##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly period ended June 30, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 000-50764
 CapTerra Financial Group, Inc.
  Colorado
    
    20-0003432(State or other jurisdiction 
of incorporation)
    
    (IRS Employer File Number)700 17th Street, Suite 1200
Denver, Colorado
    
    80202(Address of principal executive offices)
    
    (zip code)
  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



FORM 10-Q
CapTerra Financial Group, Inc.
 TABLE OF CONTENTS
 PART I FINANCIAL INFORMATIONItem 1. Financial Statements for the period ended June 30, 2008
    
    
    1Balance Sheet (Unaudited)
    
    
    1Statements of Operations (Unaudited)
    
    
    2Statements of Cash Flows (Unaudited)
    
    
    3Notes to Financial StatementsItem 2. Managements Discussion and Analysis and Plan of
Operation
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market
Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19Item 4T. Controls and Procedures
    
    
    19PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
    
    
    25Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    26SignaturesExhibit 21Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)AssetsCash and Equivalents
    
    $
    447,200
    
    
    $
    2,035,620Deposits held by an affiliate
    
    
    713,322
    
    
    
    940,880Accounts Receivable, net
    
    
    83,150
    
    
    
    2,156,959Property and equipment, net
of accumulated depreciation
    
    
    105,985
    
    
    
    112,918Construction in progress
    
    
    2,986,552
    
    
    
    2,484,179Land held for development
    
    
    4,357,495
    
    
    
    5,388,089Real estate held for sale
    
    
    16,721,531
    
    
    
    14,398,602Deferred tax asset
    
    
    2,988,872
    
    
    
    2,108,832Deposits and prepaids
    
    
    41,400
    
    
    
    48,451Total assets
    
    $
    28,445,507
    
    
    $
    29,674,530Liabilities and Shareholders EquityLiabilitiesAccounts payable
    
    $
    62,358
    
    
    $
    262,209Accrued liabilities
    
    
    75,909
    
    
    
    416,583Dividends payable
    
    
    
    
    
    
    78,187Senior subordinated note payable, related parties
    
    
    
    
    
    
    7,000,000Senior subordinated revolving note, related parties
    
    
    14,750,000
    
    
    
    14,169,198Note payable
    
    
    6,672,109
    
    
    
    5,716,397Unearned Revenue
    
    
    85,146
    
    
    
    522,841Total liabilities
    
    
    21,645,522
    
    
    
    28,165,415Shareholders equityNon controlling interest
    
    
    4,594
    
    
    
    4,594Convertible preferred stock, $.10 par value; 1,000,000
shares authorized,
517,000 shares issued and outstanding December 31, 2007,
-0- shares
issued and outstanding June 30, 2008
    
    
    
    
    
    
    51,700Common stock, $.001 par value; 50,000,000 shares authorized,
16,036,625 shares issued and outstanding December 31, 2007
23,602,614 shares issued and outstanding June 30, 2008
    
    
    23,603
    
    
    
    16,037Additional paid-in-capital
    
    
    14,071,992
    
    
    
    6,440,398Accumulated deficit
    
    
    (7,300,204
    )
    
    
    (5,003,614
    )Total shareholders equity
    
    
    6,799,985
    
    
    
    1,509,115Total liabilities and shareholders equity
    
    $
    28,445,507
    
    
    $
    29,674,530
   1




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Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Sales
    
    $
    
    
    
    $
    4,924,336
    
    
    $
    1,164,000
    
    
    $
    4,924,336Rental income
    
    
    119,788
    
    
    
    15,875
    
    
    
    146,193
    
    
    
    52,204Management fees
    
    
    
    
    
    
    71,116
    
    
    
    
    
    
    
    262,771Total revenue
    
    
    119,788
    
    
    
    5,011,327
    
    
    
    1,310,193
    
    
    
    5,239,311Operating expenses:Cost of sales
    
    
    
    
    
    
    4,645,324
    
    
    
    1,164,000
    
    
    
    4,645,324Impairment loss on real estate
    
    
    595,868
    
    
    
    1,939,513
    
    
    
    595,868
    
    
    
    1,939,513Conversion
expense
    
    
    581,250
    
    
    
    
    
    
    
    581,250
    
    
    
    Selling, general and administrative
    
    
    676,633
    
    
    
    1,081,704
    
    
    
    1,364,640
    
    
    
    1,907,906Total operating expenses
    
    
    1,853,751
    
    
    
    7,666,541
    
    
    
    3,705,758
    
    
    
    8,492,743Loss from operations
    
    
    (1,733,963
    )
    
    
    (2,655,214
    )
    
    
    (2,395,565
    )
    
    
    (3,253,432
    )Non-operating expense:Interest income
    
    
    
    
    
    
    1,128
    
    
    
    
    
    
    
    385Interest expense
    
    
    (273,234
    )
    
    
    (155,584
    )
    
    
    (626,393
    )
    
    
    (175,317
    )Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,061
    )Loss before income taxes
and non controlling interest
    
    
    (2,007,197
    )
    
    
    (2,809,670
    )
    
    
    (3,021,714
    )
    
    
    (3,429,425
    )Income tax provision
    
    
    (502,640
    )
    
    
    (953,865
    )
    
    
    (879,800
    )
    
    
    (1,166,600
    )Loss before non controlling interest
    
    
    (1,504,557
    )
    
    
    (1,855,805
    )
    
    
    (2,141,914
    )
    
    
    (2,262,825
    )Non controlling interest in income of
consolidated subsidiaries
    
    
    
    
    
    
    67,304
    
    
    
    
    
    
    
    73,751Net loss
    
    $
    (1,504,557
    )
    
    $
    (1,923,109
    )
    
    $
    (2,141,914
    )
    
    $
    (2,336,575
    )Preferred stock dividends
    
    
    (77,338
    )
    
    
    (77,338
    )
    
    
    (154,675
    )
    
    
    (153,826
    )Net loss available to common shareholders
    
    $
    (1,581,895
    )
    
    $
    (2,000,447
    )
    
    $
    (2,296,589
    )
    
    $
    (2,490,401
    )Basic and diluted loss per common share
    
    $
    (0.10
    )
    
    $
    (0.12
    )
    
    $
    (0.14
    )
    
    $
    (0.16
    )Basic and diluted weighted average common shares outstanding
    
    
    16,382,943
    
    
    
    16,036,625
    
    
    
    16,208,827
    
    
    
    16,036,625
   2




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Six months endedJune 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (2,141,914
    )
    
    $
    (2,336,575
    )Adjustments to reconcile net income to net cash used by operating activities:Deferred income taxes
    
    
    (880,040
    )
    
    
    (1,160,015
    )Depreciation
    
    
    18,329
    
    
    
    14,151Impairment of assets
    
    
    595,868
    
    
    
    1,939,513Allowance for bad debt
    
    
    
    
    
    
    215,953Conversion
expense
    
    
    581,250
    
    
    
    Stock option compensation expense
    
    
    33,623
    
    
    
    68,144Changes in operating assets and operating liabilities:Construction in progress
    
    
    (502,373
    )
    
    
    (1,038,805
    )Real estate held for sale
    
    
    (2,322,929
    )
    
    
    (1,332,260
    )Land held for development
    
    
    434,726
    
    
    
    (1,137,892
    )Accounts receivable
    
    
    2,073,809
    
    
    
    (43,644
    )Deposits and prepaids
    
    
    7,051
    
    
    
    12,710Accounts payable and accrued liabilities
    
    
    (540,281
    )
    
    
    (97,450
    )Unearned revenue
    
    
    (437,695
    )
    
    
    Indebtedness to related party
    
    
    
    
    
    
    4,480,569Net cash (used in) operating activities
    
    
    (3,080,820
    )
    
    
    (415,601
    )Cash flows from investing activities:Payment of deposits
    
    
    
    
    
    
    (399,622
    )Cash collections on notes receivable
    
    
    290,000
    
    
    
    Issuance of notes receivable
    
    
    (62,442
    )
    
    
    Cash paid for property and equipment
    
    
    (11,396
    )
    
    
    (57,068
    )Net cash provided by (used in) investing activities
    
    
    216,162
    
    
    
    (456,690
    )Cash flows from financing activities:Preferred stock dividends paid
    
    
    (78,187
    )
    
    
    (156,375
    )Proceeds from issuance of related party loans
    
    
    6,528,637
    
    
    
    Repayment of related party loans
    
    
    (6,129,924
    )
    
    
    Proceeds from issuance of notes payable
    
    
    955,712
    
    
    
    1,541,076Repayment of lease obligation
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    1,276,238
    
    
    
    1,384,701Net change in cash
    
    
    (1,588,420
    )
    
    
    512,410Cash and cash equivalents, beginning of the period
    
    
    2,035,620
    
    
    
    1,097,440Cash and cash equivalents, end of the period
    
    $
    447,200
    
    
    $
    1,609,850Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes
    
    $
    
    
    
    $
    Interest
    
    $
    
    
    
    $
    634,445Supplemental disclosure of non-cash investing and financing activitiesPreferred stock dividends declared but not paid
    
    $
    
    
    
    $
    (153,826
    )Conversion of related notes payable to common stock
    
    $
    6,817,912
    
    
    $
    
   3




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(1) Nature of Organization and Summary of Significant Accounting Policies
 Organization and Basis of Presentation
  Principles of Consolidation
  Name of Subsidiary Ownership
 Name of Subsidiary
    
    OwnershipCCI Southeast, LLC (CCISE)
    
    
    100.00
    %Riverdale Carwash Lot 3A, LLC (Riverdale)
    
    
    100.00
    %AARD-Cypress Sound, LLC (Cypress Sound)
    
    
    51.00
    %AARD-TSD-CSK Firestone, LLC (Firestone)
    
    
    51.00
    %South Glen Eagles Drive, LLC (West Valley)
    
    
    51.00
    %119th and Ridgeview, LLC (Ridgeview)
    
    
    51.00
    %53rd and Baseline, LLC (Baseline)
    
    
    51.00
    %Hwy 278 and Hwy 170, LLC (Bluffton)
    
    
    51.00
    %State and 130th, LLC (American Fork)
    
    
    51.00
    %Clinton Keith and Hidden Springs, LLC (Murietta)
    
    
    51.00
    %Hwy 46 and Bluffton Pkwy, LLC (Bluffton 46)
    
    
    51.00
    %AARD Bader Family Dollar Flat Shoals, LLC (Flat Shoals)
    
    
    51.00
    %AARD Westminster OP7, LLC (Westminster OP7)
    
    
    51.00
    %Eagle Palm I, LLC (Eagle)
    
    
    51.00
    %AARD Econo Lube Stonegate, LLC (Econo Lube)
    
    
    51.00
    %AARD Bader Family Dollar MLK, LLC (MLK)
    
    
    51.00
    %AARD-Charmar Greeley, LLC (Starbucks)
    
    
    51.00
    %AARD-Charmar Greeley Firestone, LLC
    
    
    51.00
    %AARD 5020 Lloyd Expy, LLC (Evansville)
    
    
    51.00
    %AARD 2245 Main Street, LLC (Plainfield)
    
    
    51.00
    %AARD-Buckeye, LLC (Buckeye)
    
    
    51.00
    %AARD Esterra Mesa 1, LLC (Esterra Mesa 1)
    
    
    51.00
    %AARD Esterra Mesa 2, LLC (Esterra Mesa 2)
    
    
    51.00
    %AARD Esterra Mesa 3, LLC (Esterra Mesa 3)
    
    
    51.00
    %AARD Esterra Mesa 4, LLC (Esterra Mesa 4)
    
    
    51.00
    %AARD MDJ Goddard, LLC (Goddard)
    
    
    51.00
    %AARD Charmar Arlington Boston Pizza, LLC (Charmar Boston Pizza)
    
    
    51.00
    %L-S Corona Pointe, LLC (L-S Corona)
    
    
    50.01
    %AARD LECA LSS Lonestar LLC
    
    
    51.00
    %AARD LECA VL1 LLC
    
    
    51.00
    %AARD NOLA St claude LLC
    
    
    51.00
    %AARD ORFL FD Goldenrod LLC
    
    
    51.00
    %AARD SATX CHA LLC
    
    
    51.00
    %AARD JXFL UTC LLC
    
    
    51.00
    %
  4




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Use of Estimates
  nd
 Accounting Pronouncements
     5




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(2) Current Development Projects
 pre-construction
 (3) Real Estate Held for Sale
   (4) Related Party Transactions
  GDBA
    
    
    BOCOInvestments
    
    
    Investments
    
    
    TotalRevolving Lines of Credit
    
    
    6,750,000
    
    
    
    7,250,000
    
    
    
    14,000,000Revolving Lines of Credit
    
    
    
    
    
    
    750,000
    
    
    
    750,000Senior subordinated revolving lines of credit
    
    $
    6,750,000
    
    
    $
    8,000,000
    
    
    $
    14,750,000
 GDBA Investments, LLLP
   6




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BOCO Investments, LLC
    7




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8




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(5) Notes Receivable and Development Deposits
  (6) Property and Equipment
  Equipment
    
    $
    23,277Furniture and fixtures
    
    
    17,396Computers and related equipment
    
    
    35,414Software and intangibles
    
    
    91,964$
    168,051less accumulated depreciation and amortization
    
    
    (62,066
    )$
    105,985
  (7) Shareholders Equity
 Preferred Stock
  Series A Convertible Preferred Stock
   Common Stock
   9




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Stock Based Compensation
    Options OutstandingWeighted
    
    
    WeightedAverage
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsicof Options
    
    
    Price
    
    
    Term
    
    
    ValueBalance at December 31,
2006
    
    
    385,000
    
    
    
    1.65
    
    
    
    4.9
    
    
    
    1,732,500Activity during 2007:Granted
    
    
    70,000
    
    
    
    2.08
    
    
    
    4.2
    
    
    
    Expired/Cancelled
    
    
    (26,250
    )
    
    
    1.65
    
    
    
    3.9Forfeited
    
    
    Exercised
    
    
    Balance, at December 31,
2007
    
    
    428,750
    
    
    
    1.72
    
    
    
    3.9
    
    
    
    Activity during 2008:Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired/Cancelled
    
    
    (265,000
    )
    
    
    1.66
    
    
    
    3.6Forfeited
    
    
    Exercised
    
    
    Balance, at June 30,
2008
    
    
    163,750
    
    
    
    1.81
    
    
    
    3.5
    
    
    
    
  10




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(8) Income Taxes
   Deferred tax assets:Impairment of asset
    
    $
    1,097,702Net operating loss and carry-forwards
    
    
    1,454,769Partnership income
    
    
    335,962Bad debt
    
    
    100,854Depreciation
    
    
    (415
    )Total deferred tax assets
    
    $
    2,988,872
   (9) Noncontrolling Interests
 co-developer/contractor.
 Balance
    
    
    Earnings allocated to
    
    
    Earnings disbursed/accrued for
    
    
    BalanceDecember 31, 2007
    
    
    Noncontrolling Interest
    
    
    Noncontrolling Interest
    
    
    June 30, 2008Cypress
    
    $
    4,594
    
    
    $
    
    
    
    $
    
    
    
    $
    4,594Total
    
    $
    4,594
    
    
    $
    
    
    
    $
    
    
    
    $
    4,594
  11




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(10) Concentration of Credit Risk for Cash
  (11) Notes Payable
 Vectra Bank Senior Credit Facility:
    United Western Bank Senior Credit Facility
    12




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Total as ofVectra
    
    
    United Western
    
    
    June 30, 2008Principal
    
    
    1,513,511
    
    
    
    4,882,038
    
    
    
    6,395,549Accrued Interest
    
    
    96,346
    
    
    
    180,214
    
    
    
    276,560Total
    
    
    1,609,857
    
    
    
    5,062,252
    
    
    
    6,672,109
 (12) Impairment of Assets
 Long-Lived
  (13) Subsequent Events
   13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
 Form 10-Q.
 Forward-Looking Statements
  Overview and History
        14




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15




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Results of Operations
 Results of Operations
          16




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Liquidity and Capital Resources
      17




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Recently Issued Accounting Pronouncements
    Seasonality
  Critical
Accounting Policies
   18




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19




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
    
    our ability to find suitable real estate projects; and
    
    our ability to generate sufficient revenues from those projects.
    
   20




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
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    require us to dedicate a substantial portion of our cash flow from operations
to payments on our indebtedness if we do not maintain specified financial
ratios, thereby reducing the availability of our cash flow for other purposes;
or
    
    limit our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate, thereby placing us at a competitive
disadvantage compared to our competitors that may have less indebtedness.
    
    
    incur additional indebtedness;
    
    make capital expenditures and other investments above a certain level;
    
    merge, consolidate or dispose of our assets or the capital stock or assets of any subsidiary;
    
    pay dividends, make distributions or redeem capital stock in certain circumstances;
  21




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
    
    enter into transactions with our affiliates;
    
    grant liens on our assets or the assets of our subsidiaries; and
    
    make or repay intercompany loans.
        
   22




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23




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*
    
    actual or anticipated fluctuations in our operating results;*
    
    change in financial estimates by securities analysts or our failure to
perform in line with such estimates;*
    
    changes in market valuations of other real estate oriented companies,
particularly those that market services such as ours;*
    
    announcements by us or our competitors of significant innovations,
acquisitions, strategic partnerships, joint ventures or capital
commitments;*
    
    introduction of technologies or product enhancements that reduce the
need for our services;*
    
    the loss of one or more key customers; and*
    
    departures of key personnel.
    broker-dealers broker-dealer
  24




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21
    
    List of Subsidiaries31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a)32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 Reports on Form 8-K
   25




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CAPTERRA FINANCIAL GROUP, INC.Dated: August 14, 2008
    
    By:
    
    /s/ Peter Shepard
Peter ShepardPresident, Chief Executive Officer,Dated: August 14, 2008
    
    By:
    
    /s/ James W Creamer III

James W Creamer IIITreasurer, Chief Financial Officer
  26




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21
    
    List of Subsidiaries31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a)32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  27