibleassets*

 
| ** **                              | ** ** | **June 30, 2008**          | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
| Goodwill –  Fatburger              |       | $                                    | 7,063      |                            | $          | 7,063 |   |
| Goodwill – DAC  International      |       | 1,465                                |       | 1,465                           |       |
| Total goodwill                          |       | $                                    | 8,528      |                            | 8,528      |   |
|                                    |       |                                 |       |                            |       |
| Net intangible  assets – Fatburger |       | $                                    | 4,662      |                            | 4,756      |   |
| Total net  intangible assets            |       | $                                    | 4,662      |                            | 4,756      |   |
|                                         |            |                                      |            |                                 |            |  |  |

 

Net intangible assetsdecreased $0.1 million in the six months ended June 30, 2008 due tomonthly amortization.  Net intangibleassets at June 30, 2008 consists of trademark rights of approximately $4.0million, franchise agreements of approximately $0.4 million, and othermiscellaneous intangible assets of approximately $0.3 million.  We do not believe that there is anyimpairment of goodwill or net intangible assets at June 30, 2008.

 

*Notes receivable*

 

As of June 30, 2008,our notes receivable portfolio consists of three individual loans with acombined carrying value of $0.6 million. Two of the loans are secured by real estate consisting of commercialproperty located in Texas and Arizona, and one loan is secured by stock in arestaurant business.  The loans have aweighted average interest rate (excluding fees and points) of 15.6% and aweighted average maturity of four months.

 

*Loans to senior executives*

 

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

 

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*Other assets*

 
| ** **                    | ** ** | **June 30, 2008**          | ** ** | **December 31, 2007** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **(dollars in thousands)** | ** ** |
| Trade  receivables            |       | $                                    | 1,329      |                            | $          | 1,479 |   |
|                          |       |                                 |       |                            |       |
| Inventories                   |       | $                                    | 4,039      |                            | $          | 2,505 |   |
|                          |       |                                 |       |                            |       |
| Other current  assets:        |       |                                 |       |                            |       |
| Prepaid expenses              |       | $                                    | 470        |                            | $          | 526 |   |
| Other                         |       | 2                                    |       | 2                               |       |
| Total other  current assets   |       | $                                    | 472        |                            | $          | 528 |   |
|                          |       |                                 |       |                            |       |
| Other assets:                 |       |                                 |       |                            |       |
| Software costs                |       | $                                    | 571        |                            | $          | — |   |
| Security  deposits            |       | 672                                  |       | 646                             |       |
| Capitalized  finance fees     |       | 251                                  |       | 269                             |       |
| Other                         |       | 85                                   |       | 93                              |       |
| Total other  assets           |       | $                                    | 1,579      |                            | $          | 1,008 |   |
|                          |       |                                 |       |                            |       |
| Assets held for  sale:        |       |                                 |       |                            |       |
| Current assets  held for sale |       | $                                    | —     |                            | $          | 86 |   |
| Other assets  held for sale   |       | —                               |       | 2,147                           |       |

 

Trade receivables andinventories at June 30, 2008 relate primarily to the operations ofDAC.  Other assets held for sale at December 31,2007 relates mainly to Centrisoft, and includes $1.0 million of goodwill, $0.9million of software costs, and $0.2 million of intangible assets.

 

*Deferredincome*

 

Our deferred incomerelating to the collection of unearned Fatburger franchise fees wassubstantially unchanged at $5.2 million at June 30, 2008, compared to December 31,2007.  This was the result of the collectionof $0.2 million in new franchise fees, offset by the recognition of $0.2million in franchise revenue.  As of June 30,2008, all of our deferred income was comprised of the non-refundable franchisefee received by Fatburger for each future franchise location.  These initial fees generally represent halfof the total fee per location.  Thebalance of the franchise fee (approximately an additional $5.2 million) will becollected in the future when leases on these specific franchise locations aresigned.

 

*Notespayable*

 

As of June 30, 2008,our notes payable (excluding borrowings on real estate) totaled $13.1 million,including $7.0 million of debt held at Fatburger and $0.7 million at DAC.  This compares to $15.1 million at December 31,2007.  The decrease was primarily due tothe repayment of one note payable with a carrying value of $4.0 million at December 31,2007, partially offset by additional borrowings of $2.0 million in May 2008.

 

*Accountspayable and accrued liabilities*

 

Accounts payable and accruedliabilities totaled $17.4 million at June 30, 2008, compared with $12.6million at December 31, 2007, and consisted of the following:

 
| ** **                                                | ** ** | **June 30, 2008**          | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **(dollars in thousands)** | ** ** |
| Accounts payable                                          |       | $                                    | 7,197      |                            | $          | 8,872 |   |
| Sales deposits                                            |       | 2,606                                |       | 1,478                           |       |
| Accrued wages,  bonus and commissions                     |       | 1,152                                |       | 708                             |       |
| Other                                                     |       | 6,427                                |       | 1,587                           |       |
| Total accrued  expenses and other liabilities             |       | $                                    | 17,382     |                            | $          | 12,645 |   |
|                                                      |       |                                 |       |                            |       |
| Current  liabilities associated with assets held for sale |       | $                                    | —     |                            | $          | 2,565 |   |

 

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

 

**Liquidityand Capital Resources**

 

Liquidity is ameasurement of our ability to meet potential cash requirements, includingongoing commitments to repay borrowings, fund business operations,acquisitions, and expansion (including growth of company-owned and franchisedrestaurant locations), engage in loan acquisition and lending activities andfor other general business purposes.  Inaddition to our cash on hand, our primary sources of funds for liquidity duringthe first six months of 2008 consisted of cash provided by proceeds from thesale of discontinued operations, borrowings on notes payable, and the repaymentsto us from borrowers.  As of June 30,2008, we had cash or cash equivalents of $0.5 million, which, together withprojected borrowings and proceeds from the sales of assets, we believe will besufficient to meet our current liquidity needs.

 

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At June 30,2008, we had total consolidated secured indebtedness of $18.7 million, as wellas $22.6 million of other liabilities. Our consolidated secured indebtedness consisted of:

 

·                  notes payable and other debt of Fatburgerof $7.0 million secured by the assets of Fatburger;

·                  $2.1 million in capital leases maturingon or before 2010 secured by an aircraft and various restaurant assets;

·                  notes payable of $3.5 million secured byour two Barcelona properties;

·                  $5.4 million of notes payable secured byvarious assets of the Company; and

·                  $0.7 million of short-term borrowingssecured by the assets of DAC International.

 

We consider thesale of assets to be a normal, recurring part of our operations and we arecurrently generating cash flow as a result of these transactions.  However, excluding the sale of assets fromtime to time, we are currently operating with negative cash flow, since many ofour assets do not currently generate sufficient cash to cover operatingexpenses.  We believe that our existingsources of funds will be adequate to meet our liquidity needs; however, therecan be no assurance that this will be the case.

 

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

 

*Foreigncurrency exchange rate risk*

 

Our exposure to foreigncurrency fluctuations arises mainly from our investment in Barcelona realestate.  As of June 30, 2008,approximately 20% of our total assets and 5% of our total liabilities weredenominated in the euro.  We can utilizea wide variety of financial techniques to assist in the management of currencyrisk, including currency swaps, options, and forwards, or combinations thereof.  No such currency hedging techniques were inuse as of June 30, 2008.

 

*Interestrate risk*

 

Our borrowings andthe availability of further borrowings are substantially affected by, amongother things, changes in interest rates, changes in market spreads or decreasesin credit quality of our assets. Material increases in interest expense from variable-rate fundingsources, or material decreases in monthly cash receipts from operations,generally would negatively impact our liquidity.  On the other hand, material decreases ininterest expense from variable-rate funding sources would positively affect ourliquidity.  Fluctuations in interestrates will impact our net income to the extent our operations and our fixedrate assets are funded by variable rate debt. We may also be impacted to the extent that our variable rate assetsre-price on a different schedule or in relation to a different index than anyfloating rate debt.

 

*Fatburgerdebt covenant*

 

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

 

*Fatburgerexpansion*

 

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

 

*Restrictedcash balance*

 

At June 30, 2008, wehad $0.2 million of cash restricted to secure certain obligations.

 

*Dividends*

 

While we do not have afixed dividend policy, we may declare and pay new dividends on our commonstock, subject to our financial condition, results of operations, capitalrequirements and other factors deemed relevant by the Board of Directors.  One factor the Board of Directors mayconsider is the impact of dividends on our liquidity.  We have not declared or paid any dividends inthe first half of 2008.

 

*Over-the-counter stock listing*

 

Effective October 14,2004, our stock began trading in the over-the-counter (“OTC”) market.   Trading of our commonstock on the OTC market reduces the liquidity of our common stock compared toquotation on a national market.  Also, thecoverage of the Company by security analysts and media is reduced, which webelieve results in lower prices for our common stock than might otherwiseprevail and also results in increased spreads between the bid and ask pricesfor our common stock.  Additionally,certain investors will not purchase securities 

 

23

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that are not quoted on a national market, which we believe impairsour ability to raise funds through the issuance of common stock or othersecurities convertible into common stock.

 

**Off Balance Sheet Arrangements**

 

In order tofacilitate the development of franchise locations, as of June 30, 2008,Fatburger had guaranteed the annual minimum lease payments of two restaurantsites owned and operated by franchisees. The guarantees approximate $0.7 million plus certain contingent rentalpayments as defined in the respective leases. One lease expires in August 2008, and another in July 2015.  The lease guarantees by Fatburger do notprovide us with a material source of liquidity, capital resources or otherbenefits.  There are no revenues,expenses or cash flows connected with the lease guarantees other than thereceipt of normal franchise royalties. As of June 30, 2008, we were not aware of any event or demand thatwas likely to trigger the guarantee by Fatburger.

 

We have various operatingleases for office, manufacturing and retail space which expire through2017.  The leases provide for varyingminimum annual rental payments including rent increases and free rent periods.  We have future minimum rental payments undernon-cancelable operating leases with initial or remaining terms of one year ormore of approximately $24.4 million as of June 30, 2008.

 

We did not have any otheroff-balance sheet arrangements in place as of June 30, 2008.

 

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

## ** **

Not applicable.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

*Evaluation of disclosure controls and procedures*

 

Our Chief Executive Officer and our Chief Financial Officer, afterevaluating the effectiveness of the Company’s “disclosure controls andprocedures” (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and15d-15(e)) as of June 30, 2008, have concluded that our disclosurecontrols and procedures were effective and designed to ensure that materialinformation relating to us and our consolidated subsidiaries is accumulated andcommunicated to our management to allow timely decisions regarding requireddisclosure.

 

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

 

*Changesin internal control over financial reporting*

 

There were nosignificant changes in our internal control over financial reporting inconnection with an evaluation that occurred during our second fiscal quarter of2008 that have materially affected or are reasonably likely to materiallyaffect our internal control over financial reporting.

 

24

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## **PART II– OTHER INFORMATION**

## ** **

**ITEM 1.  LEGALPROCEEDINGS**

** **

*Warlick complaint*

 

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

 

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

 

**ITEM 1A.  RISKFACTORS**

** **

Not applicable.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

** **

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

** **

Not applicable.

 

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

** **

**None.**

** **

**ITEM 5.  OTHERINFORMATION**

** **

None.

 

**ITEM 6. EXHIBITS**

** **
| 3.1    |   | Amended and Restated  Articles of Incorporation of the Registrant, incorporated by reference to  Exhibit 3.1 to the Form 10-Q for the period ended  September 30, 1999, as previously filed with the SEC on  November 22, 1999 (File No. 000-23911). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                          |
| 3.2    |   | Bylaws of the  Registrant, incorporated by reference to Exhibit 3.2 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035) on  Form S-11, as previously filed with the SEC on March 30, 1998.                                |

 

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| 4.1    |   | Common Stock  Certificate Specimen, incorporated by reference to Exhibit 4.1 to  Amendment No. 3 to the Registration Statement (Registration  No. 333-39035) on Form S-11, as previously filed with the SEC on  March 30, 1998.                                                                                                                            |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2    |   | Form of  Registration Rights Agreement, incorporated by reference to Exhibit 10.8  to Amendment No. 3 to the Registration Statement (Registration  No. 333-39035) on Form S-11, as previously filed with the SEC on  March 30, 1998.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3    |   | Form of Stock  Option Plan, incorporated by reference to Exhibit 10.3 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035) on  Form S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.4    |   | Waiver, Release,  Delegation and Amendment to Stock Option and Voting Agreement among Andrew A.  Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany Wiederhorn, and  the Registrant, dated July 31, 2002, incorporated by reference to  Exhibit 2.1 to the Form 8-K dated August 8, 2002, as  previously filed with the SEC on August 15, 2002. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    |   | Summary of Rights to  Purchase Shares, incorporated by reference to Exhibit 99.1 to the  Form 8-K dated October 18, 2002, as previously filed with the SEC  on October 18, 2002.                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Rights Agreement dated  as of October 18, 2002 between the Registrant and The Bank of New York,  incorporated by reference to Exhibit 1 to Form 8-A, as previously  filed with the SEC on October 29, 2002.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.7    |   | Amendment to the Rights  Agreement, dated as of May 1, 2004, by and between the Registrant and  The Bank of New York, as previously filed with the SEC on March 30,  2005.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.8    |   | Long Term Vesting Trust  Agreement among the Registrant and Lawrence Mendelsohn, Andrew Wiederhorn and  David Egelhoff, dated October 1, 2000, incorporated by reference to  Exhibit 4.4 to the Form 10-K for the year ended December 31,  2002, as previously filed with the SEC on March 3, 2003.                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.9    |   | Amendment Number 1 to  the Long Term Vesting Trust Agreement dated as of September 19, 2002, by  and between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson, as previously filed with the SEC on March 30, 2005.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.10   |   | Amendment Number 2 to  the Long Term Vesting Trust Agreement, dated as of May 26, 2004, by and  between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson, as previously filed with the SEC on March 30, 2005.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 11.1   |   | Computation of Per Share  Earnings.                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1   |   | Certification of Chief  Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2   |   | Certification of Chief  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 32.1   |   | Certification of the  Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 32.2   |   | Certification of the  Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                 |

 

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**SIGNATURES**

** **

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

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

 

Date:  August 8, 2008

 

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EXHIBIT INDEX

 
| 3.1    |   | Amended and Restated  Articles of Incorporation of the Registrant, incorporated by reference to  Exhibit 3.1 to the Form 10-Q for the period ended  September 30, 1999, as previously filed with the SEC on November 22,  1999 (File No. 000-23911).                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2    |   | Bylaws of the  Registrant, incorporated by reference to Exhibit 3.2 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035) on  Form S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1    |   | Common Stock  Certificate Specimen, incorporated by reference to Exhibit 4.1 to  Amendment No. 3 to the Registration Statement (Registration  No. 333-39035) on Form S-11, as previously filed with the SEC on  March 30, 1998.                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2    |   | Form of Registration  Rights Agreement, incorporated by reference to Exhibit 10.8 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035) on  Form S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3    |   | Form of Stock  Option Plan, incorporated by reference to Exhibit 10.3 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035) on  Form S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.4    |   | Waiver, Release,  Delegation and Amendment to Stock Option and Voting Agreement among Andrew A.  Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany Wiederhorn, and  the Registrant, dated July 31, 2002, incorporated by reference to  Exhibit 2.1 to the Form 8-K dated August 8, 2002, as previously  filed with the SEC on August 15, 2002. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    |   | Summary of Rights to  Purchase Shares, incorporated by reference to Exhibit 99.1 to the  Form 8-K dated October 18, 2002, as previously filed with the SEC  on October 18, 2002.                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Rights Agreement dated  as of October 18, 2002 between the Registrant and The Bank of New York,  incorporated by reference to Exhibit 1 to Form 8-A, as previously  filed with the SEC on October 29, 2002.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.7    |   | Amendment to the Rights  Agreement, dated as of May 1, 2004, by and between the Registrant and  The Bank of New York, as previously filed with the SEC on March 30,  2005.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.8    |   | Long Term Vesting Trust  Agreement among the Registrant and Lawrence Mendelsohn, Andrew Wiederhorn and  David Egelhoff, dated October 1, 2000, incorporated by reference to  Exhibit 4.4 to the Form 10-K for the year ended December 31,  2002, as previously filed with the SEC on March 3, 2003.                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.9    |   | Amendment Number 1 to  the Long Term Vesting Trust Agreement dated as of September 19, 2002, by  and between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson, as previously filed with the SEC on March 30, 2005.                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.10   |   | Amendment Number 2 to  the Long Term Vesting Trust Agreement, dated as of May 26, 2004, by and  between the Registrant and Andrew Wiederhorn, Don Coleman, and David  Dale-Johnson, as previously filed with the SEC on March 30, 2005.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 11.1   |   | Computation of Per  Share Earnings.                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1   |   | Certification of Chief  Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2   |   | Certification of Chief  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 32.1   |   | Certification of the Chief  Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 32.2   |   | Certification of the  Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                 |

 

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