Attached files
file | filename |
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EX-32.1 - EX-32.1 - True North Finance Corp | c54693exv32w1.htm |
EX-31.1 - EX-31.1 - True North Finance Corp | c54693exv31w1.htm |
EX-32.2 - EX-32.2 - True North Finance Corp | c54693exv32w2.htm |
EX-31.2 - EX-31.2 - True North Finance Corp | c54693exv31w2.htm |
Table of Contents
UNITED STATES 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, 2009.
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission file number: 333-129919
True North Finance Corporation
(Exact name of small business issuer as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) |
20-3345780 (I.R.S. Employer Identification No.) |
4999 France Avenue South, Suite 248
Minneapolis, Minnesota 55410
(Address of principal executive offices)
Minneapolis, Minnesota 55410
(Address of principal executive offices)
Issuers Telephone Number: (952) 358-6120
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large-accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common equity, as of the
latest practicable date: The number of shares outstanding of the Registrants Series A common
stock and Series B common stock as of November 13, 2009, was 1,000,000, and 67,354,092,
respectively, and the number of the Registrants preferred shares outstanding was 36,643.
Transitional Small Business Disclosure Format (check one): Yes o No þ
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
BALANCE SHEETS
(Unaudited)
(Unaudited)
September 30, 2009 | December 31, 2008 | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 98,757 | $ | | ||||
Interest receivable |
319,374 | | ||||||
Other current assets |
750,387 | | ||||||
Total current assets |
1,168,518 | | ||||||
Property and equipment |
69,798 | | ||||||
Investment in notes receivable, net of allowance of $663,735
as of September 30, 2009 |
7,730,983 | | ||||||
Real estate held for sale |
104,106,000 | | ||||||
Other assets |
786,346 | | ||||||
Total assets |
$ | 113,861,645 | $ | | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable |
$ | 2,820,836 | $ | | ||||
Current portion of notes payable |
1,713,900 | | ||||||
Other current payables |
2,359,026 | | ||||||
Total current liabilities |
6,893,762 | | ||||||
LONG TERM LIABILITIES |
||||||||
Notes payable |
70,785,923 | | ||||||
Deferred income taxes |
2,738,837 | |||||||
Total liabilities |
80,418,522 | | ||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, $1,000 stated value, 50,000 shares authorized;
36,643 shares issued and outstanding |
13,140,673 | | ||||||
Preferred stock receivable 1,170 shares |
(419,470 | ) | ||||||
Common stock (Series A), $.01 par value, 1,000,000 shares authorized;
1,000,000 shares issued and outstanding |
10,000 | 10,000 | ||||||
Common stock (Series B), $.01 par value, 150,000,000 shares authorized;
67,354,092 and 36,331,993 shares issued and outstanding
at September 30, 2009 and December 31, 2008, respectively |
673,541 | 363,320 | ||||||
Additional paid-in capital |
15,486,644 | | ||||||
Accumulated (deficit) |
(2,642,789 | ) | (373,320 | ) | ||||
Total True North Finance Corporation stockholders equity |
26,248,599 | | ||||||
Noncontrolling interests |
7,194,524 | |||||||
Total stockholders equity |
33,443,123 | | ||||||
Total liabilities and stockholders equity |
$ | 113,861,645 | $ | | ||||
The accompanying notes are an integral part of these financial statements
3
Table of Contents
STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
For the Three | For the Nine | |||||||||||||||
For the Three | Months Ended | Months Ended | For the Nine | |||||||||||||
Months Ended | September 30, | September 30, | Months Ended | |||||||||||||
September 30, 2009 | 2008 | 2009 | September 30, 2008 | |||||||||||||
INTEREST AND FEE INCOME |
$ | 306,132 | $ | | $ | 306,132 | $ | | ||||||||
OPERATING EXPENSES |
||||||||||||||||
Insurance |
8,911 | 8,911 | ||||||||||||||
Payroll |
93,076 | 93,076 | ||||||||||||||
Professional fees |
91,177 | 91,177 | ||||||||||||||
Interest expense |
2,039,456 | 2,039,456 | ||||||||||||||
Provision for doubtful accounts |
663,735 | 663,735 | ||||||||||||||
Other |
1,758,564 | 1,758,564 | ||||||||||||||
Total operating expenses |
4,654,919 | | 4,654,919 | | ||||||||||||
Operating Loss |
(4,348,787 | ) | | (4,348,787 | ) | | ||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||||||
Other expense |
(580,530 | ) | | (580,530 | ) | | ||||||||||
Other income |
12,541 | | 12,541 | | ||||||||||||
Deferred income tax benefit |
1,748,011 | | 1,748,011 | | ||||||||||||
Net income (loss) |
(3,168,765 | ) | | (3,168,765 | ) | | ||||||||||
Net (income) loss attributable to noncontrolling interests |
899,296 | | 899,296 | | ||||||||||||
Net income (loss) attributable to True North |
$ | (2,269,469 | ) | $ | | $ | (2,269,469 | ) | $ | | ||||||
Earnings (loss) per share: |
||||||||||||||||
Basic and diluted attributable to True North Stockholders |
$ | (0.09 | ) | $ | | $ | (0.09 | ) | $ | | ||||||
Weighted average basic and diluted shares outstanding |
68,354,092 | 37,331,993 | 47,889,961 | 37,331,993 | ||||||||||||
The accompanying notes are an integral part of these financial statements
4
Table of Contents
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
For the Nine Months Ended September 30, 2009
For the Nine Months Ended September 30, 2009
(Unaudited)
Common Stock | ||||||||||||||||||||||||||||||||
Non- | Additional | Stockholders | ||||||||||||||||||||||||||||||
Common | Preferred | Preferred | controlling | Paid-in- | Accum. | Equity | ||||||||||||||||||||||||||
Shares | Stock | Stock | Stock Rec. | interests | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||
(000s) | ($000s) | ($000s) | ($000s) | ($000s) | ($000s) | ($000s) | ($000s) | |||||||||||||||||||||||||
BALANCES, Dec. 31, 2008 |
37,332 | $ | 373 | $ | | $ | | $ | | $ | | $ | (373 | ) | $ | | ||||||||||||||||
Common shares issued in
Merger June 30, 2009 |
31,022 | 310 | 15,487 | 15,797 | ||||||||||||||||||||||||||||
Preferred shares issued
in Merger June 30, 2009
(36,643 shares) |
13,140 | 13,140 | ||||||||||||||||||||||||||||||
Preferred shares
receivable accrued
September 30, 2009
(1,170 shares) |
(419 | ) | (419 | ) | ||||||||||||||||||||||||||||
Non-controlling interest
acquired in Merger June
30, 2009 |
8,981 | 8,981 | ||||||||||||||||||||||||||||||
Conversion of non-controlling interest into
Series 1 Notes Payable in
July 2009 |
(887 | ) | (887 | ) | ||||||||||||||||||||||||||||
Net Loss for the nine
months ended September
30, 2009 |
(899 | ) | (2,270 | ) | (3,169 | ) | ||||||||||||||||||||||||||
BALANCES, Sept. 30,
2009 |
68,354 | $ | 683 | $ | 13,140 | $ | (419 | ) | $ | 7,195 | $ | 15,487 | $ | (2,643 | ) | $ | 33,443 | |||||||||||||||
The accompanying notes are an integral part of these financial statements
5
Table of Contents
STATEMENTS OF CASH FLOW
(Unaudited)
(Unaudited)
For the Nine | For the Nine | |||||||
Months Ended | Months Ended | |||||||
Sept. 30, 2009 | Sept. 30, 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (3,168,765 | ) | $ | | |||
Adjustments to reconcile net loss to cash flows from operating activities |
| |||||||
Depreciation |
4,387 | | ||||||
Amortization of debt fees |
22,346 | | ||||||
Amortization of prepaid expenses |
1,000 | | ||||||
Provision for doubtful accounts |
663,735 | |||||||
Changes in operating assets and liabilities |
||||||||
Change in interest receivable |
152,991 | | ||||||
Change in prepaid insurance |
18,049 | | ||||||
Change in prepaids and other current assets |
(50,938 | ) | | |||||
Change in accounts payable and accrued liabilities |
1,622,576 | | ||||||
Change in deferred income tax liability |
(2,120,011 | ) | | |||||
Change in accrued interest |
280,798 | | ||||||
Net cash flows used in operating activities |
(2,573,832 | ) | | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Proceeds from other investments |
765,282 | | ||||||
Purchase of fixed assets |
(20,124 | ) | | |||||
Cash acquired through Merger transaction |
413,526 | |||||||
Net cash flows used in investing activities |
1,158,684 | | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from Notes Payable Series A, Series 1, Other |
1,651,071 | | ||||||
Principal payments on capital lease obligations |
(2,281 | ) | | |||||
Principal payments on note payable |
(134,885 | ) | | |||||
Net cash flows from financing activities |
1,513,905 | | ||||||
Net Change in Cash and Cash Equivalents |
98,757 | | ||||||
Cash and Cash Equivalents Beginning of Period |
| | ||||||
Cash and Cash Equivalents End of Period |
$ | 98,757 | $ | | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid for interest |
$ | 2,304,034 | $ | | ||||
Cash paid for income taxes |
$ | | $ | | ||||
Supplemental noncash investing and financing activities: |
||||||||
Assets acquired in Merger |
$ | 115,852,500 | $ | | ||||
Less liabilities assumed |
(77,934,435 | ) | | |||||
Net assets acquired |
$ | 37,918,065 | $ | | ||||
Conversion of noncontrolling interest to Notes Payable Series 1 |
$ | 886,707 | $ | | ||||
The accompanying notes are an integral part of these financial statements
6
Table of Contents
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
NOTE 1 Nature of Operations and Summary of Significant Accounting Policies
Reference to the Company
References to we, us, our, True North or the Company in these notes to the consolidated
financial statements refer to True North Finance Corporation, a Delaware corporation, and its
subsidiaries. On June 22, 2009, CS Financing Corporation changed its name to True North Finance
Corporation. As discussed below, the financial statements prior to June 30, 2009 are those of CS
Fund General Partner, LLC.
Reverse Acquisition Accounting
CS Fund General Partner, LLC became a wholly owned subsidiary of True North Finance Corporation
pursuant to a merger on June 30, 2009. Under the purchase method of accounting in a business
combination effected through an exchange of equity interests, the entity that issues the equity
interests is generally the acquiring entity. In some business combinations (commonly referred to
as reverse acquisitions), however, the acquired entity issues the equity interests. Statement of
Financial Accounting Standard (SFAS) No. 141R, Business Combinations requires consideration of
the facts and circumstances surrounding a business combination that generally involve the relative
ownership and control of the entity by each of the parties subsequent to the merger. Based on a
review of these factors, the June 2009 merger with CS Fund General Partner, LLC (the Merger) was
accounted for as a reverse acquisition (i.e. True North Finance Corporation was considered as the
acquired company and CS Fund General Partner, LLC was considered as the acquiring company). As a
result, True North Finance Corporations assets and liabilities as of June 30, 2009, the date of
the Merger closing, have been incorporated into CS Fund General Partner, LLCs balance sheet based
on the fair values of the net assets acquired, which equaled the consideration paid for the
acquisition. SFAS No. 141R also requires an allocation of the acquisition consideration to
individual assets and liabilities including tangible assets, and financial assets. Further, the
Companys operating results (post Merger) include CS Fund General Partner, LLCs operating results
prior to the date of closing and the results of the combined entity following the closing of the
Merger. Although CS Fund General Partner, LLC was considered the acquiring entity for accounting
purposes, the Merger was structured so that CS Fund General Partner, LLC became a wholly owned
subsidiary of True North Finance Corporation.
Also on June 30, 2009, the Company issued 40,000 shares of preferred stock to Capital Solutions
Monthly Income Fund, LP. On that same date, Capital Solutions Monthly Income Fund, LP distributed
36,643 shares of the preferred stock to certain limited partners in complete liquidation of their
capital accounts. Other limited partners indicated an interest in converting their limited partner
interests to Series 1 Notes. Accordingly, they did not receive preferred stock and remained as
limited partners on June 30, 2009. These limited partners are reflected on the balance sheet as
non-controlling interests. In July 2009, $886,707 of the limited partnership interests was liquidated
in exchange for Series 1 Notes. As a result of these transactions, the Company obtained control of
Capital Solutions Monthly Income Fund, L.P and True North Finance Corporation.
CS Fund General Partner, LLC is the general partner of Capital Solutions Monthly Income Fund. The
investment in Capital Solutions Monthly Income Fund, LP is reflected on the balance sheet as
Non-controlling interest of $7,194,524 as of September 30, 2009.
Nature of Operations
The Company was incorporated in Delaware on August 19, 2005. The Company primarily finances real
estate and other transactions from proceeds of the Companys offering of Five Year Notes-Series A
(the Notes Offering).
CS Fund General Partner, LLC, a Delaware Limited Liability Company, was formed on November 24,
2004. CS Fund General Partner, LLC was the general partner of Capital Solutions Monthly Income
Fund.
Capital Solutions Monthly Income Fund, L.P. (the Partnership), a Delaware limited partnership, was
formed on November 4, 2004. The Partnership was originally formed to achieve advantageous rates of
return through purchasing secured, but subordinated, notes relating to the financing for
residential and commercial real estate development, construction and investment property. In June
of 2008, the Partnership foreclosed on assets secured by the outstanding notes. The Partnership
continues to own real estate for the purpose of investment and development.
7
Table of Contents
NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
Consolidated Financial Statements
In the consolidated financial statements and the notes thereto, all references to historical
information, balances and results of operations are related to CS Fund General Partner LLC as the
predecessor company pursuant to reverse acquisition accounting rules. Although pre-merger True
North Finance Corporation was an operating company since 2006, under reverse acquisition accounting
rules, the merged Companys consolidated financial statements reflect our results as an operating
company since January 1, 2008. Accordingly, the Companys operating results (post-Merger) include
the operating results of CS Fund General Partner LLC prior to the date of the Merger and the
results of the combined entity following the closing of the Merger.
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain
amounts previously reported have been reclassified to conform to the current year presentation.
Condensed Financial Statements
The accompanying condensed unaudited financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial statements and
pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. In the
opinion of management, the accompanying unaudited financial statements reflect all adjustments
consisting of normal recurring adjustments necessary for a fair presentation of its financial
position and results of operations. Interim results of operations are not necessarily indicative of
the results that may be achieved for the full year. The financial statements and related notes do
not include all information and footnotes required by U.S. generally accepted accounting principles
for annual reports. This quarterly report should be read in conjunction with the financial
statements included in the Companys report on Form 10-K filed on March 31, 2009 with the U.S.
Securities and Exchange Commission for the year ended December 31, 2008 and Form 8-K filed on July
9, 2009, Form 8-K/A filed on September 16, 2009 and Form 8-K/A filed on September 28, 2009.
Management 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include interest-bearing and non-interest-bearing bank deposits, money
market accounts, short-term certificates of deposit with original maturities of three months or
less, and short-term instruments with a liquidation provision of one month or less.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over the estimated useful lives of the
related assets, generally three to seven years. Amortization on capital leases is over the lesser
of the estimated useful life or the term of the lease. Expenditures for repairs and maintenance
are charged to operations as incurred. We periodically evaluate whether events and circumstances
have occurred that may warrant revision of the estimated useful lives of fixed assets or whether
the remaining balance of fixed assets should be evaluated for possible impairment. We use an
estimate of the related undiscounted cash flows over the remaining life of the fixed assets in
measuring their recoverability.
8
Table of Contents
NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
Revenue Recognition
Interest is recognized as revenue when earned according to the terms of the loans, using the
effective interest method. We do not accrue interest income on loans once they are determined to
be non-performing. A loan is considered non-performing: (1) when, based on current information
and events, it is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement; or (2) when the payment of interest is 90 days past due.
Cash receipts will be allocated to interest income, except when such payments are specifically
designated by the terms of the loan as principal reduction or when management does not believe our
investment in the loan is fully recoverable.
Investments in Real Estate Loans
We may from time to time acquire or sell investments in real estate loans from or to our manager or
other related parties pursuant to the terms of our Management Agreement without a premium. The
primary purpose is to either free up capital to provide liquidity for various reasons, such as loan
diversification, or place excess capital in investments to maximize the use of our capital.
Selling or buying loans allows us to diversify our loan portfolio within these parameters. Due to
the short-term nature of the loans we make and the similarity of interest rates in loans we
normally would invest in, the fair value of a loan typically approximates its carrying value.
Accordingly, discounts or premiums typically do not apply upon sales of loans and therefore,
generally no gain or loss is recorded on these transactions, regardless of whether to a related or
unrelated party.
Investments in real estate loans are generally secured by deeds of trust or mortgages. Generally,
our real estate loans require interest only payments with a balloon payment of the principal at
maturity. We have also made loans that defer interest and principal until maturity. We have both
the intent and ability to hold real estate loans until maturity and therefore, real estate loans
are classified and accounted for as held for investment and are carried at amortized cost. Loans
sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss
is recognized by us or any affiliate.
Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and
are updated, when new appraisals are received, to reflect subsequent changes in value estimates.
Such appraisals are generally dated within 12 months of the date of loan origination and may be
commissioned by the borrower.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated
credit impairment. Managements estimate of losses is based on a number of factors including the
types and dollar amounts of loans in the portfolio, adverse situations that may affect the
borrowers ability to repay, prevailing economic conditions and the underlying collateral securing
the loan. Additions to the allowance are provided through a charge to earnings and are based on an
assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on
loans are recorded as a charge-off or a reduction to the allowance for loan losses. Generally,
subsequent recoveries of amounts previously charged off are added back to the allowance and
included as income.
Estimating allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency and cooperation of
the related borrower and specific legal issues that affect loan collections or taking possession of
the property.
Additional facts and circumstances may be discovered as we continue our efforts in the collection
and foreclosure processes. This additional information often causes management to reassess its
estimates. Circumstances that may cause significant changes in our estimated allowance include,
but are not limited to:
9
Table of Contents
NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
| Changes in the level and trends relating to non-performing receivables including past due interest payments and past due principal payments; | ||
| Declines in real estate market conditions, which can cause a decrease in expected market value; | ||
| Discovery of undisclosed lines (including but not limited to, community improvement bonds, easements and delinquent property taxes); | ||
| Lack of progress on real estate developments after we advance funds. We will customarily monitor progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances; | ||
| Unanticipated legal or business issues that may arise subsequent to loan origination or loan advances or upon the sale of foreclosed property; and | ||
| Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the current value of the property. |
The Company considers a loan to be impaired when based on current information and events, it is
probable that Company will be unable to collect all amounts due according to the contractual terms
of the loan agreement or when the payment of interest or principal is 90 days past due.
Fair Value Disclosures
As of September 30, 2009, we had no assets or liabilities utilizing Level 1 or Level 2 inputs and
assets and liabilities utilizing Level 3 inputs included investments in real estate loans,
unsecured borrowings.
To the extent that valuation is based on models or inputs that are less observable or unobservable
in the market, the determination of fair value requires more judgment. Accordingly, our degree of
judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, an asset or liability will be classified in its entirety based on
the lowest level of input that is significant to the measurement of fair value.
Fair value is a market-based measure considered from the perspective of a market participant who
holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when
market assumptions are not readily available, our own assumptions are set to reflect those that
market participants would use in pricing the asset or liability at the measurement date. We use
prices and inputs that are current as of the measurement date, including during periods of market
dislocation, such as the recent illiquidity in the auction rate securities market. In periods of
market dislocation, the observability of prices and inputs may be reduced for many instruments.
This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or
Level 3 and/or vice versa.
Our valuation techniques will be consistent with at least one of the three possible approaches: the
market approach, income approach and/or cost approach. Our Level 1 inputs are based on the market
approach and consist primarily of quoted prices for identical items on active securities exchanges.
Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets
or current transactions in inactive markets for the same or similar collateral that do not require
significant adjustment based on unobservable inputs. Our Level 3 inputs are primarily based on the
income and cost approaches, specifically, discounted cash flow analyses, which utilize significant
inputs based on our estimates and assumptions.
The following table presents the valuation of our financial assets and liabilities as of September
30, 2009, measured at fair value on a recurring basis by input levels:
10
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NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets | Significant Other | Significant | Carrying Value on | |||||||||||||||||
For Identical | Observable | Unobservable Inputs | Balance at | Balance Sheet at | ||||||||||||||||
Assets (Level 1) | Inputs (Level 2) | (Level 3) | 09/30/2009 | 09/30/2009 | ||||||||||||||||
Assets |
||||||||||||||||||||
Investment in
real estate held
for sale |
$ | | $ | | $ | 104,106,000 | $ | 104,106,000 | $ | 104,106,000 | ||||||||||
Investments in
notes receivable |
$ | | $ | | $ | 7,730,983 | $ | 7,730,983 | $ | 7,730,983 | ||||||||||
Liabilities |
||||||||||||||||||||
Notes payable |
$ | | $ | | $ | 72,499,823 | $ | 72,499,823 | $ | 72,499,823 |
The following table presents the changes in our financial assets and liabilities that are measured
at fair value on a recurring basis using significant unobservable inputs (Level 3) from June 30,
2009 to September 30, 2009:
Assets | ||||||||
Investment in | Investment in notes | |||||||
real estate held for sale | receivable | |||||||
Balance on June 30, 2009 |
$ | 104,106,000 | $ | 9,159,999 | ||||
Change in temporary valuation adjustment included in net loss |
||||||||
Increase in allowance for loan losses |
| (663,735 | ) | |||||
Purchase and additions of assets |
| | ||||||
Sales, pay downs and reduction of assets |
||||||||
Proceeds
from investments |
| (765,282 | ) | |||||
Transfer to Level 1 |
| | ||||||
Transfer to Level 2 |
| | ||||||
Balance on September 30, 2009, net of temporary valuation adjustment |
$ | 104,106,000 | $ | 7,730,983 | ||||
Liabilities | ||||
Notes Payable | ||||
Balance on June 30, 2009 |
$ | 68,448,021 | ||
Increase in Series 1 Notes Payable |
3,954,128 | |||
Increase in Bond Payable |
200,000 | |||
Principal payments on notes payable |
(142,326 | ) | ||
Transfer to Level 1 |
| |||
Transfer to Level 2 |
| |||
Balance on September 30, 2009, net of temporary valuation adjustment |
$ | 72,499,823 | ||
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NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
Stock Based Compensation
The Company applies
Generally Accepted Accounting Principles (GAAP) for all compensation
related to stock, options, or warrants. GAAP requires the recognition of compensation
cost using a fair value based method whereby compensation is measured at the grant date based on
the value of the award and is recognized over the service period, which is usually the vesting
period. The Company uses the Black-Scholes pricing model to calculate the fair value of options
and warrants issued to employees and non-employees. Stock issued for compensation is valued using
the market price of the stock on the date of the related agreement.
Real Estate Held for Sale
Real estate held for sale includes real estate acquired through purchases and foreclosure and will
be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the
propertys estimated fair value, less estimated costs to sell, with fair value based upon
appraisals and knowledge of local market conditions. The carrying values of real estate held for
sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase
offers.
Management classifies real estate held for sale when the following criteria are met:
| Management commits to a plan to sell the properties; | ||
| The property is available for immediate sale in its present condition subject only to the terms that are usual and customary; | ||
| An active program to locate a buyer and other actions required to complete a sale have been initiated; | ||
| The sale of the property is probable; | ||
| The property is being actively marketed for sale at a reasonable price; | ||
| Withdrawal or significant modification of the sale is not likely. |
Our investments in real estate held for sale are accounted for at the lower of cost or fair value
less costs to sell with fair value based on appraisals and knowledge of local market conditions.
Classification of Operating Results from Real Estate Held for Sale
FAS 144 generally requires operating results from long lived assets held for sale to be classified
as discontinued operations as a separately stated component of net income. Our operations related
to real estate held for sale are separately identified in the accompanying consolidated statements
of income.
Income Taxes
The Company accounts for its
income taxes in accordance with GAAP, which
requires recognition of deferred tax assets and liabilities for future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company accounts for uncertainty in
tax positions in accordance with GAAP which requires the recognition of a tax position when it is more likely than not that
the tax position will be sustained upon examination by relevant taxing authorities, based on the
technical merits of the position.
Earnings Per Share
Basic earnings per common shares (EPS) is calculated by dividing net income available to common
stockholders by the weighted average number of shares outstanding during the period. For periods
prior to the Merger, to determine the weighted average number of shares outstanding, the number of
True North Finance Corporation common shares issued for outstanding CS Fund General Partner, LLC
member shares was equated to member shares issued and outstanding during prior periods.
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NOTE 1 Nature of Operations and Summary of Significant Accounting Policies (cont.)
Recent accounting policies
In June 2009, the Financial Accounting Standards Board (FASB) issued the Accounting Standards
Codification (the Codification). Effective July 1, 2009, the Codification is the single source of
authoritative accounting principles recognized by the FASB to be applied by non-governmental
entities in the preparation of financial statements in conformity with GAAP. We adopted the
Codification during the third quarter of 2009 and the adoption did not materially impact our
financial statements, however our references to accounting literature within our notes to the
condensed consolidated financial statements have been revised to conform to the Codification
classification.
In June 2009, the FASB issued Statement of Financial Accounting Standards (FAS) 166, Accounting
for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (FAS 166), which is
not yet included in the Codification. FAS 166 modifies the financial components approach, removes
the concept of a qualifying special purpose entity, and clarifies and amends the derecognition
criteria for determining whether a transfer of a financial asset or portion of a financial asset
qualifies for sale accounting. FAS 166 also requires expanded disclosures regarding transferred
assets and how they affect the reporting entity. FAS 166 is effective for us beginning January 1,
2010. We do not expect the adoption of FAS 166 to have a material effect on our financial
statements.
In June 2009, the FASB issued FAS 167, Amendments to FASB Interpretation No. 46R (FAS 167),
which is not yet included in the Codification. FAS 167 changes the consolidation analysis for VIEs
and requires a qualitative analysis to determine the primary beneficiary of the VIE. The
determination of the primary beneficiary of a VIE is based on whether the entity has the power to
direct matters which most significantly impact the activities of the VIE and has the obligation to
absorb losses, or the right to receive benefits, of the VIE which could potentially be significant
to the VIE. FAS 167 requires an ongoing reconsideration of the primary beneficiary and also amends
the events triggering a reassessment of whether an entity is a VIE. FAS 167 requires additional
disclosures for VIEs, including disclosures about a reporting entitys involvement with VIEs, how a
reporting entitys involvement with a VIE affects the reporting entitys financial statements, and
significant judgments and assumptions made by the reporting entity to determine whether it must
consolidate the VIE. FAS 167 is effective for us beginning January 1, 2010. We are currently
evaluating the effects, if any, this statement may have on our financial statements.
In August 2009, the FASB issued Accounting Standards Update (ASU) 2009-05, which provides
alternatives to measuring the fair value of liabilities when a quoted price for an identical
liability traded in an active market does not exist. The alternatives include using the quoted
price for the identical liability when traded as an asset or the quoted price of a similar
liability or of a similar liability when traded as an asset, in addition to valuation techniques
based on the amount an entity would pay to transfer the identical liability (or receive to enter
into an identical liability). The amended guidance is effective for us beginning October 1, 2009,
and we do not expect the effects to have a material impact on our financial statements.
NOTE 2 Business Combination
In June of 2009 a definitive merger agreement was entered into by True North Finance Corporation
and CS Fund General Partner, LLC. The merger was completed on June 30, 2009. Pursuant to the
terms of the Merger, the equity holder of CS Fund General Partner, LLC (Transactional Finance, LLC)
acquired 37,331,993 shares of common stock constituting 70% of voting control of True North Finance
Corporation. CS Fund General Partner, LLC is the general partner of Capital Solutions Monthly
Income Fund, L.P. Also on June 30, 2009 True North Finance Corporation issued 40,000 shares of
Preferred stock to Capital Solutions Monthly Income Fund, L.P. in exchange for limited partner
interest. 36,643 shares of preferred stock was simultaneously distributed by Capital Solutions
Monthly Income Fund, LP to its limited partners in complete liquidation of their capital accounts.
Certain limited partners indicated an interest in converting their limited partner interests to
Series 1 Notes. Accordingly, they did not receive preferred stock and remained as limited partners
on June 30, 2009. They are reflected on the balance sheet as non-controlling interests. As of
September 30, 2009, certain limited partners had not completed the conversion of their limited
partner interests to Series 1 Notes. These partners are reflected on the balance sheet as
non-controlling interests totaling $7,194,524 as of September 30, 2009. As a result of these
transactions, the Company controls of Capital Solutions Monthly Income Fund, L.P and True North
Finance Corporation.
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NOTE 2 Business Combination (cont.)
As a result of accounting for the Merger as a reverse acquisition, True North Finance Corporations
assets and liabilities and Capital Solutions Monthly Income Fund, L.P.s assets and liabilities as
of June 30, 2009, the closing date of the Merger, have been incorporated into CS Fund General
Partner, LLCs balance sheet based on the fair values of the net assets acquired, which equaled the
consideration paid for the acquisition. SFAS No 141R requires an allocation of the acquisition
consideration to the individual assets and liabilities. Further, the Companys operating results
(post-Merger) include CS Fund General Partner, LLC operating results prior to the date of the
closing and the results of the combined entity following the closing of the Merger. Although CS
Fund General Partner, LLC was considered the acquiring entity for accounting purposes, the Merger
was structured so that CS Fund General Partner, LLC became a wholly owned subsidiary of True North
Finance Corporation.
Assets and liabilities acquired in the Merger are summarized as follows:
| True North Finance Corporation |
| Notes receivable $2,068,485 and accrued interest of $349,273 in connection with loans issued in 2008 and 2009 secured by real estate located in California near San Francisco. | ||
| Real estate located in Maricopa County, AZ (79 acres) valued at $22,500,000. This property is subject to a mortgage of $7,000,000 which matures on August 1, 2012 and bears an interest rate of 10%. | ||
| Real estate located in Lloyd Harbor, NY (16 acres) valued at $16,750,000. This property is subject to a mortgage of $4,000,000 which matures on June 16, 2013 and bears an interest rate of 10%. | ||
| Five Year Notes-Series A (Notes) issued pursuant to a registration statement on Form S-1 (the Registration Statement). The Notes issued 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 liability acquired was $9,930,000. |
| Capital Solutions Monthly Income Fund, L.P. |
| Cash of approximately $400,000. | ||
| Various real estate investments located in the Midwestern United States valued at $7,926,000. | ||
| Various real estate investments located in Florida valued at $56,939,107. The real estate acquired is subject to senior debt of $21,687,766. | ||
| Investment in notes receivable equal to $6,944,514 (unsecured). | ||
| Deposits in escrow and other receivables of $759,890. |
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NOTE 2 Business Combination (cont.)
The following table summarizes the acquisition purchase price and the tentative allocation to the
assets acquired and liabilities assumed in connection with the acquisitions:
True North | Capital Solutions | |||||||||||
Financing | Monthly Income | |||||||||||
Corporation | Fund, LP | Total | ||||||||||
Current assets |
||||||||||||
Cash and cash equivalents |
$ | 3,516 | $ | 410,010 | $ | 413,526 | ||||||
Accounts receivable |
| 15,307 | 15,307 | |||||||||
Inventories |
| 22,418 | 22,418 | |||||||||
Accrued interest receivables |
349,273 | 123,000 | 472,273 | |||||||||
Other current assets |
26,734 | | 26,734 | |||||||||
Total current assets |
$ | 379,523 | $ | 570,735 | $ | 950,258 | ||||||
Other assets |
||||||||||||
Property plant and equipment (net) |
26,061 | 28,000 | 54,061 | |||||||||
Investments in note receivable |
2,068,486 | 5,641,514 | 7,710,000 | |||||||||
Investments in real estate |
39,250,000 | 67,334,997 | 106,584,997 | |||||||||
Other assets |
553,184 | | 553,184 | |||||||||
Total other assets |
$ | 41,897,731 | $ | 73,004,511 | $ | 114,902,242 | ||||||
Total assets acquired |
$ | 42,277,254 | $ | 73,575,246 | $ | 115,852,500 | ||||||
Current liabilites |
469,282 | 2,411,721 | 2,881,003 | |||||||||
Long term liabilities |
25,887,606 | 49,165,826 | 75,053,432 | |||||||||
Total liabilities assumed |
$ | 26,356,888 | $ | 51,577,547 | $ | 77,934,435 | ||||||
Total (assets in excess of liabilities) |
$ | 37,918,065 | ||||||||||
A reconciliation of consideration paid to the allocation of the purchase price to specific assets
and liabilities is as follows:
Fair value of outstanding preferred stock issued |
$ | 13,140,673 | ||
Fair value of outstanding common stock issued |
15,796,865 | |||
Non-controlling interests |
8,980,527 | |||
$ | 37,918,065 | |||
The following represents the unaudited proforma combined results of operations of the Merger as if
the Merger had occurred as of January 1, 2008:
For the Three | For the Three | For the Nine | For the Nine | |||||||||||||
Months Ended | Months Ended | Months Ended | Months Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Unaudited proforma information: |
||||||||||||||||
Revenue |
306,132 | 75,637 | 605,595 | 3,093,885 | ||||||||||||
Net income (loss) |
(2,572,016 | ) | (2,440,087 | ) | (7,323,914 | ) | (4,599,800 | ) | ||||||||
Basic and diluted earnings per share |
(0.05 | ) | (0.01 | ) | (0.10 | ) | (0.06 | ) | ||||||||
Weighted average basic and
diluted shares outstanding |
47,899,961 | 47,899,961 | 47,899,961 | 47,899,961 |
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NOTE 3 Stockholders Equity
Preferred Stock
On June 30, 2009 the Board of Directors authorized the issuance of 40,000 shares of preferred
stock, stated value $1,000 per share to Capital Solutions Monthly Income Fund, L.P.
Common Stock
In June of 2009 the company increased the authorized shares of common stock (referred to as Series
B) from 70,000,000 to 150,000,000 and issued 36,331,993 to Transactional Finance, LLC in connection
with the Merger. Total shares issued and outstanding of the Series B common stock is 67,354,092 as
of September 30, 2009.
In June of 2009 the authorized and issued 1,000,000 shares of Series A common stock to
Transactional Finance, LLC in connection with the Merger. The Series A common stock has a priority
voting position. As a result of the issuance of the Series B and Series A common stock in June of
2009, Transactional Finance, LLC has voting control of 70% of the Company. For periods prior to
the Merger, to determine the weighted average number of shares outstanding, the number of True
North Finance Corporation common shares issued for outstanding CS Fund General Partner, LLC member
shares was equated to member shares issued and outstanding during prior periods.
NOTE 4 Notes Payable
The Companys notes payable as of September 30, 2009 are summarized as follows:
As of | ||||||||||||
As of June 30, | September | Interest | ||||||||||
Description | 2009 | 30, 2009 | Matures | Rate | ||||||||
Five Year Notes-Series A issued in
2006, 2007, and 2008 (unsecured)
interest paid monthlly |
$ | 9,930,000 | $ | 10,130,000 | 2011 - 2013 | 10% | ||||||
Series 1 Four Year Notes issued in
2009 (unsecured) interest paid
monthly |
27,478,060 | 31,432,188 | 2013 | 10% | ||||||||
Note Payable issued in 2009 secured
by Arizona real estate, interest paid
monthly |
7,000,000 | 7,000,000 | 2013 | 10% | ||||||||
Note Payable issued in 2009 secured
by New York real estate, interest paid
monthly |
4,000,000 | 4,000,000 | 2012 | 10% | ||||||||
Senior Debt secured by real estate
foreclosed in 2008, interest paid
monthly or quarterly |
20,078,486 | 19,936,829 | 2011 - 2013 | 8% - 13% | ||||||||
Other Notes Payable |
1,475 | 806 | 2010 | 15% | ||||||||
Total Notes Payable |
$ | 68,488,021 | $ | 72,499,823 | ||||||||
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NOTE 5 Commitments and Contingencies
The Company has no pending litigation. The Fund has been and is currently subject to various legal
proceedings that arise in the ordinary course of business of owning distressed real estate and
operating a limited partnership. At this time we cannot predict the timing or outcome of the legal
proceedings.
By Order dated October 2, 2009, a district court judge for the Fourth Judicial District, Minnesota,
confirmed an arbitration award in favor of Charles T. Thompson, as Trustee for the Charles T.
Thompson Revocable Trust dated December 27, 2000 as amended and against Capital Solutions Monthly
Income Fund, L.P. in the amount of $1,000,000. As a result of this action the Company has accrued
a loss of $580,530 and a receivable in our preferred stock of $419,470.
NOTE 6 Subsequent Events
Events Subsequent to September 30, 2009 through November 16, 2009
On October 28, 2009, the Company entered into an agreement with Real Equity Solutions (RES) to
settle the Companys notes receivable (secured by the Prentiss properties in San Francisco
California) from RES in exchange for cash totaling $750,000 in three payments as follows:
1. | $225,000 On November 1, 2009 (Received) | ||
2. | $200,000 On December 10, 2009 | ||
3. | $325,000 On January 15, 2010 |
As a result, the Company recognized a loss as of September 30, 2009 for the notes receivable and
interest receivable in connection with this transaction in the amount of $953,766.
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Item 2. | Managements Discussion and Analysis or Plan of Operation. |
Some of the statements in this Quarterly Report on Form 10-Q, including, but not limited to this
Managements Discussion and Analysis or Plan of Operation, contain forward-looking statements
regarding the Companys business, financial condition, and results of operations and prospects that
are based on the Companys current expectations, estimates and projections. In addition, other
written or oral statements which constitute forward-looking statements may be made by the Company
or on the Companys behalf. Words such as expects, anticipates, intends, plans, believes,
seeks, estimates, may, would or variations of such words and similar expressions are
intended to identify such forward-looking statements. You can also identify forward-looking
statements by discussions of strategy, plans or intentions. These statements are not guarantees of
future performance, and are inherently subject to risks and uncertainties that are difficult to
predict. As a result, actual outcomes and results may differ materially from the outcomes and
results discussed in or anticipated by the forward-looking statements. All such statements are
therefore qualified in their entirety by reference to the factors specifically addressed in the
section entitled Factors That May Affect Future Results of Operations in the Companys Annual
Report on Form 10-K. New risks can arise and it is not possible for management to predict all such
risks, nor can management assess the impact of all such risks to the Companys business or the
extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as a
prediction of actual results. All forward-looking statements speak only as of the date of this
Quarterly Report on Form 10-Q. The Company undertakes no obligation to revise or update publicly
any forward-looking statements in order to reflect any event or circumstance that may arise after
the date of this Quarterly Report on Form 10-Q, other than as required by law.
Overview
Despite our operating history, we are an early stage finance company focused on the financing
of completed, or nearly completed, transactions. We invest primarily by making short- and
medium-term (twelve to thirty-six month) loans, and, on occasion, acquiring investments for
re-sale. We intend to pursue finance and investment opportunities in the following markets;
opportunistic equity, trade finance, distressed sellers, bridge finance and real estate finance
(referred to in the aggregate as Diversified Markets). We raise capital to make investments in
the Diversified Markets by making public offerings of our Notes. We acquired a substantial portion
of our assets as a result of the acquisition of the general partner of Capital Solutions Monthly
Income fund, L.P. (Fund) and other real estate purchases in June of 2009.
Our business strategy is to make loans on conservatively underwritten and completed, or nearly
completed, transactions and to secure our loans by first- and second-priority mortgages or other
UCC security interests, including the equity of entities that own the subject transaction and the
personal guarantees of the underlying principals. We will initially focus our lending on
transactions originating in the Midwest where the chosen Diversified Market niche values are less
vulnerable to large or unpredictable market swings and the networks of our management team will
provide a competitive advantage.
We plan to invest for our own account directly on our balance sheet. We seek to generate
revenue and profits by making loans and purchasing investments at yields higher than the interest
rates we must pay on our Notes and other debt. We seek to obtain effective interest yield spread
between 400 and 800 basis points above the interest rate we pay on our Notes and other debt. This
interest yield spread will consist of interest on the loan plus points and other fees. The income
from this interest spread is used to pay our expenses, which includes distribution expenses on our
Notes as well as our operating expenses.
Our Investment Committee will be responsible for constantly monitoring the Diversified
Markets. These duties include establishing and removing Diversified Markets as well as allocating
newly raised capital across the Diversified Markets based on market conditions, capacity, and
forecasted success. Capital will be deployed in the Diversified Markets through small investment
pods each managed by a separate investment pod manager. An investment pod is a name used to
describe a separately managed pool of internal capital. All investment pod managers will be
recruited and approved by the Investment Committee and Board. Each investment pod will generally
be limited to approximately 20 million dollars in investments and the investment pod managers will
manage their investments from origination through servicing to collection. The Investment
Committee, however, will have the authority to ultimately fund an investment pod in an appropriate
amount.
Liquidity
We anticipate loan repayments and asset sales of approximately $1,000,000 scheduled to be paid
in 2009 and early 2010 will provide adequate liquidity to fund the Companys operations over the
first two quarters of 2010. Thereafter, to the extent we are successful in selling Notes, and
historically we have not been, we expect that the primary source of our liquidity will come from
interest and fees earned on our loans and other investments made with the proceeds from Note sales.
Nevertheless, some short-term liquidity may be provided by the net proceeds from the sale of the
Notes. Although not contractually bound to do so, we also anticipate using some of the net proceeds
from the sale of the Notes to inject capital into the Fund. The Fund requires approximately
$1,000,000 per month to service the senior creditors on its real estate assets, its unsecured debt
and otherwise meet working capital
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demands. To the extent the Fund fails to service such debts, it will lose substantially all
of the value in its assets. The Funds only liquidity will come from the ultimate disposition of
its real estate assets. Its not anticipated that the Fund will liquidate any significant asset in
the ordinary course at fair market value prior to a significant recovery in the real estate and
credit markets.
Capital Resources and Results of Operation
Our current capital resources have been provided primarily by the net proceeds of our Notes
and the notes sold by the Fund. To date, our material commitments include payments to existing
Note holders, providing additional capital to the Fund and administrative personnel. These
expenses will be paid from cash flow from operations or from the net proceeds of the offering. We
believe we have identified prospects to purchase several investments sufficient to meet these
obligations for the remainder of 2009. We are still seeking additional capital to better
capitalize our business and will re-commence selling Notes, which, in turn, will generate cash to
fund our finance operations thereby producing net income and additional revenue. We currently have
limited revenue from operations and in all likelihood will be required to make future expenditures
in connection with our distribution efforts along with general and administrative expenses before
we will earn any material revenue.
Capital Raising Challenges
We have been selling our Notes on a continuous basis under our shelf registration statement on
Form S-1 through registered broker-dealers. We suspended offering the Notes on November 13, 2008,
and plan to recommence such offering in the 4th quarter of 2009. The Company currently
does not have any placement agreements with any broker-dealer and intends on initially offering the
Notes itself.
Dependence on One or a Few Major Borrowers
As of September 30, 2009, our investment portfolio is concentrated in a handful of assets.
Until we can create a sizeable investment portfolio spread out amongst numerous investment pods and
assets, our investments will be relatively concentrated. This concentration is a result of the
slower than anticipated sale of Notes.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, as defined in Item 303(c)(1) of
Regulation S-B promulgated under the Securities Act.
Contractual Obligations
The Company signed an employment agreement with Mr. Christopher Clouser on August 1, 2009,
which entitles him to base compensation at a rate of $350,000 per annum and options on up to
11,476,094 Series B Common Shares which are 50% vested. The agreement required the base
compensation to be increased by a minimum of $50,000 per annum commencing on the agreements first
anniversary. To the extent the Company is unable to secure an additional $250,000,000 in debt or
equity financing by the agreements first anniversary, the base compensation shall be reduced by 5%
for each $10,000,000 the Company is short of $250,000,000 up to 50%. The remaining options vest
upon the Company receiving $200,000,000 in new debt or equity financing.
Critical Accounting Estimates
Revenue Recognition
Interest is recognized as revenue when earned according to the terms of the loans, using the
effective interest method. We do not accrue interest income on loans once they are determined to
be non-performing. A loan is considered non-performing: (1) when, based on current information
and events, it is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement; or (2) when the payment of interest is 90 days past due.
Cash receipts will be allocated to interest income, except when such payments are specifically
designated by the terms of the loan as principal reduction or when management does not believe our
investment in the loan is fully recoverable.
Investments in Real Estate Loans
We may from time to time acquire or sell investments in real estate loans from or to our
manager or other related parties pursuant to the terms of our Management Agreement without a
premium. The primary purpose is to either free up capital to provide liquidity for various
reasons, such as loan diversification, or place excess capital in investments to maximize the use
of our capital. Selling or buying loans allows us to diversify our loan portfolio within these
parameters. Due to the short-term nature of the loans we make and the similarity of interest rates
in loans we normally would invest in, the fair value of a loan typically approximates
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its carrying value. Accordingly, discounts or premiums typically do not apply upon sales of loans
and therefore, generally no gain or loss is recorded on these transactions, regardless of whether
to a related or unrelated party.
Investments in real estate loans are generally secured by deeds of trust or mortgages.
Generally, our real estate loans require interest only payments with a balloon payment of the
principal at maturity. We have also made loans that defer interest and principal until maturity.
We have both the intent and ability to hold real estate loans until maturity and therefore, real
estate loans are classified and accounted for as held for investment and are carried at amortized
cost. Loans sold to or purchased from affiliates are accounted for at the principal balance and no
gain or loss is recognized by us or any affiliate.
Loan-to-value ratios are initially based on appraisals obtained at the time of loan
origination and are updated, when new appraisals are received, to reflect subsequent changes in
value estimates. Such appraisals are generally dated within 12 months of the date of loan
origination and may be commissioned by the borrower.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated
credit impairment. Managements estimate of losses is based on a number of factors including the
types and dollar amounts of loans in the portfolio, adverse situations that may affect the
borrowers ability to repay, prevailing economic conditions and the underlying collateral securing
the loan. Additions to the allowance are provided through a charge to earnings and are based on an
assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on
loans are recorded as a charge-off or a reduction to the allowance for loan losses. Generally,
subsequent recoveries of amounts previously charged off are added back to the allowance and
included as income.
Estimating allowances for loan losses requires significant judgment about the underlying
collateral, including liquidation value, condition of the collateral, competency and cooperation of
the related borrower and specific legal issues that affect loan collections or taking possession of
the property.
Additional facts and circumstances may be discovered as we continue our efforts in the
collection and foreclosure processes. This additional information often causes management to
reassess its estimates. Circumstances that may cause significant changes in our estimated
allowance include, but are not limited to:
| Changes in the level and trends relating to non-performing receivables including past due interest payments and past due principal payments; | ||
| Declines in real estate market conditions, which can cause a decrease in expected market value; | ||
| Discovery of undisclosed lines (including but not limited to, community improvement bonds, easements and delinquent property taxes); | ||
| Lack of progress on real estate developments after we advance funds. We will customarily monitor progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances | ||
| Unanticipated legal or business issues that may arise subsequent to loan origination or loan advances or upon the sale of foreclosed property | ||
| Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the current value of the property. |
The Company considers a loan to be impaired when based on current information and events, it
is probable that Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement or when the payment of interest or principal is 90 days past due.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Disclosure not required as a result of the Companys status as a smaller reporting company.
Item 4. | Controls and Procedures. |
Evaluation of disclosure controls and procedures.
As of the end of the period covered by this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. This evaluation was done under the supervision and with the
participation of our Principal Executive Officer and Principal Financial Officer. Based upon that
evaluation,
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our Principal Executive Officer and Principal Financial Officer concluded that our disclosure
controls and procedures were effective in gathering, analyzing and disclosing information needed to
satisfy our disclosure obligations under the Exchange Act.
Changes in internal controls over financial reporting.
There were no changes in our internal controls that materially affected or are reasonably
likely to materially affect the Companys internal controls over financial reporting.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings. |
The Company has no pending litigation. The Fund has been and is currently subject to various
legal proceedings that arise in the ordinary course of business of owning distressed real estate
and operating a limited partnership. At this time we cannot predict the timing or outcome of the
legal proceedings. By Order dated October 2, 2009, a district court judge for the Fourth Judicial
District, Minnesota, confirmed an arbitration award in favor of Charles T. Thompson, as Trustee for
the Charles T. Thompson Revocable Trust dated December 27, 2000 as amended and against Capital
Solutions Monthly Income Fund, L.P. in the amount of $1,000,000. The Fund will appeal this ruling.
Item 5. | Other Information. |
On November 6, 2009, the Board of Directors elected Christopher E. Clouser, John O.
Klinkenberg, Timothy R. Redpath, Constantine Deno Macricostas, Mannie Jackson, Richard B. Hirst,
Douglas A. Lennick and Philip A. Jones as directors.
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Item 6. | Exhibits |
Index to Exhibits
Exhibit | ||||
Number | Exhibit | Method of Filing | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certifications: Certification of Chief Executive Officer pursuant to Rule 15d. | Filed herewith. | ||
31.2
|
Rule 13a-14(a)/15d-14(a) Certifications: Certification of Chief Financial Officer pursuant to Rule 15d. | Filed herewith. | ||
32.1
|
Section 1350 Certifications of Chapter 63 of Title 18 of the United States Code. | Filed herewith. | ||
32.2
|
Section 1350 Certifications of Chapter 63 of Title 18 of the United States Code. | Filed herewith. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
By: | /s/ Todd A. Duckson | |||
Todd A. Duckson | ||||
Chief Executive Officer (Principal Executive Officer) Dated: November 16, 2009 |
||||
By: | /s/ Mark Williams | |||
Mark Williams | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) Dated: November 16, 2009 |
||||
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