##### **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 March 31,  2006** |
| **OR**                                                  |
| o                                                       | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| Commission File  No. 0-23911                       |
|                                                         |                                                                                                         |  |

**Fog Cutter Capital Group Inc.**(Exact name of registrant as specified in its charter)

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

 

**1410 SW Jefferson StreetPortland, OR  97201**(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x   No o.

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

| Large accelerated  filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

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

**APPLICABLE ONLY TOCORPORATE ISSUERS:**

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

| Class                                      | ** ** | **Outstanding at  April 30, 2006** |
|--------------------------------------------|------------|-----------------------------------------|
| Common Stock, par  value $0.0001 per share |       | 7,957,428 shares                        |

 

 

 

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**FOG CUTTER CAPITALGROUP INC.FORM 10-QI N D E X**

|                                            | ** ** | ** **                                                                                  | ** ** | **Page No.** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-------------------|------------|
| **PART I—FINANCIAL INFORMATION** |       |                                                                                        |       |
| Item 1.                                    |       | Interim  Financial Statements (Unaudited):                                                  |       |              |       |
|                                       |       | Consolidated  Statements of Financial Condition                                             |       | 3                 |       |
|                                       |       | Consolidated  Statements of Operations                                                      |       | 4                 |       |
|                                       |       | Consolidated  Statement of Stockholders’ Equity                                        |       | 5                 |       |
|                                       |       | Consolidated  Statements of Cash Flows                                                      |       | 6                 |       |
|                                       |       | Notes  to Consolidated Financial Statements                                                 |       | 7                 |       |
| Item 2.                                    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 15                |       |
| Item 3.                                    |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 27                |       |
| Item  4.                                   |       | Controls  and Procedures                                                                    |       | 29                |       |
| **PART II—OTHER  INFORMATION**   | ** ** | ** **                                                                                  | ** ** |
| Item  1.                                   |       | Legal  Proceedings                                                                          |       | 30                |       |
| Item  1A.                                  |       | Risk  Factors                                                                               |       | 30                |       |
| Item 2.                                    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 39                |       |
| Item 3.                                    |       | Defaults  Upon Senior Securities                                                            |       | 39                |       |
| Item 4.                                    |       | Submission  of Matters to a Vote of Security Holders                                        |       | 39                |       |
| Item  5.                                   |       | Other  Information                                                                          |       | 39                |       |
| Item  6.                                   |       | Exhibits                                                                                    |       | 39                |       |
| Signatures                                 |       | 41                                                                                          |       |
|                                            |            |                                                                                             |            |                   |            |  |  |

 

Available information

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

2

 

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**PART I—FINANCIALINFORMATION**

**ITEM 1. INTERIMFINANCIAL STATEMENTS (Unaudited)**

 

**FOG CUTTER CAPITAL GROUP INC.CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(Unaudited)(dollars in thousands, except share data)**

| ** **                                                                                                                                                                                                                        | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                        | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Assets:                                                                                                                                                                                                                           |       |                     |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                         |       |                     | $          | 2,475                       |       |   |   | $ | 4,071 |   |   |
| Loans                                                                                                                                                                                                                             |       |                     | 830        |                        |       |   | 994 |   |   |
| Investments in real estate, net                                                                                                                                                                                                   |       |                     | 28,367     |                        |       |   | 30,292 |   |   |
| Loans to senior executives                                                                                                                                                                                                        |       |                     | 1,028      |                        |       |   | 1,015 |   |   |
| Investment in Bourne End                                                                                                                                                                                                          |       |                     | 738        |                        |       |   | 803 |   |   |
| Restaurant property, plant and equipment, net                                                                                                                                                                                     |       |                     | 5,885      |                        |       |   | 5,167 |   |   |
| Intangible assets, net                                                                                                                                                                                                            |       |                     | 5,513      |                        |       |   | 5,586 |   |   |
| Goodwill                                                                                                                                                                                                                          |       |                     | 10,079     |                        |       |   | 9,979 |   |   |
| Other assets                                                                                                                                                                                                                      |       |                     | 7,988      |                        |       |   | 7,412 |   |   |
| Total assets                                                                                                                                                                                                                      |       |                     | $          | 62,903                      |       |   |   | $ | 65,319 |   |   |
| Liabilities and  Stockholders’ Equity                                                                                                                                                                                        |       |                     |       |                        |       |   |   |   |   |
| Liabilities:                                                                                                                                                                                                                      |       |                     |       |                        |       |   |   |   |   |
| Borrowings and notes payable                                                                                                                                                                                                      |       |                     | $          | 14,784                      |       |   |   | $ | 12,936 |   |   |
| Obligations under capital leases                                                                                                                                                                                                  |       |                     | 10,685     |                        |       |   | 10,856 |   |   |
| Deferred income                                                                                                                                                                                                                   |       |                     | 4,090      |                        |       |   | 4,330 |   |   |
| Deferred income taxes                                                                                                                                                                                                             |       |                     | 5,730      |                        |       |   | 5,739 |   |   |
| Accrued expenses and other liabilities                                                                                                                                                                                            |       |                     | 8,370      |                        |       |   | 10,069 |   |   |
| Total liabilities                                                                                                                                                                                                                 |       |                     | 43,659     |                        |       |   | 43,930 |   |   |
| Commitments and  contingencies                                                                                                                                                                                                    |       |                     |       |                        |       |   |   |   |   |
| Stockholders’  Equity:                                                                                                                                                                                                       |       |                     |       |                        |       |   |   |   |   |
| Preferred stock,  $.0001 par value; 25,000,000 shares authorized; no shares issued and  outstanding                                                                                                                               |       |                     | —     |                        |       |   | — |   |   |
| Common stock, $.0001  par value; 200,000,000 shares authorized; 11,757,073 shares issued as of  March 31,2006 and December 31, 2005; 7,957,428 shares outstanding  as of March 31, 2006 and December 31, 2005 |       |                     | 168,271    |                        |       |   | 168,214 |   |   |
| Accumulated  deficit                                                                                                                                                                                                              |       |                     | (137,191   | )                           |       |   | (134,977 | ) |   |
| Accumulated other  comprehensive income                                                                                                                                                                                           |       |                     | 173        |                        |       |   | 161 |   |   |
| Treasury stock,  3,799,645 common shares as of March 31, 2006 and December 31, 2005,  at cost                                                                                                                           |       |                     | (12,009    | )                           |       |   | (12,009 | ) |   |
| Total stockholders’ equity                                                                                                                                                                                                   |       |                     | 19,244     |                        |       |   | 21,389 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                                                  |       |                     | $          | 62,903                      |       |   |   | $ | 65,319 |   |   |

 

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

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**FOG CUTTER CAPITAL GROUP INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)(dollars in thousands, except share data)**

| ** **                                   | ** ** | **Quarter Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **March 31,**     | ** ** |
| ** **                                   | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Restaurant Operations:                       |       |                   |       |   |   |
| Operating revenue                            |       | $                      | 6,285      |   | $ | 5,983 |   |
| Cost of goods sold                           |       | (3,659                 | )          | (3,459 | ) |
| Franchise and royalty fee                    |       | 637                    |       | 521 |   |
| General and administrative costs             |       | (3,059                 | )          | (2,671 | ) |
| Interest expense                             |       | (211                   | )          | (154 | ) |
| Depreciation and amortization                |       | (356                   | )          | (368 | ) |
| Total restaurant operations                  |       | (363                   | )          | (148 | ) |
| Real Estate Operations:                      |       |                   |       |   |   |
| Operating income                             |       | 1,071                  |       | 1,007 |   |
| Operating expense                            |       | (441                   | )          | (423 | ) |
| Gain on sale of real estate                  |       | 505                    |       | 413 |   |
| Interest expense                             |       | (220                   | )          | (268 | ) |
| Depreciation                                 |       | (119                   | )          | (145 | ) |
| Total real estate operations                 |       | 796                    |       | 584 |   |
| Other Operating Income:                      |       |                   |       |   |   |
| Gain on sale of loans                        |       | 496                    |       | — |   |
| Loan brokerage fees                          |       | 1,693                  |       | 1,428 |   |
| Equity in loss of equity investees           |       | (76                    | )          | — |   |
| Interest Income                              |       | 80                     |       | 324 |   |
| Sales of manufacturing equipment             |       | 2,630                  |       | — |   |
| Other                                        |       | 523                    |       | 73 |   |
| Total other operating income                 |       | 5,346                  |       | 1,825 |   |
| Operating Expenses:                          |       |                   |       |   |   |
| Compensation and employee benefits           |       | 3,920                  |       | 2,066 |   |
| Cost of sales of manufacturing equipment     |       | 1,254                  |       | — |   |
| Professional fees                            |       | 169                    |       | 709 |   |
| Fees paid to related parties                 |       | 160                    |       | — |   |
| Interest Expense                             |       | 34                     |       | — |   |
| Other                                        |       | 1,422                  |       | 1,041 |   |
| Total operating expenses                     |       | 6,959                  |       | 3,816 |   |
| Net loss before  provision for income taxes  |       | (1,180                 | )          | (1,555 | ) |
| Provision for  income taxes                  |       | —                 |       | — |   |
| Net loss                                     |       | $                      | (1,180     | ) | $ | (1,555 | ) |
| Basic loss per  share                        |       | $                      | (0.15      | ) | $ | (0.19 | ) |
| Basic weighted  average shares outstanding   |       | 7,957,428              |       | 8,310,132 |   |
| Diluted net loss  per share                  |       | $                      | (0.15      | ) | $ | (0.19 | ) |
| Diluted weighted  average shares outstanding |       | 7,957,428              |       | 8,310,132 |   |
| Dividends declared per  share                |       | $                      | 0.13       |   | $ | 0.13 |   |

 

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

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**FOG CUTTER CAPITAL GROUP INC.CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY(Unaudited)(dollars in thousands)**

| ** **                                                                                                         | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **        | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|---------------------------------------|------------|-------------------|------------|
| ** **                                                                                                         | ** ** | **Shares**(1)         | ** ** | **Amount**              | ** ** | **Shares**      | ** ** | **Amount**                            | ** ** | ** Deficit** | ** ** | **Income** | ** ** | **Total** | ** ** |
| Balance at  January 1, 2006                                                                              |       |                  | 7,957,428  |                    |       | $               | 168,214    |                                  | 3,799,645  |              | $          | (12,009 | ) |   | $ | (134,977 | ) |   |   | $ | 161 |   |   | $ | 21,389 |   |
| Comprehensive income  (loss):                                                                                      |       |                  |       |                    |       |            |       |                                  |       |              |       |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                           |       |                  | —     |                    |       | —          |       | —                                |       | —            |       |   | (1,180 | ) |   |   | — |   |   | (1,180 | ) |
| Other comprehensive  income:                                                                                       |       |                  |       |                    |       |            |       |                                  |       |              |       |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation                                                                                      |       |                  | —     |                    |       | —          |       | —                                |       | —            |       |   | — |   |   |   | 149 |   |   | 149 |   |
| Reclassification  adjustment for net losses on securities and foreign currency translation  included in net income |       |                  | —     |                    |       | —          |       | —                                |       | —            |       |   | — |   |   |   | (137 | ) |   | (137 | ) |
| Total  comprehensive loss                                                                                          |       |                  | —     |                    |       | —          |       | —                                |       | —            |       |   | — |   |   |   | — |   |   | (1,168 | ) |
| Stock options  earned                                                                                              |       |                  | —     |                    |       | 57              |       | —                                |       | —            |       |   | — |   |   |   | — |   |   | 57 |   |
| Dividends declared                                                                                                 |       |                  | —     |                    |       | —          |       | —                                |       | —            |       |   | (1,034 | ) |   |   | — |   |   | (1,034 | ) |
| Balance at  March 31, 2006                                                                               |       |                  | 7,957,428  |                    |       | $               | 168,271    |                                  | 3,799,645  |              | $          | (12,009 | ) |   | $ | (137,191 | ) |   |   | $ | 173 |   |   | $ | 19,244 |   |

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(1)             Issued and outstanding

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

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**FOGCUTTER CAPITAL GROUP INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(dollars in thousands)**

| ** **                                                      | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **March 31,**     | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**   | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Net loss                                                        |       | $                      | (1,180     | ) | $ | (1,555 | ) |
| Adjustments to  reconcile net loss to net operating cash flows: |       |                   |       |   |   |
| Equity in losses of equity investees                            |       | 76                     |       | — |   |
| Depreciation and  amortization                                  |       | 575                    |       | 526 |   |
| Loss (gain) on foreign currency translation                     |       | (137                   | )          | 171 |   |
| Gain on sale of loans                                           |       | (496                   | )          | — |   |
| Gain on sale of real estate                                     |       | (505                   | )          | (413 | ) |
| Share based compensation                                        |       | 57                     |       | — |   |
| Other                                                           |       | (10                    | )          | (132 | ) |
| Change in:                                                      |       |                   |       |   |   |
| Deferred income                                                 |       | (20                    | )          | (120 | ) |
| Other assets                                                    |       | (690                   | )          | 1,374 |   |
| Accounts payable and accrued liabilities                        |       | (514                   | )          | (688 | ) |
| Net cash used in operating activities                           |       | (2,844                 | )          | (837 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                          |       |                   |       |   |   |
| Proceeds from sale of real estate                               |       | 3,486                  |       | 1,190 |   |
| Proceeds from sale of loans                                     |       | 664                    |       | — |   |
| Investment in loans and discounted loans                        |       | —                 |       | (90 | ) |
| Investment in real estate                                       |       | (828                   | )          | (1,948 | ) |
| Purchase of net assets of restaurant operations                 |       | (688                   | )          | — |   |
| Investments in restaurant property, plant, and  equipment       |       | (306                   | )          | (44 | ) |
| Other                                                           |       | (8                     | )          | (4 | ) |
| Net cash provided by (used in) investing activities             |       | 2,320                  |       | (896 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                          |       |                   |       |   |   |
| Proceeds from borrowings                                        |       | 333                    |       | 1,374 |   |
| Repayments on borrowings                                        |       | (208                   | )          | (82 | ) |
| Repayments under capital leases                                 |       | (171                   | )          | (110 | ) |
| Purchase of treasury stock                                      |       | —                 |       | (1,689 | ) |
| Dividend payments on common stock                               |       | (1,034                 | )          | (1,089 | ) |
| Net cash used in financing activities                           |       | (1,080                 | )          | (1,596 | ) |
| EFFECT OF EXCHANGE RATE CHANGE ON CASH                          |       | 8                      |       | (50 | ) |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                       |       | (1,596                 | )          | (3,379 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                |       | 4,071                  |       | 11,948 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                      |       | $                      | 2,475      |   | $ | 8,569 |   |
| SUPPLEMENTAL DISCLOSURES  OF CASH FLOWINFORMATION:              |       |                   |       |   |   |
| Cash paid for interest                                          |       | $                      | 481        |   | $ | 422 |   |
| Cash paid for income taxes                                      |       | $                      | 9          |   | $ | 2 |   |
| NONCASH FINANCING AND  INVESTING ACTIVITIES                     |       |                   |       |   |   |
| Treasury stock  acquired through exercise of option             |       | $                      | —     |   | $ | 593 |   |

 

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

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**FOG CUTTER CAPITAL GROUP INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**NOTE**           1—BASISOF PRESENTATION

The accompanying interim consolidated financialstatements of Fog Cutter Capital Group Inc. and Subsidiaries (“FCCG” orthe “Company”) are unaudited and have been prepared in conformity with therequirements of Regulation S-X promulgated under the Securities ExchangeAct 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 the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements. The accompanying interim consolidated financial statements shouldbe read in conjunction with the Company’s 2005 Annual Report on Form 10-K.A summary of the Company’s significant accounting policies is set forth inNote 2 to the consolidated financial statements in its Annual Report on Form 10-Kfor the year ended December 31, 2005.

In the Company’s opinion, all adjustments, comprisedof normal recurring accruals necessary for the fair presentation of the interimfinancial statements, have been included in the accompanying consolidatedfinancial statements. Operating results for the three months ended March 31,2006 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2006.

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requires theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosures of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates. Certain items in the previously reported consolidated financialstatements were reclassified to conform to the March 31, 2006presentation, none of which affected previously reported results of operations.

At March 31, 2006,certain Company officers and directors had, directly or indirectly, majorityvoting control of the Company.

**NOTE**           2—SIGNIFICANTTRANSACTIONS

The following significantevents affected our operations for the three months ended March 31, 2006:

*Sale of real estate*

During the three monthsended March 31, 2006, the Company sold seven stand-alone retail locationsfor a sales price of $3.5 million in cash. The properties had a net bookvalue of $3.0 million at the time of disposal, and the Company recognizedgains on the sales totaling $0.5 million.

*Sale of loan*

In March 2006, wesold our interest in one loan for $0.7 million. This loan had a carryingvalue of $0.2 million and provided a gain on sale of $0.5 million.

*Investment inBarcelona, Spain properties*

During the three monthsended March 31, 2006, the Company funded additional loans totaling$0.7 million to our Variable Interest Entities (“VIE”) in Barcelona,Spain, bringing our total investment to 

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$7.0 millionat March 31, 2006. During the same period, the VIE spent approximately$0.8 million for improvements and carrying costs on the three apartmentbuildings owned.

*Fatburger Holdings, Inc.(“Fatburger”) investment*

In March 2006, weinvested an additional $2.5 million in Fatburger, and increased our votingcontrol to 76%.

*Purchases ofRestaurant Operations*

In February 2006, our Fatburger subsidiaryacquired a controlling interest in one of its franchisees for $0.2 million.Approximately $0.4 million of restaurant property, plant, and equipmentand other assets, and $0.2 million of minority interests were recorded asa result of this transaction. In March 2006, Fatburger acquired anadditional franchise operation located in Florida for $0.5 million. As a resultof this transaction, $0.6 million of assets, including $0.1 millionof goodwill, and $0.1 million of liabilities were recorded at fair value.

*Dividends*

On February 28, 2006,the Company’s Board of Directors declared a $0.13 per share dividend for thefirst quarter of 2006. The dividend was paid on March 14, 2006 toshareholders of record on March 9, 2006.

*Recently adoptedaccounting standards*

In December 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards (“SFAS”) No. 123(R), “*Share-Based Payment*”(“FAS 123R”), which is a revision to SFAS No. 123, “*Accounting for Stock-Based Compensation*” (“FAS 123”). FAS 123Rsupersedes Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees*” (“APB Opinion No. 25”).Generally, the approach in FAS 123R is similar to the approach describedin FAS 123, except that FAS 123R requires all share-based awards toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longeran alternative under FAS 123R. The Company adopted FAS 123R on January 1,2006. See “Note 5—Stock Options and Rights.”

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

*Shareholder Derivative Complaint*

On July 6, 2004, Jeff Allen McCoon, derivatively on behalf ofthe Company, filed a lawsuit in the Circuit Court for the State of Oregon(Multnomah County case number 0407-06900) which named the Company and allof its directors as defendants. The lawsuit alleges that members of the Company’sBoard of Directors breached their duties to the Company in a number of ways,primarily relating to the leave of absence agreement with Andrew Wiederhorn. Thelawsuit generally seeks restitution of payments made under the leave of absenceagreement plus attorney fees and costs. On January 6, 2006, the CircuitCourt dismissed the entire derivative lawsuit, ruling that Mr. McCoon wasunfit to represent the Company’s shareholders. Mr. McCoon has filed anappeal to this ruling.

*Fatburger debtcovenant non-compliance*

At December 31, 2005,Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements. Fatburgerfailed to meet the prescribed fixed charge coverage ratio and the prescribeddebt-coverage ratio at December 31, 2005. Due to Fatburger’snon-compliance, the lender has the right to demand repayment of the notes in2006. Fatburger has requested a waiver from the lender for the financialcovenants with which it was not in 

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compliance.There can be no assurance that Fatburger will be successful in obtaining awaiver from the lender for non-compliance. If Fatburger fails to obtain thiswaiver and the lender exercises its right to demand payment, the Company’sliquidity could be negatively affected.

*Liquidity*

Due to Fatburger’s non-compliance on two debtcovenants, the outstanding principal of $4.5 million on two notes wascallable on demand by the lender in 2006. Fatburger intends to obtain waiversfrom the lender on these covenants or refinance the notes in 2006.

We consider the sale ofreal estate and other investments to be a normal, recurring part of ouroperations and we expect these transactions to generate adequate cash flow tomeet the Company’s liquidity needs for the 2006 fiscal year.

*Centrisoftoperations*

We expect that Centrisoftwill require capital resources and have negative cash flow for the near term. Centrisofthas a contract with a branch of the U.S. military which, when funded, isexpected to cover its operating costs. The contract has been subject to delayand uncertainty due to military budget appropriations. There can be noassurance that funds will be appropriated and paid for this contract. Centrisoftis also marketing its products to the private sector. Since Centrisoft is inthe early stages of its marketing, there can be no assurance that it will besuccessful in attracting a significant customer base. Centrisoft is currentlymarketing its software to potential customers both directly and throughre-seller relationships. There can be no assurance that Centrisoft will besuccessful in generating sufficient cash flow to support its own operations inthe near term.

*Other*

The Company may utilize a wide variety of off-balancesheet financial techniques to manage its risk. In hedging the interest rate orforeign currency exchange rate exposure, the Company may enter into hedgetransactions to counter movements in interest rates and foreign currencies. Thesehedges may be in the form of currency and interest rate swaps, options, andforwards or combinations thereof. At March 31, 2006, approximately 41% ofthe Company’s equity was invested in net assets located outside of the UnitedStates, primarily denominated in the euro or British pounds, and the Companyhad no outstanding derivative instruments held for trading or hedging purposes.

In order to facilitate the development of franchiselocations, Fatburger had guaranteed the annual minimum lease payments of fiverestaurant sites owned and operated by franchisees. As of March 31, 2006,the amount of the guarantees total approximately $1.6 million plus certaincontingent rental payments as defined in the respective leases. These leasesexpire at various times through 2015.

The Company did not haveany other off balance sheet arrangements in place as of March 31, 2006.

**NOTE**           4—GOODWILLAND OTHER INTANGIBLE ASSETS

In July 2005, we acquired a 51% voting controlinterest in Centrisoft Corporation (“Centrisoft”), and began reporting theoperations of Centrisoft on a consolidated basis as of July 1, 2005. Centrisoftdevelops and sells software that controls and enhances the productivity ofenterprise networks and provides first level security against unauthorized applicationsand users. At March 31, 2006, the Company’s consolidated financialcondition includes assets of $4.0 million, including goodwill of $2.0 million,and liabilities of $2.3 million related to Centrisoft.

In November 2005, we assumed 100% voting controlof DAC International (“DAC”) through a Shareholders Pledge Agreement which wasassigned to us in August 2002 as part of DAC’s debt 

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restructuring. As a resultof our voting control, we began reporting the operations of DAC on aconsolidated basis as of November 1, 2005. DAC is a supplier of computercontrolled lathes and milling machinery for the production of contact andintraocular lenses. At March 31, 2006, the Company’s consolidatedfinancial condition includes assets of $4.6 million, including goodwill of$0.9 million, and liabilities of $2.3 million related to DAC. For thethree months ended March 31, 2006, our consolidated results of operationsinclude net profit of $0.8 million related to DAC.

Primarily as a result of the acquisitions of Fatburger,Centrisoft, and DAC, the Company has goodwill in the amount of $10.1 millionand investments in intangible assets of $5.5 million. In accordance withFAS No. 142, “*Goodwill and OtherIntangible Assets*” (“FAS 142”), goodwill is not amortized, butis subject to an annual impairment test. Since the acquisitions of Fatburgerand Centrisoft by the Company, both operations have experience operating lossesand have funded their operations with limited liquidity. The Company believesthat these conditions are temporary in nature, however, should these conditionsnot be corrected, the Company may be required to recognize impairment losses onits recorded goodwill. As of March 31, 2006, the Company was not aware ofany events or changes in circumstances that would require the impairment of therecorded goodwill.

Netintangible assets included operating manuals, franchise agreements, leaseholdinterests, and sales contracts. Summarized information for our acquiredintangible assets is as follows (dollars in thousands):

| ** **                        | ** ** | **March 31, 2006**         | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **(dollars in thousands)** | ** ** |
| Franchise  agreements             |       |                                 | $          | 1,162 |   |   |
| Other intangible  assets          |       |                                 | 1,023      |   |   |
| Total amortized intangible assets |       |                                 | 2,185      |   |   |
| Less: accumulated  amortization   |       |                                 | (642       | ) |   |
| Net amortized intangible assets   |       |                                 | 1,543      |   |   |
| Trademarks                        |       |                                 | 3,970      |   |   |
| Total intangible  assets          |       |                                 | $          | 5,513 |   |   |

 

Trademarks,which have indefinite lives, are not subject to amortization. All otherintangible assets are amortized using the straight-line method over theestimated useful lives of the assets of five to fifteen years. Estimatedamortization expense for the remainder of 2006 and the five succeeding years isas follows (dollars in thousands):

| 2006 |   | $   | 218    |   |
|------|--------|-----|--------|--------|
| 2007 |   | 287 |   |
| 2008 |   | 279 |   |
| 2009 |   | 263 |   |
| 2010 |   | 222 |   |
| 2011 |   | 164 |   |

 

The recorded values of goodwill and other intangibleassets may become impaired in the future. The determination of the value ofsuch intangible assets requires management to make estimates and assumptionsthat affect the consolidated financial statements. Potential impairments to intangibleassets are assessed when there is evidence that events or changes incircumstances indicate that the carrying amount of an asset may not berecovered. This assessment is based on the operational performance of acquiredbusinesses, market conditions and other factors including future events. Anyresulting impairment loss could have an adverse impact on the results ofoperations of the Company.

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**NOTE**           5—STOCKOPTIONS AND RIGHTS

The Company has a non-qualified stock option plan (the“Option Plan”) which provides for options to purchase shares of the Company’scommon stock. Effective January 1, 2006, the Company applies FASBStatement No. 123R “*Share-Based Payment*”(“FAS 123R”), using the modified prospective transition method. Under thattransition method, compensation cost recognized in 2006 includes (a) compensationcost for all share based awards granted prior to, but not yet vested as of January 1,2006, based on the attribution method and grant date fair value estimated inaccordance with the original provisions of FAS 123, and (b) compensationcost for all share based awards granted subsequent to January 1, 2006,based on the grant date fair value estimated in accordance with the provisionsof FAS 123R, all recognized as the requisite service periods are rendered.Results for prior periods have not been restated.

The adoption of FAS 123R on January 1, 2006,resulted in the Company’s net loss for the three months ended March 31,2006, being approximately $0.1 million higher than if the Company had continuedto account for share based compensation under APB Opinion No. 25 and hadno impact on basic and diluted loss per share as reported for the three monthsended March 31, 2006.

Priorto January 1, 2006, the Company applied Accounting Principles Board OpinionNo. 25, “*Accounting for Stock Issued to Employees*”and related interpretations in accounting for the Option Plan. Accordingly, nocompensation expense was recognized in the Consolidated Statements ofOperations prior to January 1, 2006 for grants under the Option Plan. Hadcompensation expense for the Company’s Option Plan been determined based on thefair value at the grant date consistent with the methods of FASB Statement No. 123“*Accounting for Stock Based Compensation,*”the Company’s net loss and loss per share for the three months ended March 31,2005 would have been comparable to the pro forma amounts indicated below:

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

 

There were no optionsgranted with exercise prices below the market value of the stock at the grantdate. Fair values for 2006 were estimated using the Black-Scholes option-pricingmodel with the following weighted average assumptions used: 10% dividend yield,expected volatility of 86%, risk-free interest rate of 2.5% and expected livesof five years.

**NOTE**           6—VARIABLEINTEREST ENTITIES

As of March 31, 2006, the Company has fundedloans totaling $7.0 million to three related Spanish entities formed topurchase, reposition and sell apartment buildings in Barcelona, Spain. Underthe terms of the loans, the Company receives a preferred 30% return on itsinvestment, and, after a similar return is 

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paid to another minorityinvestor, the Company receives an 80% share in additional profits generated bythe investment. The investment meets the definition of a Variable InterestEntity (“VIE”) under FASB Interpretation 46 (“FIN 46”) and the Companyis the primary beneficiary of the VIE. As a result, the assets and liabilitiesof the VIE have been consolidated into the accompanying consolidated financialstatements as of March 31, 2006.

The VIE currently owns three apartment buildings,consisting of 44 residential units and 5 retail shops, with a bookvalue of approximately $13.0 million, including capital improvements. Theseacquisitions, and related operational expenditures, were funded with bank loanstotaling $6.2 million, the Company’s $7.0 million investment and a$0.3 million contribution from the project managers. Neither the creditorsnor the other beneficial interest holders have recourse to the Company withregard to these investments and, as a result, the maximum limit of the Company’sexposure to loss on this investment was $7.0 million as of March 31,2006.

A third party has asserted that it holds a securityinterest in one of the properties which allowed it, subject to certain legalconditions, to acquire ownership of the property on March 24, 2006 unlessthe VIE formally assumed or repaid a mortgage secured by the property in theapproximate amount of $3.9 million. Our investment in this propertytotaled approximately $4.4 million at March 31, 2006. We have subsequently negotiated anextension of time to refinance or repay the mortgage to July 21, 2006.

Duringthe three months ended March 31, 2006, the Company funded additional loansof $0.7 million to the VIE, while the VIE spent approximately $0.8 millionfor improvements and carrying costs on the three apartment buildings owned. Assetsand liabilities of the VIE included in the accompanying consolidated statementsof financial condition are summarized as follows:

| Investment in  real estate, net         |   | $         | 12,988,000 |   |
|-----------------------------------------|--------|-----------|------------|--------|
| Other assets                            |   | 122,000   |       |
| Borrowings and  notes payable           |   | 6,157,000 |       |
| Accrued expenses  and other liabilities |   | 192,000   |       |
| Minority interest                       |   | 333,000   |       |

 

**NOTE**           7—OPERATINGSEGMENTS

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

*RestaurantOperations*

As of March 31, 2006,the Company owned approximately 76% of the voting control of Fatburger, whichoperates or franchises 81 hamburger restaurants located primarily inCalifornia and Nevada. Franchisees currently own and operate approximately 53of the Fatburger locations. Two new franchise restaurants were opened duringthe three months ended March 31, 2006. Royalty revenues were approximately$0.6 million for the quarter.

*Commercial RealEstate Mortgage Brokerage Operations*

The Company hold a 51%ownership interest in George Elkins, a California mortgage banking operation,which provided brokerage services related to the production of over $1.1 billionin commercial real estate mortgages during 2005. George Elkins is headquarteredin Los Angeles, with satellite offices located throughout the southernCalifornia area. The mortgage brokerage operation also manages a commercialloan servicing portfolio in excess of $1.0 billion for various investors.

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*Real Estate,Merchant Banking and Financing Operations*

The Company invests in or finances real estate andother real estate-related or finance-related assets. The merchant banking andfinancing operations focus on the acquisition of controlling interests inbusinesses in the process of restructuring. This can take the form of assistingin a management buy-out, refinancing corporate debt or acquiring the “non-core”assets of a business.

Each of the segments operates with its own managementand personnel. There are no indirect allocations of overhead or other costs.Minority interests in earnings, which were $0.2 million for the threemonths ended March 31, 2006, and $0.1 million for the same pe riod in2005, are included in other income (loss) in the following segment financialresults.

Segmentdata for the three months ended March 31, 2006, and 2005 are as follows(dollars in thousands):

| ** **                                                | ** ** | **Real Estate,  Merchant  Banking  and Finance** | ** ** | **Commercial  Real Estate  Mortgage  Brokerage** | ** ** | **Restaurant** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------|------------|-----------|------------|
| ** **                                                | ** ** | **2006**                                                   | ** ** | **2005**                                              | ** ** | **2006**       | ** ** | **2005**  | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Restaurant operations:                                    |       |                                                       |       |                                                  |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating income                                          |       | $                                                          | —     |                                                  | $          | —         |       | $         | —     |   | $ | — |   | $ | 6,285 |   | $ | 5,983 |   | $ | 6,285 |   | $ | 5,983 |   |
| Cost of goods sold                                        |       | —                                                     |       | —                                                |       | —         |       | —    |       | (3,659 | ) | (3,459 | ) | (3,659 | ) | (3,459 | ) |
| Franchise and royalty fees                                |       | —                                                     |       | —                                                |       | —         |       | —    |       | 637 |   | 521 |   | 637 |   | 521 |   |
| General and administrative costs                          |       | —                                                     |       | —                                                |       | —         |       | —    |       | (3,059 | ) | (2,671 | ) | (3,059 | ) | (2,671 | ) |
| Interest Expense                                          |       | —                                                     |       | —                                                |       | —         |       | —    |       | (211 | ) | (154 | ) | (211 | ) | (154 | ) |
| Depreciation and amortization                             |       | —                                                     |       | —                                                |       | —         |       | —    |       | (356 | ) | (368 | ) | (356 | ) | (368 | ) |
| Total restaurant operations                               |       | —                                                     |       | —                                                |       | —         |       | —    |       | (363 | ) | (148 | ) | (363 | ) | (148 | ) |
| Real estate  operations:                                  |       |                                                       |       |                                                  |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating revenue                                         |       | 1,071                                                      |       | 1,007                                                 |       | —         |       | —    |       | — |   | — |   | 1,071 |   | 1,007 |   |
| Operating expense                                         |       | (441                                                       | )          | (423                                                  | )          | —         |       | —    |       | — |   | — |   | (441 | ) | (423 | ) |
| Gain on sale of real estate                               |       | 505                                                        |       | 413                                                   |       | —         |       | —    |       | — |   | — |   | 505 |   | 413 |   |
| Interest expense                                          |       | (220                                                       | )          | (268                                                  | )          | —         |       | —    |       | — |   | — |   | (220 | ) | (268 | ) |
| Depreciation                                              |       | (119                                                       | )          | (145                                                  | )          | —         |       | —    |       | — |   | — |   | (119 | ) | (145 | ) |
| Total real estate operations                              |       | 796                                                        |       | 584                                                   |       | —         |       | —    |       | — |   | — |   | 796 |   | 584 |   |
| Other operating  income (loss):                           |       |                                                       |       |                                                  |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Gain on sale of loans                                     |       | 496                                                        |       | —                                                |       | —         |       | —    |       | — |   | — |   | 496 |   | — |   |
| Loan brokerage fees                                       |       | —                                                     |       | —                                                |       | 1,693          |       | 1,428     |       | — |   | — |   | 1,693 |   | 1,428 |   |
| Equity in losses of equity investees                      |       | (76                                                        | )          | —                                                |       | —         |       | —    |       | — |   | — |   | (76 | ) | — |   |
| Interest income                                           |       | 78                                                         |       | 323                                                   |       | 2              |       | 1         |       | — |   | — |   | 80 |   | 324 |   |
| Sale of manufacturing equipment, net                      |       | 2,630                                                      |       | —                                                |       | —         |       | —    |       | — |   | — |   | 2,630 |   | — |   |
| Other income (loss)                                       |       | 246                                                        |       | (72                                                   | )          | 277            |       | 145       |       | — |   | — |   | 523 |   | 73 |   |
| Total other operating income                              |       | 3,374                                                      |       | 251                                                   |       | 1,972          |       | 1,574     |       | — |   | — |   | 5,346 |   | 1,825 |   |
| Operating  expenses:                                      |       |                                                       |       |                                                  |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Compensation and employee benefits                        |       | 2,263                                                      |       | 703                                                   |       | 1,657          |       | 1,363     |       | — |   | — |   | 3,920 |   | 2,066 |   |
| Cost of sales of manufacturing equipment                  |       | 1,254                                                      |       | —                                                |       | —         |       | —    |       | — |   | — |   | 1,254 |   | — |   |
| Professional fees                                         |       | 156                                                        |       | 700                                                   |       | 13             |       | 9         |       | — |   | — |   | 169 |   | 709 |   |
| Fees paid to related parties                              |       | 160                                                        |       | —                                                |       | —         |       | —    |       | — |   | — |   | 160 |   | — |   |
| Interest expense                                          |       | 34                                                         |       | —                                                |       | —         |       | —    |       | — |   | — |   | 34 |   | — |   |
| Other                                                     |       | 1,201                                                      |       | 813                                                   |       | 221            |       | 228       |       | — |   | — |   | 1,422 |   | 1,041 |   |
| Total operating expenses                                  |       | 5,068                                                      |       | 2,216                                                 |       | 1,891          |       | 1,600     |       | — |   | — |   | 6,959 |   | 3,816 |   |
| Net income (loss) before provision for income taxes  |       | (898                                                       | )          | (1,381                                                | )          | 81             |       | (26       | )          | (363 | ) | (148 | ) | (1,180 | ) | $ | (1,555 | ) |
| Provision for income taxes                                |       | —                                                     |       | —                                                |       | —         |       | —    |       | — |   | — |   | — |   | — |   |
| Net income (loss)                                         |       | $                                                          | (898       | )                                                     | $          | (1,381         | )          | $         | 81         |   | $ | (26 | ) | $ | (363 | ) | $ | (148 | ) | $ | (1,180 | ) | $ | (1,555 | ) |
| Segment assets                                            |       | $                                                          | 41,568     |                                                  | $          | 48,878         |       | $         | 1,341      |   | $ | 605 |   | $ | 19,994 |   | $ | 19,902 |   | $ | 62,903 |   | $ | 69,385 |   |
| Minority Interests                                        |       | $                                                          | (333       | )                                                     | $          | (386           | )          | $         | (223       | ) | $ | (150 | ) | $ | (174 | ) | $ | — |   | $ | (730 | ) | $ | (536 | ) |

 

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**NOTE**           8—INCOMETAXES

As of March 31, 2006, the Company had, for U.S.Federal tax purposes, a net operating loss (“NOL”) carry forward ofapproximately $86.4 million, including $7.2 million relating to Fatburger. TheCompany’s NOL begins to expire in 2018. Fatburger’s NOL began to expire in 2004and is generally subject to an annual limitation under the Internal RevenueCode of 1986, Section 382, *Limitation on NetOperating Loss Carryovers and Certain Built-In Losses Following Change inControl*. In addition, to the extent the Fatburger NOL is utilized,the recognition of the related tax benefits would first reduce goodwill relatedto the Fatburger acquisition, then other non-current intangible assets relatedto that acquisition, and then income tax expense in accordance with Statementon Financial Accounting Standards No. 109, *Accountingfor Income Taxes.*

United States tax regulations impose limitations onthe use of NOL carry forwards following certain changes in ownership. If such achange were to occur with respect to the Company, the limitation couldsignificantly reduce the amount of benefits that would be available to offsetfuture taxable income each year, starting with the year of ownership change. Toreduce the likelihood of such ownership changes, the Company established aShareholder Rights Plan dated as of October 18, 2002, which discourages,under certain circumstances, ownership changes which would trigger the NOLlimitations.

During the three monthsended March 31, 2006 and 2005 a provision for income taxes was notrequired due to the net operating loss generated during the period.

**NOTE**           9—SUBSEQUENTEVENTS

*Restaurant Openings*

Subsequent to March 31,2006, Fatburger opened one company owned restaurant.

*Mortgage notepayable*

In May 2006, theCompany borrowed $1.5 million secured by an 84,912 sq. ft. warehouse located inEugene, Oregon. The proceeds from the note will be used primarily to fundworking capital needs in our Fatburger subsidiary.

*Investment inFatburger*

On April 24, 2006, inexchange for our commitment to invest an additional $2.5 million, we acquiredadditional common stock of Fatburger, bringing our total voting control ofFatburger to 88%.

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*Certain statementscontained herein and certain statements contained in future filings by theCompany with the SEC may not be based on historical facts and are “Forward-LookingStatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Forward-Looking Statements which are based on various assumptions(some of which are beyond the Company’s control) may be identified by referenceto a future period or periods, or by the use of forward-looking terminology,such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” orsimilar terms or variations on those terms, or the negative of those terms. Actualresults could differ materially from those set forth in Forward-LookingStatements due to a variety of factors, including, but not limited to thefollowing:*

·       *economic factors, particularly in the market areas in which the Companyoperates;*

·       *the financial and securities markets and the availability of and costsassociated with sources of liquidity;*

·       *competitive products and pricing;*

·       *the real estate market;*

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

·       *changes in prevailing interest rates;*

·       *changes in currency exchange rates;*

·       *acquisitions and the integration of acquired businesses;*

·       *performance of retail/consumer markets, including consumer preferencesand concerns about healthy diet;*

·       *effective expansion of the Company’s restaurants in new and existingmarkets;*

·       *profitability and success of franchisee restaurants;*

·       *availability of quality real estate locations for restaurant expansion;*

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

·       *credit riskmanagement; and*

·       *asset/liability management.*

*Except as may berequired by law, the Company does not undertake, and specifically disclaims anyobligation, to publicly release the results of any revisions which may be madeto any Forward-Looking Statements to reflect the occurrence of anticipated orunanticipated events or circumstances after the date of such statements.*

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

**Executive Overview**

*Business Overview*

Fog Cutter CapitalGroup Inc. operates a restaurant business, conducts commercial mortgagebrokerage activities and makes real estate and other finance relatedinvestments. We also seek to acquire 

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controllinginterests in underperforming or undervalued operating businesses in which ourmanagement skills and financial structuring can create value. We are currentlyprimarily focused on four strategies for our business:

1.     Develop,strengthen and expand our restaurant operations,

2.     Positionour commercial real estate mortgage brokerage operation to maximize value,

3.     Stabilizeand enhance the operations and value of our other consolidated subsidiaries,and

4.     Sell our portfolio of directly owned real estate.

*Operating Segments*

Our operatingsegments are:

(i)             Restaurant Operations—conductedthrough our Fatburger subsidiary,

(ii)         Commercial Real EstateMortgage Brokerage Operations—conducted through our subsidiary, George ElkinsMortgage Banking (“George Elkins”), and

(iii)     Real Estate, Merchant Bankingand Financing 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 insteadfocuses on an investment-by-investment or asset-by-asset analysis within ouroperating segments.

*Significant Events*

The followingsignificant events affected our operations for the three months ended March 31,2006:

·       Saleof real estate—During the three months ended March 31, 2006, the Companysold seven stand-alone retail locations for a sales price of $3.5 million incash. The properties had a net book value of $3.0 million at the time ofdisposal, and the Company recognized gains on the sales totaling $0.5 million.

·       Saleof loan—In March 2006, we sold our interest in one loan for $0.7 million. Thisloan had a carrying value of $0.2 million and provided a gain on sale of $0.5million.

·       Investmentin Barcelona, Spain properties—During the three months ended March 31,2006, the Company funded additional loans totaling $0.7 million to our VariableInterest Entities (“VIE”) in Barcelona, Spain. During the three months ended March 31,2006, the VIE spent approximately $0.8 million for improvements on the threeapartment buildings owned. On March 20,2006, the Company was informed by the manager of the VIE that a third party hadasserted that it held a security interest in one of the properties. Thissecurity interest allowed it, subject to certain legal conditions, to acquireownership of the property on March 24, 2006 unless the VIE formallyassumed or repaid a mortgage secured by the property in the approximate amountof $3.9 million. We negotiated an extension of time to refinance or repay themortgage by July 21, 2006.

·       Fatburgerinvestment—In March 2006, we invested an additional $2.5 million inFatburger, and increased our voting control to 76%.

·       Investmentin Boo Yaa Burger—In February 2006, we invested, through our Fatburgersubsidiary, $0.2 million in Boo Yaa Burger, a Fatburger franchisee. Throughthis transaction, Fatburger consolidated approximately $0.4 million inrestaurant property, plant, and equipment and other assets, and recognized $0.2million in minority interest.

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·       Purchaseof Fatburger franchisee location—In March 2006, Fatburger paid $0.5million to purchase the net assets of one franchisee that owned and operatedone location in Florida. Through this transaction, Fatburger purchased $0.4million in net assets and recognized $0.1 million in goodwill.

·       Dividends—On February 28,2006, the Company’s Board of Directors declared a $0.13 per share dividend forthe first quarter of 2006. The dividend was paid on March 14, 2006 tostockholders of record on March 9, 2006.

·       Recently adopted accountingstandards—In December 2004, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards No. 123(R), “*Share-Based Payment*” (“FAS 123R”). FAS 123R requires allshare-based awards to employees, including grants of employee stock options, tobe recognized in the income statement based on their fair values. Effective January 1,2006, we adopted FAS 123R, using the modified prospective transition method. Theadoption of FAS 123R resulted in our net loss for the three months ended March 31,2006, being approximately $0.1 million higher than if we had continued toaccount for share based compensation under APB Opinion No. 25, and had noimpact on basic and diluted loss per share as reported for the three monthsended March 31, 2006.

**Results ofoperations**

Our operations haveresulted in a net loss as follows:

*Net Loss*

| ** **     | ** ** | **Three months ended March 31,**                        | ** ** |
|----------------|------------|-----------------------------------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                                                    | ** ** | **2005** | ** ** |
| ** **     | ** ** | **(dollars in thousands,  except per share data)** | ** ** |
| Net Loss       |       | $                                                                           | (1,180     | ) | $ | (1,555 | ) |
| Loss Per Share |       | $                                                                           | (0.15      | ) | $ | (0.19 | ) |

 

The net loss for the three months ended March 31,2006 was $1.2 million, or $0.15 per share. The loss is primarily due tosignificant operating expenses associated with our management infrastructure. Wehave put in place a management structure which we believe will enable us tosignificantly expand our operations, notably our Fatburger subsidiary. However,until the growth in operations is realized, the cost of our managementstructure will be borne by our existing operations. Our net loss for the threemonths ended March 31, 2005 of $1.6 million, or $0.19 per share, was alsoprimarily attributable to our operating expenses as we transitioned the balancesheet and began focusing on our restaurant operations and other subsidiaries.

The following sectionsdescribe the results of operations of our operating segments for the threemonths ended March 31, 2006.

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*Restaurant SegmentOperations*

Thefollowing table shows our operating margin for company-owned restaurants forthe three months ended March 31 2006 and 2005:

| ** **                                      | ** ** | **Three months ended  March 31,**                | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                                        | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(% to Company-  owned restaurant sales)** | ** ** |
| Restaurant Sales:                               |       |                                                            |       |   |   |
| Company-owned restaurant sales                  |       | 100.0                                                           | %          | 100.0 | % |
| Cost of sales (as% of Company restaurant sales) |       | 58.2                                                            | %          | 57.8 | % |
| Operating margin  (restaurant sales only)       |       | 41.8                                                            | %          | 42.2 | % |

 

Thefollowing table shows our total operating results from the restaurant segmentfor the three months ended March 31 2006 and 2005:

| ** **                              | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(% to total revenue)**          | ** ** |
| Total Restaurant  Operations:           |       |                                             |       |   |   |
| Company-owned restaurant sales          |       | 90.8                                             | %          | 92.0 | % |
| Royalty revenue                         |       | 8.1                                              | %          | 5.6 | % |
| Franchise fee revenue                   |       | 1.1                                              | %          | 2.4 | % |
| Total revenue                           |       | 100.0                                            | %          | 100.0 | % |
| Cost of goods sold                      |       | 52.9                                             | %          | 53.2 | % |
| General & administrative costs |       | 44.2                                             | %          | 41.1 | % |
| Interest expense                        |       | 3.0                                              | %          | 2.4 | % |
| Depreciation & amortization    |       | 5.1                                              | %          | 5.6 | % |
| Net loss                                |       | (5.2                                             | )%         | (2.3 | )% |

 

For the three months ended March 31, 2006,company-owned restaurant sales increased 5.0% to $6.3 million from $6.0 millionfor the same period in 2005. This increase was primarily the result ofincreased volume, since we have not had any material price increases or openedany company-owned restaurants since the first quarter of 2005. Royalty revenueincreased 53.4%, from $0.3 million in 2005 to $0.5 million in 2006, as a resultof our franchise restaurant growth strategy. Our net loss from restaurantoperations was 5.2% of total revenue for the three months ended March 31,2006 due to the increased General and Administrative expenses as we continue toset up our infrastructure to support expansion.

Our primary strategy withrespect to Fatburger is to increase the number of franchises, thus increasingthe franchise fees and future royalty income to the operation. Since weacquired our interest in Fatburger in August 2003, Fatburger has added 29new restaurants. While we seek to expand the number of existing restaurants,the identification of qualified franchisees and quality locations has an effecton the rate of growth in the number of our restaurants.

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*Commercial Real Estate Mortgage Brokerage SegmentOperations*

| ** **                        | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(% to total revenue)**          | ** ** |
| Loan Brokerage  Fees              |       | 85.8                                             | %          | 90.7 | % |
| Loan Servicing  and Other revenue |       | 14.2                                             | %          | 9.3 | % |
| Total revenue                     |       | 100.0                                            | %          | 100.0 | % |
| Compensation Expense              |       | 84.0                                             | %          | 86.6 | % |
| Professional Fees                 |       | 0.6                                              | %          | 0.5 | % |
| Other Operating  Expense          |       | 11.2                                             | %          | 14.5 | % |
| Net Income (Loss)                 |       | 4.2                                              | %          | (1.6 | )% |

 

For the three months endedMarch 31, 2006, total revenue for this business segment increased 25.3% to$2.0 million from $1.6 million in 2005. This increase was primarily due toincreased loan brokerage volume in 2006. Our net income from this businesssegment increased to $0.1 million, or 4.2% of segment revenue for the firstquarter of 2006. This compares to a loss of less than $0.1 million, or 1.6% ofsegment revenue in 2005. The improvement came as a result of our ability tomaintain segment overhead costs while volume increased during the period.

*Real Estate, Merchant Banking and Finance SegmentOperations*

| ** **                              | ** ** | **Three months eded  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **(dollars in thousands)**            | ** ** |
| *Real Estate Operations:*               |       |                                       |       |   |   |
| Operating revenue                       |       | $                                          | 1,071      |   | $ | 1,007 |   |
| Operating  expenses                     |       | (441                                       | )          | (423 | ) |
| Operating margin                        |       | 630                                        |       | 584 |   |
| Interest expense                        |       | (220                                       | )          | (268 | ) |
| Depreciation                            |       | (119                                       | )          | (145 | ) |
| Gain on sale of  real estate            |       | 505                                        |       | 413 |   |
| Net Income from real  estate operations |       | $                                          | 796        |   | $ | 584 |   |

 

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Duringthe three months ended March 31, 2006, our operating margin on real estateremained stable at approximately $0.6 million compared to the first quarter of2005. Although we have continued to sell certain real estate investments, wehave been able to maintain our operating margin due to our success in reducingvacancies and increasing lease rates. In the first quarter of 2006, we sold 7buildings for total proceeds of $3.5 million, resulting in a gain on sale ofapproximately $0.5 million.

| *** ***                          | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ***Interest Income:***           | ** ** | **(dollars in thousands)**             | ** ** |
| Loan portfolios (1):                  |       |                                             |       |   |   |
| Interest income                       |       | $                                                | 51         |   | $ | 275 |   |
| Average asset balance                 |       | $                                                | 1,975      |   | $ | 9,749 |   |
| Average yield                         |       | 10.3                                             | %          | 11.3 | % |
| Cash Deposits and  other investments: |       |                                             |       |   |   |
| Interest income                       |       | $                                                | 27         |   | $ | 49 |   |
| Average asset balance                 |       | $                                                | 2,534      |   | $ | 10,583 |   |
| Average yield                         |       | 4.3                                              | %          | 1.9 | % |
| Total:                                |       |                                             |       |   |   |
| Interest income                       |       | $                                                | 78         |   | $ | 324 |   |
| Average asset balance                 |       | $                                                | 4,509      |   | $ | 20,332 |   |
| Average yield                         |       | 6.9                                              | %          | 6.4 | % |

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(1)          Includes loans to seniorofficers.

Our interest income for the three months ended March 31,2006 was $0.1 million, compared with $0.3 million for the same period in 2005. Thedecrease is primarily attributable to the sale or repayment of loans in ourloan portfolio since March 31, 2005.

*Equity inEarnings of Equity Investees—**At*March 31, 2006, our sole equity investee was Bourne End Properties Plc. (“BourneEnd”). We own approximately 26% of Bourne End, which operates a shopping centerin the United Kingdom. During the three months ended March 31, 2006 werecognized less than $0.1 million of losses from Bourne End, primarily from a provision for UK income tax of approximately $0.3million, partially offset by operating income from the shopping center.

*Sale of manufacturing equipment—**We***began**reportingthe operations of DAC International, Inc. (“DAC”) on a consolidated basison November 1, 2005. DAC is a supplier of computer controlled lathes andmilling machinery for the production of contact and intraocular lenses. Netsales of DAC for the three months ended March 31, 2006 are summarized asfollows:

| ** **             | ** ** | **Three months ended  March 31, 2006** | ** ** |
|------------------------|------------|------------------------------------------------------------|------------|
|                   | * *   | **(dollars In thousands)**                       |       |
| DAC—sales         |       |                                                       | $          | 2,630 | * * |   |
| DAC—cost of sales |       |                                                       | (1,254     | *)* |   |
| Net sales              |       |                                                       | 1,376      | * * |   |

* *

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*Other revenue sources—**In***March 2006,we sold our interest in one loan for proceeds of $0.7 million. This loan had acarrying value of $0.2 million and provided a gain on sale of $0.5 million.

| *** ***                                   | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ***Operating Expenses:***                 | ** ** | **(dollars in thousands)**             | ** ** |
| Compensation and  employee benefits            |       | $                                                | 2,263      |   | $ | 703 |   |
| Travel and  entertainment                      |       | 322                                              |       | 137 |   |
| Insurance expense                              |       | 280                                              |       | 169 |   |
| VIE (Barcelona  properties) operating expenses |       | 185                                              |       | 81 |   |
| Professional fees                              |       | 156                                              |       | 700 |   |
| Depreciation                                   |       | 93                                               |       | 16 |   |
| Occupancy costs                                |       | 85                                               |       | 54 |   |
| Directors fees                                 |       | 78                                               |       | 97 |   |
| Other expenses                                 |       | 352                                              |       | 259 |   |
| Total operating expenses                       |       | $                                                | 3,814      |   | $ | 2,216 |   |

 

For the three months endedMarch 31, 2006, we incurred segment operating expenses from real estate,merchant banking and finance operations of $3.8 million, compared to $2.2million for the same period in 2005. The 2006 operations include compensationexpense of $0.5 million and other operating expenses of $0.2 million relatingto Centrisoft Corporation (“Centrisoft”) acquired in July 2005, as well as$0.5 million of compensation and $0.4 million of other operating expensesrelating to DAC, acquired in November 2005. Travel and entertainmentexpense for the three months ended March 31, 2006 includes $160,000 paidto Peninsula Capital Partners LLC (“PeninsulaCapital”), an entity owned by Mr. Wiederhorn, for the Company’s businessuse of certain private aircraft. The Board of Directors is aware of therelationship and approved the fees for the use of the aircraft. The fee paid isa reimbursement of costs to Peninsula Capital for the Company’s use of theaircraft.

**Changes infinancial condition**

***Overview***

Ourassets, liabilities and stockholders’ equity can be summarized as follows:

| ** **                      | ** ** | **March 31, 2006**         | ** ** | **December 31, 2005** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **(dollars in thousands)** | ** ** |
| Total assets                    |       |                                 | $          | 62,903                          |       |   |   | $ | 65,319 |   |   |
| Total liabilities               |       |                                 | 43,659     |                            |       |   | 43,930 |   |   |
| Total stockholders’ equity |       |                                 | 19,244     |                            |       |   | 21,389 |   |   |

 

The decrease in totalassets over the first quarter of 2006 is primarily due to a decrease in cashdue to operating activities and the payment of dividends. As we implement ourstrategy of focusing our efforts on the development of the Fatburgeroperations, we may determine to reduce the future dividend amount to a levelthat is more typical of the restaurant industry. Total liabilities at March 31,2006 are comparable to December 31, 2005. Stockholders’ equity decreasedduring the three months ended March 31, 2006 by approximately $2.1 millionresulting from our net loss of $1.2 million and dividends paid of $1.0 million.These changes are described in more detail as follows:

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***Cash***

Our cash decreased$1.6 million from December 31, 2005 to March 31, 2006. Significantsources and uses of cash during this quarter include:

·       $2.8million of cash used in operations—comprised primarily of our net loss of $1.2million adjusted for gains on sales of loans and real estate of $1.0 million;

·       $2.3million of cash provided by investing activities—including $3.5 million fromthe sale of real estate and a net $0.7 million received from our loanportfolio, partially offset by a $0.8 million investment in real estate and$0.7 million invested by Fatburger in a subsidiary and in the net assets of onefranchisee location; and

·       $1.1 million of cash usedin financing activities—primarily dividends paid during the quarter.

***Net Investments in Real Estate, and relatedliabilities***

Ourinvestments in real estate can be summarized as follows:

| ** **                                     | ** ** | **March 31, 2006**         | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **(dollars in thousands)** | ** ** |
| US based  investments—owned (1):          |       |                                 |       |                            |       |   |   |   |   |
| Purchase price /  improvements                 |       |                                 | $          | 3,879                           |       |   |   | $ | 7,032 |   |   |
| Accumulated  depreciation                      |       |                                 | (520       | )                               |       |   | (677 | ) |   |
| Net book value                                 |       |                                 | 3,359      |                            |       |   | 6,355 |   |   |
| US based  investments—capital leases (2): |       |                                 |       |                            |       |   |   |   |   |
| Purchase price /  improvements                 |       |                                 | 13,136     |                            |       |   | 13,141 |   |   |
| Accumulated  depreciation                      |       |                                 | (1,116     | )                               |       |   | (1,032 | ) |   |
| Net book value                                 |       |                                 | 12,020     |                            |       |   | 12,109 |   |   |
| Foreign-based  investments—owned (3):     |       |                                 |       |                            |       |   |   |   |   |
| Purchase price /  improvements                 |       |                                 | 12,988     |                            |       |   | 11,828 |   |   |
| Accumulated  depreciation                      |       |                                 | —     |                            |       |   | — |   |   |
| Net book value                                 |       |                                 | 12,988     |                            |       |   | 11,828 |   |   |
| Total investments  in real estate, net         |       |                                 | $          | 28,367                          |       |   |   | $ | 30,292 |   |   |

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(1)          Includes3 commercial properties within the United States at March 31, 2006.

(2)          Includes32 commercial properties under capital lease throughout the United States at March 31,2006.

(3)          Includes 3 apartmentbuildings in Barcelona, Spain at March 31, 2006.

Borrowingsrelated to our investments in real estate were as follows:

| ** **                                      | ** ** | **March 31, 2006**         | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **(dollars in thousands)** | ** ** |
| Obligations on  real estate under capital lease |       |                                 | $          | 10,418                          |       |   |   | $ | 10,551 |   |   |
| Borrowings on  Barcelona properties             |       |                                 | 6,157      |                            |       |   | 6,020 |   |   |
| Total borrowing related  to real estate         |       |                                 | $          | 16,575                          |       |   |   | $ | 16,571 |   |   |

 

The decrease in owned USproperties at March 31, 2006 compared to December 31, 2005 is due tothe sale of 7 properties with a net book value of $3.0 million. There was nodebt related to these properties. Investments in properties under capital leasedecreased $0.1 million at March 31, 2006 due to depreciation during thefirst quarter of 2006. Obligations under capital leases related to theseproperties decreased $0.1 million primarily due to scheduled monthly paymentsduring the same period. Our investment in apartment buildings in Barcelona,Spain increased $1.2 million since December 31, 2005. This was the 

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resultof $0.8 million of additional investment, and unrealized foreign currencytranslation gains of $0.4 million. Borrowings related to the Barcelonainvestments have increased $0.1 million due to foreign currency translationchanges.

***NetRestaurant Property, Plant and Equipmen***t

Net restaurant property,plant and equipment increased $0.7 million at March 31, 2006, primarilydue to Fatburger’s investment in Boo Yaa Burger and purchase of one franchiseelocation during the first quarter of 2006. Obligations on restaurant assetsunder capital lease remained substantially unchanged at $0.3 million at March 31,2006.

***Restaurant Debt***

As of March 31, 2006,our restaurant debt totaled $7.1 million. This compares to $6.9 million at December 31,2005. The increase was primarily due to additional borrowings and the purchaseof the assets and liabilities of one franchisee location during the firstquarter of 2006.

***Goodwill and Net Intangible Assets***

| ** **                                   | ** ** | **March 31, 2006**         | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **(dollars in thousands)** | ** ** |
| Goodwill—Fatburger  acquisition         |       |                                 | $          | 7,163                           |       |   |   | $ | 7,063 |   |   |
| Goodwill—Centrisoft  acquisition        |       |                                 | 1,999      |                            |       |   | 1,999 |   |   |
| Goodwill—DAC  International acquisition |       |                                 | 917        |                            |       |   | 917 |   |   |
| Total Goodwill                               |       |                                 | $          | 10,079                          |       |   |   | $ | 9,979 |   |   |
| Net Intangible Assets—Fatburger         |       |                                 | $          | 5,086                           |       |   |   | $ | 5,134 |   |   |
| Net Intangible  Assets—Centrisoft       |       |                                 | 427        |                            |       |   | 452 |   |   |
| Total Net Intangible  Assets                 |       |                                 | $          | 5,513                           |       |   |   | $ | 5,586 |   |   |

 

As a result of theFatburger’s acquisition and consolidation of the net assets of one franchiseelocation, goodwill increased $0.1 million from December 31, 2005 to March 31,2006. Net intangible assets decreased $0.1 million over the same period due toamortization. Net intangible assets at March 31, 2006 consists oftrademark rights of approximately $4.0 million, franchise agreements ofapproximately $0.8 million, sales contracts for Centrisoft of approximately$0.4 million, and other miscellaneous intangible assets of approximately $0.3million. We do not believe that there is any impairment of goodwill or netintangible assets at March 31, 2006.

***Loan Portfolio***

As of March 31, 2006,our loan portfolio (excluding loans to senior executives) consists of threeindividual loans with a combined carrying value of $0.8 million. Two of theloans are secured by real estate consisting of commercial property located inTexas and Arizona, and one loan is secured by stock in a restaurant business. Theloans have a weighted average interest rate (excluding fees and points) of10.8% and a weighted average maturity of 18 months. In March 2006, we soldour interest in one loan for proceeds of $0.7 million. This loan had a carryingvalue of $0.2 million and provided a gain on sale of $0.5 million.

***Loans to Senior Executives***

We currently have twoloans to our Chairman and Chief Executive Officer, Andrew Wiederhorn for atotal of $1.0 million. Both loans were made on February 21, 2002 (prior tothe passage of the Sarbanes-

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OxleyAct of 2002). The loans are due on February 21, 2007, and bear interest atthe prime rate, as published in the Wall Street Journal, which interest isadded to the principal.

***Investment in Bourne EndProperties, Ltd.***

Ourinvestment in Bourne End decreased by less than $0.1 million from December 31,2005 to $0.7 million at March 31, 2006, due to our 26% share of Bourne End’snet loss for the three months then ended.

***Other Assets***

| ** **                         | ** ** | **March 31, 2006**         | ** ** | **December 31, 2005** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **(dollars in thousands)** | ** ** |
| Trade receivables                  |       |                                 | $          | 2,298                           |       |   |   | $ | 1,246 |   |   |
| Inventory                          |       |                                 | 1,990      |                            |       |   | 1,880 |   |   |
| Software costs                     |       |                                 | 1,426      |                            |       |   | 1,484 |   |   |
| Restaurant assets                  |       |                                 | 725        |                            |       |   | 894 |   |   |
| Capitalized  deferred compensation |       |                                 | 415        |                            |       |   | 508 |   |   |
| Mortgage  servicing rights         |       |                                 | 229        |                            |       |   | 234 |   |   |
| Prepaid expenses                   |       |                                 | 123        |                            |       |   | 390 |   |   |
| Investment in  operating leases    |       |                                 | 103        |                            |       |   | 126 |   |   |
| Other                              |       |                                 | 679        |                            |       |   | 650 |   |   |
| Total other assets                 |       |                                 | $          | 7,988                           |       |   |   | $ | 7,412 |   |   |

The increase in tradereceivables at March 31, 2006 relates primarily to the operations of DAC.

***Deferred Income***

Our deferred incomerelating to the collection of unearned Fatburger franchise fees was $4.1million at March 31, 2006, compared with $4.3 million at December 31,2005. As of March 31, 2006, nearly all of the deferred income wascomprised of the non-refundable franchise fee received by Fatburger for eachfuture franchise location. These initial fees generally represent half of thetotal fee per location. The balance of the franchise fee (approximately anadditional $4.1 million) will be collected in the future as leases on thesespecific franchise locations are signed.

***Accrued Expenses and Other Liabilities***

Accrued Expenses and OtherLiabilities totaled $8.4 million at March 31, 2006, compared with $10.1million at December 31, 2005. The decrease is primarily a result of thereclassification of $1.5 million of Centrisoft debt to Borrowings and notespayable.

***Deferred Income Taxes***

Deferred income taxesremained substantially unchanged at $5.7 million at March 31, 2006. As of March 31,2006, we had, for U.S. Federal tax purposes, a net operating loss (“NOL”)carryforward of approximately $86.4 million, including $7.2 million relating toFatburger. Our NOL carryforwards begin to expire in 2018, while Fatburger’s NOLcarryforwards began to expire in 2004.

**Liquidity andCapital Resources**

Liquidity is a measurement of our ability to meetpotential cash requirements, including ongoing commitments to repay borrowings,fund business operations, acquisitions, and expansion (including growth ofcompany-owned and franchised restaurant locations), engage in loan acquisitionand lending activities and for other general business purposes. In addition toour cash on hand, our primary sources of funds for liquidity during the firstquarter of 2006 consisted of cash provided by proceeds from the sale of realestate 

24

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and loans, and repaymentsof loans. As of March 31, 2006, we had cash or cash equivalents of $2.5million, which, together with projected borrowings and proceeds from the salesof assets, we believe will be sufficient to meet our current liquidity needs.

At March 31,2006, we had total consolidated secured indebtedness of $25.5 million, as wellas $17.9 million of other liabilities. Our consolidated secured indebtednessconsisted of:

·       $10.7million in capital leases maturing between 2010 and 2040 which are secured byreal estate;

·       mortgagenotes payable of $6.2 million secured by our Barcelona properties;

·       notespayable and other debt of Fatburger of $7.1 million secured by the assets ofFatburger; and

·       $1.5million of notes payable secured by the assets of Centrisoft.

We consider the sale ofassets to be a normal, recurring part of our operations and we are currentlygenerating adequate cash flow as a result of these transactions. However,excluding the sale of assets from time to time, we are currently operating withnegative cash flow, since many of our assets do not currently generatesufficient cash to cover operating expenses. 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.

***Liquidity Risks***

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. Specific risks to our liquidity positioninclude the following:

*Interest rate risk*

Our borrowings and theavailability of further borrowings are substantially affected by, among otherthings, changes in interest rates, changes in market spreads or decreases incredit quality of our assets. Material increases in interest expense fromvariable-rate funding sources, or material decreases in monthly cash receiptsfrom operations, generally would negatively impact our liquidity. On the otherhand, material decreases in interest expense from variable-rate funding sourceswould positively affect our liquidity. Fluctuations in interest rates willimpact our net income to the extent our operations and our fixed rate assetsare funded by variable rate debt. We may also be impacted to the extent thatour variable rate assets re-price on a different schedule or in relation to adifferent index than any floating rate debt. See *Item 3—Quantitativeand Qualitative Disclosures about Market Risk* for further analysis.

*Fatburger debtcovenant non-compliance*

At December 31, 2005,Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements. Fatburgerfailed to meet the prescribed fixed charge coverage ratio and the prescribeddebt-coverage ratio at December 31, 2005. Due to Fatburger’snon-compliance, the lender has the right to demand repayment of the notes in2006. Fatburger has requested a waiver from the lender for the financial covenantswith which it was not in compliance. There can be no assurance that Fatburgerwill be successful in obtaining a waiver from the lender for non-compliance. IfFatburger fails to obtain this waiver and the lender exercises its right todemand repayment, our liquidity could be negatively affected.

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*Fatburger expansion*

Fatburger is involved in anationwide expansion of franchise and Fatburger owned locations, which willrequire significant liquidity. If real estate locations of sufficient qualitycannot be located, the timing of restaurant openings may be delayed.Additionally, if Fatburger or its franchisees cannot obtain capital sufficientto fund this expansion, the timing of restaurant openings may be delayed.

*Centrisoftoperations*

We expect that Centrisoftwill require capital resources and have negative cash flow for the near term. Centrisofthas a contract with a branch of the U.S. military which, when funded, isexpected to cover its operating costs. The contract has been subject to delayand uncertainty due to military budget appropriations. There can be noassurance that funds will be appropriated and paid for this contract.Centrisoft is also marketing its products to the private sector. SinceCentrisoft is in the early stages of its marketing, there can be no assurancethat it will be successful in attracting a significant customer base. Centrisoftis currently marketing its software to potential customers both directly andthrough re-seller relationships. There can be no assurance that Centrisoft willbe successful in generating sufficient cash flow to support its own operationsin the near term.

*Dividends*

During the three monthsended March 31, 2006, we declared a cash distribution of $0.13 per share($1.0 million). While we do not have a fixed dividend policy, we may declareand pay new dividends on our common stock, subject to our financial condition,results of operations, capital requirements and other factors deemed relevantby the Board of Directors. One factor the Board of Directors may consider isthe impact of dividends on our liquidity. As we implement our strategy offocusing our efforts on the development of the Fatburger operations, we maydetermine to reduce the future dividend amount to a level that is more typicalof the restaurant industry.

*NASDAQ delisting*

Effective October 14, 2004, due to a NASDAQ staffdetermination to delist our common stock, our stock began trading in theover-the-counter (“OTC”) market. Prior to that, we were quoted on the NASDAQNational Market. We appealed the decision with NASDAQ at various levels, butwere informed on April 21, 2005 that the NASDAQ decision was final. We arecontinuing to appeal the decision, but there can be no assurance that theappeal will be successful.

Trading of our common stock on the OTC market may reduce theliquidity of our common stock compared to quotation on the NASDAQ NationalMarket. Also, the coverage of the Company by security analysts and media couldbe reduced, which could result in lower prices for our common stock than mightotherwise prevail and could also result in increased spreads between the bidand ask prices for our common stock. Additionally, certain investors will notpurchase securities that are not quoted on the NASDAQ Stock Market, which couldmaterially impair our ability to raise funds through the issuance of commonstock or other securities convertible into common stock.

*Common stock trading price*

If the trading price of our common stock is less than $5.00 pershare, trading in our common stock could be subject to Rule 15g-9 ofthe Securities Exchange Act of 1934, as amended. Under that Rule, brokers whorecommend such securities to persons other than established customers andaccredited investors must satisfy special sales practice requirements,including an individualized written suitability determination for the purchaserand the purchaser’s written consent prior to any transaction. The SecuritiesEnforcement Remedies and Penny Stock Reform Act of 1990 also requiresadditional disclosure 

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in connection with any trades involving astock defined as a penny stock (generally, any equity security not traded on anexchange or quoted on NASDAQ that has a market price of less than $5.00 pershare), including the delivery of a disclosure schedule explaining the pennystock market and the associated risks. Such requirements could severely limitthe market liquidity of our common stock. There can be no assurance that ourcommon stock will not become treated as penny stock.

**Off Balance SheetArrangements**

In order to facilitate the development of franchiselocations, as of March 31, 2006, Fatburger had guaranteed the annualminimum lease payments of five restaurant sites owned and operated byfranchisees. The guarantees approximate $1.6 million plus certain contingentrental payments as defined in the respective leases. These leases expire atvarious times through 2015.

The lease guarantees by Fatburger do not provide uswith a material source of liquidity, capital resources or other benefits. Thereare no revenues, expenses or cash flows connected with the lease guaranteesother than the receipt of normal franchise royalties. As of March 31,2006, we were not aware of any event or demand that was likely to trigger theguarantee by Fatburger.

We have various operatingleases for office and retail space which expire through 2015. The leasesprovide for varying minimum annual rental payments including rent increases andfree rent periods. We have future minimum rental payments under non-cancelableoperating leases with initial or remaining terms of one year or more of approximately$13.5 million as of March 31, 2006.

**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Our market risk resultsfrom instruments entered into other than from trading purposes and consistsprimarily of exposure to loss resulting from changes in foreign currencyexchange rates, interest rates and commodity prices.

***Foreign Currency Exchange Rate Risk***

Ourexposure to foreign currency fluctuations arises mainly from our investment inBarcelona real estate and our UK investment in Bourne End. As of March 31,2006, approximately 41% of our equity is invested in net assets located outsideof the United States, primarily denominated in the euro or British pounds. Thefollowing table illustrates the projected effect on our net asset value as a resultof hypothetical changes in foreign currency rates as of March 31, 2006:

| **Change in Foreign  Exchange Rates (1)** | ** ** | **Projected Change in  Net Asset  Fair Value** | ** ** | **Projected Percentage  Change in Net Asset  Fair Value** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| Decrease 20%                                                  |       |                                                               | $          | (1,579,000)                                                                        |       |   |   | -8.2 | % |   |
| Decrease 10%                                                  |       |                                                               | $          | (789,000                                                                           | )          |   |   | -4.1 | % |   |
| No Change                                                     |       |                                                               | $          | —                                                                             |       |   |   | 0.0 | % |   |
| Increase 10%                                                  |       |                                                               | $          | 789,000                                                                            |       |   |   | 4.1 | % |   |
| Increase 20%                                                  |       |                                                               | $          | 1,579,000                                                                          |       |   |   | 8.2 | % |   |

 

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

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We can utilize a widevariety of financial techniques to assist in the management of currency risk,including currency swaps, options, and forwards, or combinations thereof. Nosuch currency hedging techniques were in use as of March 31, 2006.

***Interest Rate Risk***

Changes in interest rates can affect net income bychanging the spread between our interest-earning assets and ourinterest-bearing liabilities and by increasing the cost associated withoperating and expanding our restaurant operation. Changes in the level ofinterest rates can also affect, among other things, the value of ourinterest-earning assets (and the associated default rates), our ability toacquire loans and general levels of consumer spending.

Thefollowing table quantifies the potential changes in our net loss and net assetvalue as of March 31, 2006 should interest rates go up or down (shocked)by 100 or 200 basis points. Actual results could differ significantly fromthose estimated in the table.

| ** **                                  | ** ** | **Projected Percent Change In** | ** ** | **Projected Change In** | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------|------------|
| **Interest Rate Change (1)** | ** ** | ** **                                     | ** ** | **Net Loss**                 | ** ** | **Net Asset Fair  Value (2)** | ** ** | **Annual Net  Loss** | ** ** | **Net Asset  Fair Value** | ** ** |
| -200 Basis  Points                          |       |                                           | 4.8        | %                                 |       |   | -7.5 | % |   |   | $ | 72,000 |   |   | $ | (1,446,000 | ) |
| -100 Basis  Points                          |       |                                           | 1.8        | %                                 |       |   | -3.6 | % |   |   | $ | 27,000 |   |   | $ | (699,000 | ) |
|   0  Basis Points                 |       |                                           | 0.0        | %                                 |       |   | 0.0 | % |   |   | $ | — |   |   | $ | — |   |
|   100  Basis Points               |       |                                           | -1.4       | %                                 |       |   | 3.4 | % |   |   | $ | (21,000 | ) |   | $ | 654,000 |   |
|   200 Basis  Points               |       |                                           | -2.8       | %                                 |       |   | 6.6 | % |   |   | $ | (41,000 | ) |   | $ | 1,266,000 |   |
|                                             |            |                                                |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Assumes that uniformchanges occur instantaneously in both the yield on 10-year U.S. Treasurynotes and the interest rate applicable to U.S. dollar deposits in the Londoninterbank market.

(2)          Equals the value ofoff-balance sheet instruments plus the present value of cash inflows generatedfrom interest-earning assets net of cash outflows in respect ofinterest-bearing liabilities.

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Thefollowing table provides information as to the type of funding used to financeour assets as of March 31, 2006.

| ** **                                | ** ** | **March 31, 2006**         | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **Basis Amount**                | ** ** | **Coupon Type** | ** ** | **Liability** | ** ** | **Type** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| **Interest-Bearing Assets:**              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate  assets, no financing          |       |                                 | $          | 830 |   |   |   | Fixed |   |   | $ | — |   | None |   |
| Variable-rate  assets, no financing       |       |                                 | 1,028      |   |   |   | Prime |   |   | — |   | None |   |
| Cash and cash  equivalents                |       |                                 | 2,475      |   |   |   | N/A |   |   | — |   | None |   |
| Subtotal                                  |       |                                 | 4,333      |   |   |   |   |   |   | — |   |   |   |
| **Other  Assets:**                        |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Investments in real  estate               |       |                                 | 28,367     |   |   |   | N/A |   |   | 16,574 |   | Fixed |   |
| Investment in BEP                         |       |                                 | 738        |   |   |   | N/A |   |   | — |   | None |   |
| Restaurant  property, plant and equipment |       |                                 | 5,885      |   |   |   | N/A |   |   | 7,327 |   | Mixed |   |
| Intangible  assets, net                   |       |                                 | 5,513      |   |   |   | N/A |   |   | — |   | None |   |
| Goodwill                                  |       |                                 | 10,079     |   |   |   | N/A |   |   | — |   | None |   |
| Other                                     |       |                                 | 7,988      |   |   |   | N/A |   |   | — |   | None |   |
| Subtotal                                  |       |                                 | 62,903     |   |   |   |   |   |   | 23,901 |   |   |   |
| **Liability  Only:**                      |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deferred income                           |       |                                 | —     |   |   |   |   |   |   | 4,090 |   | None |   |
| Deferred income  taxes                    |       |                                 | —     |   |   |   |   |   |   | 5,730 |   | None |   |
| Other                                     |       |                                 | —     |   |   |   |   |   |   | 9,938 |   | None |   |
| Total                                     |       |                                 | $          | 62,903 |   |   |   |   |   |   | $ | 43,659 |   |   |   |

 

***Other Market Risks***

Our restaurant operationsare exposed to the impact of commodity and utility price fluctuations relatedto unpredictable factors such as weather and various other market conditionsoutside our control. Our ability to recover increased costs through higherprices is limited by the competitive environment in which we operate.

**ITEM 4. CONTROLS AND PROCEDURES**

*Evaluation of disclosure controls and procedures*

OurChief Executive Officer and our Chief Financial Officer, after evaluating theeffectiveness of the Company’s “disclosure controls and procedures” (as definedin the Securities and Exchange Act of 1934 Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report, haveconcluded that our disclosure controls and procedures were effective anddesigned to ensure that material information relating to us and ourconsolidated subsidiaries is accumulated and communicated to our management toallow timely decisions regarding required disclosure.

*Changes in internal control over financial reporting*

Therewere no significant changes in our internal control over financial reporting inconnection with an evaluation that occurred during our first fiscal quarter of2006 that have materially affected or are reasonably likely to materiallyaffect our internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**ITEM 1. LEGALPROCEEDINGS**

***NASDAQ Delisting***

EffectiveOctober 14, 2004, our common stock began trading in the over-the-counter market. Prior to that,our common stock was quoted on the NASDAQ National Market. On July 20,2004, we were notified by NASDAQ of a staff determination to delist our commonstock effective July 29, 2004. We were unsuccessful in appealing thedetermination and our common stock wasdelisted from the NASDAQ National Market on October 14, 2004. Wesubsequently requested a review of the delisting by NASDAQ’s Listing andHearing Review Council and by the Securities and Exchange Commission (“SEC”). Thoseappeals were also unsuccessful. On February 17, 2006, we filed a petitionfor review of the SEC decision with the United States Court of Appeals,District of Columbia Circuit. There can be no assurance that our petition forreview will be successful.

***ShareholderDerivative Complaint***

On July 6, 2004, JeffAllan McCoon, derivatively on behalf of Fog Cutter Capital Group Inc., filed alawsuit in the Circuit Court for the State of Oregon (Multnomah County) whichnamed us and all of our directors as defendants. The lawsuit, as amended,alleged that the Company’s Board of Directors breached their fiduciaryduties to us and our stockholders in a number of ways, primarily relating tothe leave of absence agreement with Mr. Wiederhorn. On January 6,2006, the Circuit Court dismissed the entire derivative lawsuit,ruling that Mr. McCoon was unfit to represent our stockholders. Mr. McCoonhas filed an appeal to this ruling.

**ITEM 1A. RISKFACTORS**

In addition to the otherinformation contained in this quarterly report, you should carefully read andconsider the following risk factors. If any of these risks actually occur, ourbusiness, financial condition or operating results could be materiallyadversely affected and the trading price of our common stock could decline.

*The delisting of our common stock from the NASDAQStock Market could impair our ability to finance our operations through thesale of common stock or securities convertible into common stock.*

Effective October 14,2004, due to a NASDAQ staff determination to delist our common stock, our stockbegan trading in the over-the-counter (“OTC”) market. Prior to the delisting,our common stock was quoted on the NASDAQ National Market. The liquidity of ourcommon stock is reduced by trading on the OTC market as compared to quotationon the NASDAQ National Market. The coverage of the Company by security analystsand media could be reduced, which could result in lower prices for our commonstock than might otherwise prevail and could also result in increased spreadsbetween the bid and ask prices for our common stock. Additionally, certaininvestors will not purchase securities that are not quoted on the NASDAQ StockMarket, which could materially impair our ability to raise funds through theissuance of common stock or other securities convertible into common stock.

*Because the trading price of our common stock iscurrent below $5.00 per share, trading in our common stock is subject tocertain restrictions and the market for our common stock could diminish.*

Because the trading priceof our common stock is less than $5.00 per share, trading in our common stockis subject to Rule 15g-9 of the Securities Exchange Act of 1934, asamended. Under that Rule, brokers who recommend such securities to personsother than established customers and accredited investors must satisfy specialsales practice requirements, including an individualized written suitability 

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determinationfor the purchaser and the purchaser’s written consent prior to any transaction.The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 alsorequires additional disclosure in connection with any trades involving a stockdefined as a penny stock (generally, any equity security not traded on anexchange or quoted on NASDAQ that has a market price of less than $5.00 pershare), including the delivery of a disclosure schedule explaining the pennystock market and the associated risks. Such requirements could severely limitthe market liquidity of our common stock.

*Changes in interestrates and currency exchange rates affect our net income.*

Our borrowings and theavailability of further borrowings are substantially affected by, among otherthings, changes in interest rates. Fluctuations in interest rates will affectour net income to the extent our operations and our fixed rate assets arefunded by variable rate debt. We are also affected by foreign currency exchangerate changes, as a significant portion of our assets are invested in foreigncurrencies, mainly the euro and Great British pound. See *Item 3 -Quantitative and Qualitative Disclosures about Market Risk* forfurther analysis.

*If we do not retain our key employees and managementteam our ability to execute our business strategy will be limited.*

Our future performancewill depend largely on the efforts and abilities of our key executive, financeand accounting, and managerial personnel, and on our ability to attract andretain them. The loss of one or more of our senior management personnel mayadversely affect our business, financial condition or operating results. Whenwe lose key employees, new employees must spend a significant amount of timelearning our business model in addition to performing their regular duties andintegration of these individuals often results in some disruption to ourbusiness. In addition, our ability to execute our business strategy will dependon our ability to recruit and retain key personnel. Our key employees are notobligated to continue their employment with us and could leave at any time. Aspart of our strategy to attract and retain personnel, we offer stock optiongrants to certain employees. However, given the fluctuations of the marketprice of our common stock, potential employees may not perceive our equityincentives such as stock options as attractive, and current employees whoseoptions are no longer priced below market value may choose not to remainemployed by us. In addition, due to the intense competition for qualifiedemployees, we may be required to increase the level of compensation paid toexisting and new employees, which could materially increase our operatingexpenses.

*We are the subjectof litigation, which may be expensive and may be time consuming for ourmanagement team.*

On July 6, 2004, oneof our stockholders, Jeff Allan McCoon, derivatively on behalf of Fog Cutter,filed a lawsuit in the Circuit Court for the State of Oregon (Multnomah County)which named us and all of our directors as defendants. The lawsuit, as amended,alleged that our Board of Directors breached their fiduciary duties to usand our stockholders in a number of ways, primarily relating to the leave ofabsence agreement with Mr. Wiederhorn. On January 6, 2006, theCircuit Court dismissed the entire derivative lawsuit, ruling that Mr. McCoonwas unfit to represent the Company’s stockholders. Mr. McCoon has filed anappeal to this ruling. We are obligated to indemnify our officers and directorsto the extent permitted by applicable law in connection with this action, andhave insurance for such individuals, to the extent of the limits of theapplicable insurance policies and subject to potential reservations of rights. Weare unable, however, to predict the ultimate outcome of matter. We cannotassure you that we will be successful in defending against this action and, ifwe are unsuccessful, we may be subject to significant damages that could have amaterial adverse effect on our business, financial condition and operatingresults. Even if we are successful, defending against this action has been, andwill likely continue to be, expensive, time consuming and may divert management’sattention from other business concerns and harm our business.

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**Risks related toFatburger**

*Fatburger debtcovenant non-compliance*

At December 31, 2005,Fatburger was not in compliance with all obligations under the agreementsevidencing its indebtedness, as defined in the applicable agreements. Fatburgerfailed to meet the prescribed fixed charge coverage ratio and the prescribeddebt-coverage ratio at December 31, 2005. Due to Fatburger’snon-compliance, the lender has the right to demand repayment of the notes in2006. Fatburger has requested a waiver from the lender for the financialcovenants with which it was not in compliance. There can be no assurance thatFatburger will be successful in obtaining a waiver from the lender fornon-compliance. If Fatburger fails to obtain this waiver and the lenderexercises its right to demand repayment, our liquidity could be negativelyaffected.

*Fatburger may notbe able to achieve its planned expansion.*

We intend to growFatburger primarily through developing additional new franchisee andCompany-owned restaurants. Development involves substantial risks, including:

·       theavailability of financing to Fatburger and to franchisees at acceptable ratesand upon acceptable terms;

·       developmentcosts exceeding budgeted or contracted amounts;

·       delaysin the completion of construction;

·       theinability to identify, or the unavailability of, suitable sites on acceptableleasing or purchase terms;

·       developedproperties not achieving desired revenue or cash flow levels once opened;

·       incurringsubstantial unrecoverable costs in the event that a development project isabandoned prior to completion;

·       theinability to obtain all required governmental permits;

·       changesin governmental rules, regulations and interpretations; and

·       changesin general economic and business conditions.

Although we intend tomanage Fatburger’s development to reduce such risks, we cannot assure you thatpresent or future development will perform in accordance with our expectations.We cannot assure you that we will complete the development and construction ofthe restaurants, or that any such development will be completed in a timelymanner or within budget, or that any restaurants will generate our expectedreturns on investment. Our inability to expand Fatburger in accordance with ourplans or to manage our growth could have a material adverse effect on ourresults of operations and financial condition.

*We may not be ableto obtain financing sufficient to fund our planned expansion of Fatburger.*

We are implementing anationwide and international expansion of franchise and Company-owned locationsof Fatburger, which will require significant liquidity. If Fatburger or itsfranchisees are unsuccessful in obtaining capital sufficient to fund thisexpansion, the timing of restaurant openings may be delayed and Fatburger’sresults may be harmed.

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*Fatburger’s successdepends on its ability to locate a sufficient number of suitable new restaurantsites.*

One of the biggestchallenges in meeting our growth objectives for Fatburger will be to secure anadequate supply of suitable new restaurant sites. We have experienced delays inopening some Fatburger restaurants and may experience delays in the future. Therecan be no assurance that sufficient suitable locations will be available forour planned expansion in any future period. Delays or failures in opening newrestaurants could materially adversely affect Fatburger’s performance and ourbusiness, financial condition, operating results and cash flows. In addition,Fatburger is contemplating expanding into international markets in Asia, whichmay have additional challenges and requirements.

*New restaurants,once opened, may not be profitable, if at all, for several months.*

We anticipate that newFatburger restaurants will generally take several months to reach normalizedoperating levels due to inefficiencies typically associated with newrestaurants, including lack of market awareness, the need to hire and train asufficient number of team members, operating costs, which are often materiallygreater during the first several months of operation than thereafter,pre-opening costs and other factors. Further, some, or all of the newrestaurants may not attain anticipated operating results or results similar tothose of Fatburger’s existing restaurants. In addition, restaurants opened innew markets may open at lower average weekly sales volumes than restaurantsopened in existing markets, and may have higher restaurant-level operatingexpense ratios than in existing markets. Sales at restaurants opened in newmarkets may take longer to reach average annual company-owned restaurant sales,if at all, thereby affecting the profitability of these restaurants.

*Fatburger’sexisting systems and procedures may be inadequate to support our growth plans.*

We face the risk thatFatburger’s existing systems and procedures, restaurant management systems,financial controls, information and accounting systems, management resourcesand human resources will be inadequate to support our planned expansion ofcompany-owned and franchised restaurants. Expansion may strain Fatburger’sinfrastructure and other resources, which could slow restaurant development orcause other problems. We may not be able to respond on a timely basis to all ofthe changing demands that our planned expansion will impose on Fatburger’sinfrastructure and other resources. Any failure by us to continue to improveour infrastructure or to manage other factors necessary for us to achieveFatburger’s expansion objectives could have a material adverse effect on ouroperating results.

*The quick service restaurant segment is highlycompetitive, and that competition could lower revenues, margins and marketshare.*

The quick-servicerestaurant industry is highly competitive with respect to price, service,location, personnel and the type and quality of food, and there are manywell-established competitors. Each of Fatburger’s restaurants competes directlyand indirectly with a large number of national and regional restaurant chains,as well as with locally-owned quick-service restaurants, fast casualrestaurants, and sandwich shops and other similar types of businesses. Thetrend toward a convergence in grocery, deli and restaurant services mayincrease the number of Fatburger’s competitors. Such increased competitioncould have a material adverse affect on Fatburger’s financial condition andresults of operations. Some of Fatburger’s competitors have substantiallygreater financial, marketing, operating and other resources than we have, whichmay give them a competitive advantage. Certain of Fatburger’s competitors haveintroduced a variety of new products and engaged in substantial pricediscounting in recent years and may continue to do so in the future. There canbe no assurance as to the success of any of Fatburger’s new products,initiatives or overall strategies, or assurance that competitive productofferings, pricings and promotions will not have an adverse effect uponFatburger’s financial condition and results of operations.

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*Changes in economic, market and other conditions couldadversely affect Fatburger and its franchisees, and thereby our operatingresults.*

The quick-servicerestaurant industry is affected by changes in international, national,regional, and local economic conditions, consumer preferences and spendingpatterns, demographic trends, consumer perceptions of food safety, weather,traffic patterns, the type, number and location of competing restaurants, andthe effects of war or terrorist activities and any governmental responsesthereto. Factors such as inflation, food costs, labor and benefit costs, legalclaims, and the availability of management and hourly employees also affectrestaurant operations and administrative expenses. The ability of Fatburger andits franchisees to finance new restaurant development, improvements andadditions to existing restaurants, and the acquisition of restaurants from, andsale of restaurants to, franchisees is affected by economic conditions,including interest rates and other government policies impacting land andconstruction costs and the cost and availability of borrowed funds.

*Increases in theminimum wage may have a material adverse effect on Fatburger’s business andfinancial results.*

Fatburger has asubstantial number of employees who are paid wage rates at or slightly abovethe minimum wage. As federal and state minimum wage rates increase, Fatburgermay need to increase not only the wages of its minimum wage employees, but alsothe wages paid to the employees at wage rates which are above minimum wage. Ifcompetitive pressures or other factors prevent Fatburger from offsetting theincreased costs by price increases, profitability may decline. In addition,various other proposals that would require employers to provide healthinsurance for all of their employees are being considered from time to time inCongress and various states. The imposition of any requirement that Fatburgerprovide health insurance to all employees on terms materially different fromits existing programs could have a material adverse impact on the results ofoperations and financial condition of Fatburger.

*Events reported inthe media, such as incidents involving food-borne illnesses or food tampering,whether or not accurate, can cause damage to Fatburger’s brand’s reputation andswiftly affect sales and profitability.*

Reports, whether true ornot, of food-borne illnesses (such as e-coli, avian flu, bovine spongiformencephalopathy, hepatitis A, trichinosis or salmonella) and injuries caused byfood tampering have in the past severely injured the reputations ofparticipants in the quick service restaurant segment and could in the futureaffect Fatburger as well. Fatburger’s brand’s reputation is an important assetto the business; as a result, anything that damages a brand’s reputation couldimmediately and severely hurt sales and, accordingly, revenues and profits. Ifcustomers become ill from food-borne illnesses, Fatburger could also be forcedto temporarily close some restaurants. In addition, instances of food-borneillnesses or food tampering, even those occurring solely at the restaurants ofcompetitors, could, by resulting in negative publicity about the restaurantindustry, adversely affect sales on a local, regional or system-wide basis. Adecrease in customer traffic as a result of these health concerns or negativepublicity, or as a result of a temporary closure of any Fatburger restaurants,could materially harm Fatburger’s business.

*Changing health or dietary preferences may causeconsumers to avoid products offered by Fatburger in favor of alternative foods.*

The foodservice industryis affected by consumer preferences and perceptions. Fatburger’s successdepends, in part, upon the popularity of burgers and quick-service dining. Shiftsin consumer preferences away from this cuisine or dining style could have amaterial adverse affect on our future profitability. The restaurant industry ischaracterized by the continual introduction of new concepts and is subject torapidly changing consumer preferences, tastes and eating and purchasing habits.While burger consumption in the United States has grown over the past 20 years,the demand may not continue to grow or taste trends may change. Fatburger’ssuccess will depend in part on our ability to anticipate and respond tochanging 

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consumerpreferences, tastes and eating and purchasing habits, as well as other factorsaffecting the food service industry, including new market entrants anddemographic changes. If prevailing health or dietary preferences andperceptions cause consumers to avoid these products offered by Fatburgerrestaurants in favor of alternative or healthier foods, demand for Fatburger’sproducts may be reduced and its business could be harmed.

*Fatburger issubject to health, employment, environmental and other government regulations,and failure to comply with existing or future government regulations couldexpose Fatburger to litigation, damage Fatburger’s reputation and lowerprofits.*

Fatburger and its franchisees are subject to variousfederal, state and local laws affecting their businesses. The successfuldevelopment and operation of restaurants depend to a significant extent on theselection and acquisition of suitable sites, which are subject to zoning, landuse (including the placement of drive-thru windows), environmental (includinglitter), traffic and other regulations. Restaurant operations are also subjectto licensing and regulation by state and local departments relating to health,food preparation, sanitation and safety standards, federal and state labor laws(including applicable minimum wage requirements, overtime, working and safetyconditions and citizenship requirements), federal and state laws prohibitingdiscrimination and other laws regulating the design and operation offacilities, such as the Americans with Disabilities Act of 1990. If Fatburgerfails to comply with any of these laws, it may be subject to governmentalaction or litigation, and its reputation could be accordingly harmed. Injury toFatburger’s reputation would, in turn, likely reduce revenues and profits.

In recent years, there hasbeen an increased legislative, regulatory and consumer focus on nutrition andadvertising practices in the food industry, particularly among quick servicerestaurants. As a result, Fatburger may become subject to regulatoryinitiatives in the area of nutrition disclosure or advertising, such asrequirements to provide information about the nutritional content of its foodproducts, which could increase expenses. The operation of Fatburger’s franchisesystem is also subject to franchise laws and regulations enacted by a number ofstates and rules promulgated by the U.S. Federal Trade Commission. Anyfuture legislation regulating franchise relationships may negatively affect Fatburger’soperations, particularly its relationship with its franchisees. Failure tocomply with new or existing franchise laws and regulations in any jurisdictionor to obtain required government approvals could result in a ban or temporarysuspension on future franchise sales. Changes in applicable accounting rules imposedby governmental regulators or private governing bodies could also affectFatburger’s reported results of operations, and thus cause our stock price tofluctuate or decline.

***Fatburger’searnings and business growth strategy depends in large part on the success ofits franchisees, and Fatburger’s reputation may be harmed by actions taken byfranchisees that are outside of its control.***

A portion of Fatburger’searnings comes from royalties and other amounts paid by Fatburger’s franchisees.Franchisees are independent contractors, and their employees are not employeesof Fatburger. Fatburger provides training and support to, and monitors theoperations of, its franchisees, but the quality of their restaurant operationsmay be diminished by any number of factors beyond Fatburger’s control. Consequently,franchisees may not successfully operate stores in a manner consistent withFatburger’s high standards and requirements and franchisees may not hire andtrain qualified managers and other restaurant personnel. Any operationalshortcoming of a franchise restaurant is likely to be attributed by consumersto an entire brand, thus damaging Fatburger’s reputation and potentiallyaffecting revenues and profitability.

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**Risks related toCentrisoft**

***Centrisoftcurrently relies on a single federal contract to cover its operating costswhich is subject to delay and uncertainty related to the federal appropriationsprocess.***

Centrisoft has a contractwith a branch of the United States military which, when funded, is expected tocover all of its operating expenses. Due to uncertainties related to thefederal appropriations process, funding under this contract has been subject todelay, and may remain unfunded indefinitely. There can be no assurance thatfunds will be appropriated and paid under this contact and if this contract isnot funded, Centrisoft’s operating results will suffer.

*If Centrisoft isunable to compete successfully in the highly competitive market for networkproductivity and security products for any reason, its business will fail.*

Centrisoft is an earlystage company that currently has a limited customer base. The market forenterprise network productivity and security products is intensely competitiveand we expect competition to intensify in the future. An increase incompetitive pressures in this market or Centrisoft’s failure to competeeffectively may result in pricing reductions, reduced gross margins and afailure to obtain market share. Other competitors offering similar productshave longer operating histories, greater name recognition, larger customerbases and significantly greater financial, technical, marketing and otherresources than Centrisoft does. In addition, larger competitors may bundleproducts competitive with Centrisoft’s with other products that they may sellto our potential customers. These customers may accept these bundled productsrather than separately purchasing our products.

*Customer demand,competitive pressure and rapid changes in technology and industry standardscould render Centrisoft’s products and services unmarketable or obsolete, andCentrisoft may be unable to introduce new or improved products and services, orupdate existing products or services, timely and successfully.*

*To succeed,*Centrisoftmust continually change and improve its products, add new products andservices, provide updates to products and services and replace existingproducts and services in response to changes in customer demand, competitivepressure, rapid technological developments and changes in operating systems,Internet access and communications, application and networking software,computer and communications hardware, programming tools, computer languagetechnology and computer hacker techniques. Centrisoft may be unable tosuccessfully and timely develop and introduce these new, improved or updatedproducts and services or achieve and maintain market acceptance for new,improved or updated products and services we develop and introduce.

The development and introduction of new, enterprisenetwork and security products or providing updates to existing products, is acomplex and uncertain process that requires great innovation, the ability toanticipate technological and market trends, the ability to deliver updates in atimely fashion and the ability to obtain required domestic and foreigngovernmental and regulatory certifications.

Releasing new or improvedproducts and services, or updates to products or services, prematurely may resultin quality problems, and releasing them late may result in loss of customerconfidence and market share. When Centrisoft introduces new or enhancedproducts and services, it may be unable to successfully manage the transitionfrom its existing products and services to deliver enough new products andservices to meet customer demand.

*Undetected producterrors or defects could result in loss of revenues, delayed market acceptanceand claims against Centrisoft.*

Centrisoft’s products andservices may contain undetected errors or defects, especially when firstreleased. Despite extensive testing, some errors are discovered only after aproduct has been installed and used by customers. Any errors discovered aftercommercial release could result in loss of revenues or claims againstCentrisoft or its resellers.

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*Centrisoft may berequired to defend lawsuits or pay damages in connection with the alleged oractual failure of Centrisoft’s products and services.*

Because Centrisoft’sproducts provide and monitor network security and may protect valuableinformation, Centrisoft may face claims for product liability, tort or breachof warranty relating to its products and services. Anyone who circumventsCentrisoft’s security measures could misappropriate the confidentialinformation or other property of end-users using our products and services orinterrupt their operations. If that happens, affected end-users or channelcustomers may sue Centrisoft. In addition, Centrisoft may face liability forbreaches caused by faulty installation and implementation of its products byend-users or channel customers. Although Centrisoft attempts to reduce the riskof losses from claims through contractual warranty disclaimers and liabilitylimitations, these provisions may be unenforceable. Some courts, for example,have found contractual limitations of liability in standard software licensesto be unenforceable because the licensee does not sign the license. Defending asuit, regardless of its merit, could be costly and could divert managementattention. Although Centrisoft currently maintains business liabilityinsurance, this coverage may be inadequate or may be unavailable in the futureon acceptable terms, if at all.

*Centrisoft may beunable to adequately protect our proprietary rights, which may limit itsability to compete effectively.*

Despite Centrisoft’s efforts to protect itsproprietary rights, unauthorized parties may misappropriate or infringe on itspatents, trade secrets, copyrights, trademarks, service marks and similar proprietaryrights. Centrisoft may, however, be unsuccessful in protecting its tradesecrets or, even if successful, any required litigation may be costly and timeconsuming, which could harm our business.

If Centrisoft fails toobtain and maintain patent protection for our technology, we may be unable tocompete effectively. In addition, Centrisoft relies on unpatented proprietarytechnology. Because this proprietary technology does not have patentprotection, Centrisoft may be unable to meaningfully protect this technologyfrom unauthorized use or misappropriation by a third party. Centrisoft’scompetitors may independently develop similar or superior technologies orduplicate any unpatented technologies that we have developed which couldsignificantly reduce the value of its proprietary technology or threaten itsmarket position.

**Risks related toour real estate holdings and our mortgage brokerage business**

*Our performance andvalue are subject to risks associated with our real estate assets and with thereal estate industry.*

Our economicperformance and the value of our real estate assets, and consequently the valueof our stock, are subject to the risk that if our real estate properties do notgenerate revenues sufficient to meet our operating expenses, including debtservice and capital expenditures, our cash flow will be adversely affected. Thefollowing factors, among others, may adversely affect the income generated byour real estate properties:

·       downturnsin the international, national, regional and local economic conditions(particularly increases in unemployment);

·       competitionfrom other office, hotel and commercial buildings;

·       localreal estate market conditions, such as oversupply or reduction in demand foroffice, hotel or other commercial or residential space;

·       changesin interest rates and availability of attractive financing;

·       vacancies,changes in market rental rates and the need to periodically repair, renovateand re-let space;

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·       increasedoperating costs, including insurance expense, utilities, real estate taxes,state and local taxes and heightened security costs;

·       civildisturbances, earthquakes and other natural disasters, or terrorist acts oracts of war which may result in uninsured or underinsured losses;

·       significantexpenditures associated with each investment, such as debt service payments,real estate taxes, insurance and maintenance costs which are generally notreduced when circumstances cause a reduction in revenues from a property;

·       declinesin the financial condition of our tenants and our ability to collect rents fromour tenants; and

·       decreases in the underlyingvalue of our real estate.

*Acquired propertiesmay expose us to unknown liability.*

We may acquireproperties subject to liabilities and without any recourse, or with onlylimited recourse against the prior owners or other third parties, with respectto unknown liabilities. As a result, if a liability were asserted against usbased upon ownership of those properties, we might have to pay substantial sumsto settle or contest it, which could adversely affect our results of operationsand cash flow. Unknown liabilities with respect to acquired properties mightinclude:

·       liabilitiesfor clean-up of undisclosed environmental contamination;

·       claimsby tenants, vendors or other persons against the former owners of theproperties;

·       liabilitiesincurred in the ordinary course of business; and

·       claims for indemnificationby general partners, directors, officers and others indemnified by the formerowners of the properties.

*Because we rely onour ability to sell assets to generate liquidity, fluctuations in the realestate market could negatively affect our cash flow.*

We currently generate asubstantial portion of our liquidity from sales of assets, including realestate assets. If we are unable to sell assets at effective prices, it mayaffect our liquidity and profitability.

*We may havedifficulty selling our properties, which may limit our flexibility.*

Properties like the onesthat we own could be difficult to sell. This may limit our ability to changeour portfolio promptly in response to changes in economic or other conditions. Inaddition, tax laws limit our ability to sell properties and this may affect ourability to sell properties without adversely affecting or performance orreturns. These restrictions reduce our ability to respond to changes in theperformance of our investments and could adversely affect our financialcondition and results of operations.

*Exposure to theSouthern California commercial real estate market could affect results forGeorge Elkins.*

Our mortgage brokeragebusiness, George Elkins, relies on activity in the Southern Californiacommercial real estate market. If this market weakens, we will have fewersales, resulting in less brokerage commissions.

*Competitivepressures in the commercial mortgage business could harm our business.*

The commercial mortgagebrokerage is highly competitive, and George Elkins competes with larger, betterestablished competitors who often have greater resources than George Elkins. IfGeorge Elkins is 

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unableto successfully compete against its competitors, its business will be harmedand our financial results could suffer.

**ITEM 2. UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM 3. DEFAULTSUPON SENIOR SECURITIES**

Not applicable.

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

None.

**ITEM 5. OTHERINFORMATION**

None.

**ITEM 6. EXHIBITS**

3.1          Amended and RestatedArticles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1to the Form 10-Q for the period ended September 30, 1999, aspreviously filed with the SEC on November 22, 1999.

3.2          Bylaws of theRegistrant, incorporated by reference to Exhibit 3.2 to Amendment No. 3to 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 CertificateSpecimen, incorporated by reference to Exhibit 4.1 to Amendment No. 3to the Registration Statement (Registration No. 333-39035) on Form S-11,as previously filed with the SEC on March 30, 1998.

4.2          Form ofRegistration Rights Agreement, incorporated by reference to Exhibit 10.8to 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 StockOption Plan, incorporated by reference to Exhibit 10.3 to Amendment No. 3to 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, Delegationand Amendment to Stock Option and Voting Agreement among Andrew A. Wiederhorn,Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany Wiederhorn, and theRegistrant, dated July 31, 2002, incorporated by reference to Exhibit 2.1to the Form 8-K dated August 8, 2002, as previously filed withthe SEC on August 15, 2002.

4.5          Summary of Rights toPurchase Shares, incorporated by reference to Exhibit 99.1 to the Form 8-Kdated October 18, 2002, as previously filed with the SEC on October 18,2002.

4.6          Rights Agreement datedas of October 18, 2002 between the Registrant and The Bank of New York,incorporated by reference to Exhibit 1 to Form 8-A, aspreviously filed with the SEC on October 29, 2002.

4.7          Amendment to the RightsAgreement, dated as of May 1, 2004, by and between the Registrant and TheBank of New York as previously filed with the SEC on March 30, 2005.

4.8          Long Term Vesting TrustAgreement among the Registrant and Lawrence Mendelsohn, Andrew Wiederhorn andDavid Egelhoff, dated October 1, 2000, incorporated by reference to Exhibit 4.4to 

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the Form 10-Kfor the year ended December 31, 2002, as previously filed with the SEC on March 3,2003.

4.9          Amendment Number 1 tothe Long Term Vesting Trust Agreement dated as of September 19, 2002, byand between the Registrant and Andrew Wiederhorn, Don Coleman, and DavidDale-Johnson as previously filed with the SEC on March 30, 2005.

4.10   Amendment Number 2 to the LongTerm Vesting Trust Agreement, dated as of May 26, 2004, by and between theRegistrant and Andrew Wiederhorn, Don Coleman, and David Dale-Johnson aspreviously filed with the SEC on March 30, 2005.

11.1   Computation of Per ShareEarnings.

31.1   Certification of ChiefExecutive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2   Certification of ChiefFinancial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

32.1   Certification of the ChiefExecutive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

32.2   Certification of the ChiefFinancial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|        | FOG CUTTER CAPITAL GROUP INC. |
|--------|-------------------------------|
|   | By:                           | /s/ ANDREW A. WIEDERHORN |
|   |                          | Andrew A. Wiederhorn |
|   |                          | Chief Executive Officer |
|   | By:                           | /s/ R. Scott Stevenson |
|   |                          | R. Scott Stevenson |
|   |                          | Senior Vice President and Chief Financial Officer |

 

Date:  May 11,2006

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**EXHIBITINDEX**
| 3.1  |   | Amended and Restated Articles of Incorporation of  the Registrant, incorporated by reference to Exhibit 3.1 to the  Form 10-Q for the period ended September 30, 1999, as  previously filed with the SEC on November 22, 1999.                                                                                                                                  |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Bylaws of the  Registrant, incorporated by reference to Exhibit 3.2 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035)  on Form S-11, as previously filed with the SEC on March 30,  1998.                                                                                                                                     |
| 4.1  |   | Common Stock Certificate  Specimen, incorporated by reference to Exhibit 4.1 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035)  on Form S-11, as previously filed with the SEC on March 30,  1998.                                                                                                                            |
| 4.2  |   | Form of  Registration Rights Agreement, incorporated by reference to Exhibit 10.8  to Amendment No. 3 to the Registration Statement (Registration  No. 333-39035) on Form S-11, as previously filed with  the SEC on March 30, 1998.                                                                                                                  |
| 4.3  |   | Form of Stock  Option Plan, incorporated by reference to Exhibit 10.3 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035)  on Form S-11, as previously filed with the SEC on March 30,  1998.                                                                                                                              |
| 4.4  |   | 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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