10-K 1 a05-5740_110k.htm 10-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

(Mark one)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2004

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)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.0001 per share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as quoted on NASDAQ on June 30, 2004 was $21,373,000.

As of February 28, 2005, there were 8,380,673 shares outstanding, not including options to purchase 1,528,527 shares of Fog Cutter Capital Group Inc.’s common stock and 3,376,400 treasury shares, par value $0.0001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

See Item 15 for a list of exhibits incorporated by reference into this report.

 




 

FOG CUTTER CAPITAL GROUP INC.

FORM 10-K

INDEX

PART I

 

 

 

 

Item 1.

 

Business

 

2

Item 2.

 

Properties

 

8

Item 3.

 

Legal Proceedings

 

8

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

11

PART II

 

 

 

 

Item 5.

 

Market for the Registrant’s Common Equity and Related Stockholder Matters

 

12

Item 6.

 

Selected Financial Data

 

14

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16

Item 7a.

 

Quantitative and Qualitative Disclosures about Market Risk

 

29

Item 8.

 

Financial Statements and Supplementary Data

 

30

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

31

Item 9A.

 

Controls and Procedures

 

31

PART III

 

 

 

 

Item 10.

 

Directors and Executive Officers of the Registrant

 

31

Item 11.

 

Executive Compensation

 

35

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management

 

43

Item 13.

 

Certain Relationships and Related Transactions

 

48

PART IV

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

50

Item 15.

 

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

 

51

 

 

 

 




 

FORWARD-LOOKING STATEMENTS

CERTAIN STATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY’S CONTROL) MAY BE IDENTIFIED BY REFERENCE TO A FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS “MAY,” “WILL,” “BELIEVE,” “EXPECT,” “ANTICIPATE,” “CONTINUE,” OR SIMILAR TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE RELATED TO THE ECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH THE COMPANY OPERATES, THE FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY, CONSUMER PREFERENCES, COMPETITIVE PRODUCTS AND PRICING, THE REAL ESTATE MARKET, FISCAL AND MONETARY POLICIES OF THE U.S. GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES, ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, CREDIT RISK MANAGEMENT, ASSET/LIABILITY MANAGEMENT AND LITIGATION AND GOVERNMENT INVESTIGATIONS. EXCEPT AS MAY BE REQUIRED BY LAW, THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.

1




PART I

ITEM 1.                BUSINESS

General

Fog Cutter Capital Group Inc. (“FCCG” or the “Company”) operates a restaurant business, conducts commercial mortgage lending and brokerage activities and makes real estate investments. The Company also seeks to acquire controlling interests in underperforming or undervalued operating businesses in which the Company’s management skills and financial structuring can create value.

The Company was originally incorporated as Wilshire Real Estate Investment Trust Inc. in the State of Maryland on October 24, 1997. However, we chose not to elect the tax status of a real estate investment trust (“REIT”) and on January 25, 2001, we changed our name to Fog Cutter Capital Group Inc. to better reflect the diversified nature of our business. Our capital stock is traded over the counter on the Pink Sheets under the ticker symbol “FCCG”.

Available Information

Our website is www.fccgi.com. We make our annual report on Form 10-K, as well as other reports filed with the Securities and Exchange Commission, available free of charge through our website as soon as reasonably practicable after they are filed. A copy of our annual report may also be obtained by writing to us at 1410 SW Jefferson Street, Portland, Oregon 97201, Attn: Investor Reporting.

Business Strategy

Our business strategy consists of developing, strengthening and expanding our restaurant and commercial real estate mortgage brokerage operations and continuing to identify and acquire real estate investments with favorable risk-adjusted returns. We also seek to identify and acquire controlling interests in other operating businesses in which we feel we can add value. Our operating segments consist of (i) restaurant operations conducted through our subsidiary, Fatburger Holdings, Inc. (“Fatburger”), (ii) commercial real estate mortgage brokerage activities conducted through our majority-owned subsidiary, George Elkins Mortgage Banking Company (“George Elkins”) and (iii) real estate, merchant banking and financing activities. The following is a summary of each of the operating segments:

Restaurant Operations

Our Fatburger subsidiary operates 26 hamburger restaurants and franchises 36 additional restaurants located primarily in California and Nevada. Known for their cook to order gourmet hamburgers, the 50’s-style restaurants also offer a variety of side orders and other sandwiches. The first Fatburger stand was opened in 1952 in Los Angeles when “fat” was used as slang for “good.” As of December 31, 2004, we owned approximately 71% of the voting control of Fatburger. Fatburger plans to significantly expand its franchising operations throughout the United States and has sold the rights to open 220 additional restaurants to approximately 20 individual franchisees. During the year ended December 31, 2004, franchise rights to open 31 individual Fatburger restaurants were sold. Ten new restaurants were opened during the period, including 3 company-owned locations. Royalty revenues were approximately $1.2 million for the year

Commercial Real Estate Mortgage Brokerage Operations

Our George Elkins subsidiary provided brokerage services related to the production of over $700 million in commercial real estate mortgages during 2004. George Elkins is headquartered in Los Angeles, with satellite offices located throughout the southern California area and in Las Vegas. The mortgage brokerage operation also manages a commercial loan servicing portfolio in excess of $700 million for various investors. We own 51% of the voting control of George Elkins.

2




Real Estate, Merchant Banking and Financing Operations

We invest in or finance real estate and other real estate-related or finance-related assets. Our merchant banking and financing operations focus on the acquisition of controlling interests in businesses in the process of restructuring. This can take the form of assisting in a management buy-out, refinancing corporate debt or acquiring the “non-core” assets of a business.

Principal Assets

We have set forth below information regarding our principal assets at December 31, 2004 and 2003:

 

 

December 31, 2004

 

December 31, 2003

 

 

 

Carrying Value

 

%

 

Carrying Value

 

%

 

 

 

(dollars in thousands)

 

Real estate, net

 

 

$

26,660

 

 

36.0

%

 

$

22,577

 

 

20.7

%

Cash and cash equivalents

 

 

11,948

 

 

16.2

 

 

19,607

 

 

18.0

 

Restaurant property, plant and equipment, net

 

 

6,228

 

 

8.4

 

 

5,897

 

 

5.4

 

Mortgage-backed securities(1)

 

 

9

 

 

 

 

35,510

 

 

32.6

 

Loans(2)

 

 

6,651

 

 

9.0

 

 

3,744

 

 

3.4

 

Investment in Bourne End Property Holdings Ltd

 

 

1,901

 

 

2.6

 

 

2,141

 

 

2.0

 

Intangible assets, net

 

 

5,401

 

 

7.3

 

 

5,640

 

 

5.2

 

Goodwill

 

 

7,063

 

 

9.6

 

 

7,300

 

 

6.7

 

Other assets

 

 

8,037

 

 

10.9

 

 

6,560

 

 

6.0

 

Total assets

 

 

$

73,898

 

 

100.0

%

 

$

108,976

 

 

100.0

%


(1)          Our mortgage-backed securities are secured primarily by residential mortgage loans.

(2)          Our loans are primarily secured by stock, commercial assets and real estate.

The following sections provide additional information on our principal assets and operations as of December 31, 2004.

Restaurant Operation

Fatburger.   We acquired the controlling interest in Fatburger in August 2003. Our investment consists of convertible preferred stock (the “Series A Preferred”) and redeemable convertible preferred stock (the “Series D Preferred”). As a result of our voting control, we began reporting the operations of Fatburger on a consolidated basis beginning August 15, 2003.

The Series A Preferred is convertible into a 50% ownership interest of the common stock of Fatburger on a fully diluted basis. The Company owns approximately 93% of the issued and outstanding Series A Preferred, and currently holds voting rights equal to 71% of the voting control of Fatburger. The Series A Preferred is not redeemable and does not pay dividends.

The Series D Preferred has a liquidation preference and is redeemable by Fatburger for $10.1 million plus accrued but unpaid dividends. Dividends accrue at a rate of 20% of the redemption value, compounded annually. The Series D Preferred does not have any voting rights but may be converted into common stock under certain circumstances. The Company owns all of the issued and outstanding Series D Preferred.

The accompanying consolidated statements of financial condition include net restaurant property, plant and equipment of $6.2 million relating to Fatburger operations as of December 31, 2004. Intangible assets, consisting primarily of Fatburger trademarks and franchises, totaled $5.4 million at year end. The acquisition of Fatburger also resulted in the recording of goodwill, which at December 31, 2004 totaled $7.1 million.

3




The accompanying consolidated statements of financial condition also include borrowings and notes payable of $6.3 million as of December 31, 2004 as a result of the consolidation of Fatburger. Of this amount, approximately $5.6 million is secured by substantially all of the assets of Fatburger, bears interest at rates currently ranging from 5.8% to 6.9% and requires monthly payments of principal and interest, primarily through 2014. The debt was refinanced in September 2004 and requires adherence to financial covenants and conditions with which management believes Fatburger was in compliance as of December 31, 2004. Borrowings and notes payable also include mandatory redeemable preferred stock (the “Series B Preferred”) with a carrying value of $0.7 million which was issued by Fatburger to a third party on August 15, 2003. The Series B Preferred is redeemable by Fatburger for $1.5 million at any time, but must be redeemed by August 15, 2009. Under certain circumstances, the Series B Preferred shareholders may convert their shares into the common stock of Fatburger in an amount equal to the redemption price based upon the fair value of the common stock at the time of conversion. The Series B Preferred is entitled to dividends from Fatburger equal to 2.5% per annum of the redemption price. The Series B Preferred does not have voting rights.

Commercial Real Estate Mortgage Brokerage Operation

George Elkins.   We own a 51% interest in George Elkins and began reporting their operations on a consolidated basis in May 2002. George Elkins provided brokerage services related to the production of over $700 million in commercial real estate loans during 2004 and currently acts as the loan servicer for a portfolio of $700 million in commercial real estate loans. Since George Elkins has a service based operation, there are no material assets or liabilities relating to the consolidation of that segment in the accompanying consolidated statements of financial condition.

Real Estate, Merchant Banking and Financing Operation

Real Estate

We invest, both directly and indirectly, in commercial and residential real estate. The following table sets forth information regarding our direct investments in real estate at December 31, 2004:

Date
Acquired

 

 

 

Name of Property

 

Location

 

Year Built/
Renovated

 

Net
Leaseable
Sq. Ft.

 

Approximate
Percentage
Leased at
December 31,
2004

 

Net Book Value

 

10/2002

 

50 Freestanding Retail Properties

 

Various U.S.

 

Various

 

 

225,000

 

 

 

81

%

 

 

$

19,074,000

 

 

4/1998

 

Eugene Warehouse

 

Eugene, OR

 

Unknown

 

 

84,912

 

 

 

50

%

 

 

1,554,000

 

 

6/2004

 

Barcelona Apartments

 

Spain

 

Unknown

 

 

17,100

 

 

 

100

%

 

 

4,585,000

 

 

4/1998

 

Wilsonville-Land

 

Wilsonville, OR

 

N/A

 

 

474,804

 

 

 

N/A

 

 

 

1,447,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

26,660,000

 

 


N/A—Not applicable

The following is a brief description of each of the properties set forth in the above table:

Freestanding Retail Properties.   We own directly, or through capital leases, 50 freestanding retail buildings located throughout the United States. The buildings are approximately 4,500 square feet each and were originally developed during the 1970’s and 1980’s. The buildings are leased to a variety of tenants including convenience stores, video rental outlets, shoe stores and other small businesses. As of December 31, 2004, 8 of the buildings were vacant. We also control 44 similar retail locations through operating leases.

During 2004, we sold eight similar properties that had been owned in the same portfolio for $3.7 million. Subsequent to December 31, 2004, we sold two additional stand-alone retail locations in separate

4




transactions for an aggregate sales price of $1.2 million in cash. We currently are under contract to sell three additional free-standing retail locations for a combined sales price of $1.3 million.

Eugene Warehouse,90005 Prairie Road, Eugene, Oregon.   This building is an 84,000-square-foot warehouse located on 4.5 acres with access to Interstate Route 5 via Belt Line Road and to the Eugene-Springfield metropolitan and Gateway areas. The property is within the West Eugene enterprise zone. This property is being marketed for lease or sale.

Barcelona Apartments.   This investment consists of two apartment buildings, consisting of 20 residential units and 4 retail shops located in Barcelona, Spain. We are converting the units to condominiums and preparing the individual units for sale.

Wilsonville Land.   This 10.9-acre parcel of undeveloped land is located in the city of Wilsonville, Oregon, and is being held for future development or sale.

Indebtedness.   When it is beneficial to do so, our general strategy is to leverage our real estate investments by incurring borrowings secured by these investments. Set forth below is information regarding our indebtedness relating to our real estate as of December 31, 2004.

Property

 

 

 

Principal
Amount

 

Interest Rate

 

Approximate
Maturity

 

Amortization

 

Annual
Payments

 

Freestanding Retail Properties

 

$

11,985,000

 

 

8.5

%

 

 

1/2018

 

 

 

30 Years

 

 

$

1,539,000

 

(subject to capital leases)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barcelona Apartments

 

$

1,636,000

 

 

4.0

%

 

 

06/2029

 

 

 

N/A

 

 

$

65,000

 

 

The Wilsonville and Eugene properties are not currently subject to indebtedness.

Loans

Our loans are primarily secured by stock, commercial assets and real estate. Our portfolio consists primarily of five loans with a total outstanding principal balance of $12.0 million. However, as a result of purchase discounts and other deferred income, the carrying value of these loans is $6.7 million. One of the loans, with a carrying value of $1.6 million is secured by substantially all of the common stock and assets of a corporation that develops and manufactures eyeglass lens production machinery. One additional loan with a carrying value of $1.1 million is secured by the stock of a private corporation that has developed and is marketing a software application. The remaining loans are secured by commercial or residential real estate. As of December 31, 2004, two of the Company’s loans with a carrying value totaling $2.2 million had been restructured to provide additional time for repayment by the borrowers in exchange for various extension fees or other new terms. As a result, these loans were considered impaired for accounting purposes and were on non-accrual status. However, no impairment reserves were required on these impaired loans due to management’s expectation that the carrying amounts will be collected.

All of the loans mature in 2005. Based upon our carrying value, the effective aggregate interest rate on these loans at December 31, 2004 was approximately 8.0%. The effective interest rate is net of the effect of the two impaired loans which are on non-accrual status, but does not reflect the effect of points and fees collected.

Other Subsidiaries and Investments

We also invest in other finance related opportunities, including the debt or equity of corporations in the process of restructuring their operations. We have acquired the following subsidiaries and made the following investments:

5




Bourne End.   In December 2000, we organized and led a group of investors to purchase all of the outstanding capital stock of Bourne End Properties Plc (“Bourne End”), a specialist investor in retail property. BEP Acquisitions was incorporated in Jersey, Channel Islands for the purpose of acquiring Bourne End. BEP Acquisitions is a wholly-owned subsidiary of BEP Property Holdings Limited (“BEP”), which is 26% owned by us, 71% owned by Merrill Lynch (Jersey) Holdings Limited (a subsidiary of Merrill Lynch & Co., Inc.) and 3% owned by the asset manager, Greenbau Estuary Limited.

At the time of the acquisition, Bourne End had approximately GBP 169.6 million of assets and GBP 123.1 million of debt. The real estate assets consisted of 1.7 million square feet in fifteen shopping centers located in the United Kingdom. Bourne End has sold fourteen of these properties since the acquisition, including one sale during 2004. The sales are consistent with the investor group’s strategy to reposition each of the centers with the ultimate goal of reselling the properties.

V Model Management.   As of December 31, 2004, we have invested approximately $0.6 million in a debt and equity financing package for V Model Management, a French modeling agency (“V Model”). Headquartered in Paris, V Model represents and promotes models for the fashion industry. Currently, V Model represents approximately 60 male and 60 female models. Our investment included the acquisition of 51% of the outstanding common stock of V Model. As a result of our voting control, we began reporting the operations of V Model on a consolidated basis beginning November 20, 2003.

Mortgage-Backed Securities.   Mortgage-backed securities are interests in pools of mortgages that have been securitized and are usually issued in multiple classes ranging from the most senior to the most subordinate class. Prior to 2004, investments in mortgage-backed securities were a significant part of our business. However, during 2002 through 2004, we took advantage of market opportunities and sold nearly all of our mortgage-backed securities at significant gains. As a result, at December 31, 2004, we only had one remaining security with a carrying value of less than $10,000.

Funding Sources

In order to maximize the return on our investments, we generally seek to fund acquisitions with third-party debt and equity financing so that our invested capital represents a relatively small percentage of the purchase price. Funding sources for real property assets generally involve capital leases or longer-term traditional mortgage financing with banks and other financial institutions. Our investments in corporate restructuring opportunities are often made without third-party leverage. The principal sources for funding mortgage-backed securities have historically been repurchase agreements with major investment banks. The following table sets forth information relating to our borrowings and other funding sources at December 31, 2004 and 2003.

 

 

At December 31,

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

Borrowings and Notes payable:

 

 

 

 

 

Repurchase agreements

 

$

 

$

25,318

 

Notes payable and other Fatburger debt

 

6,341

 

7,804

 

Other notes payable

 

1,636

 

 

Total borrowings

 

7,977

 

33,122

 

Obligations under capital leases

 

12,401

 

12,942

 

Total borrowings and other funding sources

 

$

20,378

 

$

46,064

 

 

6




The following table sets forth certain information related to the Company’s borrowings. During the reported periods, borrowings were comprised of repurchase agreements, notes payable and other Fatburger debt, mortgage debt on real estate and obligations under capital leases. Averages are determined by utilizing month-end balances.

 

 

December 31,

 

 

 

2004

 

2003

 

 

 

(dollars in thousands)

 

Average amount outstanding during the year

 

$

28,620

 

$

50,584

 

Maximum month-end balance outstanding during the year

 

$

45,312

 

$

54,967

 

Weighted average rate:

 

 

 

 

 

During the year

 

6.7

%

4.4

%

At end of year

 

8.6

%

4.7

%

 

Asset Quality

Real Estate.   Our real estate investments are carried at the lower of historical cost (net of depreciation) or estimated market value. Our estimate of market value is based upon comparable sales information for similar properties.

Loans.   Our loans are secured by real estate, commercial assets and corporate stock. Our evaluation of the quality of our loans is based upon the underlying value of the collateral. We also give consideration to the credit performance of these loans.

Employees

As of December 31, 2004, we had approximately 599 employees, which included approximately 28 employees of George Elkins and 560 employees of Fatburger.

Intellectual Property

We believe our trademarks and service marks have significant value and are important to our marketing efforts. To protect our proprietary rights, we rely primarily on a combination of copyright, trade secret and trademark laws, confidentiality agreements with employees and third parties, and protective contractual provisions such as those contained in license agreements with consultants, vendors and customers, although we have not signed these agreements in every case. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. Other parties may breach confidentiality agreements and other protective contracts we have entered into, and we may not become aware of, or have adequate remedies in the event of, any breach. Our policy is to pursue registration of our marks whenever possible and to oppose vigorously any infringement of these marks.

“Fatburger” is a registered trademark in the United States and in a number of international jurisdictions. All other trademarks or service marks appearing in this report are trademarks or service marks of the respective companies that use them. We pursue the registration of some trademarks and service marks in the United States and in other countries, but we have not secured registration of all our marks. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and effective copyright, trademark and trade secret protection may not be available in other jurisdictions. We license trademark rights to third parties through our franchise agreements. In the event that a licensee does not abide by compliance and quality control guidelines with respect to the licensed trademark rights or take actions that fail to adequately protect these marks, the value of these rights and our use of them in our business may be negatively impacted.

7




Competition

Restaurant Operations.   The restaurant industry, particularly the fast food segment, is highly competitive and there are numerous well-established competitors possessing substantially greater financial, marketing, personnel and other resources than the company. In addition, the fast food industry is characterized by the frequent introduction of new products, accompanied by substantial promotional campaigns. In recent years, numerous companies in the fast food industry have introduced products positioned to capitalize on growing consumer preference for food products which are, or are perceived to be, healthful, nutritious, low in calories and low in fat content. It can be expected that the company will be subject to competition from companies whose products or marketing strategies address these consumer preferences. In addition, the market for suitable restaurant locations is highly competitive in that fast food companies, major restaurant companies and non-food companies compete for prime real estate sites.

Commercial Real Estate Mortgage Brokerage Operations.   The mortgage brokerage industry is also highly competitive. There are a number of similar brokerage firms and direct lenders within the markets that we service which are competing for loan production. We rely on our relationships with lenders and borrowers to generate brokerage opportunities, but we are subject to competition relating to interest rates and underwriting standards being offered in the marketplace.

ITEM 2.                PROPERTIES

Our corporate headquarters are located in Portland, Oregon, where we lease approximately 5,000 square feet of office space under a lease expiring in December 2009. We also lease executive offices in London, England. Fatburger leases approximately 6,600 square feet of corporate office space in Santa Monica, California under a lease that will expire in July 2007. George Elkins leases approximately 6,800 square feet of office space in Los Angeles, California under a lease that will expire in June 2005.

Fatburger operates 26 restaurant locations in California and Nevada. Two of the restaurant sites in Nevada are operated from properties owned by Fatburger. The remainder of the restaurant locations are leased.

ITEM 3.                LEGAL PROCEEDINGS

Capital Consultants LLC

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

In August 2002, Mr. Mendelsohn resigned as President and Director of the Company. In November 2003, Mr. Mendelsohn entered into an agreement with the USAODO pursuant to which he pled guilty to filing a false 1998 personal tax return and agreed to cooperate in the CCL Investigation.

8




On June 3, 2004 the Company announced that Chief Executive Officer and Chairman of the Board Andrew Wiederhorn had entered into a settlement with the USAODO regarding its investigation into CCL (the “Settlement”) and would take a leave of absence from his corporate positions at the Company.

Under the Settlement terms, Mr. Wiederhorn pled guilty on June 3, 2004 to two federal counts and was sentenced to 18 months incarceration and fined $2.0 million. The first count, a violation of an ERISA provision, involved a federal law that required no criminal intent and for which his reliance on the advice of counsel was not a defense. The second count related to a violation involving a deduction on a personal tax return. The deduction was structured and approved by Mr. Wiederhorn’s tax advisors and did not reduce Mr. Wiederhorn’s tax liability or reduce the government’s tax collections. The charges to which Mr. Wiederhorn has pled guilty pursuant to the Settlement are not based upon any acts or omission involving the Company or Mr. Wiederhorn in his capacity as an officer or director of the Company.

In entering into Mr. Wiederhorn’s leave of absence agreement, the Company’s Board of Directors considered the nature of the statutes to which Mr. Wiederhorn pled and the fact that he relied on the advice of expert legal counsel and a national accounting firm. The Board also believed it was important to assure Mr. Wiederhorn’s return to active involvement with the Company because of his expertise and knowledge and to preserve a significant business relationship and the value of the Company’s investments.

Under the terms of the leave of absence agreement, Mr. Wiederhorn will continue to receive his regular salary and bonus pursuant to and as set forth in his employment agreement. In addition, in consideration of Mr. Wiederhorn’s good will, cooperation, and continuing assistance, and in recognition of Mr. Wiederhorn’s past service to the Company, to help avoid litigation and for the other reasons stated in the agreement, the Company made a leave of absence payment to Mr. Wiederhorn in the amount of $2.0 million on June 2, 2004.

To address the management transition, the Company appointed Donald Berchtold as Co-Chief Executive Officer in June 2004. Mr. Berchtold has been Senior Vice President of Administration at the Company since October 1999 and became a director in March 2004. He currently sits on the board of directors of Fatburger and has more than 25 years experience in the restaurant business. Mr. Berchtold is the father-in-law of Mr. Wiederhorn. In order to further assist the transition, David Dale-Johnson and Don Coleman serve as co-Chairmen of the Board. Both Mr. Dale-Johnson and Mr. Coleman have been directors of the Company since October 2001. Mr. Dale-Johnson was the Director of the Real Estate program at USC’s Marshall School of Business and has significant expertise in real estate, economics and finance. Mr. Coleman has held prominent executive operating positions in several major companies and is currently the Chief Operating Officer of Eagle Telephonic Inc. The Company also appointed Mr. Dale-Johnson as Chief Investment Officer, adding a new full-time position to the Company’s management team.

Mr. Wiederhorn began his leave of absence on August 2, 2004 and is expected to remain in that status until October 2, 2005. On August 13, 2004, the Board of Directors adopted a resolution changing the role of Andrew Wiederhorn from Co-Chief Executive to Chief Strategic Officer during the leave of absence period. The Board determined that during the leave of absence period, Mr. Wiederhorn would be in a better position to develop strategies that would be of future benefit to the Company, while his current status would significantly limit his ability to perform the full functions of Co-Chief Executive Officer. All other provisions of the Leave of Absence Agreement and employment agreement with Mr. Wiederhorn remain in force. On August 13, 2004, Donald J. Berchtold became sole Chief Executive Officer.

Mr. Wiederhorn and Mr. Mendelsohn, pursuant to the terms of their respective employment agreements, may have been entitled to indemnity from the Company for litigation expenses and personal losses in connection with the CCL investigations and any related litigation. Messrs. Wiederhorn and Mendelsohn had notified the Company that, although they believed they were entitled to primary indemnification from other sources, they were reserving their rights to seek indemnity from the Company. The Company did not agree to any indemnity requests. Mr. Wiederhorn released the Company from any

9




and all claims he may have had relating to the CCL matter as partial consideration for the leave of absence agreement in June 2004. The USAODO has settled the CCL matter as it relates to both Mr. Wiederhorn and Mr. Mendelsohn. As a result, the Company believes that the contingencies relating to the potential indemnification of these officers or former officers relating to CCL have now been resolved.

Nasdaq Delisting

Effective October 14, 2004, the Company’s Common Stock began trading in the over-the-counter market on the OTC “pink sheets.” Prior to that, the Company’s Common Stock was quoted on the Nasdaq National Market. On July 20, 2004, the Company was notified by Nasdaq of a staff determination to delist the Company’s Common Stock effective July 29, 2004. The Company challenged the staff determination and requested an oral hearing by a Listing Qualifications Panel to review the staff’s conclusions. A hearing was held on September 9, 2004, and, on October 12, 2004, the Company was notified by Nasdaq that the Listing Qualifications Panel upheld the staff determination and the Company’s Common Stock was delisted from the Nasdaq National Market on October 14, 2004. The Company requested a review of the Listing Qualifications Panel’s decision by Nasdaq’s Listing and Hearing Review Council. On February 16, 2005, the Company received notice that the Nasdaq Listing and Hearing Review Council had upheld the Panel’s decision. The Company is considering whether to continue the appeal process. There can be no assurance that an appeal will be successful.

Derivative Action

On July 6, 2004, Jeff Allen McCoon, derivatively on behalf of the Company, filed a lawsuit in the Circuit Court for the State of Oregon (Multnomah County Case No. 0407-06900) which named the Company and all of its directors as defendants. The lawsuit alleges that members of the Company’s Board of Directors breached their duties to the Company by entering into the leave of absence agreement with Andrew Wiederhorn. The lawsuit generally seeks restitution of payments made under the leave of absence agreement plus attorney fees and costs. The individual defendants have indemnity agreements with the Company and have asserted the right to indemnification from the Company under those indemnity agreements. This case is in the very early pleading stages and motions are pending against the complaint. The Company may incur expenses under the indemnity agreements and also may derive benefits if the plaintiff’s claims are successful. At this stage of the case, it is too early to predict the outcome with any certainty. The complaint is not specific as to the amount of damages it is seeking against the individual defendants, but it appears to seek at least the return of $2 million paid to Mr. Wiederhorn under the Leave of Absence Agreement.

Strouds Acquisition Corporation

On October 6, 2003, the Official Committee of Unsecured Creditors of Strouds Acquisition Corporation (“Strouds”) filed a lawsuit in the United States Bankruptcy Court (LA 03-23620-ER) which named the Company, among others, as a defendant. The lawsuit was amended on November 10, 2003 and limits the complaint against the Company solely in its capacity as collateral agent for certain secured creditors of Strouds Acquisition Corporation. The lawsuit, as it pertains to the Company, sought reimbursement of the proceeds from approximately $3.0 million in funds received in October 2003, which the Company was holding as collateral agent for other secured creditors. These funds were not included in the assets of the Company, but were being held in trust. On July 1, 2004, the lawsuit was settled and the Company distributed the trust funds, net of legal reimbursements of $0.3 million, in accordance with the settlement agreement. The Company received a general release from the parties and considers the matter closed.

10




George Elkins

On August 11, 2004 the Company received a notice from the minority shareholders of George Elkins informing the Company that the minority shareholders believe that a Change in Control Transaction (as defined in the Operating Agreement) has occurred as a result of the leave of absence of Mr. Wiederhorn. The notice also indicates that unless the Change in Control Transaction is corrected within 120 days, the minority shareholders intend to exercise their rights to purchase the interests held by the Company in accordance with the formula outlined in the Operating Agreement.

The Company disputes the claim that a Change in Control Transaction has occurred as a result of the leave of absence agreement with Mr. Wiederhorn. The Company believes that the market value of its investment is greater than the amount of the buyback formula and intends to vigorously defend against these claims. However, in the event that the Company was unsuccessful in defending this position, an analysis of the economic effect of the buyback formula indicates that the Company would not incur a loss on the transaction. As a result, no reserves are required due to the receipt of the notice.

The 120 day notice period has lapsed and the minority shareholders have not sought to exercise their rights to purchase the interests held by the Company. There can be no assurance that the minority shareholders will not seek to exercise these rights in the future.

Other Legal Proceedings

The Company is involved in various other legal proceedings occurring in the ordinary course of business which the Company believes will not have a material adverse effect on the consolidated financial condition or operations of the Company.

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

On December 8, 2004, at the annual stockholders’ meeting, the Company’s stockholders elected seven persons to the Board of Directors and ratified the selection of UHY LLP as the Company’s auditors for the year ending December 31, 2004.

In connection with the election of directors, the shares of common stock present in person or by proxy were voted as follows:

 

 

For

 

Withheld

 

Andrew A. Wiederhorn

 

8,192,077

 

177,471

 

Donald J. Berchtold

 

8,226,998

 

142,550

 

Don H. Coleman

 

8,230,103

 

139,445

 

Christopher DeWolfe

 

8,231,203

 

138,345

 

David Dale-Johnson

 

8,229,818

 

139,730

 

K. Kenneth Kotler

 

8,231,853

 

137,695

 

M. Ray Mathis

 

8,229,753

 

139,795

 

 

In connection with the proposal to approve the ratification of the selection of UHY LLP, independent registered public accounting firm, as the Company’s auditors for the year ending December 31, 2004, 8,287,350 shares were voted in favor of the proposal, 59,131 shares were voted against the proposal and there were 23,067 abstentions.

11




PART II

ITEM 5.                MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

From April 6, 1998 through October 13, 2004, our common stock, par value $0.0001 per share (the “Common Stock”) was quoted on the Nasdaq National Market. Effective October 14, 2004, the Company’s Common Stock began trading in the over-the-counter market on the OTC “pink sheets.” The Common Stock is quoted under the symbol “FCCG.” The approximate number of holders of record (not beneficial shareholders, as most shares are held in brokerage name) of our Common Stock at February 28, 2005, was 41.

The following table sets forth the high and low sales prices for the Common Stock as quoted on Nasdaq (or the OTC “pink sheets” after October 13, 2004) for the periods indicated.

2004

 

 

 

High

 

Low

 

First quarter

 

$

6.600

 

$

5.231

 

Second quarter

 

$

5.950

 

$

3.900

 

Third quarter

 

$

4.450

 

$

3.200

 

Fourth quarter

 

$

4.000

 

$

2.500

 

 

2003

 

 

 

High

 

Low

 

First quarter

 

$

5.390

 

$

3.660

 

Second quarter

 

$

6.750

 

$

4.700

 

Third quarter

 

$

5.790

 

$

4.900

 

Fourth quarter

 

$

5.619

 

$

5.020

 

 

During the year ended December 31, 2004, we declared four quarterly cash distributions of $0.13 per share, totaling $0.52 per share ($4.4 million). During the year ended December 31, 2003, we declared four quarterly cash dividends of $0.13 per share, totaling $0.52 per share ($4.5 million). On January 26, 2005, the Board of Directors declared a $0.13 per share dividend for the first quarter of 2005. The dividend was paid on February 10, 2005 to shareholders of record on February 4, 2005. We may declare and pay new quarterly dividends on our common stock in 2005, subject to our financial condition, results of operations, capital requirements and other factors deemed relevant by the Board of Directors.

On October 18, 2002, we adopted a stockholder rights plan (the “Plan”) and declared a distribution of one right (a “Right”) to purchase one-tenth of a share of the Company’s common stock for each outstanding share of common stock, payable to the stockholders of record on October 28, 2002. The Board of Directors authorized and directed the issuance of one Right with respect to each share of common stock issued thereafter until the Distribution Date. The Plan was adopted as a means of protecting the potential tax benefits of our net operating loss carry forward (“NOL”). Under Federal tax rules, the NOL will be limited if we experience a significant change in ownership. The Plan dilutes any new 5% holder, or any existing 5% holder that increases its stake by 1% or more, thereby preserving the Company’s NOL. If, subject to certain exceptions, any person or group commences a tender or exchange offer to purchase 5 percent or more of the Company’s Common Stock, each right not owned by such person or group will entitle its holder to purchase, at the right’s current exercise price, shares of common stock having a value of twice the right’s current exercise price. If, subject to certain exceptions, any person or group acquires 5% or more, or any existing 5% holder increases its stake by 1% or more, of our common stock (an “Acquiring Person”), each right not owned by such person or group will automatically be exercised and entitle its holder to receive one share of common stock per right (or a lesser ratio as determined by the Board of Directors, if we do not have sufficient authorized and unreserved shares) in lieu of paying the purchase price. This right to purchase common stock at a discount will not be triggered by a person or group’s

12




acquisition of 5% or more of the common stock pursuant to a tender or exchange offer (or other securities offering by us) which is for all outstanding shares at a price and on terms that the Board of Directors determines (prior to acquisition) to be adequate and in the best interests of the Company and our stockholders. The Board of Directors also has the discretion in certain circumstances to waive the triggering of such right in the event that an acquisition will not adversely effect the Company’s NOL carryforward.

In addition, if, subject to certain exceptions, we are acquired by another corporation in a merger or consolidation or more than 50 percent of our assets or earning power is acquired, each right not owned by the acquirer or affiliates will entitle its holder to purchase, at the right’s current exercise price, common stock of the acquirer having a value of twice the right’s current exercise price. This right will not be triggered, however, if the acquisition is by a person or group which acquired our common stock at a price and on terms that the Board of Directors determines (prior to acquisition) to be adequate and in the best interests of the Company and its stockholders.

The rights will expire in the year 2012. We may redeem all of the rights, at the option of the Board of Directors, at a redemption price of $.001 per right or by the issuance of shares of common stock then equivalent to $.001 per right, at any time prior to any person becoming an Acquiring Person.

On February 17, 2004, the Board of Directors of the Company unanimously resolved, by written resolution effective February 17, 2004, that the Company may purchase shares of its common stock from its stockholders from time to time, in open market purchases or negotiated transactions provided that the Company shall only purchase such shares in accordance with applicable law, including United States federal securities laws, including the safe harbor provisions of Rule 10b-18 of the Securities Act of 1934, as amended.

Effective March 1, 2004, the Company made an automatic dividend reinvestment plan available to shareholders through The Bank of New York. The Plan enables shareholders to reinvest their quarterly cash dividends and make supplemental cash contributions up to $10,000 per month, with a maximum amount of $60,000 per year, toward the purchase of the Company’s common stock. Participation in the plan is voluntary.

13




ITEM 6.                SELECTED FINANCIAL DATA

The following table sets forth selected historical, financial and operating data on a consolidated basis at December 31, 2004, 2003, 2002, 2001 and 2000 and for the years then ended. The information contained in this table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements, including the notes thereto, included elsewhere in this report.

 

 

2004

 

2003

 

2002

 

2001

 

2000

 

 

 

(dollars in thousands)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income:

 

 

 

 

 

 

 

 

 

 

 

Loans(1)

 

$

2,088

 

$

1,466

 

$

557

 

$

2,394

 

$

3,900

 

Securities

 

617

 

2,422

 

5,277

 

7,328

 

10,718

 

Other investments

 

110

 

173

 

264

 

226

 

460

 

Total interest income

 

2,815

 

4,061

 

6,098

 

9,948

 

15,078

 

Interest expense

 

112

 

669

 

1,906

 

4,548

 

7,704

 

Net interest income before loan losses

 

2,703

 

3,392

 

4,192

 

5,400

 

7,374

 

Recovery of (provision for) loan losses

 

 

 

 

 

555

 

Net interest income after loan losses

 

2,703

 

3,392

 

4,192

 

5,400

 

7,929

 

Real Estate Operations:

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

4,108

 

4,026

 

927

 

2,197

 

4,870

 

Operating expense

 

(1,760

)

(1,930

)

(669

)

(418

)

(601

)

Interest expense

 

(1,120

)

(1,335

)

(333

)

(1,244

)

(2,742

)

Gain on sale of real estate

 

1,703

 

279

 

49

 

1,142

 

5,404

 

Depreciation

 

(646

)

(616

)

(158

)

(456

)

(993

)

Total real estate operations

 

2,285

 

424

 

(184

)

1,221

 

5,938

 

Restaurant Operations:

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

21,889

 

7,502

 

 

 

 

Cost of goods sold

 

(13,042

)

(4,556

)

 

 

 

Franchise and royalty fees

 

1,431

 

463

 

 

 

 

General and administrative costs

 

(10,809

)

(3,514

)

 

 

 

Interest expense

 

(661

)

(319

)

 

 

 

Depreciation and amortization

 

(1,498

)

(494

)

 

 

 

Total restaurant operations

 

(2,690

)

(918

)

 

 

 

Other Operating Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

Loan origination income

 

5,795

 

5,408

 

2,315

 

 

 

Market valuation losses and impairments

 

 

(762

)

(400

)

(11,422

)

(22,257

)

Provision for litigation claims

 

 

 

 

(2,000

)

(225

)

Equity in earnings (losses) of equity investees

 

4,419

 

4,934

 

1,100

 

(1,335

)

 

Gain on sale of loans and securities

 

2,099

 

12,520

 

28,045

 

1,001

 

5,356

 

Other income (loss), net

 

4,457

 

1,466

 

(1,037

)

(758

)

29

 

Total other operating income (loss)

 

16,770

 

23,566

 

30,023

 

(14,514

)

(17,097

)

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

10,119

 

11,781

 

8,615

 

5,147

 

7,869

 

Leave of absence expense

 

4,750

 

 

 

 

 

Professional fees

 

2,535

 

1,925

 

2,158

 

1,365

 

1,973

 

Other

 

5,596

 

3,704

 

3,031

 

2,520

 

2,470

 

Total operating expenses

 

23,000

 

17,410

 

13,804

 

9,032

 

12,312

 

Net income (loss) before provision for income taxes and cumulative effect of a change in accounting principle

 

(3,932

)

9,054

 

20,227

 

(16,925

)

(15,542

)

Provision for income taxes

 

 

3,655

 

3,522

 

 

 

Net income (loss) before cumulative effect of a change in accounting principle

 

(3,932

)

5,399

 

16,705

 

(16,925

)

(15,542

)

Cumulative effect of a change in accounting principle

 

 

 

 

(1,021

)

 

Net income (loss)

 

$

(3,932

)

$

5,399

 

$

16,705

 

$

(17,946

)

$

(15,542

)


(1)          Includes interest on loans to senior executives.

14




 

 

 

Year Ended December 31,

 

 

 

2004

 

2003

 

2002

 

2001

 

2000

 

Basic net income (loss) per share before cumulative effect of a change in accounting principle

 

$

(0.46

)

$

0.62

 

$

1.69

 

$

(1.61

)

$

(1.48

)

Cumulative effect per share of change in accounting principle

 

 

 

 

(.10

)

 

Basic net income (loss) per share

 

$

(0.46

)

$

0.62

 

$

1.69

 

$

(1.71

)

$

(1.48

)

Weighted average shares outstanding

 

8,462,950

 

8,651,500

 

9,905,900

 

10,507,413

 

10,507,413

 

Diluted net income (loss) per share before cumulative effect of a change in accounting principle

 

$

(0.46

)

$

0.62

 

$

1.66

 

$

(1.61

)

$

(1.48

)

Cumulative effect per share of change in accounting principle

 

 

 

 

(.10

)

 

Diluted net income (loss) per share

 

$

(0.46

)

$

0.62

 

$

1.66

 

$

(1.71

)

$

(1.48

)

Diluted weighted average shares outstanding

 

8,462,950

 

8,767,400

 

10,049,100

 

10,525,413

 

10,507,413

 

Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(8,937

)

$

(7,957

)

$

(8,081

)

$

22,316

 

$

(91

)

Net cash provided by (used in) investing activities

 

$

36,652

 

$

35,229

 

$

25,767

 

$

37,413

 

$

71,072

 

Net cash (used in) provided by financing activities

 

$

(35,384

)

$

(22,469

)

$

(9,994

)

$

(56,358

)

$

(73,270

)

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.52

 

$

0.52

 

$

0.52

 

$

0.39

 

$

 

 

 

 

At December 31,

 

 

 

2004

 

2003

 

2002

 

2001

 

2000

 

Total assets

 

$

73,898

 

$

108,976

 

$

110,586

 

$

82,057

 

$

150,304

 

Cash and cash equivalents

 

$

11,948

 

$

19,607

 

$

14,505

 

$

6,753

 

$

3,394

 

Securities available for sale, at estimated fair value 

 

$

9

 

$

35,510

 

$

59,317

 

$

51,783

 

$

74,731

 

Loans

 

$

6,651

 

$

3,744

 

$

2,245

 

$

4,819

 

$

30,404

 

Investments in real estate

 

$

26,660

 

$

22,577

 

$

21,498

 

$

4,471

 

$

24,767

 

Investments in WFSG and affiliates

 

$

 

$

 

$

 

$

5,893

 

$

5,593

 

Investments in Bourne End

 

$

1,901

 

$

2,141

 

$

5,579

 

$

5,195

 

$

6,719

 

Borrowings and notes payable

 

$

7,977

 

$

33,122

 

$

35,478

 

$

37,966

 

$

88,930

 

Obligations under capital leases

 

$

12,401

 

$

12,942

 

$

16,847

 

$

 

$

 

Total stockholders’ equity

 

$

34,307

 

$

45,381

 

$

44,207

 

$

38,799

 

$

55,651

 

 

Our net earnings during 2004, 2003 and 2002 have come primarily from the sale of mortgage-backed securities and from the sale of real estate by our Bourne End subsidiary. These assets have now become a less significant part of our balance sheet and material earnings from the sale of these assets are not expected to continue. We have reinvested a portion of the proceeds from the sale of these assets into the acquisition of Fatburger and we expect to continue to emphasize our restaurant operations and other business segments. Future earnings will depend upon the success of our existing operations, such as Fatburger and George Elkins, as well the redeployment of our cash.

15




ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company and notes thereto.

GENERAL

Our business strategy consists of developing, strengthening and expanding our restaurant and commercial real estate mortgage brokerage operations and continuing to identify and acquire real estate investments with favorable risk-adjusted returns. We also seek to identify and acquire controlling interests in other operating businesses in which we feel we can add value. We make acquisitions where our expertise in intensive asset management, credit analysis and financial structuring can create value and provide an appropriate risk-adjusted rate of return. We maintain a flexible approach with respect to the nature of our business, seeking to take advantage of opportunities as they arise or are developed.

Critical Accounting Policies

Accounting For Equity Investees

The equity method of accounting is used for investments in associated companies which are not unilaterally controlled by the Company and in which the Company’s interest is generally between 20% and 50% of the outstanding voting rights. The Company’s share of earnings or losses of associated companies in which at least 20% of the voting securities is owned, is included in the consolidated statement of operations.

Valuation

At December 31, 2004, our largest asset consisted of our portfolio of real estate. We value our real estate holdings either by independent appraisal or through internally generated analysis using comparable market data.

Sale Recognition

During 2004, we were involved in significant sales of mortgage-backed securities, real estate and other assets. Our accounting policy calls for the recognition of sales of financial instruments, including mortgage-backed securities and loans, only when we have irrevocably surrendered control over these assets. We do not retain any recourse or performance obligations with respect to our sales of assets. Our sales of financial instruments were cash sales, and the cash proceeds were not contingent upon any future event.

We recognize gain on sales of real estate under the full accrual method when (1) a sale is consummated, (2) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property, (3) any receivable from the buyer is not subject to future subordination and (4) the usual risks and rewards of ownership of the property have been transferred to the buyer. If any of these conditions are not met, our accounting policy requires that gain on sale be deferred until all of the conditions have been satisfied.

Fatburger Restaurant and Franchise Revenue

Revenue from the operation of Fatburger company-owned restaurants are recognized when sales occur.

Franchise fee revenue from the sale of individual Fatburger franchises is recognized only when all material services or conditions relating to the sales have been substantially performed or satisfied. The completion of training and the opening of a location by the franchisee constitute substantial performance on the part of Fatburger. Nonrefundable deposits collected in relation to the sale of franchises are

16




recorded as deferred franchise fees until the completion of training and the opening of the restaurant, at which time the franchise fee revenue is recognized.

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

Goodwill and Other Intangible Assets

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

We assess potential impairments to intangible assets at least annually, or when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of our acquired businesses, market conditions and other factors. Future events could cause us to conclude that impairment indicators exist and that goodwill or other intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have an adverse impact on our results of operations.

Operating Segments

Our operating segments consist of (i) restaurant operations conducted through our Fatburger subsidiary, (ii) commercial real estate mortgage brokerage activities conducted through our majority-owned subsidiary, George Elkins and (iii) real estate, merchant banking and financing activities. The following is a summary of each of the operating segments:

Restaurant Operations

Fatburger operates or franchises 62 hamburger restaurants located primarily in California and Nevada. In August 2003, we provided an investment and financing package for Fatburger which involved our acquisition of the entire class of the Series A-1 Preferred and the Series D Preferred stock of Fatburger. Currently, we own approximately 71% of the voting control of Fatburger. Fatburger has plans to open additional restaurants including franchises throughout the United States. Franchisees currently own and operate 36 of the Fatburger locations and Fatburger has agreements for approximately 220 new franchise locations.

Commercial Real Estate Mortgage Brokerage Operations

George Elkins provided brokerage services related to the production of over $700 million in commercial real estate mortgages during 2004. George Elkins is headquartered in Los Angeles, with satellite offices located throughout the southern California area and in Las Vegas. The mortgage brokerage operation also manages a commercial loan servicing portfolio in excess of $700 million for various investors. The Company earned mortgage servicing fees of $0.7 million during 2004, which is included in other income in the accompanying consolidated statements of operations.

Real Estate, Merchant Banking and Financing Operations

We invest in or finance real estate, mortgage-backed securities and other real estate-related or finance-related assets. Our merchant banking and financing operations focus on the acquisition of controlling interests in businesses in the process of restructuring. This can take the form of assisting in a management buy-out, refinancing corporate debt or acquiring the “non-core” assets of a business.

17




Segment data for the twelve months ended December 31, 2004, and 2003, 2002 are as follows (dollars in thousands):

 

 

Real Estate,

 

 

 

 

 

 

 

 

 

Merchant Banking and

 

Commercial Real Estate

 

 

 

 

 

 

Finance

 

Mortgage Brokerage

 

Restaurant

 

Total

 

 

 

Twelve months ended

 

Twelve months ended

 

Twelve months ended

 

Twelve months ended

 

 

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

 

2004

 

2003

 

2002

 

2004

 

2003

 

2002

 

2004

 

2003

 

  2002  

 

2004

 

2003

 

2002

 

Net Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

1,899

 

$

1,250

 

$

469

 

$

 

$

 

$

 

$

 

$

 

 

$

 

 

$

1,899

 

$

1,250

 

$

469

 

Securities

 

617

 

2,422

 

5,277

 

 

 

 

 

 

 

 

 

617

 

2,422

 

5,277

 

Loans to senior executives

 

189

 

216

 

88

 

 

 

 

 

 

 

 

 

189

 

216

 

88

 

Other investments

 

108

 

170

 

262

 

2

 

3

 

2

 

 

 

 

 

 

 

 

110

 

173

 

264

 

Total interest income

 

2,813

 

4,058

 

6,096

 

2

 

3

 

2

 

 

 

 

 

 

2,815

 

4,061

 

6,098

 

Interest expense

 

112

 

669

 

1,906

 

 

 

 

 

 

 

 

 

112

 

669

 

1,906

 

Net interest income

 

2,701

 

3,389

 

4,190

 

2

 

3

 

2

 

 

 

 

 

 

2,703

 

3,392

 

4,192

 

Real estate operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue

 

4,108

 

4,026

 

927

 

 

 

 

 

 

 

 

 

4,108

 

4,026

 

927

 

Operating expense

 

(1,760

)

(1,930

)

(669

)

 

 

 

 

 

 

 

 

(1,760

)

(1,930

)

(669

)

Gain on sale of real estate

 

1,703

 

279

 

49

 

 

 

 

 

 

 

 

 

1,703

 

279

 

49

 

Interest expense

 

(1,120

)

(1,335

)

(333

)

 

 

 

 

 

 

 

 

(1,120

)

(1,335

)

(333

)

Depreciation

 

(646

)

(616

)

(158

)

 

 

 

 

 

 

 

 

(646

)

(616

)

(158

)

Total real estate operations

 

2,285

 

424

 

(184

)

 

 

 

 

 

 

 

 

2,285

 

424

 

(184

)

Restaurant operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

21,889

 

7,502

 

 

 

 

21,889

 

7,502

 

 

Cost of goods sold

 

 

 

 

 

 

 

(13,042

)

(4,556

)

 

 

 

(13,042

)

(4,556

)

 

Franchise and royalty fees

 

 

 

 

 

 

 

1,431

 

463

 

 

 

 

1,431

 

463

 

 

General and administrative costs

 

 

 

 

 

 

 

(10,809

)

(3,514

)

 

 

 

(10,809

)

(3,514

)

 

Interest Expense

 

 

 

 

 

 

 

(661

)

(319

)

 

 

 

(661

)

(319

)

 

Depreciation and amortization

 

 

 

 

 

 

 

(1,498

)

(494

)

 

 

 

(1,498

)

(494

)

 

Total restaurant operations

 

 

 

 

 

 

 

(2,690

)

(918

)

 

 

 

(2,690

)

(918

)

 

Other operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market valuations and impairments

 

 

(762

)

(400

)

 

 

 

 

 

 

 

 

 

(762

)

(400

)

Gain on sale of prepaid servicing credit

 

1,530

 

 

 

 

 

 

 

 

 

 

 

1,530

 

 

 

Equity in earnings of equity investee

 

4,419

 

4,934

 

1,100

 

 

 

 

 

 

 

 

 

4,419

 

4,934

 

1,100

 

Gain on sale of loans and securities

 

2,099

 

12,520

 

28,045

 

 

 

 

 

 

 

 

 

2,099

 

12,520

 

28,045

 

Loan brokerage fees

 

 

 

 

5,795

 

5,408

 

2,315

 

 

 

 

 

 

5,795

 

5,408

 

2,315

 

Other income (loss), net

 

2,501

 

1,039

 

(1,424

)

426

 

427

 

387

 

 

 

 

 

 

2,927

 

1,466

 

(1,037

)

Total other operating income

 

10,549

 

17,731

 

27,321

 

6,221

 

5,835

 

2,702

 

 

 

 

 

 

16,770

 

23,566

 

30,023

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

4,924

 

6,932

 

6,273

 

5,195

 

4,849

 

2,342

 

 

 

 

 

 

10,119

 

11,781

 

8,615

 

Leave of absence expense

 

4,750

 

 

 

 

 

 

 

 

 

 

 

4,750

 

 

 

Professional fees

 

2,498

 

1,756

 

2,018

 

37

 

169

 

140

 

 

 

 

 

 

2,535

 

1,925

 

2,158

 

Fees paid to related parties

 

342

 

425

 

75

 

 

 

 

 

 

 

 

 

342

 

425

 

75

 

Other

 

4,341

 

2,381

 

2,469

 

913

 

898

 

487

 

 

 

 

 

 

5,254

 

3,279

 

2,956

 

Total operating expenses

 

16,855

 

11,494

 

10,835

 

6,145

 

5,916

 

2,969

 

 

 

 

 

 

23,000

 

17,410

 

13,804

 

Net income (loss) before provision for income taxes

 

(1,320

)

10,050

 

20,492

 

78

 

(78

)

(265

)

(2,690

)

(918

)

 

 

 

(3,932

)

9,054

 

20,227

 

Provision for income taxes

 

 

3,454

 

3,522

 

 

 

 

 

201

 

 

 

 

 

3,655

 

3,522

 

Net income (loss)

 

$

(1,320

)

$

6,596

 

$

16,970

 

$

78

 

$

(78

)

$

(265

)

$

(2,690

)

$

(1,119

)

 

$

 

 

$

(3,932

)

$

5,399

 

$

16,705

 

Segment assets

 

$

52,357

 

$

87,179

 

$

107,561

 

$

1,341

 

$

2,230

 

$

3,025

 

$

20,200

 

$

19,567

 

 

$

 

 

$

73,898

 

$

108,976

 

$

110,586

 

 

18

 




RESULTS OF OPERATIONS—2004 Compared to 2003

NET INCOME.   Our net loss for the year ended December 31, 2004 amounted to $3.9 million, or $0.46 per share, compared to net income of $5.4 million, or $0.62 per share for the year ended December 31, 2003. The net loss for the 2004 period is primarily attributable to operating expenses of $23.0 million and losses from restaurant operations of $2.7 million, partially offset by net interest income of $2.7 million, gain on sale of loans and securities of $2.1 million, loan brokerage fees of $5.8 million, equity in earnings of equity investees of $4.4 million, and gain on the sale of a prepaid servicing credit of $1.5 million.

Operating expenses were higher than normal during the year ended December 31, 2004 primarily due to a $2.0 million leave of absence payment to Andrew Wiederhorn and the accrual of $1.8 million of future expenses associated with the leave of absence.

The 2003 net income was primarily the result of gains on the sale of loans and securities of $12.5 million, and equity in earnings of equity investees of $4.9 million, which were partially offset by our operating expenses.

The following sections describe the results of operations of our operating segments for the years ended December 31, 2004 and 2003:

Restaurant Segment

In addition to operating company owned restaurants, our strategy with respect to Fatburger is to increase the number of franchises, thus increasing the franchise fees and future royalty income to the operation. Fatburger is implementing a nationwide expansion of the franchise and currently has agreements with approximately 20 franchisees to open approximately 220 new locations. When Fatburger enters into a franchise agreement, the franchisee pays a $20,000 per restaurant non-refundable franchise fee. An additional $20,000 fee per restaurant is collected when the franchisee signs a lease agreement. These fees are recognized into income upon the opening of the franchise restaurant. As of December 31, 2004, Fatburger had collected approximately $4.4 million in franchise fees for future restaurant locations. It is expected that an additional $4.4 million relating to these locations will be collected as specific leases are signed.

During the year ended December 31, 2004, we recognized a net loss from our restaurant segment of $2.7 million. This was primarily the result of a gross margin (sales less cost of goods sold) of $8.8 million and franchise and royalty revenue of $1.4 million, offset by general and administrative costs of $10.8 million, interest expense of $0.7 million, and depreciation and amortization of $1.5 million.

During the nearly five months from acquisition through December 31, 2003, we recognized a net loss from our restaurant segment of $1.1 million. This was primarily the result of gross margin (sales less cost of goods sold) of $2.9 million and franchise and royalty revenue of $0.5 million, offset by general and administrative costs of $3.5 million, interest expense of $0.3 million, depreciation and amortization of $0.5 million and a provision for income taxes of $0.2 million.

Commercial Real Estate Mortgage Brokerage Segment

The Company owns a 51% ownership interest in George Elkins, a mortgage brokerage operation, which in 2004 provided brokerage services resulting in the production of over $700 million in commercial real estate mortgages. George Elkins is headquartered in Los Angeles, with satellite offices located throughout the southern California area and in Las Vegas. The mortgage banking operation also manages a commercial loan servicing portfolio in excess of $700 million for various investors.

19




We recognized $0.1 million in net income from the commercial real estate mortgage brokerage segment for the year ended December 31, 2004, compared to a loss of $0.1 million during the 2003 period. During the 2004 period, we recognized loan brokerage fees of $5.8 million, loan servicing and other revenue of $0.4 million, which was offset by compensation expense of $5.2 million and other operating expense of $0.9 million.

During the 2003 period, we recognized loan brokerage fees of $5.4 million, loan servicing and other revenue of $0.4 million, which was offset by compensation expense of $4.8 million and other operating expense of $1.1 million.

Real Estate, Merchant Banking, and Financing Segment

NET INTEREST INCOME.   Our net interest income for the year ended December 31, 2004 was $2.7 million, compared with $3.4 million for the year ended December 31, 2003. These results reflect a reduction in interest income on securities of $1.8 million as the result of the sale or repayment of mortgage-backed securities. This decrease was partially offset by an increase in interest income on loans (reflecting our increased investment in specialty real estate and other lending) of $0.6 million and a decrease in interest expense of $0.6 million as a result of our repayment of debt related to the mortgage-backed securities. The following tables set forth information regarding the total amount of income from interest-earning assets and expense from interest-bearing liabilities and the resulting average yields and rates:

 

 

For the Year Ended
December 31, 2004

 

 

 

Average
Balance

 

Interest
Income
(Expense)

 

Yield/Rate

 

 

 

(dollars in thousands)

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

Loan portfolios(1)

 

$

11,011

 

 

$

2,088

 

 

 

19.0

%

 

Mortgage-backed securities available for sale

 

12,831

 

 

617

 

 

 

4.8

 

 

Other investments

 

10,894

 

 

110

 

 

 

1.0

 

 

Total interest-earning assets

 

$

34,736

 

 

$

2,815

 

 

 

8.1

%

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Borrowings(2)

 

$

9,489

 

 

$

(112

)

 

 

1.2

%

 

Total interest-bearing liabilities

 

$

9,489

 

 

$

(112

)

 

 

1.2

%

 

Net interest income before provision for loan losses/spread(3)

 

 

 

 

$

2,703

 

 

 

6.9

%

 

Net interest margin(4)

 

 

 

 

 

 

 

 

7.8

%

 


(1)          Includes loans to a senior executive, which were originated prior to restrictions on loans to executive officers being imposed by the Sarbanes—Oxley Act of 2002.

(2)          Borrowings and interest expense relating to real estate investments and restaurant operations are not included in this analysis.

(3)          Net interest spread represents the unweighted difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

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

20




 

 

 

For the Year Ended
December 31, 2003

 

 

 

Average
Balance

 

Interest
Income
(Expense)

 

Yield/Rate

 

 

 

(dollars in thousands)

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

Loan portfolios(1)

 

$

6,470

 

 

$

1,466

 

 

 

22.7

%

 

Mortgage-backed securities available for sale

 

49,906

 

 

2,422

 

 

 

4.9

 

 

Other investments

 

15,526

 

 

173

 

 

 

1.1

 

 

Total interest-earning assets

 

$

71,902

 

 

$

4,061

 

 

 

5.7

%

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Borrowings(2)

 

$

30,291

 

 

$

(669

)

 

 

2.2

%

 

Total interest-bearing liabilities

 

$

30,291

 

 

$

(669

)

 

 

2.2

%

 

Net interest income before provision for loan losses/spread(3)

 

 

 

 

$

3,392

 

 

 

3.5

%

 

Net interest margin(4)

 

 

 

 

 

 

 

 

4.7

%

 


(1)          Includes loans to senior executives granted prior to the Sarbanes—Oxley Act of 2002.

(2)          Borrowings and interest expense relating to real estate investments are not included in this analysis.

(3)          Net interest spread represents the unweighted difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

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

REAL ESTATE OPERATIONS.   Our real estate operations represent activity from our direct investment in commercial property, as well as the operations of our leasehold interests in freestanding retail buildings. During the year ended December 31, 2004, we realized net income from real estate operations of $2.3 million, compared with net income from real estate operations of $0.4 million for the year ended December 31, 2003. The increase during the 2004 period was primarily the result of gains on sales of real estate of $1.7 million, compared to gains of $0.3 million during the prior year. The gains on sales during 2004 relate to the sale of eight of our freestanding retail buildings and from the recognition of the deferred gain relating to the receipt of the final payment on a real estate sale which was financed in a prior year.

OTHER OPERATING INCOME.   Our other operating income was approximately $10.5 million for the year ended December 31, 2004. This compares to other operating income of $17.7 million for the year ended December 31, 2003. The primary components of our other operating income include the following:

Gain on the Sale of Loans and Securities.   During the years ended December 31, 2004 and 2003, we sold loans and securities to unrelated third parties for approximately $30.3 million and $16.0 million, respectively, resulting in gains of approximately $2.1 million and $12.5 million, respectively.

Equity in Earnings of Equity Investees.   During 2004 and 2003, Bourne End sold properties and retired indebtedness, a process which began during the fourth quarter of 2001. For the years ended December 31, 2004, and 2003, we recorded $4.4 million and $5.0 million, respectively, in earnings relating to our share of the net income of Bourne End.

Prepaid Loan Servicing Credit.   During the year ended December 31, 2004, we sold our Wilshire Credit Corporation (“WCC”) prepaid loan servicing credit (the “Loan Servicing Credit”) for $1.5 million in cash. The Loan Servicing Credit was originally acquired by us in 1998, when we were an affiliate of WCC. The Loan Servicing Credit may be used, subject to certain limitations, to pay for loan portfolio servicing activities performed by WCC. As a result of the sale, we recognized a gain in the amount of $1.5 million.

21




Other Income.   During the year ended December 31, 2004, our other income included $1.3 million in gross modeling fees earned by V-Model, $0.3 million in net gains on foreign currency and $1.0 million in net advisory fees earned in connection with a third party real estate transaction. During the 2003 period, other revenue included $0.8 million in net gains on foreign currency and $0.3 million in net advisory fees earned in connection with third party real estate transactions.

OPERATING EXPENSES.   During 2004, operating expenses of the real estate, merchant banking and finance segment were comprised of compensation and employee benefits of $4.9 million, Leave of Absence costs of $4.8 million, professional fees of $2.5 million, V-Model operating costs of $1.7 million and other costs of $3.0 million. During 2003, operating expenses comprised of compensation and employee benefits of $6.9 million, professional fees of $1.8 million and other costs of $2.8 million.

RESULTS OF OPERATIONS—2003 Compared to 2002

NET INCOME.   Our net income for the year ended December 31, 2003 amounted to $5.4 million, or $0.62 per share, compared to net income of $16.7 million, or $1.69 per share, for the year ended December 31, 2002. The 2003 net income was primarily the result of gains on the sale of loans and securities of $12.5 million, and equity in earnings of equity investees of $4.9 million, which were partially offset by our operating expenses. The 2002 net income was primarily the result of gains on the sale of loans and securities of $28.0 million, partially offset by our operating expenses.

The following sections describe the results of operations of our operating segments for the years ended December 31, 2003 and 2002:

Restaurant Segment

During the nearly five months from acquisition through December 31, 2003, we recognized a net loss from our restaurant segment of $1.1 million. This was primarily the result of gross margins (sales less cost of goods sold) of $2.9 million and franchise and royalty revenue of $0.5 million, offset by general and administrative costs of $3.5 million, interest expense of $0.3 million, depreciation and amortization of $0.5 million and a provision for income taxes of $0.2 million.

Commercial Real Estate Mortgage Brokerage Segment

Our net loss from the commercial real estate brokerage segment was approximately $0.1 million for the year ended December 31, 2003. During the seven month period of our ownership of George Elkins during 2002, our net loss from the commercial real estate brokerage segment was $0.3 million. During the 2003 period, we recognized loan brokerage fees of $5.4 million, and loan servicing and other revenue of $0.4 million, which were offset by compensation expense of $4.8 million and other operating expense of $1.1 million. During the seven month period of our ownership during 2002, we recognized loan brokerage fees of $2.3 million, loan servicing and other revenue of $0.4 million, which were offset by compensation expense of $2.3 million and other operating expense of $0.6 million.

Real Estate, Merchant Banking, and Financing Segment

NET INTEREST INCOME.   Our net interest income for the year ended December 31, 2003 was $3.4 million, compared with $4.2 million for the year ended December 31, 2002. These results reflect a reduction in interest income on securities of $2.9 million as the result of the sale or repayment of mortgage-backed securities. This decrease was offset by an increase in interest income on loans (reflecting our increased investment in specialty real estate and other lending) of $0.9 million and a decrease in interest expense of $1.2 million as a result of our repayment of debt related to the mortgage-backed securities. The following tables set forth information regarding the total amount of income from

22




interest-earning assets and expense from interest-bearing liabilities and the resulting average yields and rates:

 

 

For the Year Ended
December 31, 2003

 

 

 

Average
Balance

 

Interest
Income
(Expense)

 

Yield/Rate

 

 

 

(dollars in thousands)

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

Loan portfolios(1)

 

$

6,470

 

 

$

1,466

 

 

 

22.7

%

 

Mortgage-backed securities available for sale

 

49,906

 

 

2,422

 

 

 

4.9

 

 

Other investments

 

15,526

 

 

170

 

 

 

1.1

 

 

Total interest-earning assets

 

$

71,902

 

 

$

4,058

 

 

 

5.7

%

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Borrowings(2)

 

$

30,291

 

 

$

(669

)

 

 

2.2

%

 

Total interest-bearing liabilities

 

$

30,291

 

 

$

(669

)

 

 

2.2

%

 

Net interest income before provision for loan losses/spread(3)

 

 

 

 

$

3,389

 

 

 

3.5

%

 

Net interest margin(4)

 

 

 

 

 

 

 

 

4.7

%

 


(1)          Includes loans to a senior executive, which were originated prior to restrictions on loans to executive officers being imposed by the Sarbanes—Oxley Act of 2002.

(2)          Borrowings and interest expense relating to real estate investments are not included in this analysis.

(3)          Net interest spread represents the unweighted difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

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

 

 

For the Year Ended
December 31, 2002

 

 

 

 

Average
Balance

 

Interest
Income
 (Expense) 

 

Yield/Rate

 

 

 

 

(dollars in thousands)

 

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

Loan portfolios(1)

 

$

4,467

 

 

$

557

 

 

 

12.5

%

 

Mortgage-backed securities available for sale

 

47,937

 

 

5,277

 

 

 

11.0

 

 

Other investments

 

16,017

 

 

262

 

 

 

1.7

 

 

Total interest-earning assets

 

$

68,421

 

 

$

6,096

 

 

 

8.9

%

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Borrowings(2)

 

$

36,310

 

 

$

(1,906

)

 

 

5.2

%

 

Total interest-bearing liabilities

 

$

36,310

 

 

$

(1,906

)