U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act
of
1934 for the fiscal year ended 12/31/97.
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act
of 1934 for the transition period from ________ to ________.
Commission File Number 333-5278-NY
ARCA CORP.
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(Name of small business issuer in its charter)
New Jersey 22-3417547
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(State or other jurisdiction (IRS Employer
of incorporation) Identification number)
215 West Main Street, Maple Shade, New Jersey 08052
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(Address of principal executive offices) (Zip code)
(609) 667-0600
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Act: none
Securities registered under Section 12(g) of the Act: none
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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) [X]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $744,586.
The estimated aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 31, 1997 was $250,000. Since
no bid or offer had been submitted by any market maker as of the date of this
Form 10-KSB, the market value is based upon the offering price of the Common
Stock of $1.00 per share pursuant to the Company's registration statement
number 333-5278-NY which became effective on November 4, 1996.
The Company had 2,060,000 shares of common stock, par value $.0001 per share,
outstanding as of December 31, 1997.
Documents incorporated by reference: The Company incorporates by reference
various exhibits from the Company's Registration Statement on Form SB-2, file
No. 33-5278-NY, which became effective on November 4, 1996.
Transitional Small Business Disclosure: Yes No XX
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<PAGE>
PART I
Item 1. Description of Business
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General
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The Company was incorporated on December 22, 1995 in the State of New Jersey
for the purpose of acquiring, developing and selling residential real
estate. The Company simultaneously formed Spring Village Holdings, Inc. a
New Jersey corporation, as a wholly owned subsidiary. The discussion of the
business of the Company set forth herein includes the business of Spring
Village Holdings, Inc.
The Company acquired from its President, and companies affiliated with him,
an 80.0% partnership interest in SVG Properties, L.P., a New Jersey limited
partnership, which owns a 124 unit apartment building in Sharon Hill,
Pennsylvania. The Partnership interest consists of a 4.5% general
partnership interest and a 75.5% limited partnership interest (see "Related
Party Transactions"). The remaining 20% of the partnership is owned by
limited partners who are independent of and are not affiliates of the
Company. The Company refinanced the property on September 18, 1997, and
intends to hold it for investment.
The Company intends to utilize its contacts and business expertise to locate
and acquire additional properties, primarily apartments, preferably those
that are undervalued or which can be acquired at less than fair value due to
the financial difficulties of their owners. There is no assurance that such
properties can be obtained under terms and conditions that are favorable to
the Company.
Initial Acquisition
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The Company acquired a 4.5% general partnership interest and a 75.5% limited
partnership interest (80% total) in SVG Properties, L.P. which owns the Spring
Village Apartments complex in Sharon Hill, Pennsylvania from Harry J. Santoro
and companies affiliated with him (Santoro), the Company's President, for
$50,000. SVG Properties, L.P. (the "Partnership") is a limited partnership
organized under the laws of the State of New Jersey on May 12, 1987. In 1987
the Partnership acquired for $2,450,000 the Mill Spring Apartments
(subsequently renamed the Spring Village Apartments). At the time of the
acquisition the property was severely in need of rehabilitation. The
Partnership invested over $1,000,000 into the property using capital
contributed by its partners and the net proceeds from a $3,250,000 mortgage
guaranteed by the Federal Housing Administration. Though the physical aspects
and the net income of the property were significantly improved, the net income
from operations was not sufficient to make the principal and interest payments
due on the first mortgage. The Partnership attributes this to the high
effective interest rate on the mortgage of 10 1/2%, plus 1/2% for insurance.
In January, 1992, the Partnership defaulted on its mortgage. In August, 1992,
Santoro acquired a controlling interest in the Partnership, along with other
assets, in exchange for $125,000. At the time of the acquisition in 1992, Mr.
Santoro owned a 7.14% limited partnership interest in SVG Properties, L.P. Mr.
Santoro also was the chief executive officer and a 16.7% owner of Santoro,
VanDervort & Gordon, Inc., the corporate general partner, which owned 14.70%
of S.V.G. Properties, L.P. Santoro then entered into negotiations with the
U.S. Department of Housing and Urban Development (HUD) to renegotiate the
terms of the first mortgage. A Provisional Workout Agreement (the "Agreement")
was agreed to and became effective on January 1, 1994, whereby HUD agreed not
to take any action as a result of the default, provided that the mortgagor
remits the minimum monthly payment and satisfactorily performed the other
requirements of the agreement. The agreement provided for a minimum monthly
payment of $24,000 ($288,000/yr.) in 1994 increasing to $34,000 per month
($408,000/yr.) in 2002.
During March of 1994, HUD announced that it planned to sell the large backlog
of mortgage loans that reverted to the Federal Housing Administration (FHA)
when borrowers defaulted on FHA insured mortgages.
On September 18, 1996, the Company was notified that the mortgage on the
Property was sold to Resource Properties XXIII, Inc. ("RPI"). Shortly
thereafter, the Company commenced negotiations with RPI whereby RPI agreed to
recast the existing debt to RPI, currently $3,490,419, under the following
terms:
(a) RPI agreed lend to the Company, pursuant to the terms of a
Promissory
Note (the "Note"), up to $110,000 for the removal of the underground oil
tanks
in order to permit the Company to refinance the Property.
(b) The Company agreed to deliver to RPI such data, reports, statements,
financials, and the like, as RPI may request, including monthly financial
statements certified to be correct by Harry J. Santoro, and annual financial
statements certified by independent public accountants.
(c) If, prior to the earlier of: (i) one year from the date that a
closure report acceptable to most lenders is received by SVG from the
engineering firm retained to remove the oil tanks and perform the remedial
work, if any, or (ii) June 30, 1998, SVG was successful in finding a lender
to make a first mortgage loan secured by the Property in an amount
sufficient to provide Resource with net proceeds (after all fees, costs and
expenses of the transaction) of at least Two Million Three Hundred Thousand
Dollars ($2,300,000), then Resource would:
(i) subordinate both the mortgage securing the Mortgage Note and
any mortgage securing the Note to the mortgage of the new lender;
(ii) agree to modify the payment terms of the Mortgage Note and
the Note as follows:
(a) interest would accrue at a rate of 150 basis points above
the interest rate on the new first mortgage on a deemed total principal
amount equal to Three Million Three Hundred Fifty Thousand Dollars
($3,350,000), less the original principal amount of the new first mortgage.
(b) payments of interest and principal (based on the deemed
principal amount described in Paragraph 8(ii)(a)) would be payable monthly
based on a twenty-five year amortization. However, to the extent the
Net Cash Flow from the Property is insufficient to make the scheduled payments
of interest and principal in full, SVG shall pay over to Resource, until such
time as the scheduled payments are current, one hundred percent (100%) of the
Net Cash Flow from the Property as defined in the agreement.
(iii) agree to special provisions in the obligations of SVG
retained by Resource as may be required by the new first mortgage lender.
(iv) after it has received all of the interest and principal
required under Paragraph 8(ii), assign its interest in the Mortgage Note and
the Note to Harry J. Santoro for no additional consideration.
As part of the proposed refinancing it was agreed that Harry J.
Santoro ("Santoro") and/or H. James Santoro, Inc. ("HJS") would do the
following:
(a) certify certain financial reports as true and correct;
(b) defer compensation for any service rendered to SVG until such time
as the proposed refinancing was completed; and thereafter, should the cash
flow from the property be insufficient to make all payments due on the
proposed new mortgage and the new promissory note due to Resource,
(c) to personally guarantee certain carve-out obligations of SVG
pursuant to the proposed new first mortgage and the new promissory note to
Resource; specifically mentioned during the course of the negotiations with
Resource were: (i) certain environmental indemnifications, and a guarantee
to refund any shortage in the tenant security deposit accounts; and SVG agreed
to:
1. Indemnify Santoro for any losses incurred as a result of the proposed
guarantees;
2. Extend the existing management agreement between SVG and HJS until
such time as Santoro has no further obligations pursuant to the Agreement;
3. At closing of the refinancing, issue to Santoro a promissory note for
the difference between the amount due to Resource pursuant to the terms of
the existing mortgage note and $3,350,000, with the same terms and conditions
as the proposed new note to Resource as outlined in the Agreement.
On September 18, 1997, S.V.G. Properties, L.P., 80% of which is owned by ARCA
Corp. through its wholly owned subsidiary Spring Village Holdings, Inc.,
completed the refinancing of its long term debt. The refinancing completes
the first objective of the Company's long term business plan. Below is a
summary of the significant financial terms of the refinancing (rounded to the
nearest $1,000):
Before After
Refinancing Refinancing
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Total long term debt 3,595,000 3,578,000
Annual debt service (1998) 342,000 326,000
Annual interest expense (1998) 331,000 296,000
Funded expense escrows 10,000 99,000
Effective interest rate 9.2% 8.3%
Maturity 7 years 10 years+/-
As a result of the refinancing, long term debt decreased by $17,000, annual
debt service decreased by $19,000, annual interest expense decreased by
$35,000, and funded cash reserves to cover anticipated future expenses such as
taxes, capital replacements and insurance increased by $89,000. Below is a
more detailed analysis of long term debt.
Principal Annual Annual
Debt Service Interest
Principal
plus interest
-----------------------------------------
New first Mortgage (Merrill)
(7.78%) (10 years) 2,500,000 215,544 194,500
New second mortgage (RPI)
(9.28%) (25 years) 927,672 95,568 86,088
New subordinate debt (Santoro)
(10.0%)(2 years) 150,000 15,000 15,000
--------- ------- --------
3,577,672 326,112 295,588
Debt forgiveness/gain on extinguishment 162,926
For more information, see Notes to Financial Statements
Now that the refinancing has been completed, the Company plans to seek new
capital to reduce total debt and to seek strategic acquisitions to enhance
shareholder value.
The Complex
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The Spring Village Apartment complex is a garden-type apartment complex
consisting of seven buildings containing 60 one-bedroom units, 49 two-bedroom
units and 15 studio units, located in Sharon Hill, Delaware County,
Pennsylvania. Construction features include brick veneer over concrete block
exterior walls, wood frame, asphalt shingle gable roofs, aluminum frame
windows and sliding patio doors. Each unit is heated by gas fired hot water
baseboard heat. All units have wall mounted air conditioners. The buildings
were built in 1966. The quality of construction and current physical condition
of the units is believed by the Company to be average. The Company is not
aware of any material adverse environmental attributes of the property. There
were seven inactive underground storage tanks formerly used to store heating
oil for the complex. The tanks were not regulated by the State of
Pennsylvania, and were removed during 1997 by a qualified environmental
engineering firm.
The current real estate tax assessment equates to a market value of
$3,190,000. The assessed value for real estate taxes is $98,890 (based on a
presumed value of $3,190,000) and the real estate taxes paid for 1997 were
$90,550. The tax basis as of December 31, 1996 of the Partnership's buildings
and equipment was $3,588,764 and $121,206 respectively, with $1,163,716 in
accumulated depreciation. The land has a tax basis of $263,727. Buildings and
improvements are depreciated using the straight line method over a 40 year
life. Equipment is depreciated using the 150% declining balance method over a
10 year life. The Company owns an 80% partnership interest in the Partnership
which owns the property. The Property has been substantially renovated and the
Company does not anticipate the need for substantial future renovations other
than routine replacements. The Company believes it has adequate insurance
coverage.
The Company plans to make the following capital expenditures during the next
twelve months:
Replace appliances and equipment $ 15,000
Replace roof 4,000
Replace soffits and fascia, painting 6,000
Grounds, landscaping, etc. 5,000
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Total $ 30,000
All of the above capital expenditures are funded on an ongoing basis by
scheduled additions to and withdrawals from escrow accounts held by the first
mortgage holder.
Future Acquisitions
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The Company intends to acquire additional single family and multi-family
residential properties in the future, as well as undeveloped acreage. The
target price per apartment unit is $28,000 and the geographic area shall be
Eastern Pennsylvania, Delaware, and Southern New Jersey. There is no
assurance that properties meeting such criteria can be acquired by the
Company or that such acquisitions will be profitable. Also, investments may
be made in properties which do not meet the above criteria upon what the
Company believes to be favorable investment opportunities, such as purchasing
properties that are distressed, at sheriff sales and/or tax sales, and the
like.
The Company intends to finance its future acquisitions through the use of its
own equity and initial acquisition debt up to 100% of the cost of the
property, including anticipated improvements. It is the Company's stated long
term goal to reduce overall debt to no greater than 50% of the market value of
the Company's real estate holdings.
The Company's policy is to acquire assets for income, with capital
appreciation being anticipated, but secondary to current income.
The Company has no limit as to the percentage of its assets which may be
invested in any particular property, except that the Company will not invest
in a transaction or a series of transactions which will require registration
as an Investment Company under the Investment Company Act of 1940.
The Company may invest in mortgages or other debt securities, including real
estate tax liens, and there are no restrictions on such investments except
that such debt securities or liens shall be secured by residential real estate
or unimproved acreage.
The Company may invest in direct or indirect interests in residential real
estate and unimproved land, including fee simple ownership, general or limited
partnership interests, listed or not listed common or preferred stock in real
estate companies or REITS which invest in residential real estate. The
Company does not intend to originate or warehouse mortgages, for purposes of
sale or servicing.
The Company, at the discretion of the Board of Directors, may change the
investment objectives and criteria as it deems appropriate and in the best
interests of the Company.
Industry Overview
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The Company's primary focus is to own and operate apartment complexes. The
industry is dominated by numerous small operators. There are several large
apartment operators in the area, including the Korman Organization, which
operates a 1,500+ unit apartment complex, International City, which competes
with the Company's existing complex. The Company believes the industry is
highly competitive.
Apartment complexes in the area similar to the one owned by the Company have
the following profiles:
Rents per month, 12/31/97 Typical Company
------------------------- ------- -------
One bedroom $475 - $600 $510
Two bedroom $585 - $695 $625
Annual rent increase 1997 1% - 2% 1% - 2%
Average occupancy 1997 94% - 97% 92% - 95%
The Company believes that the general market is stable and that its units at
current rental rates are in line with competitive complexes in the area.
Because it costs more to build a new apartment unit than to acquire an
existing unit and due to lack of suitable construction sites in the area,
competition is limited to existing apartment complexes and should be
manageable.
Employees
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In addition to Harry J. Santoro, the President, and Stephen M. Robinson, the
Vice President and Secretary, the Company, through subcontracts, employs four
other people on a regular basis who manage and maintain the apartment complex.
Facilities
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The Company currently shares its principal executive offices with Santoro
Realty, Inc. in approximately 500 square feet of leased office space at 215
West Main Street, Maple Shade, New Jersey, 08052. Monthly rent under the
lease, which terminates in March 1998, is $500, of which one half will be
paid by the Company. The building is owned by Harry J. Santoro, President of
the Company; however, the Company believes the terms of the lease are at
least as favorable as terms available from non-affiliated third parties.
Item 2. Description of Property
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See Item 1 "Description of Business" and Item 6 "Management Discussion and
Analysis or Plan of Operation".
Item 3. Legal Proceedings.
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There are no pending material legal proceedings to which the Company or any of
its properties is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters.
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The Company's common stock was approved for quotation on the OTC Bulletin
Board under the symbol "ARCA". As of the date of this Form 10-KSB, no
quotations had been submitted by any market makers and no public trading
market had commenced.
As of December 31, 1997, there were 2,060,000 shares of common stock
outstanding held by approximately 435 shareholders of record.
There have been and are expected to be no dividends declared on the
common stock.
Item 6. Management Discussion and Analysis or Plan of Operation
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The Company intends to target its marketing and business activity to renting
apartment units to moderate income people who are not in a position to acquire
a home. The Company believes that well maintained, affordable rental units
will be in great demand as a result of slow wage growth in the future. This
should provide a stable rental income base and allow for future revenue growth
through modest rental increases near the rate of inflation.
The Company's long range plan is to reduce debt to around fifty percent of a
property's value. To accomplish this, the Company plans to raise additional
capital through the sale of its securities in the future.
The Company advertises its units in local newspapers, by direct mail and
through promotional programs designed to maintain occupancy at or above 95%.
Results of Operations
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The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Form 10-KSB. The Company was incorporated on December 22, 1995. On
December 31, 1995, the Company acquired from its President an 80% partnership
interest in S.V.G. Properties, L.P. (the "Partnership") which owns a 124 unit
apartment complex. The 80% partnership interest consists of a 4.5% general
partnership interest plus a 75.5% limited partnership interest. The financial
information contained herein includes the results of operations of the
Partnership.
The Company reported total revenues of $738,863 and $744,586 in 1996 and 1997
respectively. Occupancy was approximately 93% and 93% respectively. Operating
expenses increased from $551,601 in 1996 to $663,703 in 1997 primarily due to
fees paid related to the Company's acquisition program.. Net loss increased
from $139,412 in 1996 to $162,567 in 1997. See "Selected Financial Data" and
"Financial Statements, December 31, 1997 and 1996." The Company believes
that overall the Company and the industry will realize modest increases in
net rental income and net operating income in the foreseeable future.
The prior five year rental history is summarized as follows:
Gross Potential Rents Occupancy Average Annual Rent
Year and Other Income Percentage per square foot
- ---- --------------------- ---------- --------------------
1993 $740,272 98 $9.45
1994 $753,379 96 $9.61
1995 $763,181 95 $9.74
1996 $775,730 93 $9.90
1997 $783,367 93 $10.00
No tenant occupies more than 10% of the leased space. Substantially all
leases are for one year or less, and are for residential dwelling units. A
sixty day notice is required for termination. Substantially all of the
leases expire within one year as is typical for apartment leases.
The Company is taxed as a C-corporation for federal and state income tax
purposes. As such, the Company will pay taxes on its net income as defined by
the Internal Revenue Code. No tax attributes of the Company flow through to
the shareholders except for the regular taxation of dividends paid, if any.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997 and 1996, the Company had a deficit in working capital of
$50,418 and $10,868, respectively, including cash held in escrow for
anticipated future expenses.
On December 31, 1995, the Company had $54,952 in cash. During the year ended
December 31, 1996, the Company collected $70,000 in stock subscriptions which
were receivable as of December 31, 1995. The Company used $42,848 in
operating activities and purchased $17,758 in property and equipment. The
Company also repaid $41,500 in notes payable - stockholder (Harry J. Santoro,
President). The net decrease in cash was $22,106. The Company had $32,846 in
cash on December 31, 1996, exclusive of cash held in the escrow accounts.
On December 31, 1996, the Company had $32,846 in cash. During the year ending
December 31, 1997, the Company received proceeds of $25,000 from the issuance
of common stock and $27,000 from notes payable to stockholders and related
parties. Operations provided an additional $22,875 in cash. The Company used
$41,066 to purchase property and equipment and reduces mortgage indebtedness
by $5,105. The net increase in cash for the year was $28,704. The Company
had $61,550 in cash on December 31, 1997, exclusive of $77,669 cash held in
escrow accounts.
The Company's balance sheet is highly leveraged. As discussed previously in
this Form 10-KSB, the Company plans to reduce this leverage through the
current and future equity offerings as well as by funds generated from
operations. The Company believes it can support operations and planned
capital expenditures for at least twelve months. Thereafter, the Company's
continued success will be dependant upon its ability to maintain occupancy at
93% or above and to keep costs under control.
In the event that the Company's plans change or its assumptions change or
prove to be inaccurate, the Company may be required to seek additional
financing sooner than currently anticipated. The Company has not identified
any potential sources of debt or equity financing and there can be no
assurance that the Company will be able to obtain additional financing if and
when needed or that, if available, financing will be on terms acceptable to
the Company. As a result of the refinancing which occurred on September 18,
1997, the Company anticipates breakeven net cash flow after all scheduled debt
service in 1998, including principal payments totalling $32,139 on long term
debt.
Planned Capital Expenditures
- ----------------------------
Replace appliances and equipment $ 15,000
Replace roof 4,000
Replace soffits and fascia, painting 6,000
Grounds, landscaping, etc. 5,000
--------
Total $ 30,000
All of the above capital expenditures are funded on an ongoing basis by
scheduled additions to and withdrawals from escrow accounts held by the first
mortgage holder.
Selected Financial Data
- -----------------------
The following selected financial data has been derived from the Company's
financial statements included elsewhere in this Form 10-KSB, and should be
read in conjunction with the financial statements and notes thereto.
Statement of Operations Data
12/31/97 12/31/96
-------- --------
Total Revenues 744,586 735,863
Operating Expenses 1,070,079 883,937
Loss before extraordinary item
and minority interest (325,493) (148,074)
Extraordinary item 162,926 0
Loss before minority interest (162,567) (148,074)
Minority Interest 0 ( 8,662)
Net income (loss) (162,567) (139,412)
Net (Loss) per share ($.10) ( .33)
Weighted average number of
shares outstanding 1,662,500 425,000
Balance Sheet Data December 31, 1997 December 31, 1996
- ------------------ ----------------- -----------------
Working capital (deficit) $ (50,418) ($10,868)
Total Assets $3,664,601 $3,569,410
Total Liabilities $3,822,480 $3,636,322
Stockholders' Equity
(Deficit) $ (157,879) $ (66,912)
Other
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The Company was notified that HUD sold the mortgage on the Property to
Resource Properties XXIII, Inc. Negotiations to refinance and/or restructure
the debt have been completed.
The Company issued 1,485,000 shares, for a total consideration of $89,100, to
two consultants that provided services in connection with the Company's
acquisition program. All 1,485,000 shares were issued subject to repurchase
by the Company for nominal consideration if certain conditions precedent were
not fulfilled. Additionally, voting rights to 1,250,000 of such shares were
granted to Harry J. Santoro, President of the Company, until such time as the
conditions precedent were fulfilled.
On September 19, 1997, the Company completed the refinance of its long term
debt. This Form 10-QSB should be read in conjunction with the Form 8-K which
was filed by the Company on September 24, 1997. See also "Description of
Business - Initial Acquisition".
Forward Looking Statements
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The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
The foregoing discussion includes forward-looking statements relating to the
business of the Company. Forward-looking statements contained herein or in
other statements made by the Company are made based on management's
expectations and beliefs concerning future events impacting the Company and
are subject to uncertainties and factors relating to the Company's operations
and business environment, all of which are difficult to predict and many of
which are beyond the control of the Company, that could cause actual results
of the Company to differ materially from those matters expressed in or implied
by forward-looking statements. The Company believes that the following
factors, among others, could affect its future performance and cause actual
results of the Company to differ materially from those expressed in or implied
by forward-looking statements made by or on behalf of the Company: (a) the
effect of changes in interest rates; (b) the rental rate and demand for
apartment rental units; (c) fluctuations in the costs to operate the
properties owned by the Company; (d) uninsurable risks; and (e) general
economic conditions.
Item 7. Financial Statements.
- ------------------------------
The consolidated financial statements included in this Form 10-KSB for the
years ended December 31, 1997 and 1996 have been audited by Haefele, Flanagan
& Co., P.C., independent certified public accountants, as indicated in their
report with respect thereto, and are included in reliance upon such report
given upon the authority of said firm as experts in auditing and accounting.
Please see pages F-1 through F-19 attached as an exhibit hereto.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
- ----------------------------------------------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- ----------------------------------------------------------------------
The following table sets forth information with respect to the executive
officers, key personnel, directors and nominees to become directors of the
Company:
Age Title
---- ------
Harry J. Santoro, CPA 44 President, Treasurer and
Director
Stephen M. Robinson, Esq. 55 Vice President, Secretary
and Director
Harry J. Santoro. Mr. Santoro is 44 years old and holds a Bachelor of
Science Degree in Accounting from Drexel University, Philadelphia, PA, where
he graduated Summa Cum Laude. He began work in 1975 with Haefele, Van Sciver
& Co., a local certified Public Accounting firm. Three years later he became
a Certified Public Accountant and was made a partner in the firm. The firm's
name was changed to Haefele, Van Sciver, Santoro & Co. While at the firm he
provided tax and financial planning services to individuals and businesses in
a wide range of industries, including real estate development. He left the
firm in 1982 to form a company to invest in real estate. He is currently
engaged in real estate development and apartment management as principal and
President of H. James Santoro, Inc. as well as the Company.
Stephen M. Robinson. Mr. Robinson, who is 55 years old, is admitted to
practice law in the State of New Jersey, and maintains a full time legal
practice concentrating on corporations, securities and associated general
practice matters. He received a B.A. from Rutgers University in 1964 and a
J.D. from Rutgers Law School in 1967. From 1970 to 1973, Mr. Robinson was an
assistant county prosecutor for Camden County, New Jersey, and from 1973 to
1978, he was an attorney with the United States Securities and Exchange
Commission. He returned to private practice in 1978, and has been
continuously involved in the legal aspects of public and private offerings of
securities, other '33 Act filings,'34 Act filings for public companies and
securities-oriented litigation. During the period from 1986 through 1992,
Mr. Robinson was a shareholder of the law firm of Robinson & Sacharow, P.C.,
located in Maple Shade, New Jersey. Mr. Robinson left such firm in 1992, and
opened an office at 172 Tuckerton Road, Medford, New Jersey where he continues
his securities practice.
All directors hold office until the next annual meeting of stockholders or the
election and qualification of their successors. Directors of the Company do
not receive any compensation for their services as members of the Board of
Directors, but are entitled to reimbursement for expenses incurred in
connection with their attendance at Board of Directors' meetings. Officers
are appointed by the Board of Directors and serve at the discretion of the
Board.
Item 10. Executive Compensation.
Summary Compensation Table
Annual Compensation
Name and Other Annual
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ------ ------------
Harry J. Santoro, 1996 116,000 Shares 0 0 *
President, Treasurer 1997 15,000 shares 0 $17,500 *
Stephen M. Robinson, 1996 150,000 Shares 0 0
VP, Secretary 1997 50,000 shares 0 $25,000
*SVG Properties, L.P. entered into a management agreement with H. James
Santoro, Inc., effective August 1, 1992, whereby H. James Santoro, Inc.
agreed to manage the Spring Village Apartment complex for a fee equal to 5%
of the gross rent of the complex. Such agreement is currently in effect on a
month to month basis, and shall terminate when Mr. Santoro and H. James
Santoro, Inc. have no remaining obligation or liability related to the
agreement with RPI. H. James Santoro, Inc. received in 1997 and 1996,
respectively, 37,197 and 36,770 pursuant to such agreement. Mr. Santoro owns
100% of H. James Santoro, Inc.
Employment and Consulting Agreements
- ------------------------------------
The employment agreements of the officers terminated on December 22, 1996,
and have not been renewed.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1997 and
1996, with respect to the beneficial ownership of the common stock by each
beneficial owner of more than 5% of the outstanding shares thereof, by each
director, each nominee to become a director and each executive officer named
in the Summary Compensation Table and by all executive officers, directors
and nominees to become directors of the Company as a group, both before and
after giving effect to the offering.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1996 1997
---------------------------------------------- ---------------------------------
# Shares of # Shares of
Name and Address of Common Stock % Outstanding Common Stock % Outstanding
Beneficial Owner Beneficially Common Stock Beneficially Common Stock
Owned <F1> Beneficially Owned <F2> Owned <F1> Beneficially Owned <F2>
- ------------------ --------------- ----------------------- -------------- -------------------------
Stephen M. Robinson
172 Tuckerton Road
Medford, NJ 08055 150,000 30.0% 200,000 9.7%
Harry J. Santoro
215 West Main Street
Maple Shade, NJ 08052 116,000 23.2% 125,000 6.7%
WCM Investments, Inc.
Central Park Tower
2350 Airport Freeway,
Suite 660
Bedford, TX 76022 0 0 1,250,000 <F3> 60.7%
William N. Levy
Plaza 1000, Suite 309
Main Street
Voorhees, NJ 08043 0 0 235,000 11.4%
All Directors and
Officers as a
group (2 persons) 266,000 53.2% 1,575,000 <F4>) 87,9%
<FN>
<F1>
Under the rules of the Commission, a person is deemed to be the beneficial
owner of a security if such person has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the disposition
of such security. A person is also deemed to be a beneficial owner of any
securities of that person has the right to acquire beneficial ownership within
60 days. Accordingly, more than one person may be deemed to be a beneficial
owner of the same securities. Unless otherwise indicated by footnote, the
named entities or individuals have sole voting and investment power with
respect to the shares of common stock beneficially owned.
<F2> Represents the number of shares of Common Stock beneficially owned as of
the date of this Form 10-KSB by each named person or group, expressed as a
percentage of the sum of all of the shares of such class outstanding as of
such date and the number of shares not outstanding but beneficially owned by
such named person or group.
<F3> Voting rights granted to Harry J. Santoro, President of the Company,
pursuant to an agreement related to the Company's acquisition program.
<F4> Includes 1,250,000 shares owned by WCM Investments, Inc. over which
Harry J. Santoro, President of the Company, has voting rights.
</FN>
</TABLE>
<PAGE>
Item 12. Certain Relationships and Related Party Transactions
- --------------------------------------------------------------
Pursuant to an agreement between the Company and Harry J. Santoro and
companies affiliated with him, the Company acquired on December 31, 1996 for
$50,000 from Mr. Santoro, and companies affiliated with him, an 80%
partnership interest in SVG Properties, L.P., representing all of Mr.
Santoro's ownership in the Partnership. The purchase is summarized below.
The Sellers were the owners of an aggregate of 80% of the limited or general
partnership interests of S.V.G. Properties, L.P. (SVG), as follows:
Sellers Percentage Type
------- ---------- ----
Harry J. Santoro 15.00 Limited
H.J.S. Venture Capital Co., Inc.* 44.00 Limited
H. James Santoro, Inc.* 16.50 Limited
H. James Santoro, Inc.* 4.50 General
The partnership interests in SVG were paid for as follows:
Partner Interest Sold Consideration
------- ------------- -------------
Harry J. Santoro 15.00% $ 9,375.00
H.J.S. Venture Capital Co., Inc.* 44.00% 27,500.00
H. James Santoro, Inc. 21.00% 13,125.00
Total 80.00% $50,000.00
*Owned 100% by Harry J. Santoro
SVG Properties, L.P. entered into a management agreement with H. James
Santoro, Inc., effective August 1, 1992, whereby H. James Santoro, Inc.
agreed to manage the Spring Village Apartment complex for a fee equal to 5%
of the gross rent of the complex. Such agreement is currently in effect on a
month to month basis, and shall terminate when Mr. Santoro and H. James
Santoro, Inc. have no remaining obligation or liability related to the
agreement with RPI. H. James Santoro, Inc. received in 1997 and 1996,
respectively, $37,197 and $36,770, pursuant to such agreement. Mr. Santoro
owns 100% of H. James Santoro, Inc.
The Company currently shares its principal executive offices with Santoro
Realty, Inc. in approximately 500 square feet of leased office space at 215
West Main Street, Maple Shade, New Jersey, 08052. Monthly rent under the
lease, which terminates in March 1998, is $500, of which one half will be
paid by the Company. The building is owned by Harry J. Santoro, President of
the Company; however, the Company believes the terms of the lease are at
least as favorable as terms available from non-affiliated third parties.
During the years ended December 31, 1997 and 1996, the Company incurred
$65,488 and $-0- of legal fees payable to a stockholder/director, of which
$15,488 was incurred in connection with the refinancing and is included in
deferred financing costs. The Company also incurred $25,000 and $-0- of
consulting fees payable to a stockholder/director during the years ended
December 31, 1997 and 1996. As of December 31, 1997 and 1996, $27,500 of
these fees are in accrued expenses. A portion of these fees were paid by the
issuance of the Company's common stock. See next paragraph.
Sixteen thousand (16,000) shares of common stock were issued to the President
of the Company, and twenty four thousand (24,000) shares were issued to a
consultant for services rendered in connection with the preparation of the
registration statement and prospectus for the 140,000 shares of stock issued
on May 31, 1996.
Sixty five thousand (65,000) shares of common stock were issued to officers of
the Company for services provided during the year ended December 31, 1997.
Item 13. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
--------
3.1* Articles of Incorporation of Registrant filed (A)
on December 22, 1995
3.2* By-Laws of the Registrant
10.2* Employment Agreement between the Registrant and (A)
Harry J. Santoro dated December 29, 1995
10.3* Employment Agreement between the Registrant and (A)
Stephen M. Robinson dated December 29, 1995
10.4* Promissory Note between the Registrant and Eastern (A)
States Energy, Inc. dated May 31, 1996
10.5* Subscription Agreement between the Registrant and (A)
Eastern States Energy, Inc. dated May 31, 1996
10.6* Provisional Workout Agreement between S.V.G. Properties, (A)
L.P. and the Department of Housing and Urban Development,
dated January 1, 1994
10.7* Mortgage Note between SVG Properties, L.P. and (A)
Brennan-Indio, Inc. covering the Spring Village
Apartments in the amount of $3,200,000
10.8* Mortgage between SVG Properties, L.P. and (A)
Brennan-Indio, Inc. covering the Spring Village
Apartments in the amount of $3,200,000
10.9* Loan Agreement between Resource Properties XXIII, Inc. (B)
and SVG Properties, L.P. in the amount of $110,000.
10.10* Multifamily Mortgage, Assignment of Rents and Security (C)
Agreement between SVG Properties, L.P. and
Merrill Lynch Credit Corporation, covering the Spring
Village Apartments in the amount of $2,500,000.
10.11* Promissory Note between SVG Properties, L.P. (C)
and Merrill Lynch Credit Corporation, covering
the Spring Village Apartments in the amount of $2,500,000.
10.12* Mortgage and Security Agreement between (C)
SVG Properties, L.P. and Resource Properties XXIII, Inc.
covering the Spring Village Apartments
in the amount of $927,672.78.
10.13* Amendment to Note between SVG Properties, L.P. and (C)
Resource Properties XXIII, Inc. covering the Spring
Village Apartments in the amount of $927,672,78.
10.14* Promissory Note between SVG Properties, L.P. and (C)
Harry J. Santoro in the amount of $150,000
11.1 Statement re computation of per-share earnings
21.1* List of subsidiaries of the Registrant (A)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
The following report on Form 8-K were filed during the period January 1, 1997
through December 31, 1997:
Report on Form 8-K filed September 24, 1997
- ---------
The exhibits designed above with an asterisk (*) have previously been filed
with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and 240.12b-32,
are incorporated by reference to the documents as indicated below:
(A) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 number 333-5278-NY, effective November 4, 1996.
(B) Incorporated by reference to the Registrant's Form 10-KSB dated December
31, 1996.
(C) Incorporated by reference to the Registrant's Form 8-K dated September
18, 1997, filed September 24, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ARCA CORP.
(Registrant)
Date: February 23, 1998
/S/ Harry J. Santoro
-----------------------------------
Harry J. Santoro, President,
Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
ARCA CORP.
(Registrant)
Date: February 23, 1998
/S/ Harry J. Santoro
-------------------------------------
Harry J. Santoro, Director
/S/ Stephen M. Robinson
-------------------------------------
Stephen M. Robinson, Director
<PAGE>
EARNINGS PER SHARE SCHEDULE
Exhibit 11.1
Calculation of Net Income 12/31/97
Net Income (loss) (162,567)
Assumed interest expense reduction 0
Assumed interest income increase 0
----------
(162,567)
==========
Calculation of weighted average number of shares
Weighted average shares outstanding 1,662,500
Common stock equivalents 0
----------
1,662,500
==========
Net income (loss) per share (.10)
==========
<PAGE>
ARCA CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<PAGE>
ARCA CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
TABLE OF CONTENTS
Page
Independent Auditors' Report F-1
Consolidated Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in
Stockholders' Deficit F-4
Consolidated Statements of Cash Flows F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of ARCA Corp. and Subsidiary
We have audited the accompanying consolidated balance sheets of ARCA
CORP. AND SUBSIDIARY as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' deficit, and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ARCA CORP.
AND SUBSIDIARY as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
HAEFELE, FLANAGAN & CO., P.C.
Moorestown, New Jersey
January 30, 1998
F-1
<PAGE>
ARCA CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
Rental property, net (Notes 2 & 3) $3,376,436 $3,428,375
Cash (Note 2) 61,550 32,846
Cash held in escrow (Notes 2 & 4) 77,669 32,366
Accounts receivable 8,740 15,581
Prepaid expenses 51,535 54,242
Deferred financing costs, net (Note 2) 84,171 -0-
Organization costs, net (Note 2) 4,500 6,000
--------- ---------
Total Assets $3,664,601 $3,569,410
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Mortgage notes payable (Note 5) $3,422,568 $3,154,949
Accrued interest 27,197 335,470
Notes payable (Note 6) 197,000 20,000
Accounts payable 19,228 14,106
Accrued expenses 97,302 59,096
Security deposits payable (Note 2) 55,484 52,701
Other liabilities 3,701 -0-
--------- ---------
Total Liabilities 3,822,480 3,636,322
Minority interest -0- -0-
Commitments and contingencies (Note 10)
Stockholders' Deficit (Note 7)
Common stock, $.0001 par value,
50,000,000 shares authorized,
2,060,000 shares and 500,000 shares in
1997 and 1996 issued and outstanding 206 50
Additional paid in capital 343,894 212,450
Accumulated deficit ( 301,979) ( 139,412)
----------- -----------
42,121 73,088
Stock subscriptions receivable ( 200,000) ( 140,000)
----------- -----------
Total Stockholders' Deficit ( 157,879) ( 66,912)
----------- -----------
Total Liabilities and Stockholders'
Deficit $3,664,601 $3,569,410
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ARCA CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997
1997 1996
Revenues
Rental income $ 729,510 $ 721,583
Tenant fees and other income 14,425 13,107
Interest income 651 1,173
---------- ---------
Total revenues 744,586 735,863
Operating Expenses
Administrative expenses 179,439 102,788
Utilities expense 88,027 101,799
Operating and maintenance 135,057 109,551
Taxes and insurance 134,515 147,203
Depreciation and amortization 96,665 90,260
---------- ---------
Total operating expenses 633,703 551,601
---------- ---------
Operating income 110,883 184,262
Other expense
Interest expense ( 324,402) ( 332,336)
Environmental remediation expense ( 111,974) -0-
---------- ---------
Total other expense ( 436,376) ( 332,336)
---------- ---------
Loss before extraordinary item and
minority interest ( 325,493) ( 148,074)
Extraordinary item
Net gain on extinguishment of debt 162,926 -0-
---------- ----------
Loss before minority interest ( 162,567) ( 148,074)
Minority interest -0- ( 8,662)
---------- ----------
Net loss ($ 162,567) ($ 139,412)
========== ==========
Net loss per common share - Basic
Loss before extraordinary item
and minority interest ($ .20) ($ .35)
Extraordinary item .10 -0-
Minority interest -0- .02
----------- ----------
Net loss per common share - Basic ($ .10) ($ .33)
=========== ==========
Average number of common shares
outstanding - Basic 1,662,500 425,000
=========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ARCA CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Additional Stock Total
Common Stock Paid-in Subscriptions Accumulated Stockholders'
Shares Amount Capital Receivable Deficit Deficit
------- ------- ----------- -------------- ------------
Balance, January 1, 1996 320,000 $ 32 $ 72,468 ($ 70,000) $ -0- $ 2,500
Collection of stock subscription
in February 1996 -0- -0- -0- 70,000 -0- 70,000
Issuance of common stock,
net of related costs 180,000 18 139,982 ( 140,000) -0- -0-
Net loss -0- -0- -0- -0- ( 139,412) ( 139,412)
------- ------- ------------ -------------- ---------- ----------
Balance, December 31,
1996 500,000 50 212,450 ( 140,000) ( 139,412) ( 66,912)
Issuance of shares of common
stock to management 65,000 7 32,493 -0- -0- 32,500
Issuance of shares of common
stock 1,250,000 125 74,875 ( 60,000) -0- 15,000
Issuance of shares of common
stock 235,000 23 14,077 -0- -0- 14,100
Issuance of shares of common
stock 10,000 1 9,999 -0- -0- 10,000
---------- ------- --------- ------------- ---------- ----------
Net loss -0- -0- -0- -0- ( 162,567) ( 162,567)
Balance, December 31, 1997 2,060,000 $ 206 $343,894 ($200,000) ($301,979) ($157,879)
========= ======== ========= ============= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ARCA CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
Cash Flows From Operating Activities:
Net loss ($ 162,567) ($ 139,412)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Minority interest in net loss of
consolidated subsidiary -0- ( 8,662)
Stock compensation expense 46,600 -0-
Environmental remediation expense 101,081 -0-
Depreciation and amortization 96,665 90,260
Gain on extinguishment of debt ( 162,926) -0-
(Increase) decrease in:
Accounts receivable 6,841 ( 7,621)
Prepaid expenses 26,907 ( 4,428)
Cash held in escrow 3,740 9,353
Increase (decrease) in:
Accounts payable 5,122 ( 5,006)
Accrued interest 16,722 -0-
Accrued expenses 38,206 17,693
Other liabilities 3,701 ( 1,095)
Security deposits payable 2,783 6,070
---------- -----------
Net cash provided by (used in) operating
activities 22,875 ( 42,848)
---------- -----------
Cash Flows From Investing Activities:
Collection of stock subscription receivable -0- 70,000
Purchases of property and equipment ( 41,066) ( 17,758)
----------- -----------
Net cash provided by (used in)investing
activities ( 41,066) 52,242
----------- -----------
Cash Flows from Financing Activities:
Repayment of mortgage notes payable ( 5,105) -0-
Proceeds from notes payable 27,000 10,000
Repayment of notes payable -0- ( 41,500)
Proceeds from issuance of common stock 25,000 -0-
----------- -----------
Net cash provided by (used in) financing
activities 46,895 ( 31,500)
----------- -----------
Increase (decrease) in cash 28,704 ( 22,106)
Cash, beginning 32,846 54,952
----------- -----------
Cash, ending $ 61,550 $ 32,846
=========== ===========
See accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ARCA CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 307,680 $ 364,078
========== ==========
Cash paid for income taxes $ 305 $ 700
========== ==========
Non-cash investing and financing activities:
Issuance of 1,260,000 and 180,000 shares
of common stock, respectively 85,000 140,000
Stock subscription promissory notes
receivable ( 60,000) ( 140,000)
----------- ----------
Proceeds from issuance of common stock $ 25,000 $ -0-
=========== ==========
Issuance of 300,000 shares of common
stock as partial payment of legal
and professional fees $ 46,600 $ -0-
=========== ==========
Debt incurred for environmental
remediation expenses $ 101,081 $ -0-
=========== ==========
During the year ended December 31, 1997, the Company refinanced their
existing debt as follows:
Proceeds from new first mortgage note $2,500,000
Partial repayment of original first
mortgage note ( 2,227,276)
Deposits into escrow ( 49,043)
Increase in prepaid expense ( 24,200)
Payment of deferred financing costs ( 86,331)
Repayment of accrued interest ( 324,995)
Repayment of note payable - RPI ( 101,081)
Increase in note payable - stockholder 150,000
-----------
Gain on extinguishment of debt ($ 162,926)
===========
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ARCA CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Note 1 - Organization and Business Activity
ARCA Corp., a real estate holding company was incorporated in the State
of New Jersey on December 22, 1995. The Company commenced operations on
December 31, 1995 with the acquisition of an 80% partnership interest in SVG
Properties, L.P. (T/A Spring Village Apartments) through its wholly owned
subsidiary, Spring Village Holdings, Inc. The Company's 80% partnership
interest is comprised of a 4.5% general partnership interest and 75.5% limited
partnership interests. The remaining 20% limited partnership interests are
held by unrelated individuals.
Spring Village Apartments leases 124 residential apartment units to the
general public in Sharon Hill, Pennsylvania.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of ARCA Corp.,
Spring Village Holdings, Inc. and SVG Properties, L.P. All significant
intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenues
The Company earns rental income under operating leases with tenants.
Rental income is recognized on a straight-line basis over the applicable lease
term.
Rental Property
Rental property is recorded at cost. Depreciation is provided using the
straight-line method over its estimated useful life. Maintenance and repairs
are charged to expense as incurred; major renewals and betterments are
capitalized. When items of property are sold or retired, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in operations.
F-7
<PAGE>
ARCA CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Note 2 - Summary of Significant Accounting Policies (continued)
Rental Property (continued)
The estimated useful lives of the major classes of rental property, as
determined by the Company's management, are as follows:
Buildings and improvements - 40 years
Building equipment - 10 years
Other equipment - 5 years
Cash Held in Escrow
Cash held in escrow includes amounts held by the lender to provide funds
necessary for the payment of taxes, insurance, repairs and maintenance and
other specified capital expenditures of the Spring Village Apartment complex.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over ten
years. Amortization expense for the years ended December 31, 1997 and 1996
was $2,160 and $-0-. Accumulated amortization as of December 31, 1997 and
1996 was $2,160 and $-0-.
Organization Costs
Organization costs are amortized on a straight-line basis over five
years. Amortization expense for the years ended December 31, 1997 and 1996
was $1,500 and $1,500. Accumulated amortization as of December 31, 1997 and
1996 was $3,000 and $1,500.
Security Deposits Payable
Security deposits payable represent amounts received from tenants and are
included in cash on the accompanying balance sheet. As of December 31, 1996,
the tenant security deposits payable was underfunded by $22,721. As of
December 31, 1997, the tenant security deposits are fully funded. Tenant
security deposits are guaranteed by a stockholder.
F-8
<PAGE>
ARCA CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Note 2 - Summary of Significant Accounting Policies (continued)
Advertising
The Company expenses all advertising as incurred. Direct response
advertising for which future economic benefits are probable and specifically
attributable to the advertising is not material. Advertising expense for the
periods ended December 31, 1997 and 1996 was $7,089 and $5,579.
Income Taxes
Tax provisions and credits are recorded at statutory rates for taxable
items regardless of the period for which such items are reported for tax
purposes. Deferred income taxes are provided for the temporary differences
between the carrying values of the Company's assets and liabilities for
financial reporting purposes and their corresponding income tax bases.
Deferred tax assets are reduced by a valuation allowance when the
determination can be made that it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
Net Loss Per Share of Common Stock
In 1997, the Company adopted the requirements of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Earnings per share amounts for
1996 have been presented under the requirements of SFAS No. 128.
Stock Based Compensation
The requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," became effective in 1996. The statement encourages, but does
not require, a fair value-based method of accounting for stock-based
compensation. The Company elected to continue the use of the intrinsic
value-based method of accounting; however, implementation of SFAS No. 123
would not have a material effect on the Company's results of operations or
earnings per share.
F-9
<PAGE>
ARCA CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Note 2 - Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure About
Fair Value of Financial Instruments" requires disclosure of the fair value of
financial instruments, both assets and liabilities, recognized and not
recognized in the balance sheets of the Company, for which it is practical to
estimate fair value. There are no significant differences in the carrying
amount and the fair market value of the financial instruments reported on the
balance sheets presented.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with a term to maturity of three (3)
months or less at the time of acquisition to be cash equivalents.
Note 3 - Rental Property
Rental property at December 31, 1997 and 1996 consisted of the
following:
1997 1996
---- ----
Land $ 292,792 $ 292,792
Buildings and improvements 3,150,051 3,127,770
Building equipment 104,906 87,548
Office equipment 10,452 9,025
---------- ----------
3,558,201 3,517,135
Less accumulated depreciation ( 181,765) ( 88,760)
---------- ----------
Rental property, net $3,376,436 $3,428,375
========== ==========
Depreciation expense for the periods ended December 31, 1997 and 1996 was
$93,005 and $88,760.
Note 4 - Cash Held in Escrow
Cash held in escrow at December 31, 1997 and 1996 consisted of the
following:
1997 1996
---- ----
Mortgage escrow deposits $ 52,324 $ 32,099
Reserve fund for replacements 2,304 -0-
Capital expense escrow -0- 267
Specified work escrow 23,041 -0-
--------- ----------
$ 77,669 $ 32,366
========= ==========
F-10
<PAGE>
ARCA CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Note 5 - Mortgage Notes Payable
Mortgage notes payable at December 31, 1997 and 1996 consisted of:
1997 1996
---- ----
Mortgage note payable to Resource
Properties XXIII, Inc. ("RPI") in monthly
installments of $28,740 (including
principal and interest at 10 1/2%),
due November 2022,collateralized by
land, buildings, improvements and
equipment, secured by an assignment
of the management agreement. The mortgage
note was amended in 1997 to reduce the
outstanding principal to $927,673 (see
below) $ -0- $3,154,949
Mortgage note payable to Merrill
Lynch Credit Corporation in monthly
installments of $17,962 including
interest at 7.78%, due October 2007,
secured by first mortgage on rental
property, assignment of leases, rents
and security deposits, substantially
all assets of a subsidiary, and
the payment and performance guaranty
of a stockholder 2,496,481 -0-
Mortgage note payable to RPI
in monthly installments of $7,964
including interest at 9.28%, (or 100%
of the subsidiary's net cash flow, as
defined in the agreement, if less), due
October 2022, secured by second mortgage
on rental property and the common stock
of a subsidiary 926,087 -0-
---------- ----------
$3,422,568 $3,154,949
========== ==========
In 1995, the mortgage note was payable to the Department of Housing and
Urban Development (HUD) under the provision of Section 207, pursuant to
Section 223 (f) and Section 244 of the National Housing Act, and was subject
to the terms of a Provisional Workout Arrangement. In September 1996, HUD
sold the mortgage on the Property to Resource Properties XXIII, Inc. (RPI)
subject to the same terms of the Arrangement.
F-11
<PAGE>
ARCA CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Note 5 - Mortgage Notes Payable (continued)
On September 17, 1997, the Company refinanced its existing debt as
permitted by RPI in an agreement dated November 22, 1996. As a condition of
the refinancing, RPI was granted an option to purchase the rental property for
$1.00 subject to the first and second mortgages in the event of default.
In accordance with the Agreement, RPI lent the Company up to $101,081 for
the removal of the underground oil tanks (Note 10) in order to permit the
Company to refinance its existing mortgage note payable.
Since prior to the earlier of: (i) one year from the date of the
successful removal of the underground oil tanks, or (ii) June 30, 1998, the
Company secured a first mortgage loan (New Note) of at least $2,300,000, RPI
agreed to retain a subordinate position in the promissory note payable, the
mortgage note payable and the accrued interest thereon, up to the difference
between the New Note ($2,500,000) and $3,350,000 at 1.5% above the New Note's
interest rate payable. The promissory note and certain other debt were
ultimately extinguished by RPI as part of the refinancing (Note 11). After
payment of all of the aforementioned debt, the residual amount of $150,000 was
assigned to a stockholder subject to certain covenants and restrictions. (Note
6)
Maturities of mortgage notes payable as of December 31, 1997 are as
follows:
1998 $ 32,140
1999 34,893
2000 37,886
2001 41,136
2002 44,669
Thereafter 3,231,844
---------
$3,422,568
=========
Note 6 - Notes Payable
Notes payable at December 31, 1997 and 1996 consists of the following:
1997 1996
---- ----
Notes payable to stockholders with
interest at 10% and 8% in 1997 and
1996, due on demand, unsecured $ 22,500 $ 10,000
F-12
<PAGE>
ARCA CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Note 6 - Notes Payable (continued)
1997 1996
---- ----
Notes payable to related parties
with interest at 10%, due on
demand, unsecured 24,500 10,000
Note payable to stockholder in
monthly payments of interest only
of $1,250 (or net cash flow after all
debt service of a subsidiary, if less),
due January 1, 2000, unsecured
(See Note 5) 150,000 -0-
------- --------
$197,000 $ 20,000
======= ========
Interest expense payable to stockholders and related parties in 1997 and
1996 was $6,100 and $1,066, of which $5,100 and $-0- was in accrued interest
at December 31, 1997 and 1996.
Note 7 - Equity and Stock Subscriptions Receivable
On May 31, 1996, subscriptions for one hundred forty thousand (140,000)
shares of common stock at $1 per share were received from Eastern States
Energy, Inc. (Eastern) in the form of a promissory note receivable. The note
is to be collected solely from the net cash proceeds realized from the sale or
liquidation of the assets of Eastern. On November 15, 1996, the 140,000 shares
of Eastern were reissued to the stockholders of Eastern pursuant to a Plan of
Liquidation of Eastern.
Sixteen thousand (16,000) shares of common stock were issued to the
President of the Company and twenty-four thousand (24,000) shares were issued
to a consultant for services rendered in connection with the preparation of
the registration statement and prospectus for the 140,000 shares of stock
issued on May 31, 1996.
Sixty-five thousand (65,000) shares of common stock were issued to
officers of the Company for services provided during the year ended December
31, 1997.
F-13
<PAGE> ARCA CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Note 7 - Equity and Stock Subscriptions Receivable (continued)
On March 31, 1997, one million four hundred eighty-five thousand
(1,485,000) shares of common stock were issued to two consultants, in
connection with the Company's proposed acquisition of another company, for a
total consideration of $89,100, $60,000 of which is in the form of a
promissory note receivable. The proposed acquisition was contingent upon the
closing of a bridge loan of not less than $3,500,000. In the event that the
bridge loan did not close by September 30, 1997, all 1,485,000 shares would be
subject to repurchase by the Company for nominal consideration. Should the
proposed acquisition occur, all of the assets and liabilities of the Company
will be transferred to a new company formed for such purpose as part of the
proposed acquisition, and the stockholders of record prior to the closing of
such acquisition will receive shares in such new company. However, the
1,485,000 shares were issued "ex-dividend" with respect to such reorganization
and as a result, the stockholders will not be entitled to shares in such new
company. Additionally, voting rights of such shares were granted to the
President of the Company, until such time as the closing had occurred. The
promissory note receivable was to be collected within six months and is
currently in default; however, the note is secured by the shares of common
stock issued. As of December 31, 1997, the proposed acquisition has not
occurred; however, the Company has not yet exercised their option to
repurchase the shares.
Note 8 - Income Taxes
The Company has deferred tax assets of $76,000 and $39,000 at December
31, 1997 and 1996 which represent the tax effects of net operating loss
carryforwards. The deferred tax assets have been reduced in their entirety by
a valuation allowance in each period. At December 31, 1997, the Company has
approximately $316,000 of net operating loss carryforwards to offset future
taxable income for both federal and state income tax purposes.
Note 9 - Related Party Transactions
Management of Rental Property
The rental property is managed by a company which is owned by a
stockholder. The current management agreement provides for a management fee
of 5% of gross income, which is typical for the industry. Management fees for
the years ended December 31, 1997 and 1996 were $37,197 and $36,770.
Included in accrued expenses are management fees payable of $37,197 and
$12,227 at December 31, 1997 and 1996.
F-14
<PAGE> ARCA CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
Note 9 - Related Party Transactions (continued)
Leases
The Company leases its office space from a company which is owned by a
stockholder. Monthly rental payments are $250 per month. Rent expense for
the years ended December 31, 1997 and 1996 were $3,000 and $3,000.
Other Payments
During the year ended December 31, 1997, the Company incurred $65,488 of
legal fees payable to a stockholder/director, of which $15,488 was incurred in
connection with the refinancing and is included in deferred financing costs.
The Company also incurred $25,000 of consulting fees payable to a
stockholder/director during the year ended December 31, 1997. As of December
31, 1997, $27,500 of these fees are included in accrued expenses.
Note 10 - Environmental Remediation Expense
Located beneath the Spring Village Apartment complex were seven inactive
underground storage tanks formerly used to store heating oil for the complex.
The tanks were not regulated by the State of Pennsylvania. During the year
ended December 31, 1997, the tanks were successfully removed at a cost of
$111,974 , of which $101,081 was funded by the lender (RPI). (See Note 5)
Note 11 - Extraordinary Item
In September 1997, the Company refinanced its existing debt with RPI. In
connection with the refinancing, certain debt was forgiven by the lender which
resulted in an extraordinary gain of $162,926, net of related income taxes of
$-0-. (See Note 5)
F-15
[ARTICLE] 5
[CIK] 0001006762
[NAME] ARCA CORP.
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-END] DEC-31-1997
[CASH] 61,550
[SECURITIES] 0
[RECEIVABLES] 8,740
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 199,494
[PP&E] 3,558,201
[DEPRECIATION] 181,765
[TOTAL-ASSETS] 3,664,601
[CURRENT-LIABILITIES] 249,912
[BONDS] 3,422,568
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 206
[OTHER-SE] (158,085)
[TOTAL-LIABILITY-AND-EQUITY] 3,664,601
[SALES] 0
[TOTAL-REVENUES] 744,586
[CGS] 0
[TOTAL-COSTS] 745,677
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 324,402
[INCOME-PRETAX] (325,493)
[INCOME-TAX] 0
[INCOME-CONTINUING] (325,493)
[DISCONTINUED] 0
[EXTRAORDINARY] 162,926
[CHANGES] 0
[NET-INCOME] (162,567)
[EPS-PRIMARY] (.10)
[EPS-DILUTED] (.10)
</TABLE>
