financialstatements.htm


                                                                                                                                                                                                                                                                                                                              
Exhibit 10.16

      


      
 

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      


       

      CS
        FINANCING CORPORATION

       

      


      (A
        DEVELOPMENT STAGE COMPANY)

      


      Corte
        Madera, California

      


      December
        31, 2006 and 2005

      


      


      


      


      


      


       

      



      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               
                        (A DEVELOPMENT STAGE
              COMPANY)
              
      

                    
      
    

        

      


      TABLE
        OF
        CONTENTS

      


      
        	 	 
	
                Report
                  of Independent Registered Public Accounting Firm

              	
                F-2

              
	
                Financial
                  Statements

              	 
	
                Balance
                  Sheets

              	
                F-3

              
	
                Statements
                  of Operations

              	
                F-4

              
	
                Statements
                  of Stockholder’s Equity

              	
                F-5

              
	
                Statements
                  of Cash Flows

              	
                F-6

              
	
                Notes
                  to Financial Statements

              	
                F-7
                  to F-12

              


      

      


      
        
          
          

        

        
          F-1

          
            

          

        

        
          
          

        

      

      REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

      


      


      


      To
        the
        Board of Directors

      CS
        Financing Corporation

      Corte
        Madera, California

      


      


      We
        have
        audited the accompanying balance sheets of CS Financing Corporation as of
        December 31, 2006 and 2005, and the related statements of operations,
        stockholder's equity and cash flows for the period from August 19, 2005
        (inception) to December 31, 2005, the year ended December 31, 2006 and the
        period from August 19, 2005 (inception) to December 31, 2006.  These
        financial statements are the responsibility of the Company's
        management.  Our responsibility is to express an opinion on these
        financial statements based on our audits.

      


      We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States).  Those standards require
        that we plan and perform the audit to obtain reasonable assurance about whether
        the financial statements are free of material misstatement.  An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements.  An audit also includes
        assessing the accounting principles used and significant estimates made by
        management as well as evaluating the overall financial statement
        presentation.  We believe that our audits provide a reasonable basis
        for our opinion.

      


      In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of CS Financing Corporation as
        of
        December 31, 2006 and 2005, and the results of its operations and its cash
        flows
        for the period from August 19, 2005 (inception) to December 31, 2005, the
        year
        ended December 31, 2006 and the period from August 19, 2005 (inception) to
        December 31, 2006, in conformity with U.S. generally accepted accounting
        principles.

      


      The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note 1 to the financial
        statements, the Company has incurred recurring losses and negative cash flows
        from operating activities since inception and requires additional working
        capital and the offering up to $100,000,000 in aggregate principal amount
        of
        five year Notes to support
        future operations, which raises substantial doubt about its ability to continue
        as a going concern. Management’s plans in regards to these matters are also
        discussed in Note 1. The financial statements do not include any
        adjustments that might result from the outcome of this uncertainty.

       

      


      


      


      


      Minneapolis,
        Minnesota

      March
        2,
        2007

      
 

      
        
          
          

        

        
          F-2

          
            

          

        

        
          
                                                 
              CS FINANCING CORPORATION
                    


            
                                 
                          (A DEVELOPMENT STAGE
                COMPANY)
              
      

             

             

             

          

        

      

      BALANCE
        SHEETS

      
        
          

        



      
 

      
        
          	 	 	 	
                  December
                    31,

                	 	
                  December
                    31,

                
	 	 	 	
                  2005

                	 	
                  2006

                
	
                  ASSETS

                	 	 	 	 	 
	 	
                  Cash
                    and cash equivalents

                	
                   $                 -

                	 	
                   $     127,271

                
	 	
                  Prepaid
                    insurance

                	
                             78,750

                	 	
                           78,750

                
	 	
                  Prepaid
                    expenses

                	
                                     -

                	 	
                           15,667

                
	 	
                  Debt
                    placement costs

                	
                           116,771

                	 	
                         396,525

                
	 	
                  Loan
                    origination costs

                	
                             20,000

                	 	
                           20,000

                
	 	 	 	 	 	 
	 	 	
                  Total
                    Assets

                	
                   $      215,521

                	 	
                   $     638,213

                
	 	 	 	 	 	 
	 	 	 	 	 	 
	
                  LIABILITIES
                    AND STOCKHOLDER'S EQUITY

                	 	 
	 	 	 	 	 	 
	
                  LIABILITIES

                	 	 	 	 
	 	
                  Due
                    to parent

                	
                   $      101,048

                	 	
                   $               -

                
	 	
                  Accounts
                    payable

                	
                                     -

                	 	
                         130,324

                
	 	
                  Note
                    payable

                	
                             64,199

                	 	
                           64,199

                
	 	
                  Bonds
                    payable

                	
                                     -

                	 	
                         225,000

                
	 	
                  Accrued
                    salaries

                	
                                     -

                	 	
                           54,167

                
	 	
                  Accrued
                    interest

                	
                                     -

                	 	
                                744

                
	 	 	
                  Total
                    Liabilities

                	
                           165,247

                	 	
                         474,434

                
	 	 	 	 	 	 
	
                  STOCKHOLDER'S
                    EQUITY

                	 	 	 
	 	
                  Common
                    stock, $.01 par value, 1,000,000 shares authorized;

                
	 	 	
                  77,736
                    and 237,709 shares issued and outstanding

                
	 	 	
                  at
                    December 31, 2005 and 2006, respectively

                	
                                 777

                	 	
                             2,377

                
	 	
                  Additional
                    paid-in capital

                	
                             76,959

                	 	
                         420,304

                
	 	
                  Deficit
                    accumulated during the development stage

                	
                            (27,462)

                	 	
                        (258,902)

                
	 	 	
                  Total
                    Stockholder's Equity

                	
                             50,274

                	 	
                         163,779

                
	 	 	 	 	 	 
	 	 	
                       Total
                    Liabilities and Stockholder's Equity

                	
                   $      215,521

                	 	
                   $     638,213

                


        


        
          
                                                                                                                                                                                                             See
              accompanying notes to financial statements.   

          

          
            F-3

            
              

            

          

          
            
            

          

        





                               CS
        FINANCING CORPORATION
                    

                        (A
          DEVELOPMENT STAGE COMPANY)
              
      

       

      STATEMENTS
        OF OPERATIONS

      
        
          

        



      
 

      
        
          	 	 	 	
                  August
                    19, 2005 (inception) to December 31, 2005

                	
                  Year
                    Ended December 31, 2006

                	
                  August
                    19, 2005 (inception) to December 31, 2006

                
	 	 	 	 	 	 	 	 
	
                  INTEREST
                    AND FEE INCOME

                	
                   $          -

                	 	
                   $              -

                	 	
                   $                 -

                
	 	 	 	 	 	 	 	 
	
                  OPERATING
                    EXPENSES

                	 	 	 	 	 
	 	
                  Insurance

                	 	
                      11,250

                	 	
                          90,000

                	 	
                            101,250

                
	 	
                  Payroll

                	 	
                              -

                	 	
                          74,167

                	 	
                             74,167

                
	 	
                  Professional
                    fees

                	
                       2,500

                	 	
                          48,659

                	 	
                             51,159

                
	 	
                  Interest
                    expense

                	
                              -

                	 	
                            2,836

                	 	
                               2,836

                
	 	
                  Other

                	 	
                      13,712

                	 	
                          15,778

                	 	
                             29,490

                
	 	 	
                  Total
                    Operating Expenses

                	
                      27,462

                	 	
                        231,440

                	 	
                            258,902

                
	 	 	 	 	 	 	 	 
	 	 	
                       NET
                    LOSS

                	
                   $(27,462)

                	
                   $          -

                	
                   $   (231,440)

                	
                   $          -

                	
                   $      (258,902)

                
	 	 	 	 	 	 	 	 
	
                  Basic
                    and diluted loss per common stock

                	
                   $   (0.35)

                	 	
                   $        (2.06)

                	 	
                   $           (2.52)

                
	 	 	 	 	 	 	 	 
	
                  Weighted
                    average basic and diluted shares outstanding

                	
                      77,736

                	 	
                        112,210

                	 	
                            102,902

                


        



       


      
        
                

                                                                                                                                                                                                                                          
              F-4
              
      

                              See
              accompanying notes to financial statements.
              
      

                    
      
    

          
          

        

        
          
          

          
            

          

        

        
          
          

                

              CS
              FINANCING CORPORATION      

                                      (A
              DEVELOPMENT STAGE
              COMPANY)                      

                    
      
    

        

      

      STATEMENTS
        OF STOCKHOLDER’S EQUITY

      
        
          

        



      


      


      

        
          	 	 	
                  Common
                    Stock

                	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	
                  Shares

                	 	 	
                  Amount

                	 	 	
                  Additional
                    Paid-in-Capital

                	 	 	
                  Deficit
                    Accumulated During the Development Stage

                	 	 	
                  Total
                    Stockholder's Equity

                	 
	
                  BALANCES,
                    August 19, 2005 (inception)

                	 	 	
                  -

                	 	 	$	
                  -

                	 	 	$	
                  -

                	 	 	$	
                  -

                	 	 	$	
                  -

                	 
	
                  Conversion
                    of advances due to

                     Capital
                    Solutions

                     Management,
                    LP at $1.00

                     per
                    common share in 2005

                	 	 	
                  77,736

                	 	 	 	
                  777

                	 	 	 	
                  76,959

                	 	 	 	
                  -

                	 	 	 	
                  77,736

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                  Net
                    Loss for the period from

                     August
                    19, 2005 (inception)

                     to
                    December 31, 2005

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	(27,462	)	 	 	(27,462	)
	
                  BALANCES,
                    December 31, 2005

                	 	 	
                  77,736

                	 	 	 	
                  777

                	 	 	 	
                  76,959

                	 	 	 	(27,462	)	 	 	
                  50,274

                	 
	
                  Conversion
                    of advances due to

                     Capital
                    Solutions

                     Management,
                    LP at $2.00

                     per
                    common share during

                     the
                    period from September 30,

                     2006
                    to December 31, 2006

                	 	 	
                  159,973

                	 	 	 	
                  1,600

                	 	 	 	
                  318,345

                	 	 	 	
                  -

                	 	 	 	
                  319,945

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                  Stock-based
                    compensation

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  20,000

                	 	 	 	
                  -

                	 	 	 	
                  20,000

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                  Conversion
                    of office related

                     expenses
                    for the Company

                     incurred
                    by Capital Solutions

                     Management,
                    LP into

                     additional
                    paid-in capital

                   

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  5,000

                	 	 	 	
                  -

                	 	 	 	
                  5,000

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                  Net
                    Loss for the year ended

                     December
                    31, 2006

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	(231,440	)	 	 	(231,440	)
	
                  BALANCES,
                    December 31, 2006

                	 	 	
                  237,709

                	 	 	$	
                  2,377

                	 	 	$	
                  420,304

                	 	 	$	(258,902	)	 	$	
                  163,779

                	 


        





       


      
        
                                                          
      

                                                                                                                                                                                                                                           
               F-5
              
      

                              See
              accompanying notes to financial statements.
              
      

                    
      
    

          
          

        

        
          
          

          
            

          

        

        
          
          

                

                             
              CS
              FINANCING CORPORATION
              
                                                                                                                                                     (A DEVELOPMENT STAGE COMPANY)  
                                                         
      

                    
      
    

        

      

      STATEMENTS
        OF CASH FLOWS

      
        
          

        



      

        
          	 	 	
                  Period
                    from August 19, 2005 (inception) to December 31, 2005

                	
                  Year
                    Ended December 31, 2006

                	
                  Period
                    from August 19, 2005 (inception) to December 31, 2006

                
	 	 	 	 	 	 	 
	
                  CASH
                    FLOWS FROM OPERATING ACTIVITIES

                	 	 	 	 	 
	 	
                  Net
                    loss

                	
                   $                (27,462)

                	 	
                   $              (231,440)

                	 	
                   $              (258,902)

                
	 	
                  Adjustments
                    to reconcile net loss to cash

                       flows
                    from operating activities

                	 	 
	 	
                  Stock-based
                    compensation

                	
                                                   -

                	 	
                                       20,000

                	 	
                                       20,000

                
	 	
                  Contribution
                    to equity for office related expenses for the company incurred
                    by
                    parent

                	
                                                   -

                	 	
                                          5,000

                	 	
                                          5,000

                
	 	
                  Operating
                    expenses covered by parent

                       company
                    advances or accounts payable

                	
                                       16,212

                	 	
                                       32,311

                	 	
                                       48,523

                
	 	
                  Prepaid
                    insurance

                	
                                       11,250

                	 	
                                       90,000

                	 	
                                     101,250

                
	 	
                  Prepaid
                    expenses

                	
                                                   -

                	 	
                                      (15,667)

                	 	
                                      (15,667)

                
	 	
                  Accounts
                    payable

                	
                                                   -

                	 	
                                       36,705

                	 	
                                       36,705

                
	 	
                  Accrued
                    salaries

                	
                                                   -

                	 	
                                       54,167

                	 	
                                       54,167

                
	 	
                  Accrued
                    interest

                	
                                                   -

                	 	
                                             744

                	 	
                                             744

                
	 	
                            Net
                    Cash Flows from Operating Activities

                	
                                                   -

                	 	
                                        (8,180)

                	 	
                                        (8,180)

                
	 	 	 	 	 	 	 
	
                  CASH
                    FLOWS FROM INVESTING ACTIVITIES

                	 	 	 	 	 
	 	
                  Advance
                    from parent company

                	
                                                   -

                	 	
                                             500

                	 	
                                             500

                
	 	
                            Net
                    Cash Flows from Investing Activities

                	
                                                   -

                	 	
                                             500

                	 	
                                             500

                
	 	 	 	 	 	 	 
	
                  CASH
                    FLOWS FROM FINANCING ACTIVITIES

                	 	 	 	 	 
	 	
                  Principal
                    payments on note payable

                	
                                                   -

                	 	
                                      (25,801)

                	 	
                                      (25,801)

                
	 	
                  Payment
                    of debt placement costs

                	
                                                   -

                	 	
                                      (64,248)

                	 	
                                      (64,248)

                
	 	
                  Proceeds
                    from bonds payable

                	
                                                   -

                	 	
                                     225,000

                	 	
                                     225,000

                
	 	
                            Net
                    Cash Flows from Financing Activities

                	
                                                   -

                	 	
                                     134,951

                	 	
                                     134,951

                
	 	 	 	 	 	 	 
	
                  Net
                    Change in Cash and Cash Equivalents

                	
                                                   -

                	 	
                                     127,271

                	 	
                                     127,271

                
	 	 	 	 	 	 	 
	
                  Cash
                    and Cash Equivalents - Beginning of Period

                	
                                                   -

                	 	
                                                   -

                	 	
                                                   -

                
	 	 	 	 	 	 	 
	
                  Cash
                    and Cash Equivalents - End of Period

                	
                   $                             -

                	 	
                   $                127,271

                	 	
                   $                127,271

                
	 	 	 	 	 	 	 
	
                  Cash
                    paid for Interest expense

                	
                   $                             -

                	 	
                   $                    2,092

                	 	
                   $                    2,092

                
	 	 	 	 	 	 	 
	
                  Noncash
                    investing and financing activities

                	 	 	 	 	 
	 	
                  Parent
                    company advances for debt placement

                       costs

                	
                   $                116,771

                	 	
                   $                172,983

                	 	
                   $                289,754

                


        

        	 	
                Parent
                  company advances for loan origination

                     costs

              	
                 $                  20,000

              	 	
                 $                             -

              	 	
                 $                  20,000

              
	 	
                Conversion
                  of parent company advances to

                     common
                  stock

              	
                 $                  77,736

              	 	
                 $                319,945

              	 	
                 $                397,681

              
	 	
                Issuance
                  of note payable for prepaid insurance

              	
                 $                  90,000

              	 	
                      
                         
                  $                             -

              	 	
                 $                  90,000

              
	 	
                Parent
                  company advances for payments on

                     note
                  payable

              	
                 $                  25,801

              	 	
                 $                  64,199

              	 	
                 $                  90,000

              
	 	
                Debt
                  placement costs included in accounts

                     payable

              	
                    
                  $                             -

              	 	
                  
                  $                  98,013

              	 	
                 $                  98,013

              




        
          
                  

                                                                                                                                                                                                                                                F-6
                              
      

                                See
                accompanying notes to financial statements.
              
      

                      
      
    

            
            

          

          
            
            

            
              

            

          

          
            
            

                  

                                CS
                FINANCING CORPORATION
              
      

                                 (A
                DEVELOPMENT STAGE COMPANY)
              
      

                                Notes
                to Financial Statements
              
      

                                December
                31, 2005 and 2006
              
      

                      
      
    

          

        



      
        	
                NOTE
                  1 - Summary of Significant Accounting
                  Policies

              


      

      


      Nature
        of
        Operations

      


      CS
        Financing Corporation (the Company), a subsidiary of Capital Solutions
        Management, LP (Capital Solutions), was incorporated in Delaware on August
        19,
        2005.  The Company intends to make, purchase and service mezzanine
        loans and invest in financing mezzanine real estate lenders making such
        mezzanine real estate loans in the central United States from proceeds of
        the
        Company security offering.

      


      The
        Company is a development stage company that has not generated any revenues
        to
        date.  The financial statements have been prepared in accordance with
        the provisions of Statement of Financial Accounting Standards ("SFAS") No.
        7
        "Accounting and Reporting by Development Stage Enterprises," which requires
        development stage companies to employ the same accounting principles as
        operating companies.

      


      Liquidity
        and Capital
        Resources

      


      The
        Company had a net loss for the period from August 19, 2005 (inception) to
        December 31, 2005 and for the year ended December 31, 2006.  The
        Company's ability to continue as a going concern is dependent on obtaining
        adequate funding from Capital Solutions and/or obtaining proceeds from the
        Company's security offering to commence lending activity.  In the
        future, the Company may have to seek alternative sources of capital or
        reevaluate its operating plans, which may include cessation of its operations,
        if it is unable to generate sufficient cash flows from
        operations.  There is no assurance that funding will be available for
        the Company to finance its operations on acceptable terms, or at
        all.

      


      Cash
        and Cash
        Equivalents

      


      The
        Company classifies all highly liquid investments with initial maturities
        of
        three months or less as cash equivalents. The Company deposits its cash in
        high
        quality financial institutions. The balances, at times, may exceed federally
        insured limits.

      


      Debt
        Placement
        Costs

      


      Costs
        incurred in connection with the Company's contemplated Five Year Notes -
        Series
        A security offering will be deferred until the offering is substantially
        complete and then amortized over the term of the related financing agreements
        using the straight-line method, which approximates the interest
        method.  Total debt placement costs as of December 31, 2005 and 2006
        were $116,771 and $396,525, respectively.

      


      Fair
        Value of Financial
        Instruments

      


      The
        carrying amounts for all financial instruments approximate fair
        value.  The carrying amounts for debt placement costs, loan
        origination costs, due to parent and note payable approximate fair value
        because
        of the short maturity of these instruments.  The fair value of bonds
        payable approximates the carrying value because the terms are equivalent
        to
        borrowing rates currently available to the Company for debt with similar
        terms
        and maturities.

      


           Loan
        Origination Costs

      


      Loan
        origination costs were incurred by the Company in anticipation of loans that
        the
        Company intends to offer.  These costs will be amortized over the life
        of the anticipated loan as a reduction of the loan's yield.  Total
        loan origination costs at both December 31, 2005 and 2006 were
        $20,000.

      


      Start-Up
        Costs

      


      Costs
        of
        start-up activities are expensed as incurred in accordance with SOP 98-5,
        "Reporting on the Costs of Start-Up Activities."


      
        
                                                                                                                                                                                                                                               
            F-7                    

          
          

        

        
          
          

          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               (A
              DEVELOPMENT STAGE COMPANY)
              
      

                              Notes
              to Financial Statements
              
      

                              December
              31, 2005 and 2006
              
      

                    
      
    

        

      


      


      


      
        	
                NOTE
                  1 - Summary of Significant Accounting Policies
                  (cont.)

              


      

       

      


       

      Income
        Taxes

       

      Income
        taxes are accounted for under the liability method. Deferred income taxes
        are
        provided for temporary differences between the financial reporting and the
        tax
        bases of assets and liabilities. Deferred tax assets are reduced by a valuation
        allowance to the extent that realization of the related deferred tax asset
        is
        not assured.

       

      


      Management's
        Use of Estimates

      


      The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those
        estimates.

      


      Stock-Based
        Compensation

       

      The
        Company has not adopted a stock option plan but has issued various stock
        option
        awards.  The options issued are administered by the Board of
        Directors, which selects persons to receive awards and determines the number
        of
        options subject to each award and the terms, conditions, performance measures
        and other provisions of the award.  The Company’s general policy is to
        grant stock options with an exercise price at fair value at the date of
        grant.  Refer to Note 5 for additional information related to these
        stock-based compensation awards.

       

      Effective
        January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment (SFAS
        123R), which requires companies to measure and recognize compensation expense
        for all stock-based payments at fair value. SFAS 123R is being applied on
        the modified prospective basis.

      


      Under
        the
        modified prospective approach, SFAS 123R applies to new awards and to awards
        that were outstanding on January 1, 2006 that are subsequently modified,
        repurchased, cancelled or vest. Under the modified prospective approach,
        compensation cost recognized in 2006 includes compensation cost for all
        share-based payments granted prior to, but not yet vested on January 1, 2006,
        based on the grant-date fair value estimated in accordance with the provisions
        of SFAS 123R, and compensation cost for all shared-based payments granted
        subsequent to January 1, 2006, based on the grant-date fair value estimated
        in
        accordance with the provisions of SFAS 123R. Prior periods were not restated
        to
        reflect the impact of adopting the new standard as no options were granted
        prior
        to January 1, 2006.

       

      As
        a
        result of adopting SFAS 123R on January 1, 2006, the net loss and net loss
        per
        common share for the year ended December 31, 2006, were $20,000 and $0.18
        lower,
        respectively, and the net loss and net loss per common share for the period
        August 19, 2005 (inception) to December 31, 2006, were $20,000 and $0.19
        lower,
        respectively, than if the Company had accounted for stock-based compensation
        under APB Opinion No. 25.  Options and warrants issued to
        non-employees are recorded at fair value, as required by Emerging Issues
        Task
        Force (EITF) 96-18, “Accounting for Equity Instruments That are Issued to Other
        Than Employees for Acquiring, or in Conjunction with Selling, Goods or
        Services,” using the Black-Scholes pricing model.  From August 19, 2005
        (inception) to December 31, 2006, the Company did not issue any stock-based
        awards to non-employees.

      


      During
        the year ended December 31, 2006, 25,200 options were issued to board members,
        of which 8,400 options were exercisable at December 31, 2006.  In
        accordance with SFAS No. 123R the Company assessed performance based stock
        options and recorded compensation expense of $20,000 for the year ended December
        31, 2006.

      


      



      
        
                                                                                                                                                                                       F-8                                   

          
          

        

        
          
          

          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               (A
              DEVELOPMENT STAGE COMPANY)
              
      

                              Notes
              to Financial Statements
              
      

                              December
              31, 2005 and 2006
              
      

                    
      
    

        

      


      
        	
                NOTE
                  1 - Summary of Significant Accounting Policies
                  (cont.)

              


      

      


      The
        Company uses the Black-Scholes option-pricing model to estimate fair value
        of
        stock-based awards with the following weighted average assumptions:

      
 

      
        
          	 	
                  2005

                	 	
                  2006

                
	
                  Expected
                    life (years)

                	
                  N/A

                	 	
                  10.00

                
	
                  Expected
                    volatility

                	
                  N/A

                	 	
                  40.00%

                
	
                  Dividend
                    yield

                	
                  N/A

                	 	
                  0.00%

                
	
                  Risk-free
                    interest rate

                	
                  N/A

                	 	
                  4.50%

                


        



      The
        weighted average fair value of stock options granted with an exercise price
        equal to the fair value of common stock on the date of grant during the period
        from August 19, 2005 (inception) to December 31, 2005, year ended December
        31,
        2006 and the period from August 19, 2005 (inception) to December 31, 2006
        was
        $0.00, $1.18 and $1.18 per option, respectively.

      


      The
        Company calculates expected volatility for stock options using 40% volatility
        as
        the Company believes the expected volatility will approximate this
        volatility.  The Company estimates the forfeiture rate for stock
        options of 0% as there is no historical data and the Company believes all
        stock
        options issued to date will vest.

      


      The
        risk-free rates for the expected terms of the stock options are based on
        the
        U.S. Treasury yield curve in effect at the time of grant.

      


      Net
        Loss Per Common Share

       

      In
        accordance with SFAS No. 128, Earnings Per Share, basic loss per common share
        is
        computed by dividing net loss by the weighted average common shares outstanding
        during the periods presented. Diluted loss per common share is computed by
        dividing net loss by the weighted average common and potential dilutive common
        shares outstanding computed in accordance with the treasury stock method.
        For
        all periods presented, diluted loss per common share is the same as basic
        loss
        per common share because the effect of outstanding options is antidilutive
        due
        to the net loss for all period presented.

      


      Recent
        Accounting Pronouncement

      


      In
        June
        2005, the Financial Accounting Standards Board ("FASB") issued SFAS No. 154,
        "Accounting Changes and Error Corrections," a replacement of APB Opinion
        No. 20
        and FASB Statement No. 3.  The statement applies to all voluntary
        changes in accounting principle, and changes the requirements for accounting
        for
        and reporting of a change in accounting principle. SFAS No. 154 requires
        retrospective application to prior periods' financial statements of a voluntary
        change in accounting principle unless it is impracticable.  SFAS No.
        154 is effective for accounting changes and corrections of errors made in
        fiscal
        years beginning after December 15, 2005.  Earlier application is
        permitted for accounting changes and corrections of errors made occurring
        in
        fiscal years beginning after June 1, 2005.  The statement does not
        change the transition provisions of any existing accounting pronouncements,
        including those that are in a transition phase as of the effective date of
        this
        statement.  The adoption of SFAS No. 154 did not have a material
        effect on the Company's financial statements.


      
        
                

                                      
      

                    
      
    

          
          

        

        
                F-9   

          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               (A
              DEVELOPMENT STAGE COMPANY)
              
      

                              Notes
              to Financial Statements
              
      

                              December
              31, 2005 and 2006
              
      

                    
      
    

        

      


      
        	
                NOTE
                  1 - Summary of Significant Accounting Policies
                  (cont.)

              


      

      


      In
        December 2003, the FASB issued FASB Interpretation No. 46 (Revised December
        2003), “Consolidation of Variable Interest Entities, an Interpretation of ARB
        No. 51” (FIN 46R). This standard replaces FIN 46, Consolidation of Variable
        Interest Entities” that was issued in January 2003. FIN 46R modifies or
        clarifies various provisions of FIN 46. FIN 46R addresses the consolidation
        of
        business enterprises of variable interest entities (VIE’s), as defined by FIN
        46R. FIN 46R exempts certain entities from its requirements and provides
        for
        special effective dates for entities that have fully or partially applied
        FIN 46
        prior to issuance of FIN 46R. Otherwise, application of FIN 46R is required
        in
        financial statements of public entities that have interest in structures
        commonly referred to as special purpose entities for periods ending after
        December 15, 2003. Application by the Company for all other types of VIE’s is
        required in financial statements for periods ending no later than the quarter
        ended January 31, 2005. The adoption of FIN 46R did not have a material effect
        on the Company’s financial statements.

      


      


      
        	
                NOTE
                  2 - Due to Parent

              


      

      


      During
        2005, Capital Solutions made advances to the Company which are non-interest
        bearing, unsecured and due on demand.  Advances outstanding at
        December 31, 2005 and 2006 were $101,048 and $0, respectively. Capital Solutions
        converted advances of $77,736 in 2005 into common stock at $1.00 per share,
        and
        $319,945 in 2006 into common stock at $2.00 per share.

      


      


      
        	
                NOTE
                  3 - Note Payable

              


      

      


      On
        November 15, 2005, the Company entered into an agreement with First Insurance
        Funding Corporation to finance insurance premiums.  The agreement bore
        interest at a rate of 7.55% per annum and matured in August 2006 and required
        monthly principal and interest payments of $8,254.  The balance of the
        note payable was $64,199 and $0 at December 31, 2005 and 2006,
        respectively.

      


      On
        November 17, 2006, the Company entered into an agreement with First Insurance
        Funding Corporation to finance insurance premiums. The agreement bears interest
        at a rate of 7.55% per annum and will mature in August 2007 and requires
        monthly
        principal and interest payments of $8,254. The balance of the note payable
        was
        $64,199 at December 31, 2006.

      


      


      
        	
                NOTE
                  4 - Bonds Payable

              


      

      


      The
        Company issued $225,000 of five year notes on December 24, 2006 pursuant
        to the
        Company’s current S-1 registration statement.  The notes are due in
        December 2011 and bear interest at a fixed rate (calculated based upon a
        360-day
        year) of ten percent (10%). Interest is payable monthly with the first interest
        payment commencing thirty (30) days from issuance.

       

      The
        five
        year notes are not listed on any securities exchange and there is no public
        trading market for the five year note.  The Company may redeem the
        five year notes after two years and upon at least 30 days written notice.
        These
        five year notes are general unsecured obligations and are subordinated in
        right
        to payment to all future, if any, senior debt.

      



      
        
                

                                         
      

                    
      
    

          
          

        

        
               F-10


          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               (A
              DEVELOPMENT STAGE COMPANY)
              
      

                              Notes
              to Financial Statements
              
      

                              December
              31, 2005 and 2006
              
      

                    
      
    

        

      


      


      
        	
                NOTE
                  5 - Income Taxes

              


      

      


      Income
        Tax

      


      At
        December 31, 2006, the Company had net operating loss carryforwards of
        approximately $248,000 and $247,000 for federal and state income tax purposes,
        respectively, that are available to offset future taxable income and begin
        to
        expire in the year 2025.  No benefit has been recorded for any loss
        carryforwards, and utilization in future years may be limited under
        Sections 382 and 383 of the Internal Revenue Code if significant ownership
        changes have occurred or from future tax legislation changes.

      


      The
        Company records a valuation allowance to reduce the carrying value of the
        net
        deferred taxes to an amount that is more likely than not to be realized.
        The
        increase in the valuation allowance was $10,985, $85,416 and $96,401 for
        the
        period from August 19, 2005 (inception) to December 31, 2005, year ended
        December 31, 2006 and the period from August 19, 2005 (inception) to December
        31, 2006, respectively.  The benefit for income taxes differs from the
        amount computed by applying the U.S. federal income tax rate to loss before
        income taxes as follows:

      


      
        	 	 	
                Period
                  from August 19, 2005 (inception) to December 31, 2005

              	 	 	
                Year
                  Ended December 31, 2006

              	 	 	
                Period
                  from August 19, 2005 (inception) to December 31, 2006

              	 
	
                Expected
                  benefit at statutory rate

              	 	$	(9,337	)	 	$	(72,602	)	 	$	(81,939	)
	
                State
                  tax effects

              	 	 	(1,648	)	 	 	(12,814	)	 	 	(14,462	)
	
                Increase
                  in valuation allowance

              	 	 	
                10,985

              	 	 	 	
                85,416

              	 	 	 	
                96,401

              	 
	 	 	$	
                -

              	 	 	$	
                -

              	 	 	$	
                -

              	 


      

      


      


      The
        following is a summary of deferred taxes at December 31, 2005 and
        2006:

      


        
          	 	 	 	 	 
	 	 	 	
                  2005

                	
                  2006

                
	
                  Deffered
                    tax asset:

                	 	 	 
	
                     Pre-opening
                    cost

                	 	
                   $        3,094

                	
                   $     3,094

                
	
                     Net
                    operating loss

                	 	
                            7,891

                	
                        93,307

                
	
                     Valuation
                    allowance

                	 	
                          (10,985)

                	
                       (96,401)

                
	 	 	 	
                   $             -

                	
                   $          -

                


        


        
          
            
            

          

          
            F-11

            
              

            

          

          
            
            

          

        




      
        	
                NOTE
                  6 - Stockholder’s Equity

              


      

      


      Stock
        Options

      


      On
        January 1, 2006, the Company issued nonqualified stock options to Company
        employees/directors to acquire an aggregate of 25,200 shares of common stock
        at
        $2.00 per share. The options vest on future contingent events as defined
        in the
        stock option agreements and expire ten years from the date of grant. Unexercised
        options are canceled 90 days after termination, and unvested awards are canceled
        on the date of termination of employment.

      


      The
        weighted average remaining contractual term of options exercisable at December
        31, 2006, was 9 years.

      


      The
        following table summarizes information about stock options outstanding at
        December 31, 2006:

      


      


      

        
          	 	 	
                  Options

                	 	 	
                  Weighted
                    Average Exercise Price

                	 	 	
                  Range
                    of Option Exercise Price

                	 	 	
                  Intrinsic
                    Value

                	 
	
                  Options
                    outstanding - August 19, 2005 (inception)

                	 	 	
                  -

                	 	 	$	
                  -

                	 	 	$	
                  -

                	 	 	 	 
	
                  Granted

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Canceled
                    or expired

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Exercised

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Options
                    outstanding - December 31, 2005

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Granted

                	 	 	
                  25,200

                	 	 	 	
                  2.00

                	 	 	 	
                  2.00

                	 	 	 	 
	
                  Canceled
                    or expired

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Exercised

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Options
                    outstanding - December 31, 2006

                	 	 	
                  25,200

                	 	 	$	
                  2.00

                	 	 	$	
                  2.00

                	 	 	$	
                  0

                	 
	
                  Options
                    exercisable - December 31, 2006

                	 	 	
                  8,400

                	 	 	$	
                  2.00

                	 	 	$	
                  2.00

                	 	 	$	
                  0

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 


        



      As
        of
        December 31, 2006, there was $14,736 of total unrecognized compensation costs
        related to the outstanding stock options, which is expected to be recognized
        over a weighted average period of one year.

      


      
        	
                NOTE
                  7 – Marketing Support and Wholesaler
                  Agreement

              


      

      


      The
        Company entered into an agreement with Financial Products
        Distributors ("Distributor") on December 6, 2006, for wholesale
        distribution of its 5 year Note offering to NASD registered broker-dealers.
        The Distributor is compensated under the agreement based on the total volume
        of
        Note sales by broker-dealers. The compensation scale has 5 tiers and ranges
        from 1%-1.5% of Notes sold. There is no minimum compensation and maximum
        compensation is based on if the full Notes for $100 million are
        sold.

      


      
        	
                NOTE
                  8 - Subsequent Events

              


      

      


      The
        Company issued $220,000 in January of 2007, $100,000 on February 9, 2007,
        and
        $25,000 on February 22, 2007 of five year notes pursuant to the Company’s
        current S-1 registration statement.  The notes are due in January and
        February of 2012 and bear interest at a fixed rate (calculated based upon
        a
        360-day year) of ten percent (10%). Interest is payable monthly with the
        first
        interest payment commencing thirty (30) days from issuance.  Total
        notes issued and outstanding as of February 9, 2007 are $545,000 (including
        bonds issued as of December 31, 2006 – See Note 4).

       


      
        
                

                                                                                                                                                                                                                                            
              F-12