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

 

**Washington,D.C. 20549**

 

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

 

**(Mark one)**

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

 

**OR**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**CommissionFile No. 0-23911**

 

**Fog Cutter Capital Group Inc.**

(Exact name ofregistrant as specified in its charter)

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

 

**1410 SWJefferson Street**

**Portland,OR  97201**

(Address ofprincipal executive offices) (Zip Code)

 

**(503) 721-6500**

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

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý   No o.

 

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

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

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

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

 

 

----

 

FOG CUTTER CAPITALGROUP INC.

 

FORM 10-Q

 

I N D E X

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

 

Available information

 

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

 

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PART I — FINANCIAL INFORMATION

 

## **ITEM 1.  INTERIMFINANCIAL STATEMENTS**

 

FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION

(dollars inthousands, except share data)

 
| ** **                                                                                                                                                                                                                                                           | ** ** | **June 30  2005** | ** ** | **December 31  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                                                           | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| Assets                                                                                                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                                                                           |       | $                      | 7,920      |                       | $          | 11,948 |   |
| Loans                                                                                                                                                                                                                                                                |       | 7,092                  |       | 6,651                      |       |
| Investments in  real estate, net                                                                                                                                                                                                                                     |       | 25,369                 |       | 26,660                     |       |
| Loans to senior  executives                                                                                                                                                                                                                                          |       | 3,005                  |       | 2,983                      |       |
| Investment in  Bourne End                                                                                                                                                                                                                                            |       | 2,192                  |       | 1,901                      |       |
| Restaurant  property, plant and equipment, net                                                                                                                                                                                                                       |       | 5,579                  |       | 6,228                      |       |
| Intangible  assets, net                                                                                                                                                                                                                                              |       | 5,286                  |       | 5,401                      |       |
| Goodwill                                                                                                                                                                                                                                                             |       | 7,063                  |       | 7,063                      |       |
| Other assets                                                                                                                                                                                                                                                         |       | 4,873                  |       | 5,063                      |       |
| Total assets                                                                                                                                                                                                                                                         |       | $                      | 68,379     |                       | $          | 73,898 |   |
|                                                                                                                                                                                                                                                                 |       |                   |       |                       |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                                                                                                           |       |                   |       |                       |       |
| Liabilities:                                                                                                                                                                                                                                                         |       |                   |       |                       |       |
| Borrowings and  notes payable                                                                                                                                                                                                                                        |       | 10,154                 |       | 7,977                      |       |
| Obligations  under capital leases                                                                                                                                                                                                                                    |       | 11,300                 |       | 12,401                     |       |
| Obligation under  leave of absence agreement                                                                                                                                                                                                                         |       | 596                    |       | 1,771                      |       |
| Deferred income                                                                                                                                                                                                                                                      |       | 4,371                  |       | 4,466                      |       |
| Deferred income  taxes                                                                                                                                                                                                                                               |       | 5,756                  |       | 5,782                      |       |
| Accrued expenses  and other liabilities                                                                                                                                                                                                                              |       | 7,206                  |       | 7,194                      |       |
| Total  liabilities                                                                                                                                                                                                                                                   |       | 39,383                 |       | 39,591                     |       |
|                                                                                                                                                                                                                                                                 |       |                   |       |                       |       |
| Commitments and  contingencies                                                                                                                                                                                                                                       |       |                   |       |                       |       |
|                                                                                                                                                                                                                                                                 |       |                   |       |                       |       |
| Stockholders’  Equity:                                                                                                                                                                                                                                          |       |                   |       |                       |       |
| Preferred stock,  $.0001 par value; 25,000,000 shares authorized; no shares issued and  outstanding                                                                                                                                                                  |       | —                 |       | —                     |       |
| Common stock,  $.0001 par value; 200,000,000 shares authorized; 11,757,073 shares issued as  of June 30, 2005 and December 31, 2004; 7,957,428 shares  outstanding as of June 30, 2005 and 8,380,673 shares outstanding as of  December 31, 2004 |       | 168,214                |       | 168,214                    |       |
| Accumulated  deficit                                                                                                                                                                                                                                                 |       | (127,539               | )          | (123,916                   | )          |
| Option to  purchase common stock                                                                                                                                                                                                                                     |       | —                 |       | (593                       | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                                                              |       | 330                    |       | 329                        |       |
| Treasury stock,  3,799,645 common shares as of June 30, 2005 and 3,376,400 common shares  as of December 31, 2004, at cost                                                                                                                                 |       | (12,009                | )          | (9,727                     | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                     |       | 28,996                 |       | 34,307                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                     |       | $                      | 68,379     |                       | $          | 73,898 |   |

 

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

 

3

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FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Unaudited)

*(dollarsin thousands, except share data)*

 
| ** **                                           | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2005**                         | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Interest  Income:                                |       |                             |       |                                |       |   |   |   |   |
| Loans                                                |       | $                                | 551        |                                | $          | 585 |   | $ | 773 |   | $ | 975 |   |
| Securities                                           |       | 5                                |       | 292                                 |       | 6 |   | 605 |   |
| Loans to senior  executives                          |       | 54                               |       | 51                                  |       | 107 |   | 87 |   |
| Other  investments                                   |       | 46                               |       | 24                                  |       | 94 |   | 71 |   |
| Total interest  income                               |       | 656                              |       | 952                                 |       | 980 |   | 1,738 |   |
| Interest expense                                     |       | —                           |       | 41                                  |       | — |   | 112 |   |
| Net interest  income                                 |       | 656                              |       | 911                                 |       | 980 |   | 1,626 |   |
|                                                 |       |                             |       |                                |       |   |   |   |   |
| Real Estate  Operations:                             |       |                             |       |                                |       |   |   |   |   |
| Operating income                                     |       | 1,161                            |       | 1,022                               |       | 2,168 |   | 1,976 |   |
| Operating  expense                                   |       | (417                             | )          | (420                                | )          | (840 | ) | (876 | ) |
| Gain on sale of  real estate                         |       | 1,176                            |       | 5                                   |       | 1,589 |   | 5 |   |
| Interest expense                                     |       | (260                             | )          | (281                                | )          | (528 | ) | (562 | ) |
| Depreciation                                         |       | (128                             | )          | (163                                | )          | (273 | ) | (322 | ) |
| Total real  estate operations                        |       | 1,532                            |       | 163                                 |       | 2,116 |   | 221 |   |
|                                                 |       |                             |       |                                |       |   |   |   |   |
| Restaurant  Operations:                              |       |                             |       |                                |       |   |   |   |   |
| Operating  revenue                                   |       | 6,055                            |       | 5,467                               |       | 12,037 |   | 10,751 |   |
| Cost of goods  sold                                  |       | (3,604                           | )          | (3,461                              | )          | (7,063 | ) | (6,538 | ) |
| Franchise and  royalty fee                           |       | 501                              |       | 377                                 |       | 1,022 |   | 649 |   |
| General and  administrative cost                     |       | (2,942                           | )          | (2,702                              | )          | (5,614 | ) | (5,417 | ) |
| Interest expense                                     |       | (156                             | )          | (181                                | )          | (310 | ) | (346 | ) |
| Depreciation and  amortization                       |       | (344                             | )          | (391                                | )          | (710 | ) | (743 | ) |
| Total restaurant  operations                         |       | (490                             | )          | (891                                | )          | (638 | ) | (1,644 | ) |
|                                                 |       |                             |       |                                |       |   |   |   |   |
| Other Operating  (Loss) Income:                      |       |                             |       |                                |       |   |   |   |   |
| Gain on sale of  loans and securities                |       | —                           |       | 1,013                               |       | — |   | 2,099 |   |
| Loan origination  fees                               |       | 1,002                            |       | 1,248                               |       | 2,429 |   | 2,374 |   |
| Gain on sale of  prepaid servicing credit            |       | —                           |       | 1,530                               |       | — |   | 1,530 |   |
| Equity in  earnings of equity investees              |       | 441                              |       | 1,490                               |       | 441 |   | 1,512 |   |
| Other                                                |       | 35                               |       | 662                                 |       | 109 |   | 873 |   |
| Total other  operating (loss) income                 |       | 1,478                            |       | 5,943                               |       | 2,979 |   | 8,388 |   |
|                                                 |       |                             |       |                                |       |   |   |   |   |
| Operating  Expenses:                                 |       |                             |       |                                |       |   |   |   |   |
| Compensation and  employee benefits                  |       | 1,631                            |       | 2,762                               |       | 3,698 |   | 5,523 |   |
| Leave of absence  expense                            |       | —                           |       | 4,750                               |       | — |   | 4,750 |   |
| Professional  fees                                   |       | 496                              |       | 928                                 |       | 1,205 |   | 1,169 |   |
| Other                                                |       | 957                              |       | 1,824                               |       | 1,997 |   | 2,922 |   |
| Total operating  expenses                            |       | 3,084                            |       | 10,264                              |       | 6,900 |   | 14,364 |   |
|                                                 |       |                             |       |                                |       |   |   |   |   |
| Net income  (loss) before provision for income taxes |       | 92                               |       | (4,138                              | )          | (1,463 | ) | (5,773 | ) |
| Provision for  income taxes                          |       | —                           |       | —                              |       | — |   | — |   |
| Net Income                                           |       | $                                | 92         |                                | $          | (4,138 | ) | $ | (1,463 | ) | $ | (5,773 | ) |
|                                                 |       |                             |       |                                |       |   |   |   |   |
| Basic income  (loss) per share                       |       | $                                | 0.01       |                                | $          | (0.49 | ) | $ | (0.18 | ) | $ | (0.68 | ) |
| Basic weighted  average shares outstanding           |       | 7,957,428                        |       | 8,417,005                           |       | 8,133,780 |   | 8,507,260 |   |
| Diluted net  income (loss) per share                 |       | $                                | 0.01       |                                | $          | (0.49 | ) | $ | (0.18 | ) | $ | (0.68 | ) |
| Diluted weighted  average shares outstanding         |       | 7,961,915                        |       | 8,417,005                           |       | 8,133,780 |   | 8,507,260 |   |
| Dividends  declared per share                        |       | $                                | 0.13       |                                | $          | 0.13 |   | $ | 0.26 |   | $ | 0.26 |   |

 

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

 

4

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**FOGCUTTER CAPITAL GROUP INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 

(Unaudited)

(dollars in thousands)

 
| ** **                                                                                                         | ** ** | **Common  Stock** | ** ** | **Treasury  Stock** | ** ** | **Accumulated** | ** ** | **Option  to  Purchase** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **        | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|-----------------|------------|--------------------------|------------|---------------------------------------|------------|-------------------|------------|
| ** **                                                                                                         | ** ** | **Shares  (1)**   | ** ** | **Amount**          | ** ** | **Shares**      | ** ** | **Amount**               | ** ** | **Deficit**                           | ** ** | **Common  Stock** | ** ** | **Income** | ** ** | **Total** | ** ** |
| Balance at  January 1, 2005                                                                                   |       | 8,380,673         |       | $                   | 168,214    |            | 3,376,400  |                     | $          | (9,727                                | )          | $                 | (123,916   | ) | $ | (593 | ) | $ | 329 |   | $ | 34,307 |   |
| Comprehensive  income (loss):                                                                                      |       |              |       |                |       |            |       |                     |       |                                  |       |              |       |   |   |   |   |
| Net loss                                                                                                           |       | —            |       | —              |       | —          |       | —                   |       | (1,463                                | )          | —            |       | — |   | (1,463 | ) |
| Other  comprehensive income:                                                                                       |       |              |       |                |       |            |       |                     |       |                                  |       |              |       |   |   |   |   |
| Foreign currency  translation                                                                                      |       | —            |       | —              |       | —          |       | —                   |       | —                                |       | —            |       | (419 | ) | (419 | ) |
| Reclassification  adjustment for net losses on securities and foreign currency translation  included in net income |       | —            |       | —              |       | —          |       | —                   |       | —                                |       | —            |       | 420 |   | 420 |   |
| Total  comprehensive loss                                                                                          |       | —            |       | —              |       | —          |       | —                   |       | —                                |       | —            |       | — |   | (1,462 | ) |
| Purchase of  treasury stock                                                                                        |       | (423,245          | )          | —              |       | 423,245         |       | (2,282                   | )          | —                                |       | 593               |       | — |   | (1,689 | ) |
| Dividends  declared                                                                                                |       | —            |       | —              |       | —          |       | —                   |       | (2,160                                | )          | —            |       | — |   | (2,160 | ) |
| Balance at  June 30, 2005                                                                                     |       | 7,957,428         |       | $                   | 168,214    |            | 3,799,645  |                     | $          | (12,009                               | )          | $                 | (127,539   | ) | $ | — |   | $ | 330 |   | $ | 28,996 |   |
|                                                                                                                    |            |                   |            |                     |            |                 |            |                          |            |                                       |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Issuedand outstanding

 

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

 

5

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FOG CUTTER CAPITALGROUP INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

*(dollarsin thousands)*

 
| ** **                                                               | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                                                               | ** ** | **2005**                         | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                   |       |                             |       |                                |       |   |   |   |   |
| Net income  (loss)                                                       |       | $                                | 92         |                                | $          | (4,138 | ) | $ | (1,463 | ) | $ | (5,773 | ) |
| Adjustments to  reconcile net income (loss) to net operating cash flows: |       |                             |       |                                |       |   |   |   |   |
| Equity in  (income) losses of equity investees                           |       | (441                             | )          | (1,490                              | )          | (441 | ) | (1,512 | ) |
| Depreciation and  amortization                                           |       | 532                              |       | 575                                 |       | 1,096 |   | 1,102 |   |
| Loss (gain) on  foreign currency translation                             |       | 249                              |       | (5                                  | )          | 420 |   | (20 | ) |
| Gain on sale of  securities and loans                                    |       | —                           |       | (1,013                              | )          | — |   | (2,099 | ) |
| Gain on sale of  real estate                                             |       | (1,176                           | )          | (5                                  | )          | (1,589 | ) | (5 | ) |
| Other                                                                    |       | 20                               |       | (1,812                              | )          | (114 | ) | (2,175 | ) |
| Change in:                                                               |       |                             |       |                                |       |   |   |   |   |
| Deferred income                                                          |       | 25                               |       | 149                                 |       | (95 | ) | 309 |   |
| Accrued interest  receivable                                             |       | 2                                |       | 55                                  |       | (13 | ) | 48 |   |
| Other assets                                                             |       | (1,250                           | )          | (1,345                              | )          | 136 |   | (1,201 | ) |
| Accounts payable  and accrued liabilities                                |       | (101                             | )          | 3,073                               |       | (824 | ) | 3,053 |   |
| Net cash used in  operating activities                                   |       | (2,048                           | )          | (5,956                              | )          | (2,887 | ) | (8,273 | ) |
|                                                                     |       |                             |       |                                |       |   |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                   |       |                             |       |                                |       |   |   |   |   |
| Principal  payments on securities available for sale                     |       | —                           |       | 4,571                               |       | — |   | 6,818 |   |
| Proceeds from  sale of securities available for sale                     |       | —                           |       | 27,790                              |       | — |   | 29,090 |   |
| Proceeds from  sale of real estate                                       |       | 2,128                            |       | 2                                   |       | 3,320 |   | 174 |   |
| Investment in  loans and discounted loans                                |       | (1,345                           | )          | (2,850                              | )          | (1,435 | ) | (7,073 | ) |
| Principal  repayments on loans and discounted loans                      |       | 1,108                            |       | 984                                 |       | 1,109 |   | 1,054 |   |
| Investment in  real estate                                               |       | (178                             | )          | (573                                | )          | (2,126 | ) | (1,634 | ) |
| Investments in  restaurant property, plant, and equipment                |       | 62                               |       | (227                                | )          | (20 | ) | (784 | ) |
| Other                                                                    |       | (12                              | )          | 923                                 |       | (16 | ) | 929 |   |
| Net cash  provided by (used in) investing activities                     |       | 1,763                            |       | 30,620                              |       | 832 |   | 28,574 |   |
|                                                                     |       |                             |       |                                |       |   |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                   |       |                             |       |                                |       |   |   |   |   |
| Proceeds from  borrowings                                                |       | 918                              |       | —                              |       | 2,292 |   | — |   |
| Repayments on  borrowings                                                |       | —                           |       | (24,551                             | )          | (82 | ) | (25,812 | ) |
| Repayments under  capital leases                                         |       | (135                             | )          | (118                                | )          | (245 | ) | (261 | ) |
| Purchase of  treasury stock                                              |       | —                           |       | (1,785                              | )          | (1,689 | ) | (1,785 | ) |
| Dividend  payments on common stock                                       |       | (1,061                           | )          | (1,153                              | )          | (2,151 | ) | (3,400 | ) |
| Other                                                                    |       | —                           |       | (453                                | )          | — |   | (429 | ) |
| Net cash (used  in) provided by financing activities                     |       | (278                             | )          | (28,060                             | )          | (1,875 | ) | (31,687 | ) |
|                                                                     |       |                             |       |                                |       |   |   |   |   |
| EFFECT OF  EXCHANGE RATE CHANGE ON CASH                                  |       | (86                              | )          | (5                                  | )          | (98 | ) | 16 |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                    |       | (649                             | )          | (3,401                              | )          | (4,028 | ) | (11,370 | ) |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                        |       | 8,569                            |       | 11,638                              |       | 11,948 |   | 19,607 |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                              |       | $                                | 7,920      |                                | $          | 8,237 |   | $ | 7,920 |   | $ | 8,237 |   |
|                                                                     |       |                             |       |                                |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                       |       |                             |       |                                |       |   |   |   |   |
| Cash paid for  interest                                                  |       | $                                | 382        |                                | $          | 467 |   | $ | 842 |   | $ | 975 |   |
| Cash paid for  income taxes                                              |       | $                                | 20         |                                | $          | — |   | $ | 22 |   | $ | 4 |   |
|                                                                     |       |                             |       |                                |       |   |   |   |   |
| NONCASH  FINANCING AND INVESTING ACTIVITIES                              |       |                             |       |                                |       |   |   |   |   |
| Treasury stock  acquired through exercise of option                      |       | $                                | —     |                                | $          | — |   | $ | 593 |   | $ | — |   |

 

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

 

6

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**NOTE 1****-BASIS OF PRESENTATION**

 

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

 

In the Company’s opinion,all adjustments, comprised of normal recurring accruals necessary for the fairpresentation of the interim financial statements, have been included in theaccompanying consolidated financial statements. Operating results for the six months ended June 30, 2005 are notnecessarily indicative of the results that may be expected for the year ending December 31,2005.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires the Company to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.  Certainitems in the previously reported consolidated financial statements werereclassified to conform to the June 30, 2005 presentation, none of whichaffected previously reported results of operations.

 

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

 

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

 

Dividends

 

TheCompany has declared and paid a $0.13 per share dividend for each quarter of2005 to date.  The first quarter dividendwas declared on January 26, 2005 and was paid on February 10,2005 to stockholders of record on February 4, 2005.  The second quarter dividend was declared on April 27,2005 and was paid on June 1, 2005 to stockholders of record on May 20,2005.

 

Sale of Real Estate

 

During the six monthsended June 30, 2005, the Company sold six stand-alone retail locations(including one location subject to a capital lease) in separate transactionsfor an aggregate sales price of $3.2 million in cash and a note receivable of$0.1 million.  The Company used $0.4million of the proceeds to retire an associated obligation under capital leaseand recognized gains on the sales totaling $1.6 million.

 

Investment in VariableInterest Entity

 

During January 2005,the Company funded a loan totaling $0.9 million and committed to fund anadditional $0.4 million to a Spanish entity formed to purchase, reposition andsell an apartment building in Barcelona, Spain. Under the terms of the loan, the Company receives a preferred 30% returnon its investment, and, after a similar return is paid to the minorityinvestors, the Company receives an 80% share in additional profits generated bythe investment.  The investment meets thedefinition of a Variable Interest Entity (“VIE”)  under FASB Interpretation 46 (“FIN 46”) andthe Company is considered the primary beneficiary of the VIE.

 

7

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The VIE purchased theapartment building for $1.5 million.  Thepurchase was funded with bank loans totaling $0.5 million, the Company’s $0.9million investment and a $0.1 million contribution from the projectmanagers.  Neither the creditors nor theother beneficial interest holders have recourse to the Company with regard tothis investment and, as a result, the maximum limit of the Company’s exposureto loss on this investment is $1.3 million.

 

Call Option

 

On March 14, 2005,the Company exercised an option (the “Call Option”) to acquire 423,245 sharesof the Company’s Common Stock from Andrew Wiederhorn, the Company’s formerChief Executive Officer and current Chief Strategic Officer for an exerciseprice of $3.99 per share.  The originalpurchase price for the Call Option in April 2004 was $750,000, resultingin an “all-in” cost to the Company on exercise of approximately $5.76 pershare.

 

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

 

CCL Investigation

 

On June 3, 2004, theCompany announced that then Chief Executive Officer and Chairman of the Board,Andrew Wiederhorn, had entered into a settlement (the “Settlement”) with theUnited States Attorney’s Office for the District of Oregon (“USAODO”) regardingits investigation into the failure of Capital Consultants, L.L.C (“CCL”) andwould take a leave of absence from his corporate positions at the Company.  Under the Settlement terms, Mr. Wiederhornpled guilty on June 3, 2004 to two federal counts and was sentenced to 18-monthsincarceration and fined $2.0 million. The charges to which Mr. Wiederhorn has pled guilty pursuant to theSettlement are not based upon any acts or omissions involving the Company or ofMr. Wiederhorn in his capacity as an officer or director of the Company.

 

On June 2, 2004, theCompany and Mr. Wiederhorn entered into a leave of absence agreement.  In entering into the leave of absenceagreement, the Board of Directors considered the nature of the statutes towhich Mr. Wiederhorn pled and the fact that he relied on the advice ofexpert legal counsel and a national accounting firm.  The Board also believed it was important toassure Mr. Wiederhorn’s return to active involvement with the Companybecause of his expertise and knowledge of the Company’s business andinvestments.

 

Mr. Wiederhorn beganhis leave of absence on August 2, 2004 and is expected to remain in thatstatus for approximately 14 months. Under the terms of the leave of absenceagreement, Mr. Wiederhorn will continue to receive his regular salary andbonus pursuant to and as set forth in his employment agreement.  All of the compensation costs associated withthe leave of absence agreement were charged to earnings during the year ended December 31,2004.

 

Shareholder Derivative Complaint

 

On July 6, 2004, Jeff Allan McCoon, derivatively onbehalf of the Company, filed a lawsuit in the Circuit Court for the State ofOregon (Multnomah County) which named the Company and all of its directors asdefendants. The lawsuit as amended alleges that the Company’s Boardof Directors breached their duties to the Company in a number of ways includingby: (a) entering into the Leave of Absence Agreement with AndrewWiederhorn; (b) purchasing and exercising a CallOption agreement with Andrew Wiederhorn for the purchase as TreasuryStock of 423,245 shares of the Company’s common stock; (c) purchasing asTreasury Stock 330,500 shares of the Company’s common stock from ClarenceColeman; (d) authorizing and/or allowing the Company to incur variousexpenses (including alleged excessive compensation and fringe benefitsto employees of the Company and the directors themselves).  Thelawsuit generally seeks the recovery of all payments made or to be made to Mr. Wiederhornunder the Leave of Absence Agreement (claimed to be $6.6 million), andunspecified damages as a result of the other transactions allegedabove, plus attorney fees and costs.  The lawsuit also asks that thedirectors implement changes in corporate governance. The Company’s directorshave indemnity agreements with the Company and have asserted the right toindemnification from the Company under those indemnity agreements for theexpenses incurred in connection with the lawsuit. The Company has incurredexpenses

 

8

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under the indemnityagreements and also may derive benefits if the plaintiff’s claims aresuccessful. At this stage of the case it is too early to predict the outcomewith any certainty.

 

Other 

 

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

 

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

 

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

 

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

 

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

 
| 2005                          |   | $     | 1,631  |   |
|-------------------------------|--------|-------|--------|--------|
| 2006                          |   | 2,913 |   |
| 2007                          |   | 2,259 |   |
| 2008                          |   | 1,730 |   |
| 2009                          |   | 1,169 |   |
| Thereafter                    |   | 3,690 |   |
| Total minimum  lease payments |   | $     | 13,392 |   |
|                               |        |       |        |        |  |

 

In order to facilitatethe development of franchise locations, as of June 30, 2005, Fatburger hadguaranteed the annual minimum lease payments of three restaurant sites ownedand operated by franchisees.  The amountof the guarantees total approximately $1.9 million plus certain contingentrental payments as defined in the respective leases.  These leases expire at various times through 2008.

 

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

 

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

 

Primarily due to the acquisition of Fatburger, theCompany has goodwill in the amount of $7.1 million and other intangible assetsin the amount of $5.3 million. In accordance with the Financial AccountingStandards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets”, goodwill is not amortized, but issubject to an annual impairment test.  Sincethe acquisition of Fatburger by the Company, Fatburger has experiencedoperating losses and has funded its operations and expansion with limited liquidity.  The Company believes that these conditionsare temporary in nature, however, should these conditions not be corrected, theCompany may be required to recognize impairment losses on its recordedgoodwill.  As of June 30, 2005, theCompany was not aware of any events or changes in circumstances that wouldrequire the impairment of the recorded goodwill.

 

9

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

 

Amortized intangibleassets:

 
| Franchise  Agreements              |   | $   | 871    |   |
|------------------------------------|--------|-----|--------|--------|
| Other                              |   | 445 |   |
| Total amortized  intangible assets |   | $   | 1,316  |   |

 

Unamortizedintangible assets:

 
| Trademarks |   | $ | 3,970 |   |
|------------|--------|---|-------|--------|

 

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

 
| 2005 |   | $   | 125    |   |
|------|--------|-----|--------|--------|
| 2006 |   | 191 |   |
| 2007 |   | 188 |   |
| 2008 |   | 180 |   |
| 2009 |   | 164 |   |
| 2010 |   | 164 |   |

 

The recorded values of goodwill and other intangibleassets may become impaired in the future. The determination of the value of suchintangible assets requires management to make estimates and assumptions thataffect the consolidated financial statements. Potential impairments to intangible assets are assessed when there isevidence that events or changes in circumstances indicate that the carryingamount of an asset may not be recovered. This assessment is based on the operational performance of acquiredbusinesses, market conditions and other factors including future events.   Any resulting impairment loss could have anadverse impact on the results of operations of the Company.

 

**NOTE 5 – RECENTLY ISSUED ACCOUNTING STANDARDS**

 

In December 2004,the FASB issued SFAS No. 123R, Share-Based Payment (“FAS 123R”), whichrequires that the cost resulting for all share-based payment transactions berecognized in the financial statements. This Statement requires a public entityto measure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award (withlimited exceptions). That cost will be recognized over the period during whichan employee is required to provide service in exchange for the award—therequisite service period (usually the vesting period). No compensation cost isrecognized for equity instruments for which employees do not render therequisite service. The provisions of FAS 123R are effective as of the beginningof the first interim or annual reporting period that begins after December 31,2005. The Company has not yet determined the effect of this new standard on itsconsolidated financial position and results of operations.

 

**NOTE 6 – STOCK OPTIONS AND RIGHTS**

 

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

 

The Company appliesAccounting Principles Board Opinion No. 25, *“Accountingfor Stock Issued to Employees,”*and related interpretations inaccounting for the Option Plan. Accordingly, no compensation expense has beenrecognized in the Consolidated Statements of Operations for grants under theOption Plan.  Had compensation expensefor the Company’s Option Plan been determined based on the

 

10

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fair value at the grant date consistent with the methods of FASBStatement No. 123 “*Accounting for Stock BasedCompensation,*” the Company’s net income and income per share for thesix months ended June 30, 2005 and 2004 would have been decreased to thepro forma amounts indicated below:

 
| ** **                                                                | ** ** | **Six months ended June 30,**            | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **(dollars in thousands, except share data)** | ** ** |
| Net income  (loss):                                                       |       |                                          |       |   |   |
| As reported                                                               |       | $                                             | (1,463     | ) | $ | (5,773 | ) |
| Pro forma  compensation expense from stock based compensation, net of tax |       | (146                                          | )          | (12 | ) |
| Pro forma net  income (loss)                                              |       | $                                             | (1,609     | ) | $ | (5,785 | ) |
| Net income  (loss) per common and common share equivalent:                |       |                                          |       |   |   |
| Basic income per  share:                                                  |       |                                          |       |   |   |
| As reported                                                               |       | $                                             | (0.18      | ) | $ | (0.68 | ) |
| Pro forma                                                                 |       | $                                             | (0.20      | ) | $ | (0.68 | ) |
| Diluted income  per share:                                                |       |                                          |       |   |   |
| As reported                                                               |       | $                                             | (0.18      | ) | $ | (0.68 | ) |
| Pro forma                                                                 |       | $                                             | (0.20      | ) | $ | (0.68 | ) |

 

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

 

**NOTE 7 – VARIABLE INTERESTENTITIES**

 

The Company has funded fourloans totaling $3.7 million to related Spanish entities formed to purchase,reposition and sell four apartment buildings in Barcelona, Spain.  Under the terms of the loans, the Companyreceives a preferred 30% return on its investment, and, after a similar returnis paid to the majority investors, the Company receives an 80% share inadditional profits generated by the investment. The investment meets the definition of a Variable Interest Entity (“VIE”)  under FASB Interpretation 46 (“FIN 46”) andthe Company is the primary beneficiary of the VIE.  As a result, the assets and liabilities ofthe VIE have been consolidated into the accompanying consolidated financialstatements as of June 30, 2005.

 

The VIE has purchased threeapartment buildings for $6.1 million including capital improvements.  In addition, the VIE has acquired an optionto purchase a fourth building.  Thepurchase price for the option was $0.4 million and gives the VIE the right toacquire the 24 unit apartment building for an additional payment ofapproximately $5.4 million in October 2005.  The purchases were funded with bank loans totaling$3.1 million, the Company’s $3.7 million investment and a $0.3 million contributionfrom the project managers.  The Companyhas committed to fund additional advances of $0.2 million to the VIE and mayfund an additional $3.7 million if the option is exercised.  Neither the creditors nor the otherbeneficial interest holders have recourse to the Company with regard to thisinvestment and, as a result, the maximum limit of the Company’s exposure toloss on this investment is $3.9 million as of June 30, 2005.

 

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

 
| Investment in  real estate, net        |   | $         | 6,125,000 |   |
|----------------------------------------|--------|-----------|-----------|--------|
| Other assets                           |   | 841,000   |      |
| Borrowings and  notes payable          |   | 3,106,000 |      |
| Accrued expense  and other liabilities |   | 182,000   |      |
| Minority interest                      |   | 333,000   |      |

 

11

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**NOTE 8 – OPERATING SEGMENTS**

 

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

 

**Restaurant Operations**

 

The Company owns approximately 71% of the votingcontrol of Fatburger.  As of June 30,2005, Fatburger operates or franchises 70 hamburger restaurants locatedprimarily in California and Nevada.  Fatburgerhas plans to open additional restaurants, primarily through franchiseoperations, throughout the United States. Franchisees currently own and operate approximately 44 of the Fatburgerlocations.  During the six months ended June 30,2005, franchise rights to open 7 individual Fatburger restaurants were sold and8 new franchise restaurants were opened. Royalty revenues were approximately $0.8 million for the six monthsended June 30, 2005.

 

**Commercial Real Estate MortgageBrokerage Operations**

 

The Company holds a 51% ownership interest in GeorgeElkins, a California mortgage banking operation, which provides brokerageservices related to the production of over $700 million per year in commercialreal estate mortgages. George Elkins is headquartered in Los Angeles, withsatellite offices throughout the southern California area.  The mortgage brokerage operation also managesa commercial loan servicing portfolio in excess of $700 million for variousinvestors.

 

**Real Estate, Merchant Banking andFinancing Operations**

 

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

 

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

 

12

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

 
| ** **                                           | ** ** | **Real Estate, Merchant Banking  and Finance** | ** ** | **Mortgage Brokerage** | ** ** | **Restaurant** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|----------------|------------|-----------|------------|
| ** **                                           | ** ** | **2005**                                       | ** ** | **2004**               | ** ** | **2005**       | ** ** | **2004**  | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Interest  Income:                                |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Loans                                                |       | $                                              | 880        |                   | $          | 1,062          |       | $         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 880 |   | $ | 1,062 |   |
| Securities                                           |       | 6                                              |       | 605                    |       | —         |       | —    |       | — |   | — |   | 6 |   | 605 |   |
| Other  investments                                   |       | 93                                             |       | 70                     |       | 1              |       | 1         |       | — |   | — |   | 94 |   | 71 |   |
| Total interest  income                               |       | 979                                            |       | 1,737                  |       | 1              |       | 1         |       | — |   | — |   | 980 |   | 1,738 |   |
| Interest expense                                     |       | —                                         |       | 112                    |       | —         |       | —    |       | — |   | — |   | — |   | 112 |   |
| Net interest  income                                 |       | 979                                            |       | 1,625                  |       | 1              |       | 1         |       | — |   | — |   | 980 |   | 1,626 |   |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Real estate  operations:                             |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating  revenue                                   |       | 2,168                                          |       | 1,976                  |       | —         |       | —    |       | — |   | — |   | 2,168 |   | 1,976 |   |
| Operating  expense                                   |       | (840                                           | )          | (876                   | )          | —         |       | —    |       | — |   | — |   | (840 | ) | (876 | ) |
| Gain on sale of  real estate                         |       | 1,589                                          |       | 5                      |       | —         |       | —    |       | — |   | — |   | 1,589 |   | 5 |   |
| Interest expense                                     |       | (528                                           | )          | (562                   | )          | —         |       | —    |       | — |   | — |   | (528 | ) | (562 | ) |
| Depreciation                                         |       | (273                                           | )          | (322                   | )          | —         |       | —    |       | — |   | — |   | (273 | ) | (322 | ) |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Total real  estate operations                        |       | 2,116                                          |       | 221                    |       | —         |       | —    |       | — |   | — |   | 2,116 |   | 221 |   |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Restaurant  operations:                              |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating income                                     |       | —                                         |       | —                 |       | —         |       | —    |       | 12,037 |   | 10,751 |   | 12,037 |   | 10,751 |   |
| Cost of goods  sold                                  |       | —                                         |       | —                 |       | —         |       | —    |       | (7,063 | ) | (6,538 | ) | (7,063 | ) | (6,538 | ) |
| Franchise and  advertising fees                      |       | —                                         |       | —                 |       | —         |       | —    |       | 1,022 |   | 649 |   | 1,022 |   | 649 |   |
| General and  administrative costs                    |       | —                                         |       | —                 |       | —         |       | —    |       | (5,614 | ) | (5,417 | ) | (5,614 | ) | (5,417 | ) |
| Interest Expense                                     |       | —                                         |       | —                 |       | —         |       | —    |       | (310 | ) | (346 | ) | (310 | ) | (346 | ) |
| Depreciation and  amortization                       |       | —                                         |       | —                 |       | —         |       | —    |       | (710 | ) | (743 | ) | (710 | ) | (743 | ) |
| Total restaurant  operations                         |       | —                                         |       | —                 |       | —         |       | —    |       | (638 | ) | (1,644 | ) | (638 | ) | (1,644 | ) |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Other operating  income:                             |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Gain on sale of  loans and securities                |       | —                                         |       | 2,099                  |       | —         |       | —    |       | — |   | — |   | — |   | 2,099 |   |
| Loan origination  fees                               |       | —                                         |       | —                 |       | 2,429          |       | 2,374     |       | — |   | — |   | 2,429 |   | 2,374 |   |
| Gain on sale of  prepaid servicing credit            |       | —                                         |       | 1,530                  |       | —         |       | —    |       | — |   | — |   | — |   | 1,530 |   |
| Equity in  earnings of equity investees              |       | 441                                            |       | 1,512                  |       | —         |       | —    |       | — |   | — |   | 441 |   | 1,512 |   |
| Other revenue  (loss)                                |       | (320                                           | )          | 625                    |       | 429            |       | 248       |       | — |   | — |   | 109 |   | 873 |   |
| Total other  operating income                        |       | 121                                            |       | 5,766                  |       | 2,858          |       | 2,622     |       | — |   | — |   | 2,979 |   | 8,388 |   |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating  expenses:                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Compensation and  employee benefits                  |       | 1,247                                          |       | 8,028                  |       | 2,451          |       | 2,245     |       | — |   | — |   | 3,698 |   | 10,273 |   |
| Professional  fees                                   |       | 1,184                                          |       | 1,154                  |       | 21             |       | 15        |       | — |   | — |   | 1,205 |   | 1,169 |   |
| Other                                                |       | 1,563                                          |       | 2,497                  |       | 434            |       | 425       |       | — |   | — |   | 1,997 |   | 2,922 |   |
| Total operating  expenses                            |       | 3,994                                          |       | 11,679                 |       | 2,906          |       | 2,685     |       | — |   | — |   | 6,900 |   | 14,364 |   |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Net income  (loss) before provision for income taxes |       | (778                                           | )          | (4,067                 | )          | (47            | )          | (62       | )          | (638 | ) | (1,644 | ) | (1,463 | ) | $ | (5,773 | ) |
| Provision for  income taxes                          |       | —                                         |       | —                 |       | —         |       | —    |       | — |   | — |   | — |   | — |   |
| Net income  (loss)                                   |       | $                                              | (778       | )                      | $          | (4,067         | )          | $         | (47        | ) | $ | (62 | ) | $ | (638 | ) | $ | (1,644 | ) | $ | (1,463 | ) | $ | (5,773 | ) |
| Segment assets                                       |       | $                                              | 47,673     |                   | $          | 51,502         |       | $         | 387        |   | $ | 1,944 |   | $ | 20,319 |   | $ | 20,443 |   | $ | 68,379 |   | $ | 73,889 |   |

 

13

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

 
| ** **                                           | ** ** | **Real Estate, Merchant Banking  and Finance** | ** ** | **Mortgage Brokerage** | ** ** | **Restaurant** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|------------------------|------------|----------------|------------|-----------|------------|
| ** **                                           | ** ** | **2005**                                       | ** ** | **2004**               | ** ** | **2005**       | ** ** | **2004**  | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Interest  Income:                                |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Loans                                                |       | $                                              | 605        |                   | $          | 636            |       | $         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 605 |   | $ | 636 |   |
| Securities                                           |       | 5                                              |       | 292                    |       | —         |       | —    |       | — |   | — |   | 5 |   | 292 |   |
| Other  investments                                   |       | 46                                             |       | 23                     |       | —         |       | 1         |       | — |   | — |   | 46 |   | 24 |   |
| Total interest  income                               |       | 656                                            |       | 951                    |       | —         |       | 1         |       | — |   | — |   | 656 |   | 952 |   |
| Interest expense                                     |       | —                                         |       | 41                     |       | —         |       | —    |       | — |   | — |   | — |   | 41 |   |
| Net interest  income                                 |       | 656                                            |       | 910                    |       | —         |       | 1         |       | — |   | — |   | 656 |   | 911 |   |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Real estate  operations:                             |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating  revenue                                   |       | 1,161                                          |       | 1,022                  |       | —         |       | —    |       | — |   | — |   | 1,161 |   | 1,022 |   |
| Operating  expense                                   |       | (417                                           | )          | (420                   | )          | —         |       | —    |       | — |   | — |   | (417 | ) | (420 | ) |
| Gain on sale of  real estate                         |       | 1,176                                          |       | 5                      |       | —         |       | —    |       | — |   | — |   | 1,176 |   | 5 |   |
| Interest expense                                     |       | (260                                           | )          | (281                   | )          | —         |       | —    |       | — |   | — |   | (260 | ) | (281 | ) |
| Depreciation                                         |       | (128                                           | )          | (163                   | )          | —         |       | —    |       | — |   | — |   | (128 | ) | (163 | ) |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Total real  estate operations                        |       | 1,532                                          |       | 163                    |       | —         |       | —    |       | — |   | — |   | 1,532 |   | 163 |   |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Restaurant  operations:                              |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating income                                     |       | —                                         |       | —                 |       | —         |       | —    |       | 6,055 |   | 5,467 |   | 6,055 |   | 5,467 |   |
| Cost of goods  sold                                  |       | —                                         |       | —                 |       | —         |       | —    |       | (3,604 | ) | (3,461 | ) | (3,604 | ) | (3,461 | ) |
| Franchise and  advertising fees                      |       | —                                         |       | —                 |       | —         |       | —    |       | 501 |   | 377 |   | 501 |   | 377 |   |
| General and  administrative costs                    |       | —                                         |       | —                 |       | —         |       | —    |       | (2,942 | ) | (2,702 | ) | (2,942 | ) | (2,702 | ) |
| Interest Expense                                     |       | —                                         |       | —                 |       | —         |       | —    |       | (156 | ) | (181 | ) | (156 | ) | (181 | ) |
| Depreciation and  amortization                       |       | —                                         |       | —                 |       | —         |       | —    |       | (344 | ) | (391 | ) | (344 | ) | (391 | ) |
| Total restaurant  operations                         |       | —                                         |       | —                 |       | —         |       | —    |       | (490 | ) | (891 | ) | (490 | ) | (891 | ) |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Other operating  income:                             |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Gain on sale of  loans and securities                |       | —                                         |       | 1,013                  |       | —         |       | —    |       | — |   | — |   | — |   | 1,013 |   |
| Loan brokerage  fees                                 |       | —                                         |       | —                 |       | 1,002          |       | 1,248     |       | — |   | — |   | 1,002 |   | 1,248 |   |
| Gain on sale of  prepaid servicing credit            |       | —                                         |       | 1,530                  |       | —         |       | —    |       | — |   | — |   | — |   | 1,530 |   |
| Equity in  earnings of equity investees              |       | 441                                            |       | 1,490                  |       | —         |       | —    |       | — |   | — |   | 441 |   | 1,490 |   |
| Other revenue  (loss)                                |       | (248                                           | )          | 567                    |       | 283            |       | 95        |       | — |   | — |   | 35 |   | 662 |   |
| Total other  operating income                        |       | 193                                            |       | 4,600                  |       | 1,285          |       | 1,343     |       | — |   | — |   | 1,478 |   | 5,943 |   |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Operating  expenses:                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Compensation and  employee benefits                  |       | 543                                            |       | 6,378                  |       | 1,088          |       | 1,134     |       | — |   | — |   | 1,631 |   | 7,512 |   |
| Professional  fees                                   |       | 484                                            |       | 920                    |       | 12             |       | 8         |       | — |   | — |   | 496 |   | 928 |   |
| Other                                                |       | 751                                            |       | 1,625                  |       | 206            |       | 199       |       | — |   | — |   | 957 |   | 1,824 |   |
| Total operating  expenses                            |       | 1,778                                          |       | 8,923                  |       | 1,306          |       | 1,341     |       | — |   | — |   | 3,084 |   | 10,264 |   |
|                                                 |       |                                           |       |                   |       |           |       |      |       |   |   |   |   |   |   |   |   |
| Net income  (loss) before provision for income taxes |       | 603                                            |       | (3,250                 | )          | (21            | )          | 3         |       | (490 | ) | (891 | ) | 92 |   | (4,138 | ) |
| Provision for  income taxes                          |       | —                                         |       | —                 |       | —         |       | —    |       | — |   | — |   | — |   | — |   |
| Net income  (loss)                                   |       | $                                              | 603        |                   | $          | (3,250         | )          | $         | (21        | ) | $ | 3 |   | $ | (490 | ) | $ | (891 | ) | $ | 92 |   | $ | (4,138 | ) |
| Segment assets                                       |       | $                                              | 47,673     |                   | $          | 51,502         |       | $         | 387        |   | $ | 1,944 |   | $ | 20,319 |   | $ | 20,443 |   | $ | 68,379 |   | $ | 73,889 |   |
|                                                      |            |                                                |            |                        |            |                |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

14

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**NOTE 9– INCOME TAXES**

 

As of June 30, 2005,the Company had, for U.S. Federal tax purposes, a net operating loss (“NOL”)carry forward of approximately $76.1 million, including $11.5 million relatingto Fatburger. The Company’s NOL begins to expire in 2018. Fatburger’s NOL beganto expire in 2004 and is generally subject to an annual limitation under theInternal Revenue Code of 1986, Section 382, *Limitationon Net Operating Loss Carryovers and Certain Built-In Losses Following Changein Control*.  In addition, tothe extent the Fatburger NOL is utilized, the recognition of the related taxbenefits would first reduce goodwill related to the Fatburger acquisition, thenother non-current intangible assets related to that acquisition, and thenincome tax expense in accordance with Statement on Financial AccountingStandards No. 109, *Accounting for IncomeTaxes.*

 

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

 

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

 

**NOTE 10 – SUBSEQUENT EVENTS**

 

Dividends

 

On August 2, 2005,the Board of Directors declared a $0.13 per share dividend for the third quarterof 2005.  The dividend is payable on September 1,2005 to shareholders of record on August 22, 2005.

 

Sale of Real Estate

 

Subsequent to June 30,2005, the Company sold two stand-alone retail locations for a total of $0.8million.  The proceeds from these salesconsisted of $0.5 million in cash and a note receivable of $0.3 million.  The aggregate gain on the sale of theproperties was $0.3 million.

 

Restaurant Openings

 

Subsequent to June 30,2005, four Fatburger franchise restaurants were opened.  This resulted in the recognition of franchisefees totaling $0.2 million.

 

Centrisoft Acquisition

 

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

 

15

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The Company’s investment in Centrisoft included loansand loan commitments totaling $2.9 million. In addition to fees and interest, the Company received preferred stockin Centrisoft that is convertible into 51% of the fully diluted common stock atthe time of conversion.  As a result ofthis investment, the Company will consolidate Centrisoft in its financialstatements beginning in July 2005. The consolidated assets of Centrisoft will be less than 10% of theCompany’s total assets.

 

16

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

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

* *

## **GENERAL**

 

Fog Cutter Capital Group Inc. (“FCCG” or the “Company”)focuses on developing, strengthening and expanding our restaurant andcommercial real estate mortgage brokerage operations and continuing to identifyand acquire real estate investments with favorable risk-adjusted returns. Wealso seek to identify and acquire controlling interests in other operatingbusinesses in which we feel we can add value.

 

During 2003 and 2004, we redeployed a large portion ofthe capital generated through our sale of mortgage-backed securities and fromcash distributions from our Bourne End subsidiary.  We used a portion of this capital in August 2003to acquire voting control of Fatburger Holdings Inc. and further increased ourinvestment in Fatburger in May 2004. The expansion and success of Fatburger is currently one of our primaryfocuses.  Since our acquisition,Fatburger has opened 26 additional restaurant locations and currently hasagreements for approximately 220 new franchise restaurants.

 

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

 

**Critical Accounting Policies**

 

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

** **

***Accounting For Equity Investees***

** **

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

 

*Valuation*

 

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

 

17

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*Sale Recognition*

 

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

 

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

 

***Fatburger Restaurant and Franchise Revenue***

 

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

 

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

 

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

 

***Goodwill and Other Intangible Assets***

 

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

 

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

 

18

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**RESULTS OF OPERATIONS**3⁄4SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30,2004

 

NETINCOME.  Our netloss for the six months ended June 30, 2005, was $1.5 million, or $0.18per share, compared with a net loss of $5.8 million, or $0.68 per share, forthe six months ended June 30, 2004.  The net loss for the six months ended June 30,2005 was primarily the result of losses from our restaurant operations of $0.6million and other operating expenses of $6.9 million, partially offset by gainson sales of real estate of $1.6 million. The net loss for the six months ended June 30, 2004 was primarilythe result of losses from our restaurant operations of $1.6 million and otheroperating expenses of $14.3 million, partially offset by gains on sales ofmortgage-backed securities of $2.1 million.

 

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

 

**Restaurant Segment Operations**

 

During the six months ended June 30, 2005, werecognized a net loss from our restaurant segment of $0.6 million, compared toa net loss of $1.6 million for the six months ended June 30, 2004.  The 2005 results were primarily due to agross margin (sales net of cost of goods sold) of $5.0 million and franchiseand royalty revenue of $1.0 million, offset by general and administrative costsof $5.6 million, interest expense of $0.3 million, and depreciation andamortization of $0.7 million.  TheCompany’s primary strategy with respect to Fatburger is to increase the numberof franchises, thus increasing the franchise fees and future royalty income tothe operation.  Since the Companyacquired its interest in Fatburger in August 2003, Fatburger has added 26new restaurants.  While the Company seeksto expand the number of existing restaurants, the identification of qualified franchiseesand quality locations has an impact on the rate of growth in the number of ourrestaurants.

 

The 2004 results were primarily due to a gross margin of$4.2 million and franchise and royalty revenue of $0.6 million, offset bygeneral and administrative costs of $5.4 million, interest expense of $0.3million, and depreciation and amortization of $0.7 million.

 

**Commercial Real Estate MortgageBrokerage Segment Operations**

 

Our net loss from thecommercial real estate brokerage segment was less than $0.1 million for the sixmonths ended June 30, 2005, compared to a net loss of $0.1 million duringthe 2004 period.  During the 2005 period,we recognized loan brokerage fees of $2.4 million, loan servicing and otherrevenue of $0.4 million, which was offset by compensation expense of $2.5million and other operating expense of $0.4 million.

 

During the 2004 period,we recognized loan brokerage fees of $2.4 million, loan servicing and otherrevenue of $0.2 million, which was offset by compensation expense of $2.2million and other operating expense of $0.5 million.

 

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

 

NETINTEREST INCOME. Our net interest income for the six months ended June 30, 2005, was$1.0 million, compared with $1.6 million for the six months ended June 30,2004.  The decrease is primarilyattributable to a net reduction of assets (reflecting our sales ofmortgage-backed securities and paydowns of the related debt facilities).  These changes resulted in decreases ininterest income on securities of $0.6 million and a decrease in interest incomeon loans of $0.1 million, partially offset by a decrease in interest expense of$0.1 million.  The following tables setforth information regarding the total amount of income from interest-earningassets and expense from interest-bearing liabilities and the resulting averageyields and rates:

 

19

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| ** **                                     | ** ** | **For the Six Months Ended June 30, 2005** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **Average**                                     | ** ** | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** ** | **Balance**                                     | ** ** | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**                      | ** ** |
| Interest-Earning  Assets:                      |       |                                            |       |   |   |   |   |
|                                           |       |                                            |       |   |   |   |   |
| Loan portfolios  (1)                           |       | $                                               | 9,864      |   | $ | 880 |   | 17.8 | % |
| Mortgage-backed  securities available for sale |       | 7                                               |       | 6 |   | 171.4 | % |
| Cash deposits  and other investments           |       | 9,331                                           |       | 93 |   | 2.0 | % |
| Total  interest-earning assets                 |       | $                                               | 19,202     |   | 979 |   | 10.2 | % |
|                                           |       |                                            |       |   |   |   |   |
| Interest-Bearing  Liabilities:                 |       |                                            |       |   |   |   |   |
|                                           |       |                                            |       |   |   |   |   |
| Borrowings (2)                                 |       | $                                               | —     |   | — |   | 0.0 | % |
| Total interest-bearing  liabilities            |       | $                                               | —     |   | — |   | 0.0 | % |
|                                           |       |                                            |       |   |   |   |   |
| Net interest  income (3)                       |       |                                            |       | $ | 979 |   | 10.2 | % |
| Net interest  margin (4)                       |       |                                            |       |   |   | 10.2 | % |

 

----

(1)   Includesloans to senior officers.

(2)   Excludesborrowings related to investments in real estate.

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

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

 
| ** **                                     | ** ** | **For the Six Months Ended June 30, 2004** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                     | ** ** | **Average**                                     | ** ** | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** ** | **Balance**                                     | ** ** | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**                      | ** ** |
| Interest-Earning  Assets:                      |       |                                            |       |   |   |   |   |
|                                           |       |                                            |       |   |   |   |   |
| Loan portfolios  (1)                           |       | $                                               | 9,724      |   | $ | 1,062 |   | 21.8 | % |
| Mortgage-backed  securities available for sale |       | 23,814                                          |       | 605 |   | 5.1 | % |
| Other  investments                             |       | 13,472                                          |       | 70 |   | 1.1 | % |
| Total  interest-earning assets                 |       | $                                               | 47,010     |   | $ | 1,737 |   | 7.4 | % |
|                                           |       |                                            |       |   |   |   |   |
| Interest-Bearing  Liabilities:                 |       |                                            |       |   |   |   |   |
|                                           |       |                                            |       |   |   |   |   |
| Borrowings (2)                                 |       | $                                               | 17,622     |   | $ | (112 | ) | 1.3 | % |
| Total interest-bearing  liabilities            |       | $                                               | 17,622     |   | $ | (112 | ) | 1.3 | % |
|                                           |       |                                            |       |   |   |   |   |
| Net interest  income (3)                       |       |                                            |       | $ | 1,625 |   | 6.1 | % |
| Net interest  margin (4)                       |       |                                            |       |   |   | 6.9 | % |

 

----

(1)   Includesloans to senior officers.

(2)   Excludesborrowings related to investments in real estate.

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

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

 

20

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REALESTATE OPERATIONS. Our real estate operations represent activity from our investment in 11 commercialproperties located in Oregon, Texas, Alabama, Arkansas, Louisiana, Missouri andMichigan, as well as the operations of our leasehold interests in 77freestanding retail buildings located throughout the United States.  During the six months ended June 30, 2005,we realized net income from real estate operations of approximately $2.1million, compared with net income of $0.2 million for the six months ended June 30,2004.  The increase in net income fromreal estate was primarily the result of gains recognized on sales of $1.6million during the 2005 period.  Ourstrategy with regard to our real estate investments is to position eachproperty to enhance lease values for long-term income or for sale.

 

EQUITYIN EARNINGS OF EQUITY INVESTEES.   At June 30, 2005, our sole equityinvestee was Bourne End Properties Plc. (“Bourne End”). We own approximately 26%of Bourne End, which operates a shopping center in the United Kingdom.  At the time of our original investment in2001, Bourne End owned 15 shopping centers in Europe.  Fourteen of these centers have now been sold,generating net income to us totaling $9.7 million since the acquisition.  During the six months ended June 30,2005 we recognized income of $0.4 million from equity investees, compared to$1.5 million for the six months ended June 30, 2004.  The decrease was due to the sale of shoppingcenters in the prior year.

 

GAIN ON SALE OF LOANS ANDSECURITIES.  During the six months ended June 30,2005, we did not recognize any gains on sales of loans or securities.  This compares to gains of $2.1 million,primarily from the sale of mortgage-backed securities, during the six monthsended June 30, 2004.  Because wehave sold substantially all of our subordinatemortgage-backed securities portfolio, we expect that gain on sale of securitieswill no longer contribute to future income.

 

PREPAIDLOAN SERVICING CREDIT*.** *During the sixmonths ended June 30, 2004, we sold our Wilshire Credit Corporation (WCC)prepaid loan servicing credit (the “Loan Servicing Credit”) for $1.7 million incash.  The Loan Servicing Credit wasoriginally acquired by us in 1998, when we were an affiliate of WCC.  The Loan Servicing Credit may be used,subject to certain limitations, to pay for loan portfolio servicing activitiesperformed by WCC.  As a result of thesale, we recognized a gain in the amount of $1.5 million.

 

OPERATINGEXPENSES.  Duringthe six months ended June 30, 2005, we incurred segment operating expensesfrom merchant banking, real estate and finance operations of $4.0 million,compared to $11.7 million during the comparable period in 2004.  Operating expenses for the 2005 period includecompensation costs of $1.2 million, professional fees of $1.2 million and othercosts of $1.6 million. Operating expenses for the 2004 period includecompensation costs of $8.0 million, professional fees of $1.2 million and othercosts of $2.5 million.  Compensationcosts during the 2004 period included $4.7 million in accruals under the Leaveof Absence Agreement with Mr. Wiederhorn.

 

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

 

NETINCOME.  Our net incomefor the quarter ended June 30, 2005, was $0.1 million, or $0.01 per share,compared with a net loss of $4.1 million, or $0.49 per share, for the quarterended June 30, 2004.  The net incomefor the quarter ended June 30, 2005 was primarily the result of gains onsales of real estate of $1.2 million, offset by losses from our restaurantoperations of $0.5 million and other operating expenses.  The net loss for the quarter ended June 30,2004 was primarily the result of losses from our restaurant operations of $0.9million and other operating expenses of $4.1 million, partially offset by gainson sales of mortgage-backed securities of $1.0 million.

 

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

 

21

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**Restaurant Segment Operations**

 

During the quarter ended June 30, 2005, werecognized a net loss from our restaurant segment of $0.5 million, compared toa net loss of $0.9 million for the quarter ended June 30, 2004.  The 2005 results were primarily due to agross margin (sales net of cost of goods sold) of $2.5 million and franchiseand royalty revenue of $0.5 million, offset by general and administrative costsof $2.9 million, interest expense of $0.2 million, and depreciation andamortization of $0.3 million.

 

The 2004 results were primarily due to a gross marginof $2.0 million and franchise and royalty revenue of $0.4 million, offset bygeneral and administrative costs of $2.7 million, interest expense of $0.2million, and depreciation and amortization of $0.4 million.

 

**Commercial Real Estate MortgageBrokerage Segment Operations**

 

Our net operations fromthe commercial real estate brokerage segment were substantially break-even forthe quarters ended June 30, 2005 and June 30, 2004.  During the 2005 period, we recognized loanbrokerage fees of $1.0 million, loan servicing and other revenue of $0.3million, which was offset by compensation expense of $1.1 million and otheroperating expense of $0.2 million.

 

During the 2004 period,we recognized loan brokerage fees of $1.2 million, loan servicing and otherrevenue of $0.1 million, which was offset by compensation expense of $1.1million and other operating expense of $0.2 million.

 

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

 

NETINTEREST INCOME. Our net interest income for the quarter ended June 30, 2005, was$0.7 million, compared with $0.9 million for the six months ended June 30,2004.  The decrease is primarilyattributable to a net reduction of assets (reflecting our sales ofmortgage-backed securities and paydowns of the related debt facilities).  These changes resulted in decreases ininterest income on securities of $0.3 million, partially offset by a decreasein interest expense of $0.1 million.  Thefollowing tables set forth information regarding the total amount of incomefrom interest-earning assets and expense from interest-bearing liabilities andthe resulting average yields and rates:

 
| ** **                                     | ** ** | **For the Quarter Ended June 30, 2005** | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                     | ** ** | **Average**                                  | ** ** | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** ** | **Balance**                                  | ** ** | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**                   | ** ** |
| Interest-Earning  Assets:                      |       |                                         |       |   |   |   |   |
|                                           |       |                                         |       |   |   |   |   |
| Loan portfolios  (1)                           |       | $                                            | 9,980      |   | $ | 605 |   | 24.2 | % |
| Mortgage-backed  securities available for sale |       | 5                                            |       | 5 |   | 400.0 | % |
| Cash deposits  and other investments           |       | 7,898                                        |       | 46 |   | 2.3 | % |
| Total  interest-earning assets                 |       | $                                            | 17,883     |   | 656 |   | 14.7 | % |
|                                           |       |                                         |       |   |   |   |   |
| Interest-Bearing  Liabilities:                 |       |                                         |       |   |   |   |   |
|                                           |       |                                         |       |   |   |   |   |
| Borrowings (2)                                 |       | $                                            | —     |   | — |   | 0.0 | % |
| Total  interest-bearing liabilities            |       | $                                            | —     |   | — |   | 0.0 | % |
|                                           |       |                                         |       |   |   |   |   |
| Net interest  income (3)                       |       |                                         |       | $ | 656 |   | 14.7 | % |
| Net interest  margin (4)                       |       |                                         |       |   |   | 14.7 | % |

 

----

(1)   Includesloans to senior officers.

(2)   Excludesborrowings related to investments in real estate.

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

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

 

22

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| ** **                                     | ** ** | **For the Quarter Ended June 30, 2004** | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                     | ** ** | **Average**                                  | ** ** | **Interest** | ** ** | **Annualized** | ** ** |
| ** **                                     | ** ** | **Balance**                                  | ** ** | **Income (Expense)** | ** ** | **Yield/Rate** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**                   | ** ** |
| Interest-Earning  Assets:                      |       |                                         |       |   |   |   |   |
|                                           |       |                                         |       |   |   |   |   |
| Loan portfolios  (1)                           |       | $                                            | 11,528     |   | $ | 636 |   | 22.1 | % |
| Mortgage-backed  securities available for sale |       | 15,856                                       |       | 292 |   | 7.4 | % |
| Other  investments                             |       | 10,694                                       |       | 23 |   | 0.9 | % |
| Total  interest-earning assets                 |       | $                                            | 38,078     |   | $ | 951 |   | 10.0 | % |
|                                           |       |                                         |       |   |   |   |   |
| Interest-Bearing  Liabilities:                 |       |                                         |       |   |   |   |   |
|                                           |       |                                         |       |   |   |   |   |
| Borrowings (2)                                 |       | $                                            | 12,278     |   | $ | (41 | ) | 1.3 | % |
| Total  interest-bearing liabilities            |       | $                                            | 12,278     |   | $ | (41 | ) | 1.3 | % |
|                                           |       |                                         |       |   |   |   |   |
| Net interest  income (3)                       |       |                                         |       | $ | 910 |   | 8.7 | % |
| Net interest  margin (4)                       |       |                                         |       |   |   | 9.6 | % |

 

----

(1)   Includesloans to senior officers.

(2)   Excludesborrowings related to investments in real estate.

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

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

 

REALESTATE OPERATIONS. During the quarter ended June 30, 2005, we realized net income fromreal estate operations of approximately $1.5 million, compared with net incomeof $0.2 million for the quarter ended June 30, 2004.  The increase in net income from real estatewas primarily the result of gains recognized on sales of $1.2 million duringthe 2005 period.

 

EQUITYIN EARNINGS OF EQUITY INVESTEES.   At June 30, 2005, our sole equityinvestee was Bourne End Properties Plc. (“Bourne End”). We recognized our shareof the earnings of equity investees in the amount of $0.4 million during thethree months ended June 30, 2005. This compares to earnings of $1.5 million during the 2004 period.

 

GAIN ON SALE OF LOANS ANDSECURITIES.  During the quarter ended June 30,2005, we did not recognize any gains on sales of loans or securities.  This compares to gains of $1.0 million,primarily from the sale of mortgage-backed securities, during the quarter endedJune 30, 2004.  Because we have soldsubstantially all of our subordinate mortgage-backedsecurities portfolio, we expect that gain on sale of securities will not contributeto future income.

 

PREPAIDLOAN SERVICING CREDIT*.** *During the quarterended June 30, 2004, we sold our Wilshire Credit Corporation (WCC) prepaidloan servicing credit (the “Loan Servicing Credit”) for $1.7 million incash.  The Loan Servicing Credit wasoriginally acquired by us in 1998, when we were an affiliate of WCC.  The Loan Servicing Credit may be used,subject to certain limitations, to pay for loan portfolio servicing activitiesperformed by WCC.  As a result of thesale, we recognized a gain in the amount of $1.5 million.

 

OPERATINGEXPENSES.  Duringthe three months ended June 30, 2005, we incurred segment operatingexpenses from merchant banking, real estate and finance operations of $1.8million, compared to $8.9 million during the comparable period in 2004.  Operating expenses for the 2005 periodinclude compensation costs of $0.5 million, professional fees of $0.5 millionand other costs of $0.8 million. Operating expenses for the 2004 period includecompensation costs of $6.4 million, professional fees of $0.9 million and othercosts of $1.6 million.  Compensationcosts during the 2004 period included $4.7 million in accruals under the Leaveof Absence Agreement with Mr. Wiederhorn.

 

23

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**CHANGES IN FINANCIAL CONDITION**

 

GENERAL.  Total assets decreased from approximately $73.9million at December 31, 2004 to approximately $68.4 million at June 30,2005.  Total liabilities decreased slightlyfrom approximately $39.6 million at December 31, 2004 to approximately $39.4million at June 30, 2005.  Stockholders’equity decreased during the six months ended June 30, 2005 byapproximately $5.3 million resulting primarily from our net loss of $1.5million, dividends declared of $2.2 million and the purchase of treasury stockof $1.7 million.

 

INVESTMENTSIN REAL ESTATE. Investments in real estate decreased by $1.3 million during the six monthsended June 30, 2005.  The decreasewas primarily due to the purchase of an apartment building in Barcelona, Spainfor $1.5 million, and capital improvements of $0.6 million, offset by depreciationof $0.3 million, a decrease in carrying value due to changes in foreigncurrency of $0.5 million, the sale of six retail properties with a net bookvalue of $2.1 million, including one subject to capital lease with a carryingvalue of $0.4 million, and the disposal of two additional properties subject tocapital leases with a carrying value of $0.5 million.

 

LOANPORTFOLIO.  We makeloans from time to time, to borrowers who, due to their particularcircumstances, may not have access to traditional lending sources.  Asa result, these transactions can provide good returns to the Company, but theyalso come with a higher relative degree of risk.  These lendingopportunities can arise in a variety of circumstances, but generally involvesituations in which the borrower needs further financing to maintain or developits business and other financing sources are not available.

 

As we negotiate theseloans, we generally seek to obtain significant origination fees andinterest rates, as well as opportunities to take equity positions in theborrower.  These loans are typically short-term, with maturities rangingfrom 6 to 24 months.  While the Companywill seek security (including real estate) for any loan it makes, in some casesthe value of the assets pledged may not exceed the amount of theloan.   While the Company believes that these loans provide goodreturns to the Company, there can be no assurance that these loans willcontinue to perform in the future.

 

As of June 30, 2005,our special situation loan portfolio consisted of four individual loans with acombined carrying value of $7.1 million. Two of the four loans are secured by real estate consisting ofcommercial or single-family properties located in Texas and Nevada.  One loan is secured by all of the stock andassets of a commercial manufacturing business, and one loan is secured by stockin a software company.  The loans have aweighted average interest rate (including the effects of $2.4 million inimpaired loans on non-accrued status and excluding fees and points) of 8.2% anda weighted average maturity of 2 months. Subsequent to June 30, 2005, one real estate loan with a carryingvalue of $3.0 million paid off in full.

 

During the six monthsended June 30, 2005, our loan portfolio increased by approximately $0.4million.  This was primarily the resultof amortization of deferred loan fees. As of June 30, 2005, two of the Company’s loans totaling $2.4million had been restructured to provide additional time for repayment by theborrowers in exchange for various extension fees or other new terms.  As a result, these loans were consideredimpaired for accounting purposes, however, no impairment reserves were requiredon these loans due to management’s expectation that the carrying amounts willbe collected.

 

LOANSTO SENIOR EXECUTIVES. On February 21, 2002 (prior to the passage of the Sarbanes-OxleyAct of 2002), we loaned Mr. Wiederhorn $175,000 to finance the purchase ofCommon Stock.  This loan is full recourseto Mr. Wiederhorn and is secured by all of Mr. Wiederhorn’s rightsunder his employment agreement.  At Mr. Wiederhorn’sdirection (in accordance with the terms of his employment agreement), on February 21,2002, we loaned a limited partnership (the “LP”) controlled by Mr. Wiederhorn’sspouse $687,000 to finance the purchase of Common Stock.  The loan is secured by the membershipinterests of two limited liability companies owned by the LP.  The limited liability companies each own aparcel of real property in Oregon and have no liabilities.  At the time of the loan, the real propertieshad an appraised value of $725,000.  Theloan is also guaranteed by Mr. Wiederhorn. The Common Stock purchased with the proceeds of these loans does notserve as security for the loans.  The

 

24

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loans are due on February 21,2007, and bear interest at the prime rate, as published in the Wall StreetJournal, which interest is added to the principal annually.

 

On July 9, 2002(prior to the passage of the Sarbanes-Oxley Act of 2002), we loaned Mr. Wiederhorn$2.0 million.  This loan is full recourseto Mr. Wiederhorn and his spouse and is secured by trust deeds on tworesidences located in Oregon.  The loanis due on August 1, 2007 and bears interest at 8.5% per annum, payablemonthly.

 

Further information onthese loans to executives is included in our proxy statements for 2004 andprior years’ Annual Meeting of Stockholders.

 

INVESTMENT IN BOURNE END.  Ourinvestment in Bourne End increased by $0.3 million from $1.9 million at December 31,2004 to approximately $2.2 million at June 30, 2005, due to our share ofearnings in this equity investee.

 

RESTAURANTPROPERTY, PLANT AND EQUIPMENT, NET.  Our investment in restaurant property, plantand equipment, net of depreciation, decreased $0.6 million during the six monthsended June 30, 2005 to a balance of $5.6 million.  The decrease was primarily the result ofdepreciation expense.

 

INTANGIBLEASSETS, NET.  As aresult of the acquisition and consolidation of Fatburger, as of June 30,2005 we had intangible assets, net of amortization, of $5.3 million.  This consisted of trademark rights ofapproximately $4.0 million, franchise agreements of approximately $0.9 millionand other miscellaneous intangible assets of approximately $0.4 million.  Intangible assets decreased $0.1 millionduring the six months ended June 30, 2005 primarily as the result ofamortization expense.

 

GOODWILL.  Primarily as a result of the acquisition andconsolidation of Fatburger, we had recorded goodwill of $7.1 million as of June 30,2005.  Goodwill did not change during thesix months ended June 30, 2005.

 

OTHERASSETS.  At June 30,2005, the Company’s other assets consisted of the following: (dollars inthousands)

 
| Capitalized  deferred compensation |   | $     | 693    |   |
|------------------------------------|--------|-------|--------|--------|
| Prepaid expenses                   |   | 773   |   |
| Trade  receivables                 |   | 518   |   |
| Investment in  operating leases    |   | 240   |   |
| Mortgage  servicing rights         |   | 243   |   |
| Real estate  purchase option       |   | 401   |   |
| Restaurant  assets                 |   | 663   |   |
| Other                              |   | 1,342 |   |
| Total                              |   | $     | 4,873  |   |

 

The capitalized deferredcompensation included in other assets relates to the acquisition of GeorgeElkins.  In conjunction with theacquisition, certain employees of George Elkins entered into long-termemployment agreements.  These employeesreceived payments totaling $1.9 million which we capitalized as deferredcompensation.  The employees areobligated to perform under the employment agreements and must repay anyunearned deferred compensation payments upon early termination.  The deferred compensation is earned ratablyover the terms of the employment agreements, and we are amortizing the $1.9million investment over the contract terms. At June 30, 2005, the remaining contracts expire within the next 23months.

 

BORROWINGS AND NOTESPAYABLE.  Our borrowings and notespayable increased $2.2 million during the six months ended June 30, 2005to an ending balance of $10.2 million. This was primarily the result of borrowings to finance the purchase ofan apartment building in Barcelona, Spain.

 

25

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OBLIGATIONSUNDER CAPITAL LEASES. Obligations under capital leases decreased approximately $1.1 millionduring the six months ended June 30, 2005. This decrease was primarily the result of the disposal of two propertiessubject to capital leases with a carrying value of $0.9 million.

 

DEFERREDINCOME.  Franchisefee revenue from the sales of individual Fatburger franchises is recognizedonly when all material services or conditions relating to the sales have beensubstantially performed or satisfied. The completion of training and the opening of a location by thefranchisee constitute substantial performance. Fatburger charges $40,000 per location in franchise fees.  One-half of the fees are collected in cash atthe time the franchise rights are granted and the balance is collected at thetime the lease for the location is executed. Nonrefundable deposits collectedin relation to the sale of franchises are recorded as deferred franchise feesuntil the completion of training and the opening of the restaurant, at whichtime the franchise fee revenue is recognized. As of June 30, 2005, our deferred income relating to the collectionof unearned Fatburger franchise fees was $4.4 million, a decrease of less than$0.1 million from December 31, 2004. As of June 30, 2005, nearly all of the deferred income wascomprised of the initial $20,000 non-refundable deposit received per locationand the balance of the franchise fee will be collected in cash as leases onthese locations are signed.

 

DEFERREDINCOME TAXES.  Ourdeferred income taxes remained unchanged at $5.8 million at June 30, 2005.  As of June 30, 2005, we had, for U.S.Federal tax purposes, a net operating loss (“NOL”) carryforward ofapproximately $77.6 million, including $13.5 million relating to Fatburger.  The NOL carryforward may reduce the futurecash payment of the deferred income tax liability.  Our NOL begins to expire in 2018.  Fatburger’s NOL began to expire in 2004 andis generally subject to an annual limitation under the Internal Revenue Code of1986, Section 382, Limitation on Net Operating Loss Carryovers and CertainBuilt-In Losses Following Change in Control. In addition, to the extent the Fatburger NOL is utilized, therecognition of the related tax benefits would first reduce goodwill related tothe Fatburger acquisition, then other non-current intangible assets related tothat acquisition, and then income tax expense in accordance with Statement onFinancial Accounting Standards No. 109, Accounting for Income Taxes.

 

United States tax regulationsimpose limitations on the use of NOL carry forwards following certain changesin ownership.  If such a change were tooccur with respect to the Company, the limitation could significantly reducethe amount of benefits that would be available to offset future taxable incomeeach year, starting with the year of ownership change.  To reduce the likelihood of such ownershipchanges, we established a Shareholder Rights Plan dated as of October 18,2002, which discourages, under certain circumstances, ownership changes whichwould trigger the NOL limitations.

 

STOCKHOLDERS’EQUITY. Stockholders’ equity decreased by approximately $5.3 million in the sixmonths ended June 30, 2005, resulting primarily from our net loss of $1.5million, purchase of treasury stock of $1.7 million and dividends declared of $2.2million.

 

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

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Liquidity is ameasurement of our ability to meet potential cash requirements, includingongoing commitments to repay borrowings, fund business operations andacquisitions, engage in loan acquisition and lending activities and for othergeneral business purposes.  The primarysources of funds for liquidity during the six months ended June 30, 2005consisted of net cash provided by investing activities, including proceeds onthe sale of real estate.  As of June 30,2005, we had cash or cash equivalents of $7.9 million which we believe will besufficient to meet our current liquidity needs.

 

26

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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.

 

Fluctuations in interestrates will impact our net income to the extent our operations and our fixedrate assets are funded by variable rate debt. We may also be impacted to the extent that our variable rate assetsreprice on a different schedule or in relation to a different index thanany floating rate debt.  See “Item 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.”

 

At June 30, 2005, wehad total consolidated secured indebtedness of $21.4 million, as well as $18.0million of other liabilities. The consolidated secured indebtedness consistedof (i) $11.3 million outstanding of capital leases maturing between 2010and 2040 which are secured by real estate, (ii) mortgage notes payable of$3.1 million secured by real estate and (iii) notes payable and other debtof Fatburger of $7.0 million secured by the assets of Fatburger.

 

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

 

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

 

During the year ended December 31, 2004, we declared fourquarterly cash distributions of $0.13 per share each, totaling $0.52 per share($4.4 million).  Through August 2,2005, we have declared three quarterly cash dividends of $0.13 per shareeach.  The Company does not have a fixeddividend policy and may declare and pay new quarterly dividends on ourcommon stock, subject to our financial condition, results of operations,capital requirements and other factors deemed relevant by the Board ofDirectors.  One factor the Board ofDirectors may consider is the impact of dividends on the Company’s liquidity.

 

Effective October 14, 2004, the Company’s Common Stock begantrading in the over-the-counter (“OTC”) market on the OTC “pink sheets.”  Prior to that, the Company’s Common Stock wasquoted on the NASDAQ National Market.  OnJuly 20, 2004, the Company was notified by NASDAQ of a staff determinationto delist the Company’s Common Stock effective July 29, 2004.  The Company challenged the staffdetermination and requested an oral hearing by a Listing Qualifications Panelto review the staff’s conclusions.  Ahearing was held on September 9, 2004, and, on October 12, 2004, theCompany was notified by NASDAQ that the Listing Qualifications Panel upheld thestaff determination and the Company’s Common Stock was delisted from the NASDAQNational Market on October 14, 2004. The Company requested a review of the Listing Qualifications Panel’sdecision by NASDAQ’s Listing and Hearing Review Council.  On February 16, 2005, the Companyreceived notice that the NASDAQ Listing and Hearing Review Council had upheldthe Panel’s decision.  On April 21,2005, the Board of Governors of NASDAQ approved the decision of the NASDAQListing and Hearing Review Council and the NASDAQ decision became final.  The Company has appealed the decision to theSecurities and Exchange Commission. There can be no assurance that the appealwill be successful.

 

Trading of our Common Stock on the OTC pink sheets may reduce theliquidity of our Common Stock compared to quotation on the NASDAQ NationalMarket.  Also, the coverage of theCompany by security analysts and media could be reduced, which could result inlower prices for our Common Stock

 

27

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thanmight otherwise prevail and could also result in increased spreads between thebid and ask prices for the our Common Stock. Additionally, certain investors will not purchase securities that arenot quoted on the NASDAQ Stock Market, which could materially impair ourability to raise funds through the issuance of Common Stock or other securitiesconvertible into Common Stock.

 

In addition, if the trading price of our Common Stock is less than$5.00 per share, trading in our Common Stock could also be subject to therequirements of Rule 15g-9 promulgated under the Securities Exchange Actof 1934, as amended.  Under that Rule,brokers and dealers who recommend such low priced securities to persons otherthan established customers and accredited investors must satisfy special salespractice requirements, including a requirement that they make an individualizedwritten suitability determination for the purchaser and receive the purchaser’swritten consent prior to any transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990also requires additional disclosure in connection with any trades involving astock defined as a penny stock (generally, according to regulations adopted bythe SEC, any equity security not traded on an exchange or quoted on NASDAQ thathas a market price of less than $5.00 per share, subject to certainexceptions), including the delivery, prior to any penny stock transaction, of adisclosure schedule explaining the penny stock market and the risksassociated therewith.  Such requirementscould severely limit the market liquidity of our Common Stock.  There can be no assurance that our Common Stockwill not become treated as penny stock.

 

**OFF BALANCE SHEET ARRANGEMENTS**

 

In order to facilitatethe development of franchise locations, as of June 30, 2005, Fatburger hadguaranteed the annual minimum lease payments of three restaurant sites ownedand operated by franchisees.  Theguarantees approximate $1.9 million plus certain contingent rental payments asdefined in the respective leases.  Theseleases expire at various times through 2008.

 

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

 

We did not have any otheroff balance sheet arrangements in place as of June 30, 2005.

 

28

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## **ITEM3.**  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

## ** **

Our market risk isprimarily the exposure to loss resulting from changes in foreign currencyexchange rates, interest rates and commodity prices.  Our exposure to foreign currency fluctuationsarises from our UK investment in BEP and our investment in Barcelona realestate as of June 30, 2005, approximately 19% of the Company’s equity iscurrently invested in net assets located outside of the United States.  These investments are primarily denominated inBritish pounds or the Euro.

 

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

 
| **Change in Foreign  Exchange Rates (1)** | ** ** | **Projected Change in  Net Asset  Fair Value** | ** ** | **Projected  Percentage Change  in Net Asset  Fair Value** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                      |       |                                           |       |                                                       |       |
| Decrease 10%                              |       | $                                              | (560,000   | )                                                          | -1.9       | % |
| Decrease 20%                              |       | $                                              | (1,119,000 | )                                                          | -3.9       | % |
| No Change                                 |       | $                                              | —     |                                                       | 0.0        | % |
| Increase 10%                              |       | $                                              | 560,000    |                                                       | 1.9        | % |
| Increase 20%                              |       | $                                              | 1,119,000  |                                                       | 3.9        | % |

 

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(1)  Assumes thatuniform percentage changes occur instantaneously in both the Great Britainpound and the euro.  A decrease in theforeign exchange rate indicates a strengthening of the U.S. dollar against thatcurrency.  An increase in the foreignexchange rate indicates a weakening of the U.S. dollar against that currency.

 

We can utilize a widevariety of financial techniques to assist in the management of currencyrisk.  For example, in hedging theexchange rate exposure of a foreign currency denominated asset or liability, wemay enter into hedge transactions to counter movements in the differentcurrencies.  These hedges may be in theform of currency swaps, options, and forwards, or combinations thereof.  No such currency hedging techniques were inuse as of June 30, 2005.

 

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

 

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

 

The following tablequantifies the potential changes in net interest income and net portfolio valueas of June 30, 2005 should interest rates go up or down (shocked) by 100or 200 basis points. Net portfolio value is calculated as the sum of the valueof off-balance sheet instruments and the present value of cash in-flowsgenerated from interest-earning assets net of cash out-flows in respect ofinterest-bearing liabilities.  The tableassumes that changes in interest rates occur instantaneously.  Actual results could differ significantlyfrom those estimated in the table.

 

29

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Projected Percent ChangeIn

 
| **Change in Interest  Rates (1)** | ** ** | **Net Interest  Income** | ** ** | **Net Portfolio  Fair Value** | ** ** | **Change in Annual  Net  Interest Income** | ** ** | **Change in Net  Portfolio  Fair Value** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| -200 Basis  Points                |       | 15.0                     | %          | -4.3                          | %          | $                                          | 93,000     |                                     | $          | (1,240,000 | ) |
| -100 Basis  Points                |       | 3.5                      | %          | -2.0                          | %          | $                                          | 22,000     |                                     | $          | (593,000 | ) |
|  0 Basis  Points             |       | 0.0                      | %          | 0.0                           | %          | $                                          | —     |                                     | $          | — |   |
| 100 Basis Points                  |       | -2.0                     | %          | 1.9                           | %          | $                                          | (13,000    | )                                        | $          | 543,000 |   |
| 200 Basis Points                  |       | -4.1                     | %          | 3.6                           | %          | $                                          | (25,000    | )                                        | $          | 1,042,000 |   |
|                                   |            |                          |            |                               |            |                                            |            |                                          |            |  |  |  |

 

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

 

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

 

Assets and LiabilitiesAs of June 30, 2005

(dollars in thousands)

 
| **Interest-Bearing Assets**               | ** ** | **Basis Amount** | ** ** | **Coupon Type** | ** ** | **Liability** | ** ** | **Type**   | ** ** |
|-------------------------------------------|------------|------------------|------------|-----------------|------------|---------------|------------|------------|------------|
| ** **                                | ** ** | ** **       | ** ** | ** **      | ** ** | ** **    | ** ** | ** ** | ** ** |
| Fixed-rate  assets, no financing          |       | $                | 7,303      |            | Fixed      |          | $          | —     |       | None |   |
| Variable-rate  assets, no financing       |       | 2,794            |       | Prime           |       | —        |       | None       |       |
| Cash and cash  equivalents                |       | 7,920            |       | N/A             |       | —        |       | None       |       |
| Subtotal                                  |       | 18,017           |       |            |       | —        |       |       |       |
|                                      |       |             |       |            |       |          |       |       |       |
| Other Assets                              |       |             |       |            |       |          |       |       |       |
|                                      |       |             |       |            |       |          |       |       |       |
| Investments in  real estate               |       | 25,369           |       | N/A             |       | 14,405        |       | Fixed      |       |
| Investment in  BEP                        |       | 2,192            |       | N/A             |       | —        |       | None       |       |
| Restaurant property,  plant and equipment |       | 5,579            |       | N/A             |       | 7,049         |       | LIBOR      |       |
| Intangible  assets, net                   |       | 5,286            |       | N/A             |       | —        |       | None       |       |
| Goodwill                                  |       | 7,063            |       | N/A             |       | —        |       | None       |       |
| Other                                     |       | 4,873            |       | N/A             |       | —        |       | None       |       |
| Subtotal                                  |       | 50,362           |       |            |       | 21,454        |       |       |       |
|                                      |       |             |       |            |       |          |       |       |       |
| Liability Only                            |       |             |       |            |       |          |       |       |       |
|                                      |       |             |       |            |       |          |       |       |       |
| Deferred income                           |       | —           |       |            |       | 4,371         |       | None       |       |
| Deferred income  taxes                    |       | —           |       |            |       | 5,756         |       | None       |       |
| Other                                     |       | —           |       |            |       | 7,802         |       | None       |       |
| Total                                     |       | $                | 68,379     |            |       |          | $          | 39,383     |       |   |   |

 

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

 

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

 

**(A)  Evaluation of disclosure controls 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) and 15d-15(e))as of the end of the period covered by this report, have concluded that ourdisclosure controls and procedures were effective and designed to ensure thatmaterial information relating to us and our consolidated subsidiaries would bemade known to us by others within these entities.

 

**(B) Changes in internal control over financial reporting**.  There were no significant changes in ourinternal control over financial reporting in connection with an evaluation thatoccurred during our second fiscal quarter of 2005 that have materially affectedor are reasonably likely to materially affect our internal control overfinancial reporting.

 

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FORWARD-LOOKINGSTATEMENTS

 

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 STATEMENTSWHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY’SCONTROL) MAY BE IDENTIFIED BY REFERENCE TO A FUTURE PERIOD OR PERIODS, ORBY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS “MAY,” “WILL,” “BELIEVE,” “EXPECT,”“ANTICIPATE,” “CONTINUE,” OR SIMILAR TERMS OR VARIATIONS ON THOSE TERMS, OR THENEGATIVE OF THOSE TERMS.  ACTUAL RESULTSCOULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING STATEMENTS DUETO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE RELATED TO THEECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH THE COMPANYOPERATES, THE FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY OF ANDCOSTS ASSOCIATED WITH SOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND PRICING,THE REAL ESTATE MARKET, FISCAL AND MONETARY POLICIES OF THE U.S.  GOVERNMENT, CHANGES IN PREVAILING INTERESTRATES, ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, PERFORMANCE OFRETAIL/CONSUMER MARKETS, DETERIORATION IN CONSUMER CREDIT, CREDIT RISKMANAGEMENT, ASSET/LIABILITY MANAGEMENT, THE IMPACT OF ONGOING LITIGATION, ANDTHE IMPACT OF THE SETTLEMENT OF THE INVESTIGATION OF THE COMPANY’S CHIEF EXECUTIVEOFFICER.  EXCEPT AS MAY BE REQUIREDBY LAW, THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANYOBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BEMADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATEDOR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.

 

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## **PART II — OTHERINFORMATION**

 

**Item 1.**    Legal Proceedings.

 

Capital Consultants LLC

 

As the Company haspreviously disclosed, the Company’s former Chief Executive Officer and currentChief Strategic Officer, Andrew Wiederhorn, and former President, LawrenceMendelsohn, received letters from the United States Attorney’s Office for theDistrict of Oregon (“USAODO”) in March 2001 advising them that they weretargets of a grand jury investigation (the “CCL Investigation”) into thefailure of Capital Consultants, L.L.C (“CCL”). CCL was a lender to Wilshire Credit Corporation (“WCC”) and related andaffiliated companies. WCC was a mortgage loan servicing company owned by Mr. Wiederhornand Mr. Mendelsohn that provided mortgage loan servicing for WilshireFinancial Services Group Inc., a public company for which Mr. Wiederhornacted as CEO and Mr. Mendelsohn acted as President and which wasprincipally engaged in banking, loan pool purchasing, and investing inmortgage-backed securities.  As a resultof the liquidity crisis in the financial markets in the fall of 1998, WilshireFinancial Services Group Inc. experienced significant losses and filed forbankruptcy, which in turn had a significant impact on its affiliates, includingWCC, which could not repay the amounts borrowed from CCL.  At the time, Wilshire Financial ServicesGroup Inc. owned approximately 8.6% of the Company’s common stock and managedthe Company’s investments under a management agreement.

 

In August 2002, Mr. Mendelsohnresigned as President and Director of the Company. In November 2003, Mr. Mendelsohnentered into an agreement with the USAODO pursuant to which he pled guilty tofiling a false 1998 personal tax return and agreed to cooperate in the CCLInvestigation.

 

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

 

Under the Settlementterms, Mr. Wiederhorn pled guilty on June 3, 2004 to two federalcounts and was sentenced to 18 months incarceration and fined $2.0million.  The first count, a violation ofan ERISA provision, involved a federal law that required no criminal intent andfor which his reliance on the advice of counsel was not a defense. The secondcount related to a violation involving a deduction on a personal taxreturn.  The deduction was structured andapproved by Mr. Wiederhorn’s tax advisors and did not reduce Mr. Wiederhorn’stax liability or reduce the government’s tax collections.  The charges to which Mr. Wiederhorn haspled guilty pursuant to the Settlement are not based upon any acts or omissionsinvolving the Company or Mr. Wiederhorn in his capacity as an officer ordirector of the Company.

 

In entering into Mr. Wiederhorn’sleave of absence agreement, the Company’s Board of Directors considered thenature of the statutes to which Mr. Wiederhorn pled and the fact that herelied on the advice of expert legal counsel and a national accountingfirm.  The Board also believed it wasimportant to assure Mr. Wiederhorn’s return to active involvement with theCompany because of his expertise and knowledge and to preserve a significantbusiness relationship and the value of the Company’s investments.

 

Under the terms of theleave of absence agreement, Mr. Wiederhorn will continue to receive hisregular salary and bonus pursuant to and as set forth in his employmentagreement.  In addition, in considerationof Mr. Wiederhorn’s good will, cooperation, and continuing assistance, andin recognition of Mr. Wiederhorn’s past service to the Company, to helpavoid litigation and for the other reasons stated in the agreement, the Companymade a leave of absence payment to Mr. Wiederhorn in the amount of $2.0million on June 2, 2004.

 

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Mr. Wiederhorn beganhis leave of absence on August 2, 2004 and is expected to remain in thatstatus until October 2005.  On August 13,2004, the Board of Directors adopted a resolution changing the role of AndrewWiederhorn from Co-Chief Executive to Chief Strategic Officer during the leaveof absence period.  All other provisionsof the Leave of Absence Agreement and employment agreement with Mr. Wiederhornremain in force.  On August 13,2004, Donald J. Berchtold became the sole Chief Executive Officer of theCompany.

 

NASDAQ Delisting

 

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

 

Shareholder Derivative Complaint

 

On July 6, 2004, Jeff Allan McCoon, derivatively onbehalf of the Company, filed a lawsuit in the Circuit Court for the State ofOregon (Multnomah County) which named the Company and all of its directors asdefendants. The lawsuit as amended alleges that the Company’s Boardof Directors breached their duties to the Company in a number of ways includingby: (a) entering into the Leave of Absence Agreement with AndrewWiederhorn; (b) purchasing and exercising a CallOption agreement with Andrew Wiederhorn for the purchase as TreasuryStock of 423,245 shares of the Company’s common stock; (c) purchasing asTreasury Stock 330,500 shares of the Company’s common stock from ClarenceColeman; (d) authorizing and/or allowing the Company to incur variousexpenses (including alleged excessive compensation and fringe benefitsto employees of the Company and the directors themselves).  Thelawsuit generally seeks the recovery of all payments made or to be made to Mr. Wiederhornunder the Leave of Absence Agreement (claimed to be $6.6 million), andunspecified damages as a result of the other transactions allegedabove, plus attorney fees and costs.  The lawsuit also asks that thedirectors implement changes in corporate governance. The Company’s directorshave indemnity agreements with the Company and have asserted the right toindemnification from the Company under those indemnity agreements for theexpenses incurred in connection with the lawsuit. The Company has incurredexpenses under the indemnity agreements and also may derive benefits if theplaintiff’s claims are successful. At this stage of the case it is too early topredict the outcome with any certainty.

 

Other Legal Proceedings

 

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

 

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

 

None.

 

**Item 3.**    DefaultsUpon Senior Securities.

 

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Not applicable.

 

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

 

**None.**

 

**Item 5.**    Other Information.

 

None.

 

**Item 6.**    Exhibits

** **

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

 

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

 

4.1           CommonStock Certificate Specimen, incorporated by reference to Exhibit 4.1 toAmendment No. 3 to the Registration Statement (Registration No. 333-39035)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 ofStock Option 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           Summaryof Rights to Purchase Shares, incorporated by reference to Exhibit 99.1 tothe Form 8-K dated October 18, 2002, as previously filed with the SECon October 18, 2002.

 

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

 

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

 

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

 

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

 

4.9           AmendmentNumber 2 to the Long Term Vesting Trust Agreement,dated as of May 26, 2004, by and between the Registrant and AndrewWiederhorn, Don Coleman, and David Dale-Johnson as previously filed with theSEC on March 30, 2005.

 

11.1         Computationof Per Share Earnings.

 

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

 

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

 

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

 

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                        | FOG CUTTER CAPITAL  GROUP INC. |
|-----------------------------|--------------------------------|
|                        |                           |
|                        |                           | By: /s/ Donald J.  Berchtold |   |
|                        |                           | Donald J. Berchtold |
|                        |                           | Chief Executive Officer |
|                        |                           |   |
|                        |                           |   |
|                        |                           | By: /s/ R. Scott  Stevenson |   |
|                        |                           | R. Scott Stevenson |
|                        |                           | Senior Vice President  and Chief Financial Officer |
|                        |                           |
| Date: August 12,  2005 |

 

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EXHIBIT INDEX

 

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

 

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

 

4.1           CommonStock Certificate Specimen, incorporated by reference to Exhibit 4.1 toAmendment No. 3 to the Registration Statement (Registration No. 333-39035)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 ofStock Option 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           Summaryof Rights to Purchase Shares, incorporated by reference to Exhibit 99.1 tothe Form 8-K dated October 18, 2002, as previously filed with the SECon October 18, 2002.

 

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

 

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

 

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

 

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

 

4.9           AmendmentNumber 2 to the Long Term Vesting Trust Agreement,dated as of May 26, 2004, by and between the Registrant and AndrewWiederhorn, Don Coleman, and David Dale-Johnson as previously filed with theSEC on March 30, 2005.

 

11.1         Computationof Per Share Earnings.

 

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

 

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

 

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

 

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

 

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