**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 September 30, 2003** |
|                            |
| **OR**                          |
|                            |
| **o**                           |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                            |   |   |
| **Commission File No. 0-23911** |

 

**Fog Cutter Capital Group Inc.**

(Exact name of registrant as specified in its charter)

 

| **Maryland**                                                    |   | **52-2081138**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **1410 SW Jefferson Street  Portland, OR  97201**          |
| (Address of principal executive offices) (Zip Code)             |
|                                                            |
| **(503) 721-6500**                                              |
| (Registrant’s telephone number, including area code)       |

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.  Yes ýNo o.

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes o No ý.

 

**APPLICABLE ONLY TOCORPORATE ISSUERS:**

 

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

 

| **Class**                                 |   | **Outstanding  at September 30, 2003** |
|-------------------------------------------|--------|---------------------------------------------|
| Common Stock, par value $0.0001 per share |   | 8,670,700 shares                            |

 

 

----

 

FOG CUTTER CAPITAL GROUP 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.                                | Changes in 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 and Reports on Form 8-K |
|                                   |   |
| Signatures                             |

 

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

 

2

----

 

**PART I****— FINANCIAL INFORMATION**

 

**ITEM 1****.  INTERIMFINANCIAL STATEMENTS**

 

FOG CUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

*(dollars in thousands, except share data)*

 
|                                                                                                                                                                                                                                                                                                          |   | **September 30  2003** |    | **December 31  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|----------------------------|--------|
|                                                                                                                                                                                                                                                                                                          |   | **(Unaudited)**             |    |                       |   |
| Assets                                                                                                                                                                                                                                                                                                        |   |                        |    |                       |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                     |   | $                           | 15,132  |                       | $      | 14,505 |   |
| Securities available for sale,  pledged under repurchase agreements, at estimated fair value                                                                                                                                                                                                                  |   | 41,659                      |    | 56,524                     |   |
| Securities available for sale,  at estimated fair value                                                                                                                                                                                                                                                       |   | 747                         |    | 2,794                      |   |
| Loans                                                                                                                                                                                                                                                                                                         |   | 4,031                       |    | 2,245                      |   |
| Investments in real estate, net                                                                                                                                                                                                                                                                               |   | 22,231                      |    | 21,498                     |   |
| Loans to senior executives                                                                                                                                                                                                                                                                                    |   | 2,952                       |    | 2,918                      |   |
| Investment in Bourne End                                                                                                                                                                                                                                                                                      |   | 4,375                       |    | 5,579                      |   |
| Restaurant property, plant and  equipment, net                                                                                                                                                                                                                                                                |   | 5,684                       |    | —                     |   |
| Intangible assets, net                                                                                                                                                                                                                                                                                        |   | 5,704                       |    | —                     |   |
| Goodwill                                                                                                                                                                                                                                                                                                      |   | 7,420                       |    | —                     |   |
| Other assets                                                                                                                                                                                                                                                                                                  |   | 4,871                       |    | 4,523                      |   |
| Total assets                                                                                                                                                                                                                                                                                                  |   | $                           | 114,806 |                       | $      | 110,586 |   |
|                                                                                                                                                                                                                                                                                                          |   |                        |    |                       |   |
| Liabilities and Stockholders’  Equity                                                                                                                                                                                                                                                                    |   |                        |    |                       |   |
| Liabilities:                                                                                                                                                                                                                                                                                                  |   |                        |    |                       |   |
| Borrowings and notes payable                                                                                                                                                                                                                                                                                  |   | $                           | 38,224  |                       | $      | 35,478 |   |
| Obligations under capital  leases                                                                                                                                                                                                                                                                             |   | 13,949                      |    | 16,847                     |   |
| Dividend payable                                                                                                                                                                                                                                                                                              |   | 76                          |    | 1,253                      |   |
| Obligation to repurchase stock                                                                                                                                                                                                                                                                                |   | —                      |    | 4,201                      |   |
| Deferred income                                                                                                                                                                                                                                                                                               |   | 3,030                       |    | —                     |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                         |   | 6,418                       |    | 4,134                      |   |
| Accrued expenses and other  liabilities                                                                                                                                                                                                                                                                       |   | 6,364                       |    | 4,466                      |   |
| Total liabilities                                                                                                                                                                                                                                                                                             |   | 68,061                      |    | 66,379                     |   |
|                                                                                                                                                                                                                                                                                                          |   |                        |    |                       |   |
| 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; 11,716,600 shares issued as of  September 30, 2003 and 11,518,600 shares issued as of December 31,  2002; 8,670,700 shares outstanding as of September 30, 2003 and  9,517,460 shares outstanding as of December 31, 2002 |   | 168,018                     |    | 167,027                    |   |
| Common stock, subject to put  options; none as of September 30, 2003; 1,044,760 common shares as of  December 31, 2002                                                                                                                                                                              |   | —                      |    | (3,131                     | )      |
| Accumulated deficit                                                                                                                                                                                                                                                                                           |   | (115,061                    | )       | (116,503                   | )      |
| Accumulated other comprehensive  income                                                                                                                                                                                                                                                                       |   | 1,805                       |    | 1,700                      |   |
| Treasury stock; 3,045,900  common shares as of September 30, 2003, and 2,001,140 common shares as  of December 31, 2002, at cost                                                                                                                                                                    |   | (8,017                      | )       | (4,886                     | )      |
| Total stockholders’ equity                                                                                                                                                                                                                                                                               |   | 46,745                      |    | 44,207                     |   |
| Total liabilities and  stockholders’ equity                                                                                                                                                                                                                                                              |   | $                           | 114,806 |                       | $      | 110,586 |   |

 

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

 

3

----

 

FOG CUTTER CAPITAL GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

*(dollars inthousands, except share data)*

 
|                                           |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                           |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                           |   |                                       |   |                                      |   |   |   |   |   |
| Net interest income:                           |   |                                       |   |                                      |   |   |   |   |   |
| Loans                                          |   | $                                          | 588    |                                      | $      | 67 |   | $ | 1,012 |   | $ | 259 |   |
| Securities                                     |   | 509                                        |   | 1,445                                     |   | 1,983 |   | 4,489 |   |
| Other investments                              |   | 36                                         |   | 156                                       |   | 127 |   | 295 |   |
| Total interest income                          |   | 1,133                                      |   | 1,668                                     |   | 3,122 |   | 5,043 |   |
| Interest expense                               |   | 160                                        |   | 578                                       |   | 578 |   | 1,686 |   |
| Net interest income                            |   | 973                                        |   | 1,090                                     |   | 2,544 |   | 3,357 |   |
|                                           |   |                                       |   |                                      |   |   |   |   |   |
| Real estate operations:                        |   |                                       |   |                                      |   |   |   |   |   |
| Operating income                               |   | 1,034                                      |   | —                                    |   | 2,965 |   | — |   |
| Operating expense                              |   | (498                                       | )      | (9                                        | )      | (1,564 | ) | (39 | ) |
| Gain on sale of real estate                    |   | —                                     |   | —                                    |   | 279 |   | — |   |
| Interest expense                               |   | (320                                       | )      | (27                                       | )      | (1,040 | ) | (83 | ) |
| Depreciation                                   |   | (155                                       | )      | (17                                       | )      | (461 | ) | (50 | ) |
| Total real estate operations                   |   | 61                                         |   | (53                                       | )      | 179 |   | (172 | ) |
|                                           |   |                                       |   |                                      |   |   |   |   |   |
| Restaurant operations:                         |   |                                       |   |                                      |   |   |   |   |   |
| Operating revenue                              |   | 2,472                                      |   | —                                    |   | 2,472 |   | — |   |
| Cost of goods sold                             |   | (1,515                                     | )      | —                                    |   | (1,515 | ) | — |   |
| Franchise and advertising fees                 |   | 152                                        |   | —                                    |   | 152 |   | — |   |
| General and administrative costs               |   | (901                                       | )      | —                                    |   | (901 | ) | — |   |
| Interest expense                               |   | (112                                       | )      | —                                    |   | (112 | ) | — |   |
| Depreciation and amortization                  |   | (141                                       | )      | —                                    |   | (141 | ) | — |   |
| Total restaurant operations                    |   | (45                                        | )      | —                                    |   | (45 | ) | — |   |
|                                           |   |                                       |   |                                      |   |   |   |   |   |
| Other operating income:                        |   |                                       |   |                                      |   |   |   |   |   |
| Equity in (loss) earnings of equity  investees |   | 500                                        |   | (352                                      | )      | 1,370 |   | 1,697 |   |
| Gain on sale of loans and securities           |   | 1,289                                      |   | 3,526                                     |   | 10,672 |   | 13,827 |   |
| Loan brokerage fees                            |   | 1,244                                      |   | 793                                       |   | 3,497 |   | 1,299 |   |
| Gain on foreign currency                       |   | 491                                        |   | 6                                         |   | 728 |   | 20 |   |
| Other revenue (loss)                           |   | 234                                        |   | (502                                      | )      | 590 |   | (768 | ) |
| Total other operating income                   |   | 3,758                                      |   | 3,471                                     |   | 16,857 |   | 16,075 |   |
|                                           |   |                                       |   |                                      |   |   |   |   |   |
| Operating expenses:                            |   |                                       |   |                                      |   |   |   |   |   |
| Compensation and employee benefits             |   | 2,283                                      |   | 1,514                                     |   | 8,101 |   | 3,254 |   |
| Professional fees                              |   | 444                                        |   | 476                                       |   | 1,539 |   | 1,421 |   |
| Other                                          |   | 916                                        |   | 868                                       |   | 2,835 |   | 1,978 |   |
| Total operating expenses                       |   | 3,643                                      |   | 2,858                                     |   | 12,475 |   | 6,653 |   |
|                                           |   |                                       |   |                                      |   |   |   |   |   |
| Net income before provision for income  taxes  |   | 1,104                                      |   | 1,650                                     |   | 7,060 |   | 12,607 |   |
| Provision for income taxes                     |   | 550                                        |   | —                                    |   | 2,260 |   | 800 |   |
| Net income                                     |   | $                                          | 554    |                                      | $      | 1,650 |   | $ | 4,800 |   | $ | 11,807 |   |

 

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

 

4

----

 
|                                        |   | **Three  Months Ended  September 30** |   | **Nine  Months Ended  September 30** |   |
|---------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                        |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Basic net income per share                  |   | $                                          | 0.06   |                                      | $      | 0.17 |   | $ | 0.56 |   | $ | 1.18 |   |
|                                        |   |                                       |   |                                      |   |   |   |   |   |
| Basic weighted average shares outstanding   |   | 8,670,575                                  |   | 9,764,373                                 |   | 8,585,550 |   | 9,997,472 |   |
|                                        |   |                                       |   |                                      |   |   |   |   |   |
| Diluted net income per share                |   | $                                          | 0.06   |                                      | $      | 0.17 |   | $ | 0.50 |   | $ | 1.17 |   |
|                                        |   |                                       |   |                                      |   |   |   |   |   |
| Diluted weighted average shares outstanding |   | 9,746,241                                  |   | 9,907,564                                 |   | 9,661,216 |   | 10,121,512 |   |
|                                        |   |                                       |   |                                      |   |   |   |   |   |
| Dividends declared per share                |   | $                                          | 0.13   |                                      | $      | 0.13 |   | $ | 0.39 |   | $ | 0.39 |   |

 

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

 

5

----

 

**FOG CUTTER CAPITAL GROUP INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

(Unaudited)

(dollarsin thousands)

 
|                                                                                                         |   | **Common  Stock** |       | **Treasury  Stock** |       | **Common  Stock  Subject to Options** |       | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Income** |   | **Total** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|---------------------|------------|---------------------------------------|------------|--------------------------|--------|-----------------------------------------------|--------|-----------|--------|
|                                                                                                         |   | **Shares (1)**    | ** ** | **Amount**          | ** ** | **Shares**                            | ** ** | **Amount**               |   |                                          |   |      |   |
| Balance at January 1,  2003                                                                        |   | 9,517,460         |       | $                   | 167,027    |                                  | 2,001,140  |                     | $      | (4,886                                        | )      | $         | (3,131 | ) | $ | (116,503 | ) | $ | 1,700 |   | $ | 44,207 |   |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Comprehensive income:                                                                                        |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Net income                                                                                                   |   | —            |       | —              |       | —                                |       | —                   |   | —                                        |   | 4,800     |   | — |   | 4,800 |   |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Other comprehensive income:                                                                                  |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Foreign currency translation                                                                                 |   | —            |       | —              |       | —                                |       | —                   |   | —                                        |   | —    |   | 88 |   | 88 |   |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Unrealized holding gains on securities available for sale                                                    |   | —            |       | —              |       | —                                |       | —                   |   | —                                        |   | —    |   | 11,402 |   | 11,402 |   |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Reclassification adjustment for gains on securities and foreign  currency translation included in net income |   | —            |       | —              |       | —                                |       | —                   |   | —                                        |   | —    |   | (11,385 | ) | (11,385 | ) |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Total comprehensive income                                                                                   |   | —            |       | —              |       | —                                |       | —                   |   | —                                        |   | —    |   | — |   | 4,905 |   |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Purchase of treasury stock                                                                                   |   | (1,044,760        | )          | —              |       | 1,044,760                             |       | (3,131                   | )      | 3,131                                         |   | —    |   | — |   | — |   |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Common stock issued pursuant to exercise of stock options                                                    |   | 198,000           |       | 991                 |       | —                                |       | —                   |   | —                                        |   | —    |   | — |   | 991 |   |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Dividends declared                                                                                           |   | —            |       | —              |       | —                                |       | —                   |   | —                                        |   | (3,358    | )      | — |   | (3,358 | ) |
|                                                                                                         |   |              |       |                |       |                                  |       |                     |   |                                          |   |      |   |   |   |   |   |
| Balance at September 30, 2003                                                                           |   | 8,670,700         |       | $                   | 168,018    |                                  | 3,045,900  |                     | $      | (8,017                                        | )      | —    |   | $ | (115,061 | ) | $ | 1,805 |   | $ | 46,745 |   |
|                                                                                                              |        |                   |            |                     |            |                                       |            |                          |        |                                               |        |           |        |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Issued and outstanding

 

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

 

6

----

 

FOG CUTTER CAPITAL GROUP INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Unaudited)

 *(dollars in thousands)*

 
|                                                                              |   | **Three  Months Ended  September 30,** |   | **Nine Months  Ended  September 30,** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------------|--------|
|                                                                              |   | **2003**                               |   | **2002**                                   |   | **2003** |   | **2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                             |   |                                   |   |                                       |   |   |   |   |   |
| Net income                                                                        |   | $                                      | 554    |                                       | $      | 1,650 |   | $ | 4,800 |   | $ | 11,807 |   |
| Adjustments to reconcile net income to net  cash used in operating activities:    |   |                                   |   |                                       |   |   |   |   |   |
| Depreciation                                                                      |   | 241                                    |   | 64                                         |   | 613 |   | 203 |   |
| Gain on foreign currency translation                                              |   | (491                                   | )      | (6                                         | )      | (728 | ) | (20 | ) |
| Gain on sale of securities available for  sale                                    |   | (1,283                                 | )      | (3,357                                     | )      | (10,658 | ) | (14,061 | ) |
| Gain on sale of loans                                                             |   | (7                                     | )      | (169                                       | )      | (15 | ) | 234 |   |
| Purchase of loans and discounted loans                                            |   | —                                 |   | (2,102                                     | )      | (1,486 | ) | (2,128 | ) |
| Principal repayments on loans and  discounted loans                               |   | 289                                    |   | 38                                         |   | 782 |   | 2,789 |   |
| Equity in (income) loss of equity investees                                       |   | (500                                   | )      | 352                                        |   | (1,370 | ) | (1,697 | ) |
| Other                                                                             |   | 32                                     |   | 380                                        |   | (253 | ) | 712 |   |
| Change in:                                                                        |   |                                   |   |                                       |   |   |   |   |   |
| Deferred income                                                                   |   | 980                                    |   | —                                     |   | 980 |   | — |   |
| Accrued interest receivable                                                       |   | (19                                    | )      | 14                                         |   | 57 |   | (123 | ) |
| Other assets                                                                      |   | (324                                   | )      | 179                                        |   | 334 |   | 214 |   |
| Accounts payable and accrued liabilities                                          |   | (266                                   | )      | (2,272                                     | )      | 946 |   | (2,355 | ) |
| Net cash used in operating activities                                             |   | (794                                   | )      | (5,229                                     | )      | (5,998 | ) | (4,425 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                             |   |                                   |   |                                       |   |   |   |   |   |
| Repayments of securities available for sale                                       |   | 7,178                                  |   | 1,512                                      |   | 14,486 |   | 4,362 |   |
| Purchase of securities available for sale                                         |   | —                                 |   | —                                     |   | — |   | (8,250 | ) |
| Proceeds from sale of securities available  for sale                              |   | 1,844                                  |   | 2,604                                      |   | 13,835 |   | 25,139 |   |
| Loans to senior executives                                                        |   | —                                 |   | (2,000                                     | )      | — |   | (2,750 | ) |
| Investment in real estate                                                         |   | (1,987                                 | )      | —                                     |   | (1,987 | ) | — |   |
| Payments made in connection with  acquisition of subsidiary, net of cash acquired |   | (4,965                                 | )      | —                                     |   | (4,965 | ) | (1,850 | ) |
| Investment in and loans to equity investees                                       |   | —                                 |   | —                                     |   | (3,000 | ) | — |   |
| Proceeds from investments in and loans to  equity investees                       |   | 3,042                                  |   | —                                     |   | 5,942 |   | 1,381 |   |
| Transfer from restricted cash deposit                                             |   | —                                 |   | 2,579                                      |   | — |   | — |   |
| Other                                                                             |   | 54                                     |   | 18                                         |   | (194 | ) | 28 |   |
| Net cash provided by investing activities                                         |   | 5,166                                  |   | 4,713                                      |   | 24,117 |   | 18,060 |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                             |   |                                   |   |                                       |   |   |   |   |   |
| Proceeds from borrowings                                                          |   | —                                 |   | —                                     |   | — |   | 10,508 |   |
| Repayments on borrowings                                                          |   | (953                                   | )      | (1,412                                     | )      | (9,173 | ) | (8,968 | ) |
| Repayment of obligations under capital  leases                                    |   | (2,891                                 | )      | —                                     |   | (3,184 | ) | — |   |
| Payment of obligation to purchase treasury  stock                                 |   | —                                 |   | —                                     |   | (1,399 | ) | — |   |
| Purchase of treasury stock                                                        |   | —                                 |   | (432                                       | )      | — |   | (432 | ) |
| Proceeds from issuance of common stock                                            |   | 2                                      |   | —                                     |   | 877 |   | — |   |
| Dividend payments on common stock                                                 |   | (1,127                                 | )      | (1,275                                     | )      | (4,610 | ) | (3,823 | ) |
| Other                                                                             |   | —                                 |   | —                                     |   | — |   | 31 |   |
| Net cash used in financing activities                                             |   | (4,969                                 | )      | (3,119                                     | )      | (17,489 | ) | (2,684 | ) |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                           |   | 2                                      |   | 27                                         |   | (3 | ) | 29 |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                             |   | (595                                   | )      | (3,608                                     | )      | 627 |   | 10,980 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                 |   | 15,727                                 |   | 21,341                                     |   | 14,505 |   | 6,753 |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        |   | $                                      | 15,132 |                                       | $      | 17,733 |   | $ | 15,132 |   | $ | 17,733 |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION AND NON-CASH TRANSACTIONS:     |   |                                   |   |                                       |   |   |   |   |   |
| Cash paid for interest                                                            |   | $                                      | 523    |                                       | $      | 594 |   | $ | 1,722 |   | $ | 1,768 |   |
| Notes payable issued to settle obligation  to purchase treasury stock             |   | $                                      | 331    |                                       | $      | — |   | $ | 3,131 |   | $ | — |   |
| Sale of loan in exchange for treasury stock                                       |   | $                                      | — |                                       | $      | — |   | $ | — |   | $ | 1,833 |   |
| Non-cash assets acquired                                                          |   | $                                      | 19,502 |                                       | $      | — |   | $ | 19,502 |   | $ | — |   |
| Non-cash liabilities assumed                                                      |   | $                                      | 14,537 |                                       | $      | — |   | $ | 14,537 |   | $ | — |   |

 

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

 

7

----

 

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

 

Theaccompanying interim consolidated financial statements of Fog Cutter CapitalGroup Inc. and Subsidiaries (“FCCG” or the “Company”) are unaudited and havebeen prepared in conformity with the requirements of Regulation S-X promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”),particularly Rule 10-01 thereof, which governs the presentation of interimfinancial statements.  Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  The accompanying interimconsolidated financial statements should be read in conjunction with theCompany’s 2002 Annual Report on Form 10-K/A. A summary of the Company’s significant accounting policies is set forthin Note 2 to the consolidated financial statements in the 2002 Annual Report onForm 10-K/A.

 

In theCompany’s opinion, all adjustments, comprised of normal recurring accrualsnecessary for the fair presentation of the interim financial statements, havebeen included in the accompanying consolidated financial statements.  Operating results for the nine months endedSeptember 30, 2003 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2003.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires the Company to make estimatesand assumptions 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 the reportingperiod.  Actual results could differfrom those estimates.  Certain items inthe previously reported consolidated financial statements were reclassified toconform to the September 30, 2003 presentation, none of which affectedpreviously reported results of operations.

 

AtSeptember 30, 2003, certain Company officers and directors controlled,directly or indirectly, the significant voting majority of the Company.

 

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

 

Acquisition ofFatburger Holdings, Inc.

 

OnAugust 15, 2003, the Company completed a $5.4 million interim investment andfinancing package (the “Interim Agreement”) for Fatburger Holdings, Inc.(“Fatburger”).  Fatburger operates orfranchises 51 hamburger restaurants located in California, Nevada, Arizona andWashington.  Franchisees currently ownand operate about half of the Fatburger locations.

 

Underthe Interim Agreement, the Company acquired approximately 98% of the votingcontrol of Fatburger from existing shareholders.  The parties agreed to document and consummate a final investmentand financing package in accordance with specific terms outlined in the InterimAgreement, in which the Companywould exchange its current stock ownership in Fatburger for newly issuedpreferred shares, with initial voting control of approximately 88% ofFatburger.  As of November 12, 2003, theparties are continuing to document the final agreements.  The Company expects that the finalagreements will be completed during the fourth quarter of 2003.  Under the terms of the Interim Agreement,the financial effect of the final agreement will be retroactive to August 15,2003.  The difference in financialresults that would have been reflected on the accompanying interim financialstatements between the Interim Agreement and the final agreement was immaterialat September 30, 2003.

 

Underthe terms of the final agreement, the Company’s investment and financing package forFatburger consists of the purchase of convertible preferred stock andredeemable preferred stock.  Theacquisition price for the two classes of preferred stock was $5.4 million.  Based upon the relative fair value of thestock, the Company allocated $1.2 million of the purchase price to theconvertible preferred (“Series A-1 Preferred”) and $4.2 million to the redeemablepreferred (“Series D Preferred”).  TheSeries D Preferred has a liquidation preference of $6.0 million.  It accrues a preferred dividend equal to 20%per annum of the liquidation preference. The Series D Preferred may be redeemed by Fatburger at any time for $6.0million, but is required to be redeemed by May 15, 2004.  The due date for the mandatory redemption ofthe Series D Preferred may be extended for nine additional months if Fatburgerhas redeemed at least $2.25 million by May 15, 2004 and has paid all accrueddividends, including a special 10% extension dividend (not to exceed $225,000)on the portion of the Series D Preferred being extended.  The Series D Preferred initially has votingrights equal to approximately 68% of the voting control of Fatburger.  In the event Fatburger defaults on theSeries D Preferred, the Company will be issued additional stock to bring theCompany’s total ownership and control of Fatburger to 90%.

 

TheSeries A-1 Preferred is convertible at the option of the Company into a 20%ownership interest of the common stock of Fatburger on a fully dilutedbasis.  If Fatburger extends themandatory redemption period of the Series D Preferred, the conversion featureof the Series A-1 Preferred increases to an undiluted 35% ownership interest inthe common stock of Fatburger.  TheSeries A-1 Preferred initially has voting rights equal to 20% of the votingcontrol of Fatburger.

 

Theprimary reason for the acquisition was to finance a management led buy-out ofFatburger’s majority shareholders.  FogCutter expects to earn preferred dividends on its investment in the Series DPreferred and convert its Series A-1 Preferred into common stock in order toparticipate in potential future increases in the value of Fatburger. TheCompany owns the entire class of the Series A-1 Preferred and the Series DPreferred.  The Company’s ability totransfer the Series A-1 Preferred and the Series D Preferred is subject tocertain right of first offer and right of first refusal restrictions.  The shares are also entitled to certainco-sale rights.  As a result of itsvoting control, the Company began reporting the operations of Fatburger on aconsolidated basis beginning August 15, 2003.

 

Thefollowing supplemental pro forma information discloses the results ofoperations for the three months ended September 30, 2003 and 2002, and for thenine months ended September 30, 2003 and 2002 as though the acquisition hadbeen completed as of the beginning of the period being reported.  The supplemental pro forma information ispresented in accordance with generally accepted accounting principles, butshould be read in conjunction with the accompanying interim financialstatements.

 

8

----

 
|                                   |   | **Three  Months Ended**       |   | **Nine Months  Ended** |   |
|----------------------------------------|--------|-------------------------------|--------|------------------------|--------|
|                                   |   | **September  30,**            |   | **September  30,**     |   |
|                                   |   | **2003**                      |   | **2002**               |   | **2003** |   | **2002** |   |
|                                   |   | **(*dollars  in thousands*)** |   |
|                                   |   |                          |   |                   |   |   |   |   |   |
| Net interest  income                   |   | $                             | 973    |                   | $      | 1,090 |   | $ | 2,544 |   | $ | 3,357 |   |
| Real estate  operating income (loss)   |   | 61                            |   | (53                    | )      | 179 |   | (172 | ) |
| Restaurant  operating income (loss)    |   | (267                          | )      | (207                   | )      | (986 | ) | (704 | ) |
| Other operating  income                |   | 3,758                         |   | 3,471                  |   | 16,857 |   | 16,075 |   |
| Operating  expenses                    |   | (3,643                        | )      | (2,858                 | )      | (12,475 | ) | (6,653 | ) |
| Net income before  provision for taxes |   | 882                           |   | 1,443                  |   | 6,119 |   | 11,903 |   |
| Provision for  income taxes            |   | (786                          | )      | (24                    | )      | (2,536 | ) | (1,107 | ) |
| Net income                             |   | $                             | 96     |                   | $      | 1,419 |   | $ | 3,583 |   | $ | 10,796 |   |
| Basic net income  per share            |   | $                             | 0.01   |                   | $      | 0.15 |   | $ | 0.42 |   | $ | 1.08 |   |

 

 

The purchaseprice was allocated to the portion of Fatburger’s tangible and identifiableintangible assets acquired and liabilities assumed by the Company based ontheir estimated fair values at the acquisition date. The allocation of thepurchase price was based, in part, on third-party valuations of the fair valuesof identifiable intangible assets and restaurant property, plant, andequipment. The excess of the purchase price over the fair values of the portionof assets and liabilities acquired amounted to $7.4 million and was allocatedto goodwill.  The carryover basis ofminority interest in the transaction was not material.

 

The followingtable summarizes the allocated basis of the assets acquired and liabilitiesassumed as of the acquisition date (in thousands):

 
| Current assets (primarily cash and accounts  receivable)                        |   | $      | 770    |   |
|---------------------------------------------------------------------------------|--------|--------|--------|--------|
| Restaurant property, plant and equipment                                        |   | 5,773  |   |
| Goodwill                                                                        |   | 7,420  |   |
| Identifiable intangible assets (primarily  trademarks and franchise agreements) |   | 5,725  |   |
| Other assets                                                                    |   | 249    |   |
| Current liabilities                                                             |   | (3,110 | )      |
| Deferred income                                                                 |   | (2,550 | )      |
| Long-term debt                                                                  |   | (8,591 | )      |
| Other liabilities                                                               |   | (286   | )      |
| Net assets                                                                      |   | $      | 5,400  |   |

 

 

Theaccompanying consolidated statements of financial condition include borrowingsand notes payable of $9.0 million as of September 30, 2003 as a result of theconsolidation of Fatburger.  Of thisamount, approximately $7.2 million is secured by substantially all of theassets of Fatburger, bears interest at fixed rates ranging from 8.0% to 9.5%and requires monthly payments of principal and interest, primarily through2008.  The debt requires adherence tofinancial covenants and conditions. Fatburger had been in violation of certain of the covenants, butreceived a waiver from the lender as of June 30, 2003.

 

As ofSeptember 30, 2003, borrowings and notes payable also include mandatoryredeemable preferred stock (the “Series B Preferred”) with a carrying value of$0.8 million which was issued by Fatburger to a third party on August 15,2003.  The Series B Preferred isredeemable by Fatburger for $1.5 million at any time, but must be redeemed byAugust 15, 2009.  Under certaincircumstances, the Series B Preferred shareholders may convert their sharesinto the common stock of Fatburger in an amount equal to

 

9

----

 

the redemption price based uponthe fair value of the common stock at the time of conversion.  The Series B Preferred is entitled todividends from Fatburger equal to 2.5% per annum of the redemption price.  The Series B Preferred does not have votingrights.

 

Also includedin borrowings and notes payable as of September 30, 2003, are notes payableissued by Fatburger to third parties on August 15, 2003 in the amount of $1.0million.

 

**               **Asa result of the acquisition of Fatburger, the Company adopted the followingcritical accounting policies:

** **

***Fatburger Restaurant and Franchise Revenue***

** **

**        Revenue from the operation of Fatburgercompany-owned restaurants is recognized when sales occur.**

** **

**        Franchise fee revenue from the sale ofindividual Fatburger franchises is recognized only when all material servicesor conditions relating to the sales have been substantially performed orsatisfied.  The completion of trainingand the opening of a location by the franchisee constitute substantialperformance on the part of Fatburger. Nonrefundable deposits collected in relation to the sale of franchisesare recorded as deferred franchise fees until the completion of training andthe opening of the restaurant, at which time the franchise fee revenue isrecognized.**

** **

**        In addition to franchise fee revenue,Fatburger collects a royalty ranging from 5% to 6% of gross sales and anadvertising fee equal to 2% of gross sales from restaurants operated byfranchisees.  Fatburger recognizesroyalty and advertising fees as the related sales are made by the franchisees.  Costs relating to continuing franchisesupport are expensed as incurred. Fatburger expenses advertising costs upon the inception of theadvertising campaign.**

** **

***Goodwill and Other Intangible Assets***

** **

**                Goodwill represents the excessof the purchase price and other acquisition related costs over the estimatedfair value of the net tangible and intangible assets acquired.  The Company does not amortize goodwill.  Intangible assets are stated at cost andinclude trademarks, operating manuals, franchise agreements and leaseholdinterests.  Trademarks, which haveindefinite lives, are not subject to amortization.  All other intangible assets are amortized over their estimateduseful lives, which range from five to fifteen years.**

 

The Companyassesses potential impairments to intangible assets at least annually, or whenthere is evidence that events or changes in circumstances indicate that thecarrying amount of an asset may not be recovered. Judgments regarding theexistence of impairment indicators and future cash flows related to intangibleassets are based on operational performance of the acquired businesses, marketconditions and other factors.  Anyresulting impairment loss could have an adverse impact on the results ofoperations.

 

10

----

 

Treasury Stock

 

On February 7, 2003, the Company purchased 1,044,760 shares of theCompany’s common stock (the “Option Shares”) under a put option agreement (the“Put Option”) with a group of shareholders related to Lawrence A. Mendelsohn(the “Stockholders”).  Prior to hisresignation on August 30, 2002, Mr. Mendelsohn was the President anda member of the Board of Directors of the Company.

 

Under the Put Option, the Stockholders had the right to require theCompany to purchase the Option Shares at a price per share equal to eightypercent (80%) of the book value per share of the Company as of the end of themost recent calendar month preceding the delivery of the exercise notice.

 

The Stockholders exercised theirright to require the purchase of the Option Shares on December 24,2002.  The option price was determinedto be $4.02 per share and the closing date was February 7, 2003.  Approximately $1.4 million of the totalpurchase price of $4.2 million for the shares was paid in cash to theStockholders at closing.  The remainingpurchase price of approximately $2.8 million was paid with a promissory notewhich matures 11 months following the closing date and bears interest at 0% forthe first 90 days and 12% per annum thereafter.  The note was prepaid by the Company on November 3, 2003,without penalty or premium.

 

The acquisition of the OptionShares resulted in the Company recording $3.1 million in treasury stock as ofMarch 31, 2003 and reducing the number of outstanding shares by1,044,760.  The effect of thistransaction had been fully reflected in the stockholders’ equity of the Companyas of December 31, 2002.  TheCompany also recorded notes payable of $2.8 million.  Performance under the notes payable was secured by the pledge of696,500 shares of the Company’s treasury stock.  The note payable was prepaid in full on November 3, 2003.

 

11

----

 

Dividends

 

The Company has declared and paid a $0.13 pershare dividend for each of the three quarters of 2003.  The first quarter dividend was paid onMarch 7, 2003, to stockholders of record on February 28, 2003.  The second quarter dividend was paid onJune 3, 2003, to stockholders of record on May 20, 2003.  The third quarter dividend was paid onSeptember 2, 2003 to stockholders of record on August 21, 2003.

 

StroudsAcquisition Corporation

 

In March 2003, theCompany structured a financing package to help stabilize Strouds AcquisitionCorporation, a distressed specialty linen retailer. The financing packageallowed Strouds critical time to examine its business model and evaluatefurther strategic options. The Company’s $3.0 million financing package forStrouds included a $2.0 million loan participation in Fleet Retail FinanceInc.’s senior secured credit facility; a $900,000 subordinated secured loan;100,000 shares of preferred stock; and common stock warrants for up to 49.5% ofStrouds’ voting stock.

 

On May 20, 2003,Strouds filed for bankruptcy protection under Chapter 11 of the Bankruptcy Codeand proceeded to liquidate its assets. As of September 30, 2003, the Company had been repaid in full onits $2.0 million participation in the Fleet Retail credit facility and all ofits $900,000 subordinated secured loan, plus interest.  Subsequent to September 30, 2003, theCompany was also reimbursed $0.2 million for its legal costs relating to thebankruptcy of Strouds.

 

As of September 30,2003, the Company no longer had any recorded investment in Strouds.  During the nine months endedSeptember 30, 2003, the Company recorded a charge to earnings of $0.1million relating to its investment in the preferred stock and common stockwarrants of Strouds.

 

On October 6, 2003,the Official Committee of Unsecured Creditors of Strouds AcquisitionCorporation filed a lawsuit in the United State Bankruptcy Court (LA03-23620-ER) which names the Company, among others, as a defendant.  The complaint against the Company generallyalleges that the structure of the Strouds financing package gave unfairadvantage to the Company, to the detriment of the unsecured creditors.  The lawsuit, as it pertains to the Company,seeks reimbursement of the proceeds from the $2.0 million loan participation inFleet Retail Finance Inc.’s senior secured credit facility (the “FleetParticipation”) and approximately $3.0 million in funds received inOctober 2003, which the Company is holding as collateral agent for othersecured creditors.  The Company believesthat the allegations are without merit with regard to the Fleet Participationand does not expect to incur a loss as a result of the lawsuit.  The $3.0 million being held as collateralagent for other secured creditors will continue to be held in trust, lessreimbursements to the Company, from time-to-time, of the Company’s relatedlegal costs, until the bankruptcy court resolves the dispute regarding itsdistribution.

 

Mortgage-BackedSecurities

 

Through several transactions during the nine months endedSeptember 30, 2003, the Company sold mortgage-backed securities for $13.8million in cash.  As a result of thesetransactions, the Company recognized gains on the sale of securities of $10.7million in the accompanying consolidated statement of operations.

 

Bourne EndProperties PLC

 

InJune 2003, Bourne End Properties PLC (“Bourne End”), which is 26% owned bythe Company, sold two of its retail shopping centers in England for a totalsales price of approximately GBP 31.0 million ($49.0 million).  Proceeds from the sales were primarily usedto repay Bourne End’s real estate debt. The gain to Bourne End was GBP 5.4 million ($8.6 million).  During the nine months endedSeptember 30, 2003, the Company recorded $1.5 million as its equity in theearnings of Bourne End.

 

12

----

 

FreestandingRetail Buildings

 

In August 2003,the Company purchased 15 freestanding retail buildings for a purchase price of$4.6 million.  The Company waspreviously the lessee of each of the buildings and was sub-leasing 12 of the 15properties to a variety of small businesses. Each property has 4,500 square feet of retail space.  The properties are located in Texas,California, Arizona, Oklahoma and Mississippi.

 

Seven of the 15 purchased retail buildings had previously beenaccounted for as investments in real estate under capital leases.  These assets had a carrying value prior tothe purchase of $2.8 million.  As aresult of the purchase transaction, investment in real estate increased $1.8million and the remaining $2.8 million of the purchase price satisfiedobligations under capital leases.

 

**NOTE 3 – VALUATION OF MORTGAGE-BACKEDSECURITIES**

 

When possible, the fair value of the Company’s investment inmortgage-backed securities is determined by market quotes at each reportingdate.  At September 30, 2003,approximately $38.0 million (90% of the portfolio) of the Company’smortgage-backed securities consisted of a “AAA” rated FNMA certificate forwhich market quotes were obtained.  Forthe remaining mortgage-backed securities, where market quotes are notavailable, the fair value is determined by the Company as the present value ofthe anticipated cash flows from the underlying collateral using certainassumptions.  These assumptionsinclude:  (i) future rate of prepayment;(ii) discount rate used to calculate present value; and (iii) default rates andloss severity on loan pools underlying the mortgage-backed securities.

 

The Company evaluates, onan ongoing basis, the carrying value of its securities portfolio, which isaccounted for as available-for-sale.  Tothe extent differences between the book basis of the securities and theircurrent market values are deemed to be temporary in nature, such unrealizedgains or losses are reflected directly in equity as “other comprehensive incomeor loss.”  Declines in fair value areconsidered other-than-temporary when: (i) the carrying value of the beneficialinterests exceeds the fair value of such beneficial interests using currentassumptions, and (ii) the timing and/or extent of cash flows expected to bereceived on the beneficial interests has adversely changed from the previousvaluation date.  To the extent declinesin fair value are considered other-than-temporary, a write-down is recorded inthe consolidated statement of operations. During the quarters ended September 30, 2003 and 2002, no marketvaluation losses and impairments were recorded.

 

 **NOTE 4 – COMMITMENTS, CONTINGENCIES& OFF-BALANCE SHEET RISK**

 

**During 2001, the Company’s ChiefExecutive Officer, Andrew Wiederhorn, and former president, LawrenceMendelsohn, received letters from the United States Attorney’s office inPortland, Oregon advising them that they were targets of a grand juryinvestigation into the failure of Capital Consultants, L.L.C. (“CCL”).  CCL was a lender to a former affiliate ofthe Company.  The investigation is ongoingand it is not possible at this stage to predict its outcome.  Messrs. Wiederhorn and Mendelsohn, pursuantto the terms of their respective employment agreements, may be entitled toindemnity from the Company for litigation expenses and personal losses inconnection with these investigations and any related litigation.  Messrs. Wiederhorn and Mendelsohn havenotified the Company that they are reserving their rights to seek indemnityfrom the Company, however, they may be entitled to primary indemnification fromother sources.  At this time, it is notpossible to determine the extent of liability, if any, the Company may facewith regard to these potential indemnity claims.  The Company has not received, nor agreed to, any indemnityrequests.**

 

13

----

 

On October 6, 2003,the Official Committee of Unsecured Creditors of Strouds AcquisitionCorporation filed a lawsuit in the United States Bankruptcy Court (LA03-23620-ER) which names the Company, among others, as defendants.  The complaint against the Company generallyalleges that the structure of the Strouds financing package gave unfairadvantage to the Company, to the detriment of the unsecured creditors.  The lawsuit, as it pertains to the Company,seeks reimbursement of the proceeds from the $2.0 million loan participation inFleet Retail Finance Inc.’s senior secured credit facility (the “FleetParticipation”) and approximately $3.0 million in funds received inOctober 2003, which the Company is holding as collateral agent for othersecured creditors.  The Company believesthat the allegations are without merit with regard to the Fleet Participationand does not expect to incur a loss as a result of the lawsuit.  The $3.0 million being held as collateralagent for other secured creditors will continue to be held in trust, lessreimbursements to the Company, from time-to-time, of the Company’s relatedlegal costs, until the bankruptcy court resolves the dispute regarding itsdistribution.

 

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

 

The Company may utilize a wide variety of off-balance sheet financialtechniques to manage its risk.  Inhedging the interest rate or exchange rate exposure of a foreign currency, theCompany may enter into hedge transactions to counter movements in interestrates or foreign currencies.  Thesehedges may be in the form of currency and interest rate swaps, options, andforwards, or combinations thereof.  AtSeptember 30, 2003, the Company’s economic hedging activities were limitedto one Great Britain pound (“GBP”) purchased put option.  The contract entitles FCCG to sell a totalof GBP 7.5 million for U.S. dollars (“USD”) at an exchange rate of 1.46 USD perone GBP.  The option expires inDecember 2003.  The estimated fairvalue of the currency hedging contract was zero at September 30, 2003, dueto the limited term remaining on the contract and the spread between thecurrent strike price and the GBP spot rate.

 

Subsequent to September 30, 2003, the Company entered into aforward commitment to sell GBP 2.25 million on December 1, 2003 for $1.6574USD per one GBP.  This was done toguarantee a favorable exchange rate for GBP denominated funds that arescheduled to be distributed to the Company from its investment in Bourne End.

 

Fatburger has operating leases for office and retail space which expirethrough January 2023.  Such leasesprovide for varying minimum annual rental payments including scheduled rentincreases and free rent periods.

 

Fatburger has operating leases for equipment and real property thathave initial or remaining noncancelable terms in excess of one year.

 

Future minimum rental payments, by year and in the aggregate, undernoncancelable leases with initial or remaining terms of one year or more,consisted approximately of the following at September 30, 2003:

 
| 2004                         |   | $         | 1,320,000  |   |
|------------------------------|--------|-----------|------------|--------|
| 2005                         |   | 1,288,000 |       |
| 2006                         |   | 1,234,000 |       |
| 2007                         |   | 1,166,000 |       |
| 2008                         |   | 989,000   |       |
| Thereafter                   |   | 4,303,000 |       |
| Total minimum lease payments |   | $         | 10,300,000 |   |

 

Fatburger maintains various capitalized equipment leases for itsrestaurants.  Future minimum rental payments,by year and in the aggregate, under noncancelable capital leases with initialor remaining terms of one year or more, consisted approximately of thefollowing at September 30, 2003:

 
| 2004                         |   | $       | 114,000 |   |
|------------------------------|--------|---------|---------|--------|
| 2005                         |   | 99,000  |    |
| 2006                         |   | 96,000  |    |
| 2007                         |   | 44,000  |    |
| 2008                         |   | 8,000   |    |
| Total                        |   | 361,000 |    |
| Total minimum lease payments |   | (62,000 | )       |
| Future lease expense         |   | $       | 299,000 |   |

 

As of September 30, 2003, Fatburger has guaranteed the annual minimumlease payments of five restaurant sites, which are funded by franchisees, approximating$562,000 in the aggregate and certain contingent rental payments as defined.These leases expire at various times through 2009.

 

14

----

 

 

**NOTE5 - GOODWILL AND OTHER INTANGIBLE ASSETS**

 

The acquisitionof Fatburger resulted in the recognition of goodwill in the amount of $7.4million and other intangible assets in the amount of $5.7 million.  Summarized information for the Company’sacquired intangible assets as of September 30, 2003 is as follows (dollarsin thousands):

 
| Amortized intangible assets:       |   |   |   |
|------------------------------------|--------|--------|--------|
|                               |   |   |   |
| Franchise  Agreements              |   | $      | 1,100  |   |
| Other                              |   | 704    |   |
| Total  amortized intangible assets |   | $      | 1,804  |   |
|                               |   |   |   |
| Unamortized  intangible assets:    |   |   |   |
|                               |   |   |   |
| Trademarks                         |   | $      | 3,900  |   |

 

 

Trademarks,which have indefinite lives, are not subject to amortization.  All other intangible assets are amortizedusing the straight-line method over five to fifteen years, the estimated usefullives of the assets.  Estimatedamortization expense for the remainder of 2003 and the five succeeding years isas follows (dollars in thousands):

 
| 2003 |   | $   | 53     |   |
|------|--------|-----|--------|--------|
| 2004 |   | 214 |   |
| 2005 |   | 214 |   |
| 2006 |   | 214 |   |
| 2007 |   | 214 |   |
| 2008 |   | 179 |   |

 

The recordedvalues of goodwill and other intangible assets may become impaired in thefuture. The determination of the value of such intangible assets requiresmanagement to make estimates and assumptions that affect the consolidatedfinancial statements.  Potentialimpairments to intangible assets are assessed when there is evidence thatevents or changes in circumstances indicate that the carrying amount of anasset may not be recovered.  Thisassessment is based on the operational performance of acquired businesses,market conditions and other factors including future events.  Any resulting impairment loss could have anadverse impact on the results of operations of the Company.

 

15

----

 

**NOTE6 – RECENTLY ISSUED ACCOUNTING STANDARDS**

 

InMay 2003, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 150*,Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity* (“SFAS No. 150”), effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning afterJune 15, 2003. This statement establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity.  Theadoption of SFAS No. 150 did not have a material impact on the results ofoperations or the financial position of the Company.

 

InMay 2003, the FASB issued SFAS No. 149, *Amendment of Statement 133 onDerivative Instruments and Hedging Activities*(“SFAS No. 149”),effective for contracts entered into or modified after June 30, 2003 andfor hedging relationships designated after June 30, 2003. This rule amendsSFAS No. 133*,Accounting for Derivative Instruments and Hedging Activities*, asamended, to clarify financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities.  The adoption of SFAS No. 149 did not have amaterial impact on the results of operations or the financial position of theCompany.

 

InJanuary 2003, the FASB issued FASB Interpretation No. 46, *Consolidationof Variable Interest Entities* (“FIN 46”), which was originallyeffective for the Company on July 1, 2003. In October 2003, the FASBdeferred the effective date for applying the provisions of FIN 46 toDecember 31, 2003 for interests held by public companies in variableinterest entities or potential variable interest entities created beforeFebruary 1, 2003. FIN 46 requires a variable interest entity to be consolidatedby a company if that company is subject to a majority of the risk of loss fromthe variable interest entity’s activities or entitled to receive a majority ofthe entity’s residual returns or both. The Company has completed its evaluationof the provisions of FIN 46 and does not have any significant interests invariable interest entities. Accordingly, the adoption of FIN 46 did not have amaterial impact on the results of operations or the financial position of theCompany.

 

InDecember 2002, the FASB issued SFAS No. 148, *Accounting for Stock-Based Compensation- Transition and Disclosure*, (“SFAS No. 148”) effective for fiscalyears ending after December 15, 2002. This rule amends SFAS No. 123 toprovide several alternatives for adopting stock option expense provisions, aswell as additional required interim financial statement disclosures.  SFAS No. 148 does not require companies toexpense stock options in current earnings. The Company has not adopted theprovisions of SFAS No. 123 for expensing stock based compensation; however, theCompany has adopted the additional interim disclosure provisions of thestatement. There was no material impact from the adoption of SFAS No. 148 onthe results of operations or the financial position of the Company.

 

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN45), “*Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*”. This interpretation expandsthe disclosures to be made by a guarantor in its financial statements about itsobligations under certain guarantees and requires the guarantor to recognize aliability for the fair value of an obligation assumed under a guarantee. Thedisclosure requirements of FIN 45 were effective for the Company as ofDecember 31, 2002, and require disclosure of the nature of the guarantee,the maximum potential amount of future payments that the guarantor could berequired to make under the guarantee, and the current amount of the liability,if any, for the guarantor’s obligations under the guarantee. The recognitionrequirements of FIN 45 are to be applied prospectively to guarantees issued ormodified after December 31, 2002. The Company does not have guaranteesthat are subject to the disclosure or recognition requirements of FIN 45. As aresult, the implementation of the requirements of FIN 45 did not have amaterial impact on the results of operations or the  financial position of the Company.

 

16

----

 

**NOTE 7 – STOCK OPTIONS AND RIGHTS**

 

The Companyhas adopted a non-qualified stock option plan (the “Option Plan”) whichprovides for options to 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 Companyapplies Accounting Principles Board Opinion No. 25, *“Accounting for Stock Issued toEmployees,”*and related interpretations in accounting for the OptionPlan. Accordingly, no compensation expense has been recognized in theConsolidated Statements of Operations for grants under the Option Plan.  Had compensation expense for the Company’sOption Plan been determined based on the fair value at the grant dateconsistent with the methods of SFAS No. 123 “*Accounting for Stock Based Compensation*”,the Company’s net income and income per share for the nine months endedSeptember 30, 2003 and 2002 would have been decreased to the pro formaamounts indicated below:

 
|                                                                      |   | **Nine  months ended September 30,**      |   |
|---------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                      |   | **2003**                                       |   | **2002** |   |
|                                                                      |   | **(dollars  in thousands, except share data)** |   |
| Net income:                                                               |   |                                           |   |   |   |
| As reported                                                               |   | $                                              | 4,800  |   | $ | 11,807 |   |
| Pro forma compensation expense from stock  based compensation, net of tax |   | (45                                            | )      | (74 | ) |
| Pro forma net income                                                      |   | $                                              | 4,755  |   | $ | 11,733 |   |
| Net income per common and common share  equivalent:                       |   |                                           |   |   |   |
| Basic income per share:                                                   |   |                                           |   |   |   |
| As reported                                                               |   | $                                              | 0.56   |   | $ | 1.18 |   |
| Pro forma                                                                 |   | $                                              | 0.55   |   | $ | 1.17 |   |
| Diluted income per share:                                                 |   |                                           |   |   |   |
| As reported                                                               |   | $                                              | 0.50   |   | $ | 1.17 |   |
| Pro forma                                                                 |   | $                                              | 0.49   |   | $ | 1.16 |   |

 

There were nooptions granted with exercise prices below the market value of the stock at thegrant date. Fair values were estimated using the Black-Scholes option-pricingmodel with the following weighted average assumptions used: 1% dividend yield,expected volatility of 25%, risk-free interest rate of 5.0% and expected livesof three to five years.

 

**NOTE 8 – OPERATING SEGMENTS**

 

As a result ofthe acquisition of Fatburger during the quarter ending September 30, 2003,the Company has reportable operating segments. The Company’s operating segments consist of (i) merchant banking, realestate and financing activities; (ii) commercial real estate mortgage brokerageactivities conducted by George Elkins Mortgage Banking Company; and (iii)restaurant operations conducted by Fatburger. The following is a summary of each of the operating segments:

 

17

----

 

MerchantBanking, Real Estate and Financing Operations

 

The merchantbanking, real estate and financing operations focus on the acquisition ofassets where the Company’s expertise in intensive asset management, creditanalysis and financial structuring can create value.  The Company invests primarily in the equity or debt ofcorporations in the process of restructuring, mortgage-backed securities, realestate, and other finance-related opportunities.  This business strategy focuses on diversified investing,structuring and managing of financial assets. Many of these investments are made in conjunction with partners.  The Company maintains a flexible approachwith respect to the nature of its investments, seeking to take advantage ofopportunities as they arise or are developed.

 

CommercialReal Estate Mortgage Brokerage Operations

 

In May 2002,the Company purchased a 51% ownership interest in George Elkins MortgageBanking Company (“George Elkins”), a California mortgage banking operation,which provides brokerage services related to the production of approximately$600 million per year in commercial real estate mortgages.  The Company began reporting the operationsof George Elkins on a consolidated basis beginning May 15, 2002.  George Elkins is headquartered in LosAngeles, with satellite offices located throughout the southern Californiaarea.  The mortgage banking operationalso manages a commercial loan servicing portfolio in excess of $700 millionfor various investors.

 

RestaurantOperations

 

InAugust 2003, the Company completed an investment and financing package forFatburger which involved the acquisition of the entire class of the Series A-1Preferred and the Series D Preferred stock of Fatburger.  As a result of its voting control, theCompany began reporting the operations of Fatburger on a consolidated basis beginningAugust 15, 2003.  Fatburger operatesor franchises 51 hamburger stands located in California, Nevada, Arizona andWashington.  Fatburger has plans to openadditional restaurants including expansion into Oregon, Louisiana, Colorado,Georgia, New York, Ohio, New Jersey, Florida, and Michigan.  Franchisees currently own and operate abouthalf of the Fatburger locations.

 

18

----

 

Segmentdata for the nine months ended September 30, 2003, and 2002 are as follows(dollars in thousands):

 
|                                                |   | **Merchant Banking,  Real Estate and Finance** |   | **Mortgage  Brokerage**                    |       | **Restaurant**                             |       | **Total**                                  |       |
|-----------------------------------------------------|--------|------------------------------------------------|--------|--------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
|                                                |   | **Nine months  ended  September 30,**     |   | **Nine months  ended  September 30,** |       | **Nine months  ended  September 30,** |       | **Nine months  ended  September 30,** |       |
|                                                |   | **2003**                                       |   | **2002**                                   | ** ** | **2003**                                   | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** |   |
| Net Interest Income:                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Loans                                               |   | $                                              | 1,012  |                                       | $          | 371                                        |       | $                                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,012 |   | $ | 371 |   |
| Securities                                          |   | 1,983                                          |   | 4,489                                      |       | —                                     |       | —                                     |       | — |   | — |   | 1,983 |   | 4,489 |   |
| Other investments                                   |   | 125                                            |   | 182                                        |       | 2                                          |       | 1                                          |       | — |   | — |   | 127 |   | 183 |   |
| Total interest income                               |   | 3,120                                          |   | 5,042                                      |       | 2                                          |       | 1                                          |       | — |   | — |   | 3,122 |   | 5,043 |   |
| Interest expense                                    |   | 578                                            |   | 1,686                                      |       | —                                     |       | —                                     |       | — |   | — |   | 578 |   | 1,686 |   |
| Net interest income                                 |   | 2,542                                          |   | 3,356                                      |       | 2                                          |       | 1                                          |       | — |   | — |   | 2,544 |   | 3,357 |   |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Real estate operations:                             |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating revenue                                   |   | 2,965                                          |   | —                                     |       | —                                     |       | —                                     |       | — |   | — |   | 2,965 |   | — |   |
| Operating expense                                   |   | (1,564                                         | )      | (39                                        | )          | —                                     |       | —                                     |       | — |   | — |   | (1,564 | ) | (39 | ) |
| Gain on sale of real estate                         |   | 279                                            |   | —                                     |       | —                                     |       | —                                     |       | — |   | — |   | 279 |   |   |   |
| Interest expense                                    |   | (1,040                                         | )      | (83                                        | )          | —                                     |       | —                                     |       | — |   | — |   | (1,040 | ) | (83 | ) |
| Depreciation                                        |   | (461                                           | )      | (50                                        | )          | —                                     |       | —                                     |       | — |   | — |   | (461 | ) | (50 | ) |
| Total real estate operations                        |   | 179                                            |   | (172                                       | )          | —                                     |       | —                                     |       | — |   | — |   | 179 |   | (172 | ) |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Restaurant operations:                              |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating income                                    |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | 2,472 |   | — |   | 2,472 |   | — |   |
| Cost of goods sold                                  |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | (1,515 | ) | — |   | (1,515 | ) | — |   |
| Franchise and advertising fees                      |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | 152 |   | — |   | 152 |   | — |   |
| General and administrative costs                    |   |                                           |   |                                       |       |                                       |       |                                       |       | (901 | ) |   |   | (901 | ) |   |   |
| Interest Expense                                    |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | (112 | ) | — |   | (112 | ) | — |   |
| Depreciation and amortization                       |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | (141 | ) | — |   | (141 | ) | — |   |
| Total restaurant operations                         |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | (45 | ) | — |   | (45 | ) | — |   |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Other operating income:                             |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Equity in earnings of equity investee               |   | 1,370                                          |   | 1,697                                      |       | —                                     |       | —                                     |       | — |   | — |   | 1,370 |   | 1,697 |   |
| Gain on sale of loans and securities                |   | 10,657                                         |   | 13,827                                     |       | —                                     |       | —                                     |       | — |   | — |   | 10,657 |   | 13,827 |   |
| Loan brokerage fees                                 |   | —                                         |   | —                                     |       | 3,497                                      |       | 1,299                                      |       | — |   | — |   | 3,497 |   | 1,299 |   |
| Gain on foreign currency                            |   | 728                                            |   | —                                     |       | —                                     |       | —                                     |       | — |   | — |   | 728 |   | — |   |
| Other revenue (loss)                                |   | 238                                            |   | (962                                       | )          | 367                                        |       | 214                                        |       | — |   | — |   | 605 |   | (748 | ) |
| Total other operating income                        |   | 12,993                                         |   | 14,562                                     |       | 3,864                                      |       | 1,513                                      |       | — |   | — |   | 16,857 |   | 16,075 |   |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                 |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Compensation and employee benefits                  |   | 4,908                                          |   | 1,939                                      |       | 3,193                                      |       | 1,315                                      |       | — |   | — |   | 8,101 |   | 3,254 |   |
| Professional fees                                   |   | 1,415                                          |   | 1,288                                      |       | 124                                        |       | 133                                        |       | — |   | — |   | 1,539 |   | 1,421 |   |
| Other                                               |   | 2,198                                          |   | 1,702                                      |       | 637                                        |       | 276                                        |       | — |   | — |   | 2,835 |   | 1,978 |   |
| Total operating expenses                            |   | 8,521                                          |   | 4,929                                      |       | 3,954                                      |       | 1,724                                      |       | — |   | — |   | 12,475 |   | 6,653 |   |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss) before provision for income taxes |   | 7,193                                          |   | 12,817                                     |       | (88                                        | )          | (210                                       | )          | (45 | ) | — |   | 7,060 |   | 12,607 |   |
| Provision for income taxes                          |   | 2,152                                          |   | 800                                        |       | —                                     |       | —                                     |       | 108 |   | — |   | 2,260 |   | 800 |   |
| Net income (loss)                                   |   | $                                              | 5,041  |                                       | $          | 12,017                                     |       | $                                          | (88        | ) | $ | (210 | ) | $ | (153 | ) | $ | — |   | $ | 4,800 |   | $ | 11,807 |   |
| Segment assets                                      |   | $                                              | 96,597 |                                       | $          | 99,409                                     |       | $                                          | 2,989      |   | $ | 2,929 |   | $ | 15,220 |   | $ | — |   | $ | 114,806 |   | $ | 102,338 |   |
|                                                     |        |                                                |        |                                            |            |                                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

----

 

Segment data for the threemonths ended September 30, 2003, and 2002 are as follows (dollars inthousands):

 
|                                                |   | **Merchant Banking,  Real Estate and Finance** |   | **Mortgage Brokerage**                     |       | **Restaurant**                             |       | **Total**                                  | ** ** |
|-----------------------------------------------------|--------|------------------------------------------------|--------|--------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
|                                                |   | **Three months ended  September 30,**     |   | **Three months ended  September 30,** |       | **Three months ended  September 30,** |       | **Three months ended  September 30,** |       |
|                                                |   | **2003**                                       |   | **2002**                                   | ** ** | **2003**                                   | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2003** | ** ** | **2002** |   |
| Net Interest Income:                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Loans                                               |   | $                                              | 588    |                                       | $          | 133                                        |       | $                                          | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 588 |   | $ | 133 |   |
| Securities                                          |   | 509                                            |   | 1,445                                      |       | —                                     |       | —                                     |       | — |   | — |   | 509 |   | 1,445 |   |
| Other investments                                   |   | 35                                             |   | 89                                         |       | 1                                          |       | 1                                          |       | — |   | — |   | 36 |   | 90 |   |
| Total interest income                               |   | 1,132                                          |   | 1,667                                      |       | 1                                          |       | 1                                          |       | — |   | — |   | 1,133 |   | 1,668 |   |
| Interest expense                                    |   | 160                                            |   | 578                                        |       | —                                     |       | —                                     |       | — |   | — |   | 160 |   | 578 |   |
| Net interest income                                 |   | 972                                            |   | 1,089                                      |       | 1                                          |       | 1                                          |       | — |   | — |   | 973 |   | 1,090 |   |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Real estate operations:                             |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating income                                    |   | 1,034                                          |   | —                                     |       | —                                     |       | —                                     |       | — |   | — |   | 1,034 |   | — |   |
| Operating expense                                   |   | (498                                           | )      | (9                                         | )          | —                                     |       | —                                     |       | — |   | — |   | (498 | ) | (9 | ) |
| Gain on sale of real estate                         |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | — |   | — |   | — |   | — |   |
| Interest expense                                    |   | (320                                           | )      | (28                                        | )          | —                                     |       | —                                     |       | — |   | — |   | (320 | ) | (28 | ) |
| Depreciation                                        |   | (155                                           | )      | (16                                        | )          | —                                     |       | —                                     |       | — |   | — |   | (155 | ) | (16 | ) |
| Total real estate operations                        |   | 61                                             |   | (53                                        | )          | —                                     |       | —                                     |       | — |   | — |   | 61 |   | (53 | ) |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Restaurant operations:                              |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating revenue                                   |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | 2,472 |   | — |   | 2,472 |   | — |   |
| Cost of goods sold                                  |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | (1,515 | ) | — |   | (1,515 | ) | — |   |
| Franchise and advertising fees                      |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | 152 |   | — |   | 152 |   | — |   |
| General and administrative costs                    |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | (901 | ) | — |   | (901 | ) | — |   |
| Interest Expense                                    |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | (112 | ) | — |   | (112 | ) | — |   |
| Depreciation and amortization                       |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | (141 | ) | — |   | (141 | ) | — |   |
| Total restaurant operations                         |   | —                                         |   | —                                     |       | —                                     |       | —                                     |       | (45 | ) | — |   | (45 | ) | — |   |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Other operating income:                             |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Equity in earnings of equity investee               |   | 500                                            |   | (352                                       | )          | —                                     |       | —                                     |       | — |   | — |   | 500 |   | (352 | ) |
| Gain on sale of loans and securities                |   | 1,274                                          |   | 3,526                                      |       | —                                     |       | —                                     |       | — |   | — |   | 1,274 |   | 3,526 |   |
| Loan brokerage fees                                 |   | —                                         |   | —                                     |       | 1,244                                      |       | 793                                        |       | — |   | — |   | 1,244 |   | 793 |   |
| Gain on foreign currency                            |   | 491                                            |   | (14                                        | )          | —                                     |       | —                                     |       | — |   | — |   | 491 |   | (14 | ) |
| Other revenue (loss)                                |   | 126                                            |   | (676                                       | )          | 123                                        |       | 194                                        |       | — |   | — |   | 249 |   | (482 | ) |
| Total other operating income                        |   | 2,391                                          |   | 2,484                                      |       | 1,367                                      |       | 987                                        |       | — |   | — |   | 3,758 |   | 3,471 |   |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                 |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Compensation and employee benefits                  |   | 1,203                                          |   | 672                                        |       | 1,080                                      |       | 842                                        |       | — |   | — |   | 2,283 |   | 1,514 |   |
| Professional fees                                   |   | 365                                            |   | 418                                        |       | 79                                         |       | 58                                         |       | — |   | — |   | 444 |   | 476 |   |
| Other                                               |   | 663                                            |   | 678                                        |       | 253                                        |       | 190                                        |       | — |   | — |   | 916 |   | 868 |   |
| Total operating expenses                            |   | 2,231                                          |   | 1,768                                      |       | 1,412                                      |       | 1,090                                      |       | — |   | — |   | 3,643 |   | 2,858 |   |
|                                                |   |                                           |   |                                       |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income (loss) before provision for income taxes |   | 1,193                                          |   | 1,752                                      |       | (44                                        | )          |                                       | (102       | ) | (45 | ) |   | — |   | 1,104 |   | 1,650 |   |
| Provision for income taxes                          |   | 442                                            |   | —                                     |       | —                                     |       | —                                     |       | 108 |   | — |   | 550 |   | — |   |
| Net income (loss)                                   |   | $                                              | 751    |                                       | $          | 1,752                                      |       | $                                          | (44        | ) | $ | (102 | ) | $ | (153 | ) | $ | — |   | $ | 554 |   | $ | 1,650 |   |
| Segment assets                                      |   | $                                              | 96,597 |                                       | $          | 99,409                                     |       | $                                          | 2,989      |   | $ | 2,929 |   | $ | 15,220 |   | $ | — |   | $ | 114,806 |   | $ | 102,338 |   |

 

20

----

 

**NOTE9– INCOME TAXES**

 

During the three months and nine months ended September 30, 2003,the Company recognized a provision for income taxes of $0.6 million and $2.3million, respectively.  As ofSeptember 30, 2003, the Company, including Fatburger, had a net operatingloss carryforward (“NOL”).  The NOL maysignificantly reduce or eliminate the future payment of the deferred income taxliability established through this provision. However, U.S. tax regulations impose limitations on the use of losscarry forwards following certain changes in ownership.  If such a change in ownership were to occur,the limitation could significantly reduce the amount of benefits that would beavailable to offset future taxable income each year, starting with the year ofownership change.  For financialaccounting purposes, the Company treats the NOL as if it were limited due to achange in ownership control.

 

In order toprotect the NOL from an actual limitation, on October 28, 2002, theCompany implemented a shareholder rights plan through the dividend of certainstock purchase rights (the “Rights”). The Rights are intended to protect the income tax loss carryforward fromthe limitations imposed under the Internal Revenue Code by preventing a changein ownership control.

 

**NOTE 10 – SUBSEQUENT EVENTS**

 

FreestandingRetail Buildings

 

InOctober 2002, the Company acquired the leasehold interests in 109freestanding retail stores located throughout the United States.  The purchase was made through the Company’swholly-owned subsidiary, Fog Cap Retail Investors LLC.  The leases cover approximately 500,000square feet of retail space located in 25 states. The stores are free-standing,prime retail locations ranging from 4,500-7,000 square feet each.  Leaseholds are, in general, 25-30 years, andare sublet to a broad tenant mix.

 

In many cases,the Company has the option to terminate a lease by giving notice to theproperty owner.  The notice to terminatemust include an offer to purchase the property at a price calculated using adeclining percentage of the original fair market value of the property at thetime the original lease was initiated (generally in the 1970’s and1980’s).  The property owner then hasthe option to accept the Company’s offer to purchase the property or allow thelease to terminate.  Fog Cutter RetailInvestors LLC has exercised its option to terminate seven leases and hasaccordingly offered to purchase the related properties for a total purchaseprice of  approximately $1.7million.  The offers to purchase five ofthese properties, for a total purchase price of approximately $1.3 million,have been accepted by the landlords. These transactions are expected to close during the fourth quarter of2003.  The Company does not expect thepurchase to have a material effect on the operations of the Company during thefourth quarter of 2003.

 

Bourne EndProperties PLC

 

As ofSeptember 30, 2003 Bourne End, which is 26% owned by the Company, hadentered into agreements to sell  two ofits retail shopping centers located in England and Scotland for a total salesprice of approximately GBP 37.1 million ($61.6 million).  Proceeds from the sales will primarily beused to repay Bourne End’s real estate debt. One of the property sales closed on October 15, 2003 at a salesprice of GBP 23.5 million ($39.0 million). The Company’s share of gain from this sale is expected to beapproximately $3.5 million.  Thecompletion of the sale of the other property is scheduled for the fourthquarter of 2003.

 

Mortgage-BackedSecurities

 

In October 2003, the trustee for two mortgage-backed securitiesowned by the Company exercised its option to call or prepay the bonds infull.  As a result, the Company receivedcash proceeds of $2.1 million and expects to recognize a gain on the prepaymentof $1.8 million.  Of this amount, $1.4million had been included in accumulated other comprehensive income inshareholders’ equity as of September 30, 2003.

 

21

----

 

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

 

*Thefollowing discussion and analysis should be read in conjunction with theInterim Consolidated Financial Statements of Fog Cutter Capital Group Inc. andthe notes thereto included elsewhere in this filing.  References in this filing to “Fog Cutter Capital Group Inc.,”“we,” “our,” and “us” refer to Fog Cutter Capital Group Inc. and itssubsidiaries unless the context indicates otherwise.*

* *

**GENERAL**

 

Fog CutterCapital Group Inc. (“FCCG” or the “Company”) is a Nasdaq-listed corporationwhich focuses on the acquisition of assets where its expertise in intensiveasset management and financial structuring can create value.  We maintain our headquarters in PortlandOregon, and also have executive offices in New York, Los Angeles, andLondon.  We invest primarily in thefollowing types of assets:

 

•                  equity or debtof corporations in the process of restructuring,

•                  mortgage-backedsecurities,

•                  real estate, and

•                  otherfinance-related investments.

 

Our business strategy focuses on diversified investing, structuring andmanaging of financial and real estate assets. We provide debt or equity capital to businesses that are in the processof restructuring their operations.  Manyof these investments are made in conjunction with partners.  We maintain a flexible approach with respectto the nature of our investments, seeking to take advantage of opportunities asthey arise or are developed.

 

**CriticalAccounting Policies**

 

**Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.  The preparation of these financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts 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.**

** **

***AccountingFor Equity Investees***

** **

The equitymethod of accounting is used for investments in associated companies which arenot unilaterally controlled by the Company and in which the Company’s interestis generally between  20% and 50% of theoutstanding voting rights.  TheCompany’s  share of  earnings or  losses  of associated companies, in which at least20% of the voting securities is owned, is included in the consolidatedstatement of operations.

** **

***Valuation***

** **

**AtSeptember 30, 2003, our largest asset was our portfolio of mortgage-backedsecurities.  Approximately $38 million(90%) of our mortgage-backed securities consisted of a “AAA” rated FNMAcertificate for which market quotes were obtained.  When available, we use listed market prices or dealer/lendervalue opinions to determine the fair value of the securities in ourportfolio.  However, in the absence ofthese third-party quotations, fair values for these securities are determinedby us, using a third-party valuation model and internally developed assumptions.**

 

22

----

 

**Valuationmodels and assumptions impact the carrying value of our mortgage-backedsecurities and the amount and timing of gains and losses recognized.  The use of different valuation models orassumptions could produce different financial results.  Changes in the fixed-income markets and theactual performance of our mortgage-backed securities may impact our estimatesof fair value in the future, potentially affecting, positively or negatively,our future operating results and equity.**

** **

**Ourkey valuation assumptions include default rates and loss severity, whichaccount for the anticipated credit losses in the pools of loans underlying ourmortgage-backed securities.  Other keyvaluation assumptions include prepayment rates and discount rates.  Our internal valuation methodology calls fordeveloping the key valuation assumptions of credit losses and prepayment speedsbased upon the observable recent history of performance, generally averagedacross the latest three to six months, subject to general economic and marketconsiderations.  Our key valuationassumption of discount rates is developed based on the assessment of thecurrent yields required by investors for similar classes of fixed incomeinstruments.  We apply our valuationmethodology consistently and believe that the resulting fair value estimatesare reasonable;  however, theseestimated values may differ from those realized in a bona fide saletransaction, given the judgmental nature of the values of these assets.  We believe our assumptions and the resultingestimated values of the mortgage-backed securities at September 30, 2003are conservative, based on the facts and circumstances as of that date;however, there can be no assurance that there will be no future losses on thesesecurities due to changes in their performance or overall market conditions.**

 

***Sale Recognition***

 

**Wecontinue to be involved in significant sales of mortgage-backed securities andother assets.  Our accounting policycalls for the recognition of sales of financial instruments, includingmortgage-backed securities and loans, only when we have irrevocably surrenderedcontrol over these assets.  We do notretain any recourse or performance obligations with respect to our sales ofassets.  Our sales of financialinstruments were cash sales, and the cash proceeds were not contingent upon anyfuture event.**

** **

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

 

***Fatburger Restaurant and Franchise Revenue***

 

**Revenuefrom the operation of Fatburger company-owned restaurants 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.**

 

23

----

 

**Inaddition to franchise fee revenue, Fatburger collects a royalty ranging from 5%to 6% of gross sales and an advertising fee equal to 2% of gross sales fromrestaurants operated by franchisees. Fatburger recognizes royalty and advertising fees as the related salesare made by the franchisees.  Costsrelating to continuing franchise support are expensed as incurred.  Fatburger expenses advertising costs uponthe inception of the advertising campaign.**

 

***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 cost and include trademarks, operatingmanuals, franchise agreements and leasehold interests.  Trademarks, which have indefinite lives, arenot subject to amortization.  All otherintangible assets are amortized over their estimated useful lives, which rangefrom five to fifteen years.**

 

We assesspotential impairments to intangible assets at least annually, or when there isevidence that events or changes in circumstances indicate that the carryingamount of an asset may not be recovered. Our judgments regarding the existenceof impairment indicators and future cash flows related to intangible assets arebased on operational performance of our acquired businesses, market conditionsand other factors. Future events could cause us to conclude that impairmentindicators exist and that goodwill or other intangible assets associated withour acquired businesses is impaired. Any resulting impairment loss could havean adverse impact on our results of operations.

 

**RESULTS OF OPERATIONS — NINE MONTHS ENDEDSEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002**

 

NETINCOME.  Our net income for the ninemonths ended September 30, 2003, was $4.8 million, or $0.56 per share,compared with net income of $11.8 million, or $1.18 per share, for the ninemonths ended September 30, 2002. The net income for the 2003 period is primarily attributable to netinterest income of $2.5 million, gain on sale of loans and securities of $10.7million, and loan brokerage fees of $3.5 million, partially offset by otheroperating expenses of $12.5 million and provision for income taxes of $2.3million.  The net income for the 2002period is primarily attributable to net interest income of $3.4 million, gainon sale of loans and securities of $13.8 million, and equity in earnings of BEPof $1.7 million, partially offset by other operating expenses of $6.7 millionand provision for income taxes of $0.8 million.

 

The followingsections describe the results of operations of our operating segments for thenine months ended September 30, 2003:

 

MerchantBanking, Real Estate and Finance Operations

 

NET INTERESTINCOME.  Our net interest income for thenine months ended September 30, 2003, was $2.5 million, compared with $3.4million for the nine months ended September 30, 2002.  The decrease is primarily attributable to areduction of assets (reflecting our sales of mortgage-backed securities andpaydowns of the related debt facilities). In addition, the Company sold higher yielding subordinatedmortgage-backed securities and replaced them with a lower yielding AAA ratedFNMA certificate.  These changesresulted in decreases in interest income on securities of $2.5 million,partially offset by a decrease in interest expense of $1.1 million.  The following tables set forth informationregarding the total amount of income from interest-earning assets and expensefrom interest-bearing liabilities and the resulting average yields and rates:

 

24

----

 
|                                                                   |   | **For the  Nine Months Ended September 30, 2003** |   |
|------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                   |   | **Average  Balance**                                   |   | **Interest  Income (Expense)** |   | **Annualized  Yield/Rate** |   |
|                                                                   |   | **(dollars in thousands)**                             |   |
| Interest-Earning Assets:                                               |   |                                                   |   |   |   |   |   |
|                                                                   |   |                                                   |   |   |   |   |   |
| Loan portfolios (1)                                                    |   | $                                                      | 6,314  |   | $ | 1,012 |   | 21.4 | % |
| Mortgage-backed securities available for  sale                         |   | 53,750                                                 |   | 1,983 |   | 4.9 | % |
| Other investments                                                      |   | 14,309                                                 |   | 127 |   | 1.2 | % |
| Total interest-earning assets                                          |   | $                                                      | 74,373 |   | $ | 3,122 |   | 5.6 | % |
|                                                                   |   |                                                   |   |   |   |   |   |
| Interest-Bearing Liabilities:                                          |   |                                                   |   |   |   |   |   |
|                                                                   |   |                                                   |   |   |   |   |   |
| Borrowings (2)                                                         |   | $                                                      | 31,762 |   | $ | (578 | ) | 2.4 | % |
| Total interest-bearing liabilities                                     |   | $                                                      | 31,762 |   | $ | (578 | ) | 2.4 | % |
|                                                                   |   |                                                   |   |   |   |   |   |
| Net interest income before provision for  loan losses/spread  (3) |   |                                                   |   | $ | 2,544 |   | 3.2 | % |
| Net interest margin  (4)                                          |   |                                                   |   |   |   | 4.6 | % |

 

----

(1)          Includes loans to senior executives.  Interest income includes the recovery of$0.3 million recognized under the cash basis.

(2)          Excludes borrowingsrelated to investments in real estate.

(3)          Net interest spread represents the differencebetween the average rate on interest-earning assets and the average cost ofinterest-bearing liabilities.

(4)          Net interest marginrepresents net interest income divided by average interest-earning assets.

 
|                                                                   |   | **For the  Nine Months Ended September 30, 2002** |   |
|------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                   |   | **Average  Balance**                                   |   | **Interest  Income (Expense)** |   | **Annualized  Yield/Rate** |   |
|                                                                   |   | **(dollars in thousands)**                             |   |
| Interest-Earning Assets:                                               |   |                                                   |   |   |   |   |   |
|                                                                   |   |                                                   |   |   |   |   |   |
| Loan portfolios (1)                                                    |   | $                                                      | 4,162  |   | $ | 371 |   | 11.9 | % |
| Mortgage-backed securities available for sale                          |   | 55,202                                                 |   | 4,489 |   | 10.8 | % |
| Other investments                                                      |   | 13,812                                                 |   | 183 |   | 1.8 | % |
| Total interest-earning assets                                          |   | $                                                      | 73,176 |   | $ | 5,043 |   | 9.2 | % |
|                                                                   |   |                                                   |   |   |   |   |   |
| Interest-Bearing Liabilities:                                          |   |                                                   |   |   |   |   |   |
|                                                                   |   |                                                   |   |   |   |   |   |
| Borrowings (2)                                                         |   | $                                                      | 39,940 |   | $ | (1,686 | ) | 5.6 | % |
| Total interest-bearing liabilities                                     |   | $                                                      | 39,940 |   | $ | (1,686 | ) | 5.6 | % |
|                                                                   |   |                                                   |   |   |   |   |   |
| Net interest income before provision for  loan losses/spread  (3) |   |                                                   |   | $ | 3,357 |   | 3.6 | % |
| Net interest margin  (4)                                          |   |                                                   |   |   |   | 6.1 | % |

 

----

(1)          Includes loans to seniorofficers.

(2)          Excludes borrowingsrelated to investments in real estate.

(3)          Net interest spread represents the differencebetween the average rate on interest-earning assets and the average cost ofinterest-bearing liabilities.

(4)          Net interest marginrepresents net interest income divided by average interest-earning assets.

 

25

----

 

REAL ESTATEOPERATIONS.  Our real estate operationsrepresent activity from our investment in commercial property located inOregon, Texas, Arizona, Oklahoma, Mississippi and California, as well as theoperations of our leasehold interests in 89 freestanding retail buildingslocated throughout the United States. During the nine months ended September 30, 2003, we realized net incomefrom real estate operations of approximately $0.2 million, compared with a netloss of $0.2 million for the nine months ended September 30, 2002.

 

In October 2002, the Company assumed leasehold interests in 109free-standing retail stores located throughout the United States.  The leasehold interests on five of theretail stores were sold to the property owner for $0.1 million during thequarter ended June 30, 2003.  InAugust 2003, the Company purchased the fee interest in 15 of thefreestanding retail buildings for a purchase price of $4.6 million.  As a result, as of September 30, 2003,we continued to own leasehold interests in 89 of the original free-standingretail stores.  The properties aresublet to a broad tenant mix including convenience stores, shoe stores, videorental outlets, auto parts dealers, carpet retailers and other smallbusinesses.  The stores range in sizefrom 4,500-7,000 square feet each.  Theinitial term of the leasehold interests has an average expiration ofapproximately 5 years.  However, we areentitled to exercise extension options which will allow us to control theproperties for an additional 15 to 30 years. In approximately 70% of the leases, the rent during the extended term isless than currently being charged or is below the Company’s estimate of thethen current market rents.

 

Of the remaining leases, 39 are on terms and conditions that requirecapitalization of the obligation. Accordingly, as of September 30, 2003, we had capitalized $14.4million as investment in real estate as a result of the transaction, andrecognized a capital lease obligation of $13.7 million. The remaining 50 leasesare classified as operating leases.  Allof our subleases are accounted for as operating leases.

 

EQUITY INEARNINGS OF EQUITY INVESTEES.  Werecognized income of $1.4 million from equity investees.  This was primarily the result of ourinvestment in Bourne End.  This comparesto earnings of $1.7 million during the 2002 period.  In December 2000, we organized and led a group of investors,including Merrill Lynch (Jersey) Holdings Limited (a subsidiary of MerrillLynch & Co., Inc.) to purchase all of the outstanding capital stock ofBourne End.  During the nine monthsended September 30, 2003, we recognized our share of the earnings ofBourne End, amounting to $1.5 million. During the comparable period of 2002, we recognized earnings of  $1.7 million on Bourne End.

 

GAIN ON SALEOF LOANS AND SECURITIES.  During thenine months ended September 30, 2003, we recognized $10.7 million in gainson the sale of loans and securities, primarily from the sale of mortgage-backedsecurities.  During the comparableperiod of 2002, we recognized gains on the sale of loans and securities of$13.8 million, primarily from the sale of stock in Wilshire Financial ServicesGroup Inc. and mortgage-backed securities.

 

OPERATINGEXPENSES.  During the nine months endedSeptember 30, 2003, we incurred segment operating expenses from merchantbanking, real estate and finance operations of $8.5 million.  This was $3.6 million higher than thecomparable period in 2002.  The primaryreason for the increase was $3.0 million in operating expenses associated withcompensation relating to bonuses awarded during 2003.

 

CommercialReal Estate Mortgage Brokerage Operations

 

In May 2002,the Company purchased a 51% ownership interest in George Elkins MortgageBanking Company (“George Elkins”), a California mortgage banking operation,which provides brokerage services related to the production of approximately$600 million per year in commercial real estate mortgages.  The Company began reporting the operations ofGeorge Elkins on a consolidated basis beginning May 15, 2002.  George Elkins is headquartered in LosAngeles, with satellite offices located throughout the southern Californiaarea.  The mortgage banking operationalso manages a commercial loan servicing portfolio in excess of $700 millionfor various investors.

 

26

----

 

Our net lossfrom the commercial real estate brokerage segment was $0.1 million for the ninemonths ended September 30, 2003. During the five months from acquisition through September 30, 2002,our net loss from the commercial real estate brokerage segment was $0.2million.  During the 2003 period, werecognized loan brokerage fees of $3.5 million, loan servicing and otherrevenue of $0.4 million, which was offset by compensation expense of $3.2million and other operating expense of $0.6 million.  During the 2002 period, we recognized loan brokerage fees of $1.3million, loan servicing and other revenue of $0.2 million, which was offset bycompensation expense of $1.3 million and other operating expense of $0.3million.

 

RestaurantOperations

 

InAugust 2003, the Company completed an investment and financing package forFatburger which involved the acquisition of the entire class of the Series A-1Preferred and the Series D Preferred stock of Fatburger.  As a result of our voting control, we beganreporting the operations of Fatburger on a consolidated basis beginningAugust 15, 2003.  Fatburger operatesor franchises 51 hamburger restaurants located in California, Nevada, Arizonaand Washington.  Franchisees currentlyown and operate about half of the Fatburger locations.

 

During the twomonths from acquisition through September 30, 2003, we recognized a netloss from our restaurant segment of $0.2 million.  This was primarily the result of net sales (net of cost of goodssold) of  $1.0 million and franchise andadvertising revenue of $0.1 million, offset by general and administrative costsof $0.9 million, interest expense of $0.1 million, depreciation andamortization of $0.1 million and a provision for income taxes of $0.1 million.

 

**RESULTS OF OPERATIONS****3⁄4THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDEDSEPTEMBER 30, 2002**

 

NET INCOME.  Our net income for the three months endedSeptember 30, 2003, was $0.6 million, or $0.06 per share, compared withnet income of $1.7 million, or $0.17 per share, for the three months endedSeptember 30, 2002.  The net incomefor the 2003 period is attributable to net interest income of $1.0 million,gain on sale of loans and securities of $1.3 million, loan brokerage fee of$1.2 million, and other operating income of $1.3 million, partially offset byother operating expenses of $3.6 million and a provision for income taxes of$0.6 million.  The net income for the2002 period is attributable to net interest income of $1.1 million and gain onsale of loans and securities of $3.5 million, partially offset by other operatingexpenses of $2.9 million.

 

The followingsections describe the results of operations of our operating segments for thethree months ended September 30, 2003:

 

MerchantBanking, Real Estate and Finance Operations

 

NET INTERESTINCOME.  Our net interest income for thethree months ended September 30, 2003, was $1.0 million, compared with$1.1 million for the three months ended September 30, 2002.  The 2003 results includes the recovery of$0.3 million of interest income recognized under the cash basis, and reflect areduction of assets (reflecting our sales of mortgage-backed securities andpaydowns of the related debt facilities), resulting in decreases in interestincome on securities of $0.9 million, partially offset by a decrease ininterest expense of $0.4 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:

 

27

----

 
|                                                             |   | **For the  Three Months Ended September 30, 2003** |   |
|------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                             |   | **Average  Balance**                                    |   | **Interest  Income (Expense)** |   | **Annualized  Yield/Rate** |   |
|                                                             |   | **(dollars in thousands)**                              |   |
| Interest-Earning Assets:                                         |   |                                                    |   |   |   |   |   |
|                                                             |   |                                                    |   |   |   |   |   |
| Loan portfolios (1)                                              |   | $                                                       | 6,562  |   | $ | 588 |   | 35.8 | % |
| Mortgage-backed securities available for  sale                   |   | 45,453                                                  |   | 509 |   | 4.5 | % |
| Other investments                                                |   | 15,153                                                  |   | 36 |   | 1.00 | % |
| Total interest-earning assets                                    |   | $                                                       | 67,168 |   | $ | 1,133 |   | 6.8 | % |
|                                                             |   |                                                    |   |   |   |   |   |
| Interest-Bearing Liabilities:                                    |   |                                                    |   |   |   |   |   |
|                                                             |   |                                                    |   |   |   |   |   |
| Borrowings (2)                                                   |   | $                                                       | 26,966 |   | $ | (160 | ) | 2.4 | % |
| Total interest-bearing liabilities                               |   | $                                                       | 26,966 |   | $ | (160 | ) | 2.4 | % |
|                                                             |   |                                                    |   |   |   |   |   |
| Net interest income before provision for  loan losses/spread (3) |   |                                                    |   | $ | 973 |   | 4.4 | % |
| Net interest margin  (4)                                    |   |                                                    |   |   |   | 5.8 | % |

 

----

(1)          Includes loans to senior executives.  Interest income includes the recovery of$0.3 million recognized under the cash basis.

(2)          Excludes borrowings related to investments inreal estate.

(3)          Net interest spread represents the differencebetween the average rate on interest-earning assets and the average cost ofinterest-bearing liabilities.

(4)          Net interest marginrepresents net interest income divided by average interest-earning assets.

 
|                                                             |   | **For the  Three Months Ended September 30, 2002** |   |
|------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                             |   | **Average  Balance**                                    |   | **Interest  Income (Expense)** |   | **Annualized  Yield/Rate** |   |
|                                                             |   |                                                    |   | **(dollars in thousands)** |   |   |   |
| Interest-Earning Assets:                                         |   |                                                    |   |   |   |   |   |
|                                                             |   |                                                    |   |   |   |   |   |
| Loan portfolios (1)                                              |   | $                                                       | 5,168  |   | $ | 134 |   | 10.4 | % |
| Mortgage-backed securities available for  sale                   |   | 53,982                                                  |   | 1,445 |   | 10.7 | % |
| Other investments                                                |   | 18,207                                                  |   | 89 |   | 2.0 | % |
| Total interest-earning assets                                    |   | $                                                       | 77,358 |   | $ | 1,668 |   | 8.6 | % |
|                                                             |   |                                                    |   |   |   |   |   |
| Interest-Bearing Liabilities:                                    |   |                                                    |   |   |   |   |   |
|                                                             |   |                                                    |   |   |   |   |   |
| Borrowings (2)                                                   |   | $                                                       | 39,037 |   | $ | (578 | ) | 5.9 | % |
| Total interest-bearing liabilities                               |   | $                                                       | 39,037 |   | $ | (578 | ) | 5.9 | % |
|                                                             |   |                                                    |   |   |   |   |   |
| Net interest income before provision for  loan losses/spread (3) |   |                                                    |   | $ | 1,090 |   | 2.7 | % |
| Net interest margin  (4)                                    |   |                                                    |   |   |   | 5.6 | % |

 

----

(1)          Includes loans to seniorofficers

(2)          Excludes borrowingsrelated to investments in real estate.

(3)          Net interest spread represents the differencebetween the average rate on interest-earning assets and the average cost ofinterest-bearing liabilities.

(4)          Net interest marginrepresents net interest income divided by average interest-earning assets.

 

28

----

 

REAL ESTATEOPERATIONS.  During the three monthsended September 30, 2003, we realized net income from real estateoperations of approximately $0.1 million (net of depreciation of $0.2 million),compared with a net loss of $0.1 million for the three months ended September 30,2002.

 

GAIN ON SALEOF LOANS AND SECURITIES.  During thethree months ended September 30, 2003, we recognized $1.3 million in gainson the sale of loans and securities, primarily from the sale of mortgage-backedsecurities.  During the comparableperiod of 2002, we recognized gains on the sale of loans and securities of $3.5million.

 

OPERATINGEXPENSES.  During the three months endedSeptember 30, 2003, our merchant banking, real estate and finance segmentincurred operating expenses of $2.2 million. This was $0.5 million higher than the comparable period in 2002.  The primary reason for the increase was $0.5million in operating expenses associated with compensation.

 

CommercialReal Estate Mortgage Brokerage Operations

 

Our net lossfrom the commercial real estate brokerage segment was less than $0.1 millionfor the three months ended September 30, 2003.  During the three months ended September 30, 2002, our netloss from the commercial real estate brokerage segment was $0.1 million.  During the 2003 period, we recognized loanbrokerage fees of $1.2 million, loan servicing and other revenue of $0.1million, which was offset by compensation expense of $1.1 million and otheroperating expense of $0.3 million. During the 2002 period, we recognized loan brokerage fees of $0.8million, loan servicing and other revenue of $0.2 million, which was offset bycompensation expense of $0.8 million and other operating expense of $0.2million.

 

RestaurantOperations

 

During the twomonths from acquisition through September 30, 2003, we recognized a netloss from our restaurant segment of $0.2 million.  This was primarily the result of net sales (net of cost of goodssold) of  $1.0 million and franchise andadvertising revenue of $0.1 million, offset by general and administrative costsof $0.9 million, interest expense of $0.1 million, depreciation andamortization of $0.1 million and a provision for income taxes of $0.1 million.

 

**CHANGES IN FINANCIAL CONDITION**

 

GENERAL.  Total assets increased from approximately$110.6 million at December 31, 2002 to approximately $114.9 million atSeptember 30, 2003.  Totalliabilities increased from approximately $66.4 million at December 31,2002 to approximately $68.1 million at September 30, 2003.  Stockholders’ equity increased by approximately$2.5 million resulting primarily from net income of $4.8 million, and increasesin other comprehensive income of $0.1 million, the issuance of capital stock asa result of the exercise of stock options of $1.0 million, partially offset bydividends declared of $3.4 million.

 

SECURITIESAVAILABLE FOR SALE.  The balance ofmortgage-backed securities available for sale decreased from $59.3 million atDecember 31, 2002 to $42.4 million at September 30, 2003.  The decrease was primarily the result of thesale of mortgage-backed securities witha carrying value of $13.8 million and cash repayments of securities of $14.5million, partially offset by increases in market value of $11.4 million.

 

We mark our securities portfolio to estimated fair value at the end ofeach month.  We determine the fair valueof the securities by utilizing market quotes, when available, or modeling theanticipated cash flows using certain estimates (e.g. prepayment speeds, defaultrates, severity of losses, and discount rate). As of each reporting period, we evaluate whether and to what extent anyunrealized loss is to be recognized as other than temporary.  At September 30, 2003, approximately$38.0 million of our mortgage-backed securities portfolio consisted of a “AAA”rated FNMA certificate for which market value quotes were obtained.

 

29

----

 

We are a partyto an employment agreement which entitlesthe Company’s president, Robert G. Rosen, to a bonus payment equal to 10% ofthe cumulative net proceeds from the sale of certain of our mortgage-backedsecurities.  All but approximately $4.4million of the securities that were subject to the bonus formula had been soldas of September 30, 2003, and the bonuses relating to the sold securitieshave been accrued and paid. The amount of unrealized gain included instockholders’ equity in the accompanying statement of financial position hasbeen reduced by the amount of the bonus that would have been payable toMr. Rosen had the remaining $4.4 million securities been sold at theircarrying value.

 

AtSeptember 30, 2003, securities available for sale were as follows:

 
|                                                                   |   | **Amortized  Cost  (1)** |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Fair Value** |   |
|------------------------------------------------------------------------|--------|-------------------------------|--------|------------------------------|--------|-------------------------------|--------|----------------|--------|
|                                                                   |   | **(dollars in thousands)**    |   |
| Total Mortgage-backed securities, pledged  under repurchase agreements |   | $                             | 38,827 |                         | $      | 2,832                         |   | $              | — |   | $ | 41,659 |   |
| Other Mortgage-backed securities                                       |   | 133                           |   | 614                          |   | —                        |   | 747            |   |
| Total Mortgage-backed securities                                       |   | $                             | 38,960 |                         | $      | 3,446                         |   | $              | — |   | $ | 42,406 |   |

 

----

(1)                                  Theamortized cost of the securities excludes accrued interest of $0.1 million.

 

LOANPORTFOLIO.  During the nine months endedSeptember 30, 2003, our loan portfolio increased by approximately $1.8million.  This was primarily the resultof the acquisition of a new $1.4 million loan. One loan with at carrying value of $1.6 million failed to make ascheduled principal payment in September 2003.  We have agreed to modify the borrower’s repayment schedule.  Interest payments are current on the loanand we expect to fully recover its carrying value.  The loan is held at the lower of cost or fair value.  Accordingly, no impairment loss has beenrecognized on the loan.

 

INVESTMENTS INREAL ESTATE.  Investments in real estateincreased by $0.7 million during the nine months ended September 30,2003.  The increase was primarily due tothe purchase of the fee interest in fifteen freestanding retail buildings for$4.6 million.  We had been the lessor onthese buildings prior to the purchase. Of the fifteen retail buildings acquired, seven had previously beentreated as assets under capital leases and included in investments in realestate with a net capitalized amount of $2.8 million.  As a result, the net increase in investment in real estate as aresult of the $4.6 million acquisition was $1.8 million.  This increase was partially offset by therecognition of the sale of two finished industrial zoned lots totaling 227,863 square feet or 5.2acres in Irwindale, California.  Theland had a carrying value of $0.8 million.

 

In October 2002, the Company assumed leasehold interests in 109free-standing retail stores located throughout the United States.  The leasehold interests on five of theretail stores were sold to the property owner for $0.1 million during thequarter ended June 30, 2003.  As describedabove, in August 2003, the Company purchased the fee interest in 15 of thefreestanding retail buildings for a purchase price of $4.6 million.  As a result, as of September 30, 2003,we continued to own leasehold interests in 89 of the original free-standingretail stores.  The leased propertiesare sublet to a broad tenant mix including convenience stores, shoe stores,video rental outlets, auto parts dealers, carpet retailers and other smallbusinesses.

 

Of the remaining leases, 39 are on terms and conditions that requirecapitalization of the obligation. Accordingly, as of September 30, 2003, we had capitalized $14.4million as investment in real estate as a result of the transaction, andrecognized a capital lease obligation of $13.7 million. The remaining 50 leasesare classified as operating leases.  Allof our subleases are accounted for as operating leases.

 

30

----

 

LOANS TO SENIOREXECUTIVES.  The Company has employmentagreements with Mr. Wiederhorn and Mr. Rosen, which allowed theseexecutives to borrow a specified maximum amount from us to purchase shares ofCommon Stock.  We granted loans toMr. Wiederhorn and Mr. Rosen prior to the passage of theSarbanes-Oxley Act of 2002.  These loansare full recourse, secured loans bearing interest at the prime rate.  At September 30, 2003, in addition tothe $2 million loan to Mr. Wiederhorn described below, we had outstandingloans to Mr. Wiederhorn, including accrued interest, of approximately $1.0million.  The loans to Mr. Rosenwere paid off before the 2002 year end. The Company is not obligated to make additional advances on loans underthe employment agreements.  The loan toMr. Wiederhorn is further described as follows:

 

On February 21,2002, we loaned Mr. Wiederhorn $175,000 to finance the purchase of CommonStock.  This loan is full recourse toMr. Wiederhorn and is secured by all of Mr. Wiederhorn’s rights underhis employment agreement.  We areentitled to net amounts payable under the employment agreement against anyamounts payable by Mr. Wiederhorn upon any default or at maturity of theloan.  At Mr. Wiederhorn’sdirection (in accordance with the terms of his employment agreement), onFebruary 21, 2002, we loaned a limited partnership controlled byMr. Wiederhorn’s spouse (the “LP”) $687,000 to finance the purchase ofCommon Stock.  The loan is secured bythe membership interests 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 propertyhad an appraised value of $725,000.  Theloan is also guaranteed by Mr. Wiederhorn.  The Common Stock purchased with the proceeds of these loans doesnot serve as security for the loans. The loans are due on February 21, 2007, and bear interest at theprime rate, as published in the Wall Street Journal, which interest is added tothe principal annually.

 

Prior to the passage ofthe Sarbanes-Oxley Act of 2002, we loaned Mr. Wiederhorn $2.0million.  This loan is full recourse toMr. Wiederhorn and his spouse and is secured by trust deeds on tworesidences located in Oregon.  The loanis due on August 1, 2007 and bears interest at 8.5% per annum, payablemonthly.  The Board of Directors (withMr. Wiederhorn abstaining) concluded that the terms of the loan were atleast as favorable to the Company as would be available in an arms length,third party transaction and approved the loan on July 9, 2002.

 

Further information onthese loans to executives is included in our 2002 annual report on Form 10-Kand proxy statements for our 2003 and prior years Annual Meeting ofStockholders, and these executives’ employment agreements have been previouslyfiled with the SEC.

 

INVESTMENT IN BOURNE END.  In December 2000, we organized and leda group of investors to purchase all of the outstanding capital stock of BourneEnd Properties Plc (“Bourne End”), a specialist investor in retail property.  Atthe time of the acquisition, Bourne End had approximately GBP 169.6 million ofassets and GBP 123.1 million of debt. The real estate assets consisted of 1.7 million square feet in fifteenshopping centers located in the United Kingdom.  As of September 30, 2003, Bourne End had sold eleven of theoriginal fifteen shopping centers, including two properties sold during thenine months ended September 30, 2003. The sales are consistent with theinvestor group’s strategy to reposition each of the centers, including selectednew capital expenditures on existing space and new development on excess oradjoining land, with the ultimate goal of reselling the properties.

 

Our investmentin Bourne End decreased by $1.2 million to $4.4 million at September 30,2003.  The decrease was primarily theresult of cash distributions in the amount of $2.7 million received from BourneEnd.  Under the equity method ofaccounting, these receipts are treated as a reduction in the carrying value ofthe investment.  The reduction incarrying value was partially offset by the recognition of our share of theearnings of Bourne End in the amount of $1.5 million.

 

RESTAURANTPROPERTY, PLANT AND EQUIPMENT, NET.  Asa result of the acquisition and consolidation of Fatburger, we recordedrestaurant property, plant and equipment, net of depreciation, of $5.7 million,consisting of $1.7 million in real estate used in the restaurant operation and$4.0 million in restaurant leasehold improvements, furniture, fixtures andequipment.

 

31

----

 

INTANGIBLEASSETS, NET.  As a result of theacquisition and consolidation of Fatburger, we recorded intangible assets, netof amortization, of $5.7 million.  Thisconsisted of trademark rights of approximately $3.9 million, franchiseagreements of approximately $1.1 million and other miscellaneous intangibleassets of $0.7 million.

 

GOODWILL.  As a result of the acquisition andconsolidation of Fatburger, we recorded goodwill of $7.4 million.

 

OTHER ASSETS.  AtSeptember 30, 2003, the Company’s other assets consisted of the following:

 
| Capitalized deferred compensation |   | $         | 1,341,000 |   |
|-----------------------------------|--------|-----------|-----------|--------|
| Receivable from bond trustee      |   | 1,193,000 |      |
| Investment in operating leases    |   | 499,000   |      |
| Mortgage servicing rights         |   | 278,000   |      |
| Other                             |   | 1,560,000 |      |
| Total                             |   | $         | 4,871,000 |   |

 

Thecapitalized deferred compensation included in other assets relates to theacquisition of George Elkins.  Inconjunction with the acquisition, certain employees of George Elkins enteredinto long-term employment agreements. These employees received payments totaling $1.9 million which wecapitalized as deferred compensation. The employees are obligated to perform under the employment agreementsand must repay any unearned deferred compensation payments upon earlytermination.  The deferred compensationis earned ratably over the terms of the employment agreements, and we areamortizing the $1.9 million investment over the remaining terms, which rangefrom 19 to 44 months.

 

BORROWINGS ANDNOTES PAYABLE.  Borrowings and notespayable increased by approximately $2.7 million during the nine months endedSeptember 30, 2003, primarily due to the acquisition of approximately $9.0million in borrowings in connection with the consolidation of Fatburger and theissuance of a $2.8 million note payable in connection with the purchase ofcommon stock, partially offset by the payment of borrowings related tomortgage-backed securities.

 

OBLIGATIONS UNDER CAPITAL LEASES. Obligations under capital leases decreased approximately $2.9 million to$13.9 million.  This decrease wasprimarily the result of the repayment of $2.7 million obligations in connectionwith the purchase of the fee interest in fifteen retail buildings which hadbeen part of our portfolio of leasehold interests, seven of which hadpreviously been accounted for as capital leases.

 

OBLIGATION TO PURCHASE TREASURY STOCK. During the nine months ended September 30, 2003, we fulfilled ourobligation to purchase treasury stock under an exercised put option. OnFebruary 7, 2003, we purchased 1,044,760 shares of the Company’s commonstock (the “Option Shares”) under a put option agreement (the “Put Option”)with a group of shareholders related to Lawrence A. Mendelsohn (the“Stockholders”).  Prior to hisresignation on August 30, 2002, Mr. Mendelsohn was the President anda member of the Board of Directors of the Company.  Approximately $1.4 million of the total purchase price of $4.2million was paid in cash to the Stockholders at closing.  The remaining purchase price ofapproximately $2.8 million was paid with a promissory note which matures 11months following the closing date and bears interest at 0% for the first 90days and 12% per annum thereafter.  Thenote is carried in “Borrowings and Notes Payable” at September 30, 2003 onthe accompanying statements of financial condition.  However, subsequent to September 30, 2003, we prepaid thenote in full.

 

32

----

 

DEFERRED INCOME.  Franchise feerevenue from the sales 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. Nonrefundable deposits collected in relation to the sale of franchisesare recorded as deferred franchise fees until the completion of training andthe opening of the restaurant, at which time the franchise fee revenue isrecognized.  As of September 30, 2003,our deferred income relating to the collection of unearned Fatburger franchisefees was $3.0 million.

 

DEFERRED INCOME TAXES.  Ourdeferred income taxes increased $2.3 million to $6.4 million atSeptember 30, 2003.  This wasprimarily the result of an accrued provision for income taxes of $2.3 million.  As of September 30, 2003, we had, forU.S. Federal tax purposes, a net operating loss carryforward (“NOL”).  The NOL may significantly reduce oreliminate the future payment of the tax liability.  However, U.S. tax regulations impose limitations on the use ofloss carry forwards following certain changes in ownership.  If such a change occurs, the limitationcould significantly reduce the amount of benefits that would be available tooffset future taxable income each year, starting with the year of ownershipchange.

 

In order toprotect the NOL, on October 18, 2002, we announced a dividend distributionof one right (a “Right”) to purchase one-tenth of a share of our common stockfor each outstanding share of common stock, payable to the stockholders ofrecord on October 28, 2002 (the “Record Date”).  Rights will also be attached to each common share issued afterthe Record Date.  Generally, each Rightentitles the registered holder to purchase one-tenth of a common share from usat a price of $15 per whole common share. The Rights are intended to protect our income tax loss carryforward fromthe limitations imposed under the Internal Revenue Code if there is a change incontrol.  Under certain circumstances,individuals attempting to acquire a 5% ownership interest in the Company (orindividuals attempting to increase their existing holdings in excess of 5% bymore than 1%) will have their interests immediately diluted throughdistributions of stock to all other Right holders.  The description and terms of the Rights are set forth in a RightsAgreement (the “Rights Agreement”) between us and The Bank of New York, asRights Agent, dated as of October 18, 2002.  We filed a summary of the Rights Agreement with the Securitiesand Exchange Commission on Form 8-K on October 18, 2002.

 

STOCKHOLDERS’EQUITY.  Stockholders’ equity increasedby approximately $2.5 million during the nine months ended September 30,2003 primarily due to our net income of $4.8 million, the issuance of newcapital stock as a result of the exercise of stock options of $1.0 million, andincreases in other comprehensive income of $0.1 million.  These increases were partially offset bydeclared dividends of $3.4 million.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Liquidity is a measurement of our ability to meet potential cashrequirements, including ongoing commitments to repay borrowings, fundinvestments, engage in loan acquisition and lending activities, and for othergeneral business purposes.  The primarysources of funds for liquidity during the nine months ended September 30,2003, consisted of net cash provided by investing activities, includinginterest and principal payments related to our mortgage-backed securitiesportfolio and the sale of mortgage-backed securities.

 

33

----

 

Our borrowings and the availability of further borrowings aresubstantially affected by, among other things, changes in interest rates,changes in market spreads whereby the market value of the collateral securingsuch borrowings may decline substantially, or decreases in credit quality ofunderlying assets.  In the event ofdeclines in market value or credit quality, we may be required to provideadditional collateral for, or repay a portion of outstanding balances of, ourshort-term borrowing facilities. However, our borrowings against securitiesconsist of non-recourse, short-term repurchase agreements held in wholly-ownedsubsidiaries.  As a result, ourpotential risk from collateral calls is limited to the equity in the assetsbeing financed, which at September 30, 2003, totaled $15.3 million.  We consider the potential exposure tocollateral calls to be significantly less than the $15.3 million equity since$14.1 million relates to our equity in a “AAA” rated FNMA security.  As of September 30, 2003, we had nooutstanding collateral calls.  Foradditional information with respect to our monthly mark-to-market of oursecurities available for sale portfolio, see “CHANGES IN FINANCIALCONDITION–SECURITIES AVAILABLE FOR SALE.”

 

Fluctuations in interest rates will continue to impact our net interestincome to the extent our fixed rate assets are funded by variable rate debt orour variable rate assets reprice on a different schedule or in relation toa different index than any floating rate debt which in turn could impactpotential returns to shareholders.  See“Item 7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.”

 

At September 30, 2003, we had total consolidated securedindebtedness of $52.2 million, as well as $15.9 million of other liabilities.The consolidated secured indebtedness consisted of (i) $26.4 million ofrepurchase agreements secured by $41.7 million of mortgage-backed securities,(ii) $14.0 million outstanding of obligations under capital leases maturingbetween 2010 and 2040 which are secured by real estate, (iii) notes payable of$3.8 million, and (iv) long-term debt of Fatburger of $8.0 million secured bysubstantially all of the assets of Fatburger. Approximately $26.4 million of this indebtedness had terms which allowedthe lender to request additional collateral if the value of the underlyingcollateral declined.  However, due tothe non-recourse nature of our repurchase agreements, our exposure to collateralcalls is limited to the equity in the assets being financed.

 

If our existing liquidity position were to prove insufficient, and wewere unable to fund additional collateral requirements or 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. Furthermore, since from time to time there is extremely limitedliquidity in the market for subordinated and residual interests inmortgage-related securities, there can be no assurance that we will be able todispose of such securities promptly for fair value in such situations.

 

We consider the sale of assets to be a normal, recurring part of ouroperations and we are currently generating positive cash flow as a result ofthese transactions.  However, excludingthe sale of assets from time to time, we are currently operating with negativecash flow, since many of our assets do not generate current cash flowssufficient to cover current operating expenses.  We believe that our existing sources of funds will be adequatefor purposes of meeting our liquidity needs, however, there can be no assurancethat this will be the case.  Materialincreases in interest expense from variable-rate funding sources, collateralcalls, or material decreases in monthly cash receipts, generally wouldnegatively impact our liquidity.  On theother hand, material decreases in interest expense from variable-rate fundingsources or an increase in market value of our mark-to-market financial assetsgenerally would positively affect our liquidity.

 

34

----

 

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

 

Market risk is the exposure to loss resulting from changes in interestrates, foreign currency exchange rates, commodity prices, and equityprices.  We have some exposure toforeign currency fluctuations (approximately 9% of the Company’s equity isinvested in assets located in the United Kingdom at September 30, 2003),which we have mitigated through the purchase of a Great Britain pound (“GBP”)put option.  The contract entitles us tosell a total of GBP 7.5 million for U.S. dollars (“USD”) at an exchange rate of1.46 USD per one GBP. The option expires during December 2003.  Due to the limited remaining term, theestimated fair value of these currency hedging contracts was approximately zeroat September 30, 2003.

 

In October 2003, we entered into a forward commitment to sell GBP2.25 million on December 1, 2003 for $1.6574 USD per one GBP.  We entered into this commitment to guaranteea favorable exchange rate for a portion of the GBP denominated funds that arescheduled to be received from the investment in Bourne End during the fourthquarter of 2003.

 

The primary market risk to which we are exposed is interest raterisk.  This type of risk is highlysensitive to many factors beyond our control, including governmental monetaryand tax policies, domestic and international economic and politicalconsiderations, and other factors. Changes in the general level of interest rates can affect our netinterest income by affecting the spread between our interest-earning assets andour interest-bearing liabilities. Changes in the level of interest rates can also affect, among otherthings, the value of our interest-earning assets (including mortgage-backedsecurities) and our ability to acquire loans.

 

It is our objective to attempt to control risks associated withinterest rate movements.  In general,our strategy is to limit our exposure to earnings variations and variations inthe value of assets and liabilities as interest rates change over time.  Our asset and liability management strategyis formulated and monitored regularly to review, among other things, thesensitivity of our assets and liabilities to interest rate changes, the bookand market values of assets and liabilities, unrealized gains and losses,including those attributable to hedging transactions, purchase andsecuritization activity, and maturities of investments and borrowings.

 

The following table quantifies the potential changes in net interestincome and net portfolio value as of September 30, 2003 should interestrates go up or down (shocked) by 100 or 200 basis points, assuming the yieldcurves of the rate shocks will be parallel to each other and instantaneous. Netportfolio value is calculated as the sum of the value of off-balance sheetinstruments and the present value of cash in-flows generated frominterest-earning assets net of cash out-flows in respect of interest-bearingliabilities. The cash flows associated with the loan portfolios and securitiesavailable for sale are calculated based on prepayment and default rates thatvary by asset but not by changes in interest rates. Projected losses, as wellas prepayments, are generated based upon the actual experience with the subjectpool, as well as similar, more seasoned pools. To the extent available, loancharacteristics such as loan-to-value ratio, interest rate, credit history andproduct types are used to produce the projected loss and prepayment assumptionsthat are included in the cash flow projections of the securities.  The following table applies the U.S.Treasury yield curve generally for assets and LIBOR for repurchase agreementliabilities and assume a uniform change in both rates.  The table assumes that changes in interestrates occur  instantaneously.  The table also reflects that we have asignificant exposure to LIBOR rates since our short-term repurchase agreementborrowings are generally based on LIBOR rates. Actual results could differ significantly from those estimated in thetable.

 

35

----

 

Projected Percent Change In

 
| **Change in Interest Rates (1)** |   | **Net Interest  Income** |   | **Net Portfolio  Value** |   | **Change in Annual  Net****Interest  Income** |     | **Change in Net****Portfolio  Value** |   |
|----------------------------------|--------|--------------------------|--------|--------------------------|--------|-----------------------------------------------|----------|---------------------------------------|--------|
| -200 Basis Points                |   | 4.0                      | %      | 9.7                      | %      | $                                             | 91,000   |                                  | $      | 4,538,000 |   |
| -100 Basis Points                |   | 3.9                      | %      | 4.3                      | %      | $                                             | 88,000   |                                  | $      | 1,999,000 |   |
| 0 Basis Points                   |   | 0.0                      | %      | 0.0                      | %      | $                                             | —   |                                  | $      | — |   |
| 100 Basis Points                 |   | -2.2                     | %      | -3.1                     | %      | $                                             | (50,000  | )                                     | $      | (1,468,000 | ) |
| 200 Basis Points                 |   | -4.4                     | %      | -6.1                     | %      | $                                             | (100,000 | )                                     | $      | (2,859,000 | ) |

 

----

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

 

The following table sets forth information as to the type of funding usedto finance the Company’s assets as of September 30, 2003.  As indicated in the table, a largepercentage of the Company’s fixed-rate assets are financed by floating-rateliabilities and the Company’s variable-rate assets are generally funded byvariable-rate liabilities which use the same index.

 

Assets and Liabilities

As of September 30, 2003

(dollars in thousands)

 
|                                     |   | **Basis  Amount** |    | **Coupon  Type** |   | **Liability** |   | **Type** |   |
|------------------------------------------|--------|-------------------|---------|------------------|--------|---------------|--------|----------|--------|
| Interest-Bearing Assets                  |   |              |    |             |   |          |   |     |   |   |   |
|                                     |   |              |    |             |   |          |   |     |   |   |   |
| Fixed-rate asset, financed floating      |   | $                 | 3,688   |             | Fixed  |          | $      | 2,523    |   | LIBOR |   |
| Fixed-rate assets, no financing          |   | 5,197             |    | Fixed            |   | —        |   | None     |   |
| Variable-rate, financed variable         |   | 37,972            |    | 1 TCM (1)        |   | 23,859        |   | LIBOR    |   |
| Variable-rate assets, no financing       |   | 2,532             |    | Prime            |   | —        |   | None     |   |
| Cash and cash equivalents                |   | 15,132            |    | N/A              |   | —        |   | None     |   |
| Subtotal                                 |   | 64,521            |    |             |   | 26,382        |   |     |   |
|                                     |   |              |    |             |   |          |   |     |   |
| Other Assets                             |   |              |    |             |   |          |   |     |   |
|                                     |   |              |    |             |   |          |   |     |   |
| Investments in real estate               |   | 22,231            |    | N/A              |   | 13,949        |   | Fixed    |   |
| Investment in BEP                        |   | 4,375             |    | N/A              |   | —        |   | None     |   |
| Restaurant property, plant and equipment |   | 5,684             |    | N/A              |   | 8,014         |   | Fixed    |   |
| Intangible assets, net                   |   | 5,704             |    | N/A              |   | —        |   | None     |   |
| Goodwill                                 |   | 7,420             |    | N/A              |   | —        |   | None     |   |
| Other                                    |   | 4,871             |    | N/A              |   | —        |   | None     |   |
| Subtotal                                 |   | 50,285            |    |             |   | 21,963        |   |     |   |
|                                     |   |              |    |             |   |          |   |     |   |
| Liability Only                           |   |              |    |             |   |          |   |     |   |
|                                     |   |              |    |             |   |          |   |     |   |
| Notes payable                            |   | —            |    |             |   | 3,828         |   | Fixed    |   |
| Deferred income                          |   | —            |    |             |   | 3,530         |   | None     |   |
| Deferred income taxes                    |   | —            |    |             |   | 6,418         |   | None     |   |
| Other                                    |   | —            |    |             |   | 6,440         |   | None     |   |
| Total                                    |   | $                 | 114,806 |             |   |          | $      | 68,561   |   |   |   |

 

----

(1)  1TCM means the one year Treasury Constant Maturity Index.

 

36

----

 

Asset and liability management involves managing the timing andmagnitude of the repricing of assets and liabilities.  It is our objective to attempt to control risks associated withinterest rate movements.  Asset andliability management can utilize a wide variety of off-balance sheet financialtechniques to assist it in the management of interest rate risk.  For example, in hedging the interest rateand exchange rate exposure of a foreign currency denominated asset orliability, we may enter into hedge transactions to counter movements in thedifferent currencies as well as interest rates in those currencies.  These hedges may be in the form of currencyand interest rate swaps, options, and forwards, or combinations thereof.  No such interest rate techniques were in useas of September 30, 2003.

 

Methods for evaluating interest rate risk include an analysis of ourinterest rate sensitivity “gap,” which is defined as the difference betweeninterest-earning assets and interest-bearing liabilities maturing or repricingwithin a given time period.  A gap isconsidered positive when the amount of interest-rate sensitive assets exceedsthe amount of interest-rate sensitive liabilities.  A gap is considered negative when the amount of interest-ratesensitive liabilities exceeds interest-rate sensitive assets.  During a period of rising interest rates, anegative gap would tend to adversely affect net interest income, while apositive gap would tend to result in an increase in net interest income.  During a period of falling interest rates, anegative gap would tend to result in an increase in net interest income, whilea positive gap would tend to affect net interest income adversely.  Since different types of assets andliabilities with the same or similar maturities may react differently tochanges in overall market rates or conditions, changes in interest rates mayaffect net interest income positively or negatively even if an institution wereperfectly matched in each maturity category.

 

The following table sets forth the estimated contractual maturity orrepricing of our interest-earning assets and interest-bearing liabilities at September 30, 2003.

 

As of September 30, 2003

(dollars in thousands)

 
|                                                                                      |   | **Within****3 Months** |   | **4 to 12****Months** |   | **One Year to****3 Years** |   | **More than****3 Years** |   | **TOTAL** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|----------------------------|--------|--------------------------|--------|-----------|--------|
| Interest-sensitive assets(1):                                                             |   |                   |   |                  |   |                       |   |                     |   |      |   |
| Cash and cash equivalents                                                                 |   | $                      | 15,132 |                  | $      | —                     |   | $                        | — |      | $      | — |   | $ | 15,132 |   |
| Securities available for sale                                                             |   | —                 |   | —                |   | 37,972                     |   | 4,434                    |   | 42,406    |   |
| Loans                                                                                     |   | 3,031                  |   | 702                   |   | —                     |   | 298                      |   | 4,031     |   |
| Loans to senior executives                                                                |   | 952                    |   | —                |   | —                     |   | 2,000                    |   | 2,952     |   |
| Total rate-sensitive assets                                                               |   | $                      | 19,115 |                  | $      | 702                        |   | $                        | 37,972 |      | $      | 6,732 |   | $ | 64,521 |   |
|                                                                                      |   |                   |   |                  |   |                       |   |                     |   |      |   |
| Interest-sensitive liabilities  :                                                         |   |                   |   |                  |   |                       |   |                     |   |      |   |
| Borrowings and notes payable                                                              |   | $                      | 27,618 |                  | $      | 3,539                      |   | $                        | 3,099  |      | 3,968  |   | $ | 38,224 |   |
| Obligations under capital  leases                                                         |   | —                 |   | —                |   | —                     |   | 13,949                   |   | 13,949    |   |
| Total rate-sensitive  liabilities                                                         |   | $                      | 27,618 |                  | $      | 3,539                      |   | $                        | 3,099  |      | $      | 17,917 |   | $ | 52,173 |   |
|                                                                                      |   |                   |   |                  |   |                       |   |                     |   |      |   |
| Interest rate sensitivity gap                                                             |   | $                      | (8,503 | )                     | $      | (2,837                     | )      | $                        | 34,873 |      | $      | (11,185 | ) |   |   |
| Cumulative interest rate  sensitivity gap                                                 |   | $                      | (8,503 | )                     | $      | (11,340                    | )      | $                        | 23,533 |      | $      | 12,348 |   |   |   |
| Cumulative interest rate  sensitivity gap as a percentage  of total rate-sensitive assets |   | -13                    | %      | -18                   | %      | 37                         | %      | 19                       | %      |      |   |

 

----

(1)  Real estate propertyholdings are not considered interest rate sensitive.

 

37

----

 

**ITEM 4****.  CONTROLS ANDPROCEDURES**

 

(a)                                  **Evaluation of disclosure controls and procedures**.  Our Chief Executive Officer and our ChiefFinancial Officer, after evaluating the effectiveness of the Company’s“disclosure controls and procedures” (as defined in the Securities Exchange Actof 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered bythis report, have concluded that our disclosure controls and procedures wereadequate and designed to ensure that material information relating to us andour consolidated subsidiaries would be made known to them by others withinthose entities.

 

(b)                                 **Changes in internal controls**.  Therewere no significant changes in our internal controls over financial reportingthat occurred during our last fiscal quarter that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

38

----

 

FORWARD-LOOKINGSTATEMENTS

 

CERTAINSTATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE FILINGSBY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE“FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THESECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOMEOF WHICH ARE BEYOND THE COMPANY’S CONTROL) MAY BE IDENTIFIED BY REFERENCETO A FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY,SUCH AS “MAY,” “WILL,” “BELIEVE,” “EXPECT,” “ANTICIPATE,” “CONTINUE,” ORSIMILAR TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSETERMS.  ACTUAL RESULTS COULD DIFFERMATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETYOF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE RELATED TO THE ECONOMICENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH THE COMPANY OPERATES,THE FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY OF AND COSTSASSOCIATED WITH SOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND PRICING, THEREAL 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 AND THE IMPACT OF ONGOINGLITIGATION.  EXCEPT AS MAY BEREQUIRED BY LAW, THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANYOBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BEMADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATEDOR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.

 

39

----

 

**PART II – OTHER INFORMATION**

 

**Item 1.**           Legal Proceedings.

 

**During2001, the Company’s Chief Executive Officer, Andrew Wiederhorn, and formerpresident, Lawrence Mendelsohn, received letters from the United StatesAttorney’s office in Portland, Oregon advising them that they were targets of agrand jury investigation into the failure of Capital Consultants, L.L.C.(“CCL”).  CCL was a lender to a formeraffiliate of the Company.  Theinvestigation is ongoing and it is not possible at this stage to predict itsoutcome.  Messrs. Wiederhorn andMendelsohn, pursuant to the terms of their respective employment agreements,may be entitled to indemnity from the Company for litigation expenses andpersonal losses in connection with these investigations and any relatedlitigation.  Messrs. Wiederhorn andMendelsohn have notified the Company that they are reserving their rights toseek indemnity from the Company, however, they may be entitled to primaryindemnification from other sources.  Atthis time, it is not possible to determine the extent of liability, if any, theCompany may face with regard to these potential indemnity claims.  The Company has not received, nor agreed to,any indemnity requests.**

** **

On October 6, 2003,the Official Committee of Unsecured Creditors of Strouds AcquisitionCorporation filed a lawsuit in the United States Bankruptcy Court (LA03-23620-ER) which names the Company, among others, as defendants.  The complaint against the Company generallyalleges that the structure of the Strouds financing package gave unfairadvantage to the Company, to the detriment of the unsecured creditors.  The lawsuit, as it pertains to the Company,seeks reimbursement of the proceeds from the $2.0 million loan participation inFleet Retail Finance Inc.’s senior secured credit facility (the “FleetParticipation”) and approximately $3.0 million in funds received inOctober 2003, which the Company is holding as collateral agent for othersecured creditors.  The Company believesthat the allegations are without merit with regard to the Fleet Participationand does not expect to incur a loss as a result of the lawsuit.  The $3.0 million being held as collateralagent for other secured creditors will continue to be held in trust, lessreimbursements to the Company, from time-to-time, of the Company’s relatedlegal costs, until the bankruptcy court resolves the dispute regarding itsdistribution.

** **

**Item 2.**                     Changes in Securities and Use ofProceeds.

 

Not applicable.

 

**Item 3.**                     Defaults Upon Senior Securities.

 

Not applicable.

 

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

** **

None

** **

**Item 5.**                     Other Information.

 

**TRANSACTIONSWITH AFFILIATES**

 

**MendelsohnPut Option**

 

OnAugust 8, 2002, we entered into an agreement (the “Assignment”), effectiveJuly 31, 2002, in which we accepted the assignment of the obligations ofthe grantor, pursuant to a Stock Option and Voting Agreement datedOctober 16, 2001, granted by Mr. Wiederhorn to Mr. Mendelsohn,(“Mendelsohn”) and other related stockholders for whom Mendelsohn was servingas agent, (collectively, the “Stockholders”). At the time of the assignment, Mr. Mendelsohn was the President anda member of the Board of Directors of the Company.  Mr. Mendelsohn resigned from the Company on August 30,2002.

 

40

----

 

Under theAssignment, the Stockholders had the option (the “Put Option”) to require us topurchase up to 1,044,760 shares of common stock (the “Option Shares”) at aprice per share equal to eighty percent (80%) of the book value per share ofthe Company as of the end of the most recent calendar month preceding thedelivery of the exercise notice (the “Evaluation Date”).

 

The Stockholders exercised theirright to require us to purchase the Option Shares on December 24,2002.  The option price was determinedto be $4.02 per share and the closing date was February 7, 2003.  One third of the purchase price for theshares purchased under the Option Agreement was paid in cash to theStockholders at closing.  The remainingpurchase price was paid with a promissory note which matures 11 monthsfollowing the closing date and which bears interest at 0% for the first 90 daysand 12% per annum thereafter.  The notemay be prepaid at any time without penalty or premium.  Subsequent to September 30, 2003, thepromissory note was prepaid in full.

 

**StockPurchase Loans to Officers**

 

The Company hasemployment agreements with Mr. Wiederhorn and Mr. Rosen, whichallowed these executives to borrow a specified maximum amount from us topurchase shares of Common Stock.  Wegranted loans to Mr. Wiederhorn and Mr. Rosen prior to the passage ofthe Sarbanes-Oxley Act of 2002.  Theseloans are full recourse, secured loans bearing interest at the prime rate.  At September 30, 2003, in addition tothe $2.0 million loan to Mr. Wiederhorn described in “Loan to ExecutiveOfficer” below, we had outstanding loans to Mr. Wiederhorn, includingaccrued interest, of approximately $1.0 million.   The loans to Mr. Rosen were paid off before the 2002 yearend.  The Company is not obligated tomake additional advances on loans under the employment agreements.  The loan to Mr. Wiederhorn is furtherdescribed as follows:

 

On February 21,2002, we loaned Mr. Wiederhorn $175,000 to finance the purchase of CommonStock.  This loan is full recourse toMr. Wiederhorn and is secured by all of Mr. Wiederhorn’s rights underhis employment agreement.  We areentitled to net amounts payable under the employment agreement against anyamounts payable by Mr. Wiederhorn upon any default or at maturity of theloan.  At Mr. Wiederhorn’sdirection (in accordance with the terms of his employment agreement), onFebruary 21, 2002, we loaned a limited partnership controlled byMr. Wiederhorn’s spouse (the “LP”) $687,000 to finance the purchase ofCommon Stock.  The loan is secured bythe membership interests of two limited liability companies owned by theLP.  The limited liability companieseach own a parcel of real property in Oregon and have no liabilities.  At the time of the loan, the real propertyhad an appraised value of $725,000.  Theloan is also guaranteed by Mr. Wiederhorn.  The Common Stock purchased with the proceeds of these loans doesnot serve as security for the loans. The loans are due on February 21, 2007, and bear interest at theprime rate, as published in the Wall Street Journal, which interest is added tothe principal annually.

 

Further information onthese loans to executives is included in our 2002 annual report on Form 10-Kand proxy statements for our 2003 and prior years Annual Meeting of Stockholders,and these executives’ employment agreements have been previously filed with theSEC.

 

**Loanto Executive Officer**

 

Prior to the passage ofthe Sarbanes-Oxley Act of 2002, we loaned Mr. Wiederhorn $2.0million.  This loan is full recourse toMr. Wiederhorn and his spouse and is secured by trust deeds on tworesidences located in Oregon.  The loanis due on August 1, 2007 and bears interest at 8.5% per annum, payablemonthly.  The Board of Directors (withMr. Wiederhorn abstaining) concluded that the terms of the loan were atleast as favorable to the Company as would be available in an arms length,third party transaction and approved the loan on July 9, 2002.

 

41

----

 

**Fog Cutter Long-TermVesting Trust**

 

In the fourth quarter of 2000, we establisheda trust which purchased 525,000 shares of the Company’s common stock from anunrelated shareholder.  Our contributionto the trust of approximately $1.3 million was included in compensation expensefor the year ended December 31, 2000. The trust was established for the benefit of our employees and directorsto raise their ownership in the Company, thereby strengthening the mutuality ofinterests between them and our shareholders. While these shares are held in trust, they will be voted ratably withballots cast by all other shareholders. In December 2002, using the retained earnings on trust assets, thetrust purchased an additional 100,000 shares of our stock in the open market.

 

Andrew Wiederhorn, David Dale-Johnson and DonH. Coleman are the trustees for the trust. Pursuant to the terms of the trust, the trustees will, from time totime, allocate the shares to our directors and employees.  A beneficiary shall not have any rights withrespect to any shares allocated unless and until the beneficiary completes fiveyears of continuous service with the Company, commencing with the date thebeneficiary is first allocated such shares. Upon the beneficiary’s completion of the vesting period, the trusteesshall promptly distribute the shares allocated to the beneficiary; provided,however, that the trustees may, in lieu of distributing the shares, make a cashpayment to the beneficiary equal to the fair market value of the sharesallocated as of the date immediately prior to the date of distribution ordistribute any combination of cash or shares, as determined by the trustees, intheir sole discretion.

 

As of September 30, 2003, the trusteeshad allocated 285,500 shares to our employees and directors.

 

**Business Use of PrivateAircraft**

 

During the nine months endedSeptember 30, 2003, we paid $270,000 to Peninsula Capital Partners LLC(“Peninsula Capital”), an entity owned by Mr. Wiederhorn, for theCompany’s business use of certain private aircraft.  The Board of Directors is aware of the relationship and approvedthe fees for the use of the aircraft. The fee paid is a reimbursement of costs to Peninsula Capital for theCompany’s use of the aircraft and is included in other expense on theaccompanying statements of operations.

 

**Item 6.****           Exhibitsand Reports on Form 8-K.**

 

(a)     Reportson Form 8-K:

 

A Form 8-K was filed with the Securities and ExchangeCommission by the Company on August 7, 2003 announcing the results ofoperations and financial condition for the three month and six month periodsending June 30, 2003.

 

A Form 8-K was filed with the Securities and Exchange Commission by theCompany on August 13, 2003, announcing the completion of an amended andrestated employment agreement with Andrew A. Wiederhorn, its chairman and chiefexecutive officer.  In addition, the Company announced that it had alsoentered into an employment agreement with its chief financial officer, R. ScottStevenson.

 

A Form 8-K was filed with the Securities and Exchange Commission by theCompany on August 22, 2003, announcing its investment in FatburgerHoldings, Inc.

 

(b) Exhibits

 

See Exhibit Index immediately following the signature page andcertifications.

 

42

----

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                               | FOG CUTTER  CAPITAL GROUP INC.                     |
|------------------------------------|----------------------------------------------------|
|                               |
|                               | By:  /s/ Andrew A. Wiederhorn                 |   |
|                               | Andrew A.  Wiederhorn                              |
|                               | Chairman and  Chief Executive Officer              |
|                               |                                               |
|                               |                                               |
|                               | By:  /s/ R. Scott Stevenson                   |   |
|                               | R. Scott  Stevenson                                |
|                               | Senior Vice  President and Chief Financial Officer |
|                               |                                               |
|                               |                                               |
| Date:  November 13, 2003 |
|                                    |                                                    |  |  |

 

43

----

 

**Exhibit Index**

 
| 2.1    |   | Purchase and  Sale Agreement between WREP Islands, Limited and The Aggmore Limited  Partnership, dated November 19, 2001, incorporated by reference to  Exhibit 2.1 to a Form 8-K dated November 19, 2001, as previously filed  with the SEC on December 4, 2001.                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 2.2    |   | Loan Option  Agreement, by and between the Registrant and entities listed therein, dated  January 1, 2002, incorporated by reference to Exhibit 2.1 to the Form  8-K dated March 6, 2002, as previously filed with the SEC on  March 8, 2002.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 2.3    |   | Property Option  Agreement, by and between the Registrant and the entities listed therein,  dated effective March 6, 2002, incorporated by reference to Exhibit 2.2  to the Form 8-K dated March 6, 2002, as previously filed with the SEC on  March 8, 2002.                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 2.4    |   | Medium Term  Participation Agreement by and among Fog Cap L.P. and participants listed  therein, dated March 6, 2002, incorporated by reference to Exhibit 2.3  to the Form 8-K dated March 6, 2002, as previously filed with the SEC on  March 8, 2002.                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 2.5    |   | Interim Finance and Stock Purchase Agreement, by and  between the entities listed therein and the Registrant, dated as of August  15, 2003.                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1    |   | Amended and  Restated Articles of Incorporation of the Registrant, incorporated by  reference to Exhibit 3.1 to the Form 10-Q for the period ended  September 30, 1999, as previously filed with the SEC on  November 22, 1999.                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 3.2    |   | Bylaws of  the Registrant, incorporated by reference to Exhibit 3.2 to Amendment No. 3  to the Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 4.1    |   | Common Stock  Certificate Specimen, incorporated by reference to Exhibit 4.1 to Amendment  No. 3 to the Registration Statement (Registration No. 333-39035) on Form  S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 4.2    |   | Form of  Registration Rights Agreement, incorporated by reference to Exhibit 10.8 to  Amendment No. 3 to the Registration Statement (Registration No. 333-39035) on  Form S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 4.3    |   | Form of  Stock Option Plan, incorporated by reference to Exhibit 10.3 to Amendment No.  3 to the Registration Statement (Registration No. 333-39035) on Form S-11, as  previously filed with the SEC on March 30, 1998.                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 4.4    |   | Long Term  Vesting Trust Agreement among the Registrant and Lawrence Mendelsohn, Andrew  Wiederhorn and David Egelhoff, dated October 1, 2000, incorporated by  reference to Exhibit 4.4 to the Form 10-K for the year ended  December 31, 2002, as previously filed with the SEC on March 3,  2003.                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 4.5    |   | Waiver,  Release, Delegation and Amendment to Stock Option and Voting Agreement among  Andrew A. Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany  Wiederhorn, and the Registrant, dated July 31, 2002, incorporated by  reference to Exhibit 2.1 to the Form 8-K dated August 8, 2002, as  previously filed with the SEC on August 15, 2002. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 4.6    |   | Summary of  Rights to Purchase Shares, incorporated by reference to Exhibit 99.1 to the  Form 8-K dated October 18, 2002, as previously filed with the SEC on  October 18, 2002.                                                                                                                                                                                |

 

44

----

 
| 4.7    |   | Rights  Agreement dated as of October 18, 2002 between the Registrant and The  Bank of New York, incorporated by reference to Exhibit 1 to Form 8-A, as  previously filed with the SEC on October 29, 2002.                                                                                                                                                                                                                                                                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1   |   | Deed of  Trust, by and among WREP Islands Limited, The Aggmore Limited Partnership and  the Registrant and Fog Cap L.P., dated November 19, 2001, incorporated  by reference to Exhibit 2.2 to the Form 8-K dated November 19, 2001, as  previously filed with the SEC on December 12, 2001.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2   |   | Stock Option  Agreement, by and among individuals listed on Schedule 4 thereto,  Aggmore Limited Partnership acting through its General Partner, Anglo Irish  Equity Limited and the Registrant, dated November 19, 2001, incorporated  by reference to Exhibit 2.3 to the Form 8-K dated November 19, 2001, as  previously filed with the SEC on December 4, 2001.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3   |   | Amended and  restated Employment Agreement between the Registrant and Andrew A.  Wiederhorn, incorporated by reference to Exhibit 10.3 to the Form 8-K dated  August 13, 2003, as previously filed with the SEC on August 13,  2003.                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4   |   | Amended  Employment Agreement dated October 9, 1999, and amended and restated  December 31, 2001, between the Registrant and Fog Cap L.P. and Robert G.  Rosen, incorporated by reference to Exhibit 10.12 to the Form 10-K for the  year ended December 31, 2001, as previously filed with the SEC on  March 22, 2002.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5   |   | Employment  Agreement between the Registrant and R. Scott Stevenson dated as of  June 30, 2003, incorporated by reference to Exhibit 10.5 to the Form 8-K  dated August 13, 2003, as previously filed with the SEC on  August 13, 2003.                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 11.1   |   | Computation  of Per Share Earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Certification  of Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Certification  of Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Certification  of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.2   |   | Certification  of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 99.1   |   | Letter,  dated October 28, 1998, from Steven Kapiloff to Andrew Wiederhorn,  incorporated by reference to Schedule 99.2 to the Form 10-Q for the  period ended September 30, 1998, as previously filed with the SEC on  November 23, 1998.                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 99.2   |   | Letter dated  November 12, 1999 from Arthur Andersen LLP, incorporated by reference to  Exhibit 99.1 to the Form 8-K dated November 12, 1999, as previously  filed with the SEC on November 15, 1999.                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 99.3   |   | Settlement  Agreement, dated as of December 10, 1999 by and between the Registrant,  on behalf of itself and all of its subsidiaries and affiliates, Andrew A.  Wiederhorn, and Lawrence A. Mendelsohn, and Wilshire Financial Services Group  Inc., on behalf of itself and all of its subsidiaries and affiliates, other  than First Bank of Beverly Hills, F.S.B., incorporated by reference to  Exhibit 99.1 to the Form 8-K dated December 13, 1999, as previously  filed with the SEC on December 17, 1999. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 99.4   |   | Jordan D.  Schnitzer Resignation Letter dated March 5, 2002, incorporated by  reference to Exhibit 1.1 to the Form 8-K dated March 5, 2002, as  previously filed with the SEC on March 7, 2002.                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 99.5   |   | Settlement  Agreement, incorporated by reference to Exhibit 99.1 to the Form 8-K dated  May 13, 2002, as previously filed with the SEC on May 14, 2002.                                                                                                                                                                                                                                                                                                                                                                |

 

45

----

 
| 99.6 |   | Lawrence A.  Mendelsohn Resignation Letter dated August 30, 2002, incorporated by  reference to Exhibit 1.1 to the Form 8-K dated August 30, 2002, as  previously filed with the SEC on September 3, 2002. |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

46

----