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| CLNW.PK > SEC Filings for CLNW.PK > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
2005. The general partner of ECR Ltd. is an unrelated real estate developer
("General Partner"). The Company owns the largest interest in Stone Oak Prime,
L.P. ("Limited Partner") at forty-eight percent (48%). Other partners of the
Limited Partner include Thomas R. Johnson, President and CEO of the Company,
Christopher J. Hall, Chairman and the majority shareholder of the Company, and
Bryan P. Brown, President of REG. The General Partner is required to fund five
percent (5%) of the equity and the Limited Partner is required to fund
ninety-five percent (95%).
As a Limited Partner, the Company is entitled to receive a preferred return of
its capital contribution plus a ten percent (10%) per annum cumulative return,
compounded monthly. Following the repayment of the capital contributions and
accrued interest, excess cash, at the discretion of the General Partner, and net
refinancing or disposition proceeds shall be paid fifty percent (50%) to the
General Partner and fifty percent (50%) to the Limited Partner. At September 30,
2008 and December 31, 2007, the Company's investment totaled approximately
$2.598 million and $1.780 million, respectively.
The Cambridge at Auburn
On December 11, 2006 the Company entered into a partnership agreement to provide
ninety-five percent (95%) of the equity for the acquisition and rehabilitation
of a 156-unit, 312-bed full service, private dormitory located in Auburn,
Alabama, immediately adjacent to the campus of Auburn University. The project is
now known as The Cambridge at Auburn. The Company is the sole limited partner of
Cambridge at Auburn, LP ("CA, LP"). The general partner of CA, LP is an
unrelated real estate developer that will also serve as the management company
of the project. The general partner of CA, LP is the same general partner of The
Estates at Canyon Ridge, Ltd. transaction described in the preceding paragraph.
As the limited partner, the Company is entitled to receive a preferred return of
its capital contribution plus a ten percent (10%) per annum cumulative return,
compounded monthly. Following the repayment of the preferred return on the
capital contribution, excess cash, at the discretion of the general partner, as
well as refinancing or disposition proceeds shall be paid fifty percent (50%) to
the general partner and fifty percent (50%) to the limited partner. At
September 30, 2008 and December 31, 2007, the Company's investment totaled
approximately $1.36 million and $1.50 million, respectively.
TNO Holdings, LLC
During the course of 2007, the Company provided financing to TNO Holdings, LLC,
a Florida limited liability company, totaling approximately $811,000 at
September 30, 2008. TNO Holdings owned three municipal bond issues secured by a
first mortgage lien on five long-term care facilities located in Oklahoma and
Texas. The purpose of the loan from the Company is to provide working capital
for the facilities and fund various capital improvements. The loan accrued
interest at a rate of 9.50% and compounds monthly. Following discussions with
the managing member of TNOH, the Company has agreed convert the loan to an
approximately 42% equity interest in TNOH. During the fourth quarter of 2007,
the two nursing homes located in Texas were sold to a third party and the net
sales proceeds were used to redeem a portion of the municipal bond issue secured
by the facilities and owned by TNO Holdings. The subsequent distribution to the
members of TNOH resulted in the repayment of substantially all of the funds
originally loaned to TNOH by the Company plus an additional return. The Company
continues to maintain an equity interest in TNOH. TNOH continues to own the
Texas municipal bond issue pending collection of the remaining accounts
receivable and two Oklahoma municipal bond issues secured by three additional
nursing home facilities.
Critical Accounting Policies
General
Management's discussion and analysis of its financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to the
reported amounts of revenues and expenses and the valuation of our assets,
income taxes, and contingencies. We base our estimates on historical experience
and on various other assumptions, as well as reliance on independent appraiser
reports on the valuation of certain of our debt securities. We believe our
estimates and assumptions to be reasonable under the circumstances. However,
actual results could differ form those estimates under different assumptions or
conditions.
Valuation of Marketable Securities
Investments in publicly traded equity securities are generally based on quoted
market prices. Investments in the RDC Series A and B bonds represent debt
securities and there is no readily available quoted market price, as these
securities are owned by a limited number of holders. The Series A bonds have
been valued at $145,000, which represents the pro rata share of the underlying
value of the collateral (the Retama Park horse track facility). The Company has
fully impaired the Series B bonds based on the limited available market, the
uncertainty of principal or interest payments and the subordinate lien on the
collateral.
Valuation of Other Investments
Other investments (in non-marketable securities) are generally stated at cost,
and are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount on the investment may not be fully
recoverable. Recoverability of such investments is measured by a comparison of
the carrying amount of the investment to future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the investment exceeds the fair value of the investment.
Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between
the tax basis of assets and liabilities and their carrying amount for financial
reporting purposes, as measured by the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Risk Factors
In addition to the other information set forth in this quarterly report, you
should carefully consider the factors discussed in Part II, Item 6 in our Annual
Report on Form 10-KSB for the year ended December 31, 2007, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-KSB are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition or operating results.
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO SEPTEMBER 30,
2007
RESULTS OF OPERATIONS
a. Revenues and Other Income
Revenue
The Company's revenue for the three months and nine months ended September 30,
2008 was $1,240,624 and $3,661,427, respectively, compared to $1,257,999 and
$3,542,211, respectively, for the three months and nine months ended
September 30, 2007. Retama Entertainment Group, Inc. ("REG"), an 80% owned
subsidiary of the Company, is engaged as the management company of the Retama
Park racetrack located in Selma, TX. The owner of the facility, the Retama
Development Corporation (the "RDC"), reimburses REG for the majority of payroll
and payroll related expenses, plus a monthly management fee of $20,000. It is
important to note that the financial performance of Retama Park does not
directly impact and is not included in the Company's financial statements. As a
result of this arrangement, the majority of the Company's revenue consists of
the reimbursement of REG's payroll expenses. Therefore, the similarity in
revenue for the three months and nine months ended September 30, 2008 as
compared to the three months and nine months ended September 30, 2007 largely
reflects continued personnel efficiency at Retama Park, offset somewhat by
raises offered to key REG employees.
Interest Income
Interest income for the three months and nine months ended September 30, 2008
was $218,323 and $576,775, respectively, compared to $157,479 and $401,027,
respectively, for the three months and nine months ended September 30, 2007. The
increase in interest income is largely attributable to the realization of a full
quarter's preferred return on the Auburn investment in 2008 as compared to 2007,
as well as an increase in the RDC receivable accruing additional interest.
b. Expenses
Cost and Other Expenses of Revenues
Operating expenses for the three months and nine months ended September 30, 2008
was $1,399,453 and $3,998,731 compared to $1,380,532 and $3,917,409,
respectively, for the three months and nine months ended September 30, 2007.
Operating expenses have remained flat as payroll and payroll related expenses
have remained relatively consistent during these time periods as further
detailed in the Revenue section above.
Income Tax
Total income tax benefit for each period presented is in the customary
relationship to net loss before taxes, as expected for a regular C corporation.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2008, the Company's operating
activities used cash of $1,419,896 compared to $1,619,753 cash used for the nine
months ended September 30, 2007. The decrease in cash used for operating
activities is largely due to a smaller loss in year-to-date 2008 compared to the
same period in 2007 and a reduction in the amount loaned under the Funding
Agreement for this period in 2008 as compared to the same period in 2007.
OFF-BALANCE SHEET ARRANGEMENTS
We currently have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources. See Note 6 - Related Party
Transactions to the financial statements herein.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurement" ("SFAS
No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The
standard applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, but does not expand the use of fair
value in any new circumstances. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those years. Early adoption is permitted. The adoption of
SFAS No. 157 did not have a material impact on the Company's consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159). SFAS No. 159 allows
entities the option to measure eligible financial instruments at fair value as
of specified dates. Such election, which may be applied on an instrument by
instrument basis, is typically irrevocable once elected. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company did
not elect the fair value option for any of its existing financial instruments
other than those mandated by other FASB standards; accordingly, the impact of
the adoption of SFAS No. 159 on the Company's financial statements was
immaterial.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141(R)"), which replaces SFAS 141. SFAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements, which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008. The
adoption of SFAS 141(R) will have an impact on accounting for business
combinations once adopted, but the effect is dependent upon acquisitions at that
time.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51" ("SFAS 160"), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
non-controlling interest, changes in a parent's ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that SFAS 160 is effective for fiscal years
beginning after December 15, 2008. The adoption of SFAS No. 160 will impact how
we report the minority interest in our consolidated 80% owned subsidiary, but
this impact will not be significant to our financial position.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No. 133"
(SFAS 161). SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," currently establishes the disclosure requirements for derivative
instruments and hedging activities. SFAS 161 amends and expands the disclosure
requirements of Statement 133 with enhanced quantitative, qualitative and credit
risk disclosures. The Statement requires quantitative disclosure in a tabular
format about the fair values of derivative instruments, gains and losses on
derivative instruments and information about where these items are reported in
the financial statements. Also required in the tabular presentation is a
separation of hedging and non-hedging activities. Qualitative disclosures
include outlining objectives and strategies for using derivative instruments in
terms of underlying risk exposures, use of derivatives for risk management and
other purposes and accounting designation, and an understanding of the volume
and purpose of derivative activity. Credit risk disclosures provide information
about credit risk related contingent features included in derivative agreements.
SFAS 161 also amends SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," to clarify these disclosures about concentrations of credit risk
should include derivative adoption. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company does not expect the application of this Statement
on its disclosures to have a material impact in its consolidated financial
statements.
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