##### 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 September 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
    
    (IRS Employer File Number)of incorporation)700 17th Street, Suite 1200Denver, 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
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 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 September 30, 2008
    
    
    3Balance Sheet (Unaudited)
    
    
    3Statements of Operations (Unaudited)
    
    
    4Statements of Cash Flows (Unaudited)
    
    
    5Notes to Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis and Plan of Operation
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20Item 4T. Controls and Procedures
    
    
    20PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    26Signatures
    
    
    27Exhibit 21Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



September 30
    
    
    December 31,2008
    
    
    2007(unaudited)
    
    
    (audited)AssetsCash and Equivalents
    
    $
    781,048
    
    
    $
    2,035,620Deposits held by an affiliate
    
    
    707,292
    
    
    
    940,880Accounts Receivable, net
    
    
    78,385
    
    
    
    2,156,959Property and equipment, net
of accumulated depreciation
    
    
    98,461
    
    
    
    112,918Real estate held for sale
    
    
    14,627,963
    
    
    
    14,398,602Construction in progress
    
    
    2,376,675
    
    
    
    2,484,179Land held for development
    
    
    2,660,607
    
    
    
    5,388,089Deferred tax asset, net of valuation allowance
    
    
    3,364,000
    
    
    
    2,108,832Deposits and prepaids
    
    
    35,611
    
    
    
    48,451Total assets
    
    $
    24,730,042
    
    
    $
    29,674,530Liabilities and Shareholders EquityLiabilitiesAccounts payable
    
    $
    75,222
    
    
    $
    262,209Accrued liabilities
    
    
    57,884
    
    
    
    416,583Dividends payable
    
    
    
    
    
    
    78,187Senior subordinated note payable, related parties
    
    
    1,500,000
    
    
    
    7,000,000Senior subordinated revolving note, related parties
    
    
    14,242,835
    
    
    
    14,169,198Note payable
    
    
    6,308,617
    
    
    
    5,716,397Unearned Revenue
    
    
    
    
    
    
    522,841Total liabilities
    
    
    22,184,558
    
    
    
    28,165,415Shareholders equityNon controlling interest
    
    
    
    
    
    
    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 September 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 September 30, 2008
    
    
    23,603
    
    
    
    16,037Additional paid-in-capital
    
    
    14,081,937
    
    
    
    6,440,398Retained earnings
    
    
    (11,560,056
    )
    
    
    (5,003,614
    )Total shareholders equity
    
    
    2,545,484
    
    
    
    1,509,115Total liabilities and shareholders equity
    
    $
    24,730,042
    
    
    $
    29,674,530
   3




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Sales
    
    $
    3,171,409
    
    
    $
    815,000
    
    
    $
    4,381,723
    
    
    $
    5,739,336Financing activities
    
    
    45,691
    
    
    
    10,314
    
    
    
    38,090
    
    
    
    58,487Rental income
    
    
    116,570
    
    
    
    51,283
    
    
    
    224,048
    
    
    
    103,487Management fees
    
    
    
    
    
    
    148,383
    
    
    
    
    
    
    
    362,981Total revenue
    
    
    3,333,670
    
    
    
    1,024,980
    
    
    
    4,643,861
    
    
    
    6,264,291Operating expenses:Cost of sales
    
    
    2,954,748
    
    
    
    815,000
    
    
    
    4,118,748
    
    
    
    5,460,324Impairment loss on real estate
    
    
    4,156,444
    
    
    
    (40,868
    )
    
    
    4,752,312
    
    
    
    1,898,645Conversion expense
    
    
    
    
    
    
    
    
    
    
    581,250
    
    
    
    Selling, general and administrative
    
    
    579,167
    
    
    
    748,078
    
    
    
    1,943,805
    
    
    
    2,655,984Total operating expenses
    
    
    7,690,359
    
    
    
    1,522,210
    
    
    
    11,396,115
    
    
    
    10,014,953Loss from operations
    
    
    (4,356,689
    )
    
    
    (497,230
    )
    
    
    (6,752,254
    )
    
    
    (3,750,662
    )Non-operating expense:Interest income
    
    
    931
    
    
    
    6,641
    
    
    
    9,394
    
    
    
    7,535Interest expense
    
    
    (278,133
    )
    
    
    
    
    
    
    (912,987
    )
    
    
    (275,730
    )Other income (expense)
    
    
    
    
    
    
    (100,413
    )
    
    
    
    
    
    
    (1,570
    )Loss before income taxes
and non controlling interest
    
    
    (4,633,891
    )
    
    
    (591,002
    )
    
    
    (7,655,847
    )
    
    
    (4,020,427
    )Income tax provision
    
    
    (374,039
    )
    
    
    (360,880
    )
    
    
    (1,254,079
    )
    
    
    (1,527,480
    )Loss before non controlling interest
    
    
    (4,259,852
    )
    
    
    (230,122
    )
    
    
    (6,401,768
    )
    
    
    (2,492,947
    )Non controlling interest in income of
consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,751Net loss
    
    $
    (4,259,852
    )
    
    $
    (230,122
    )
    
    $
    (6,401,768
    )
    
    $
    (2,566,698
    )Preferred stock dividends
    
    
    
    
    
    
    (78,186
    )
    
    
    
    
    
    
    (232,012
    )Net loss available to common shareholders
    
    $
    (4,259,852
    )
    
    $
    (308,308
    )
    
    $
    (6,401,768
    )
    
    $
    (2,798,710
    )Basic and diluted loss per common share
    
    $
    (0.18
    )
    
    $
    (0.02
    )
    
    $
    (0.27
    )
    
    $
    (0.17
    )Basic and diluted weighted average common shares outstanding
    
    
    23,602,614
    
    
    
    16,036,625
    
    
    
    23,602,614
    
    
    
    16,036,625
   4




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Nine months endedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    
    (6,401,766
    )
    
    $
    (2,566,698
    )Adjustments to reconcile net income to net cash used by operating activities:Deferred income taxes
    
    
    (1,254,079
    )
    
    
    Depreciation
    
    
    25,853
    
    
    
    28,472Impairment of assets
    
    
    4,752,312
    
    
    
    1,898,645Allowance for bad debt
    
    
    
    
    
    
    215,953Conversion expense
    
    
    581,250
    
    
    
    Stock option compensation expense
    
    
    43,568
    
    
    
    98,297Changes in operating assets and operating liabilities:Construction in progress
    
    
    (4,644,808
    )
    
    
    (4,354,196
    )Real estate held for sale
    
    
    (229,361
    )
    
    
    (9,706,445
    )Land held for development
    
    
    2,727,482
    
    
    
    661,932Accounts receivable
    
    
    2,078,574
    
    
    
    (255,958
    )Deposits and prepaids
    
    
    12,840
    
    
    
    34,567Accounts payable and accrued liabilities
    
    
    (546,775
    )
    
    
    551,658Income tax assets and liabilities
    
    
    
    
    
    
    (1,475,897
    )Unearned revenue
    
    
    (522,841
    )
    
    
    Non-controlling interest
    
    
    (4,594
    )
    
    
    Net cash (used in) operating activities
    
    
    (3,382,346
    )
    
    
    (14,869,670
    )Cash flows from investing activities:Payment of deposits
    
    
    
    
    
    
    86,791Cash collections on notes receivable
    
    
    365,025
    
    
    
    Issuance of notes receivable
    
    
    (131,437
    )
    
    
    Cash paid
for disposal of property and equipment
    
    
    (11,396
    )
    
    
    (57,296
    )Net cash provided by investing activities
    
    
    222,192
    
    
    
    29,495Cash flows from financing activities:Preferred stock dividends paid
    
    
    (78,187
    )
    
    
    (233,711
    )Proceeds from issuance of related party loans
    
    
    12,638,861
    
    
    
    12,200,000Repayment of related party loans
    
    
    (11,247,313
    )
    
    
    (3,400,000
    )Proceeds from issuance of notes payable
    
    
    3,016,292
    
    
    
    8,854,866Repayment of notes payable
    
    
    (2,424,072
    )
    
    
    (1,961,403
    )Net cash provided by financing activities
    
    
    1,905,582
    
    
    
    15,459,752Net change in cash
    
    
    (1,254,572
    )
    
    
    619,577Cash and cash equivalents, beginning of the period
    
    
    2,035,620
    
    
    
    1,097,440Cash and cash equivalents, end of the period
    
    
    781,048
    
    
    $
    1,717,017Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes
    
    
    (1,089
    )
    
    $
    1,000Interest
    
    
    
    
    
    $
    780,981Supplemental disclosure of non-cash investing and financing activitiesPreferred stock dividends declared but not paid
    
    
    
    
    
    $
    232,012Conversion of related notes payable to common stock
    
    
    6,817,912
    
    
    $
    
   5




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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
    
    OwnershipAARD-Cypress Sound, LLC (Cypress Sound)
    
    
    51.00
    %AARD-TSD-CSK Firestone, LLC (Firestone)
    
    
    51.00
    %South Glen Eagles Drive, LLC (West Valley)
    
    
    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
    %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
    %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
    %
  6




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Use of Estimates
   Accounting Pronouncements
     7




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(2) Current Development Projects
  (3) Real Estate Held for Sale
   (4) Related Party Transactions
  GDBA
    
    
    BOCOInvestments
    
    
    Investments
    
    
    TotalRevolving Lines of Credit
    
    
    7,000,000
    
    
    
    7,000,000
    
    
    
    14,000,000BOCO Note Payable
    
    
    
    
    
    
    750,000
    
    
    
    750,000BOCO Note Payable
    
    
    
    
    
    
    750,000
    
    
    
    750,000Accrued Interest
    
    
    105,862
    
    
    
    136,973
    
    
    
    242,835Senior subordinated revolving notes related parties
    
    $
    7,105,862
    
    
    $
    8,636,973
    
    
    $
    15,742,835
 GDBA Investments, LLLP
     8




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BOCO Investments, LLC
     9




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10




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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
    
    
    (69,590
    )$
    98,461
  (7) Shareholders Equity
 Preferred Stock
  Series A Convertible Preferred Stock
   11




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'

Stock Based Compensation
    Options OutstandingWeighted
    
    
    WeightedAverage
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsicof Options
    
    
    Price
    
    
    Term
    
    
    ValueBalance, at December
31,
2007
    
    
    214,375
    
    
    
    3.44
    
    
    
    3.9
    
    
    
    Activity during 2008:Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired/Cancelled
    
    
    (152,500
    )
    
    
    3.32
    
    
    
    3.2Forfeited
    
    
    Exercised
    
    
    Balance, at
September 30,
2008
    
    
    61,875
    
    
    
    3.62
    
    
    
    3.2
    
    
    
    
 (8) Income Taxes
  Deferred tax assets:Impairment of asset
    
    
    2,499,825Net operating loss and carry-forwards
    
    
    2,891,790Partnership income
    
    
    130,229Origination Fee Income
    
    
    (84,529
    )Depreciation
    
    
    (23,352
    )Other temporary differences
    
    
    (49,964
    )5,364,000Valuation Allowance
    
    
    (2,000,000
    )Total net deferred tax assets
    
    
    3,364,000
    12




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Given the complexities of tax laws
and FASB 109 and the fact that there is a degree of interpretation and
subjectivity, it has been our policy to hire a third party CPA firm for our tax
work and FASB 109 calculation. During the quarter ended September, 30, 2008, we
changed to a new CPA firm to perform these services. During their review of our past
calculations to tie into the current quarter, they disagreed with the FASB 109
calculation made by our former CPA firm for the year ended December 31,
2007. After detailed consultation with our new CPA firm, the Company believes
there is a variance which understated the tax benefit and overstated the net
loss on the income statement by $498,000, and understated the deferred tax
asset on the balance sheet by $498,000. Because we discovered the issue
while analyzing our deferred tax asset for the quarter ended September 30,
2008 and the Company had already determined the need for a valuation allowance,
we have adjusted the deferred tax asset accordingly. The Company increased the
valuation allowance by $498,000 which is included in the total valuation
allowance of $2,000,000. (9) Noncontrolling Interests
 co-developer/contractor.
 Balance
    
    
    
    
    
    
    
    
    
    
    BalanceDecember 31,
    
    
    Earnings allocated to
    
    
    Earnings disbursed/accrued for
    
    
    September 30,2007
    
    
    Noncontrolling Interest
    
    
    Noncontrolling Interest
    
    

2008Cypress
    
    $
    4,594
    
    
    $
    
    
    
    $
    (4,594
    )
    
    $
    Total
    
    $
    4,594
    
    
    $
    
    
    
    $
    (4,594
    )
    
    $
    
 (10) Concentration of Credit Risk for Cash
  (11) Notes Payable
 Vectra Bank Senior Credit Facility:
    13




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United Western Bank Senior Credit Facility
    (12) Impairment of Assets
 Long-Lived
   14




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Form 10-Q.
 Forward-Looking Statements
  Overview and History
      15




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16




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Results of Operations
 Results of Operations
      We had an income tax benefit of
$374,039 for the quarter ended September 30, 2008 compared to an income
tax benefit of $360,880 for the quarter ended September 30, 2007. The
income tax benefit for the quarter ended September 30, 2008 was after the
effect of a $2,000,000 valuation allowance against our deferred tax asset taken
on September 30, 2008, which included a $498,000 adjustment for the year
ended December 31, 2007. The Company determined that an allowance is
needed related to the recognition of its deferred tax asset based on the
continuing deterioration of the commercial real estate market combined with the
tightening credit markets in the third quarter.     17




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We had an income tax benefit of
$1,254,079 for the nine-months ended September 30, 2008 compared to an
income tax benefit of $1,527,480 for the nine-months ended September 30,
2007. The income tax benefit for the nine-months ended September 30, 2008
was after the effect of a $2,000,000 valuation allowance against our deferred
tax asset taken on September 30, 2008, which included a $498,000
adjustment for the year ended December 31, 2007. The Company determined
that an allowance is needed related to the recognition of its deferred tax
asset based on the continuing deterioration of the commercial real estate
market combined with the tightening credit markets in the third quarter.  Liquidity and Capital Resources
     18




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Recently Issued Accounting Pronouncements
    Seasonality
   19




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Critical Accounting Policies
   
   
   
      20




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
    
    our ability to find suitable real estate projects; and
    
    our ability to generate sufficient revenues from those projects.
   21




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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.
  22




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
    
    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;
    
    enter into transactions with our affiliates;
    
    grant liens on our assets or the assets of our subsidiaries; and
    
    make or repay intercompany loans.
       23




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24




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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.
   25




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broker-dealers broker-dealer
   
   
   
   
   
 
 Exhibits21
    
    
    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
   26




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CAPTERRA FINANCIAL GROUP, INC.Dated: November 14, 2008
    By:
    /s/ Peter ShepardPeter ShepardPresident, Chief Executive Officer,Dated: November 14, 2008
    By:
    /s/ James W Creamer IIIJames W Creamer IIITreasurer, Chief Financial Officer  27




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EXHIBIT INDEX
 Exhibit No.
    
    Description21
    
    
    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
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