YAVAPAI HILLS INC
10SB12G/A, 2000-08-15
GENERAL BLDG CONTRACTORS - RESIDENTIAL BLDGS
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<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-SB/A




                 GENERAL FORM FOR REGISTRATION OF SECURITIES OF
                             SMALL BUSINESS ISSUERS
        Under Section 12(b) or (g) of The Securities Exchange Act of 1934

                                Amendment No. 1


                               YAVAPAI HILLS, INC.
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in its Charter)

           Delaware                                    51-0120836
--------------------------------------       -----------------------------------
(State or other jurisdiction                        (I.R.S. Employer
of incorporation or organization)                  Identification No.)

1800 Northern Boulevard, Suite 309, Roslyn, New York 11576
--------------------------------------------------------------------------------
(Address of principal executive offices)         (Zip Code)


Issuer's telephone number (516) 621-8580
                          --------------

Securities to be registered pursuant to Section 12 (b) of the Act:  None


Securities to be registered pursuant to Section 12 (g) of the Act:

                     Common Stock, par value $1.00 per share
                     ---------------------------------------
                                (Title of Class)

<PAGE>

                            INTRODUCTORY STATEMENT

This Amendment No. 1 to General Form for Registration of Securities of Small
Business Issuers on Form 10-SB relates to the Form 10-SB (the
"Registration Statement") filed by Yavapai Hills, Inc. (the "Company") on July
12, 2000. The following Items of the Registration Statement are amended hereby.

Part I, Item 1, of the Registration Statement, Description of Business, is
amended to read in its entirety as follows:

ITEM 1.           DESCRIPTION OF BUSINESS.

                  The Company's principal business is the development and sale
of building sites for single family houses ("building sites") at Yavapai Hills,
its master planned community at Prescott, Arizona. Periodically over the years
the Company built for sale single family homes and townhouses, but it has not
done so in recent years.

                  Since its acquisition of the Yavapai Hills property in 1974
and through July 31, 2000 the Company has sold 895 building sites, 12 family
homes, 21 town houses, and 14 acres of commercial property. Approximately 700
single-family homes have been built at the property and substantially all are
occupied.

                  The Company still owns approximately 1,100 acres. These
include 20 acres with 41 fully developed building sites, 44 acres with 30
partially completed building sites, 864 acres approved for approximately 1,635
single and multi-family units, an additional 70 acres zoned for 465 multi-family
units or a mobile home park, and 102 acres zoned for commercial/retail.

                  All building sites are served by city water and sewer, natural
gas, electricity and telephone and cable TV.

                  During the past five fiscal years, the Company has sold
building sites as follows:

<TABLE>
<CAPTION>
                            FISCAL YEAR
                          ENDED AUGUST 31           NO. SITES SOLD
                          ---------------           --------------
                         <S>                        <C>
                                1995                     58
                                1996                     61
                                1997                     24
                                1998                     18
                                1999                     13
                         nine months ended
                              5/31/00                    20
</TABLE>


                                       2
<PAGE>

The prices of building sites currently being offered range from $49,000 to
$80,000. The Company believes that in recent years the purchasers of its
building sites have constructed on them homes costing from $200,000 to $400,000.
Some persons have acquired their sites for future building while others build
promptly after acquiring the site.

                  Building sites are sold with a minimum down payment of 20%
and are deeded to the buyers at the time of sale. Unless the full purchase is
paid in cash at the time of sale, a buyer gives a five-year first mortgage
for the unpaid balance, which is amortized on a 30 year basis but has a
balloon payment at the end of the fifth year. Most buyers of building sites
give purchase money mortgages.

                  The terms of sale for property other than building sites are
separately negotiated.

                  The Company generally develops its acreage in tracts suitable
for between 30 and 60 building sites and generally completes development of a
tract before offering the home sites in the tract for sale. The development work
includes providing paved roads, water, sewer, electrical, telephone and cable TV
stubbed to the property line of the building site lot.

                  The Company competes with other subdivisions in the Prescott,
Arizona area and, to a lesser extent, with subdivisions elsewhere which offer
building sites for primary and secondary homes.

                  The Company employs 3 persons.


Part I, Item 2, of the Registration Statement, Management's Discussion and
Analysis or Plan of Operation, is amended to read in its entirety as follows:

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION.

Year Ended August 31, 1999 Compared to Year Ended August 31, 1998

Results of Operations:

                  Revenues from the sale of home-sites decreased by $58,690, or
6.2%, to $892,890 in 1999 from $951,580 in 1998. The average price per site


                                       3
<PAGE>

sold rose by $15,819, or 29.9%, to $68,684 from $52,865 in the prior year,
reflecting higher unit development and capitalized costs associated with the
parcel sections being sold. Thirteen home-sites were sold in 1999, five fewer
than the eighteen sold one year ago, which the Company believes is due to
greater sales resistance by potential customers to the higher selling prices.

                  Cost of sales for home-site sales increased by $25,501, or
6.6%, to $409,641 in fiscal 1999 from $384,140 in fiscal 1998. Average unit cost
of sales increased sharply by $10,170, or 47.7%, to $31,511 from $21,341 one
year ago, reflecting higher development and capitalized costs associated with
the home-sites being sold. These costs include an allocation of the original
purchase price, related land improvement costs and capitalized interest expense.

                  Gross profit from home-site sales declined by $84,191, or
14.8%, to $483,249 in 1999 from $567,440 in 1998. As a percentage of home-site
sales, gross profit decreased by 5.5% to 54.1% in 1999 from 59.6% in 1998. Per
unit gross profit dollars increased by $5,649, or 17.9%, to $37,173 in 1999 from
$31,524 in 1998.

                  In 1998, the Company realized a $681,161 gain on the sale of a
portion of the land held for investment. The cost of the 5.3 acres sold,
purchased in the early 1970's, was $12,644. No such sale was made in 1999. The
Company still owns approximately 102 acres of this land, which is near the land
being developed for home-sites. There is no active marketing program to sell
this land; sales are considered for attractive offers.

                  Interest income on mortgages decreased by $37,890, or 27.5%,
to $100,109 in fiscal 1999 from $137,999 in fiscal 1998, due to a decrease of
approximately $227,000 in the average outstanding balance of mortgages
receivable and a 1.33% decline in the average effective rate of interest earned
thereon from 9.76% to 8.43%, the latter decrease reflecting a decline in
medium-term interest rates generally during such period. At times, the Company
has offered below-market interest rates (typically 1% below market) to buyers as
an inducement to consummate home-site sales. In all applicable instances, in
accordance with generally accepted accounting principles for financial


                                       4
<PAGE>

reporting purposes, the contractual sales price is reduced by the difference
between the present value of the receivable at the market rate and the contract
interest rate. Under this method interest is recorded at the market rate by
application of the interest (constant rate) method.

                  Interest income on temporary investments declined by $25,925,
or 39.6%, to $39,532 in fiscal 1999 from $65,457 in fiscal 1998, due to a
decrease in average temporary investments coupled with a decline in the average
interest rate earned thereon. The Company's excess funds are invested in U.S.
Treasury Bills and money market accounts. Dividend and other income declined by
$4,718 to $14,405 in fiscal 1999 from $19,123 in 1998, reflecting various
decreases in miscellaneous revenue items.

                  Advertising and selling expenses decreased by $19,470, or
12.0%, to $143,267 in fiscal 1999 from $162,737 in fiscal 1998. As a percentage
of home-site sales, these expenses decreased slightly by 1.1% to 16.0% compared
to 17.1% one year ago. Approximately one-half of the decrease in dollar terms
was attributable to commission expenses, paid at rates ranging from 8.0% to
9.0%, which declined by $9,752 to $77,399 in 1999 from $87,151 in 1998.

                  Officers' salaries decreased by $40,000, or 6.7%, to $560,000
in 1999 from $600,000, reflecting a decrease in bonus of $20,000 for each
officer. Employment agreements provide for base salaries of $200,000 for each
officer.

                  General and administrative expenses decreased by $33,145, or
5.4%, to $575,399 in 1999 from $608,544 in 1998. As a percentage of homesite
sales, these expenses were virtually unchanged at approximately 64%. Management
fees paid to Rainbow Canyon Realty & Development, Inc., a company controlled by
the son of one of the Company's officer/principal stockholders, increased by
$10,000 to $62,000 in 1999, pursuant to the related agreement. Variations in
other items in this expense category were either individually immaterial or not
indicative of significant trends.

                  Interest charged to expense was $75 in 1999 and $2,415 in
1998, representing miscellaneous interest charges not incurred on the Company's
interest-bearing debt. All of such other interest charges, aggregating $81,798
in 1999 and $37,641 in 1998 were capitalized as part of land


                                       5
<PAGE>

inventory. On November 30, 1999, the Company replaced its existing credit line
with a new development loan agreement for a $1,000,000 line of credit with a new
lender.

                  The Company provides an allowance for foreclosure losses. Such
losses equal the excess of the unpaid mortgage balance and unpaid but accrued
interest over the cost of the lot, which cost is returned to inventory. The
allowance is provided at two percent of the aggregate contractual mortgage
balances outstanding; the Company's historical loss experience has shown this
percentage to be adequate. The provision for such losses was reduced by $3,302
and $4,719 in 1999 and 1998, respectively.

                  As a result of all of the foregoing, but primarily due to the
non-recurrence of the gain on the sale of a portion of the land held for
investment, the Company incurred a pre-tax loss of $638,144 in 1999 compared to
a pre-tax gain of $102,203 in 1998.

                  The Company carried back a portion of the 1999 net loss to
1998, resulting in refundable federal and state income taxes of $14,600 in 1999
compared to a combined current income tax provision of $20,100 in 1998,
reflecting an effective current combined rate of approximately 20% one year ago.
Deferred taxes of $2,800 in 1999 and $1,000 in 1998 were provided for the
appreciation in the Company's trading portfolio of equity securities. The
Company can carry the $548,400 balance of the net operating loss forward to 2019
to offset against future taxable income. Such carry forward results in a
$186,400 deferred tax asset against which the Company has provided a 100%
deferred tax valuation allowance.

                  Net loss was accordingly $(626,344) in 1999 compared to net
income of $81,103 in 1998. Basic and diluted earnings (loss) per share was
$(0.91) in 1999 and $0.12 in 1998. The Company has no common stock equivalents.

Liquidity and Capital Resources:

                  At August 31, 1999 the Company's cash and equivalents,
mortgages, accrued interest and other receivables, and equity securities totaled
$2,240,000, almost two times the total of liabilities of $1,135,000. The
Company's cash and cash equivalents totaled $1,063,000.


                                       6
<PAGE>

Historically the Company's cash requirements not provided internally have been
funded by bank borrowings. Apart from borrowings and related repayments, the
Company's principal source and needs for cash are home-sites sales and related
mortgage collections and developmental expenses including capitalized interest
for land improvements and related costs. In 1999, the Company's operating,
investing and financing activities all required cash, totaling approximately
$458,000. Notable elements were $172,000 and $272,000 for operating and
financing activities, respectively. In 1998, operating activities used
$2,285,000, of which $1,829,000 was for land development expenditures, while
sale proceeds of land held for investment and note payable proceeds, net of
repayments, provided investing and financing inflows of $694,000 and $1,198,000,
respectively.

                  On November 30, 1999 the Company entered into a new loan
agreement, providing for a $1,000,000 credit line, payable in installments of
$40,000 for each lot sold for cash with the remaining outstanding principal due
on June 1, 2002. Interest on the unpaid balance is payable monthly at prime plus
1%. Approximately $632,000 was drawn against the new credit line on December 7,
1999 to pay off the balance of the existing line.

Inflation:

                  Inflation has not had a material impact on the Company's
recent operations. However, a significant and sustained increase in interest
rates would likely have a negative effect, as the Company's borrowing and
capitalized costs would increase, resulting in higher selling prices and higher
borrowing costs for buyers.

Nine Months Ended May 31, 2000 Compared to Nine Months Ended May 31, 1999.

Results of Operations:

                  Revenues from the sale of home-sites increased by
$617,329, or 96.3%, to $1,258,618 in 2000 from $641,289 in 1999. The average
price per site sold declined by $8,323, or 11.7%, to $62,931 from $71,254 in the
prior year, reflecting lower unit development and capitalized costs associated
with the parcel sections being sold. Twenty homes-sites were sold in 2000,
eleven more than the nine sold in the prior period, which the Company believes
is due to both the lower selling prices and a general improvement in the
industry in the Company's market.

                  Cost of sales for home-site sales increased by $262,855, or
76.9%, to $604,804 in 2000 from $341,949 in 1999. Average unit cost of sales
decreased by $7,754, or 20.4%, to $30,240 from $37,994 one year ago,
reflecting lower development and capitalized costs associated with the
home-sites being sold. These costs include an allocation of the original
purchase price, related land improvement costs and capitalized interest
expense.

                                       7
<PAGE>

                  Gross profit from home-site sales increased by
$354,474, or 118.4%, to $653,814 in 2000 from $299,340 in 1999. As a percentage
of home-site sales, gross profit increased by 5.2% to 51.9% in 2000 from
46.7% in 1999. Per unit gross profit dollars decreased by $569, or 1.7%, to
$32,691 in 2000 from $33,260 in 1999.

                  Interest income on mortgages decreased by $2,539, or 3.3%, to
$74,105 in 2000 from $76,644 in 1999, due to a decrease of approximately $60,000
in the average outstanding balance of mortgages receivable. The average
effective rate of interest earned thereon in both periods was virtually
unchanged at approximately 8.76%. At times, the Company has offered below-market
interest rates (typically 1% below market) to buyers as an inducement to
consummate home-site sales. In all applicable instances, in accordance
with generally accepted accounting principles for financial reporting purposes,
the contractual sales price is reduced by the difference between the present
value of the receivable at the market rate and the contract interest rate. Under
this method interest is recorded at the market rate by application of the
interest (constant rate) method.

                  Interest income on temporary investments declined by $9,502,
or 30.9%, to $21,241 in 2000 from $30,743 in 1999, due to a decrease in average
temporary investments coupled with a decline in the average interest rate earned
thereon. The Company's excess funds are invested in U.S. Treasury Bills and
money market accounts. Dividend and other income declined by $10,630 to $3,028
in 2000 from $13,658 in 1999, due principally to the sale of substantially all
of the Company's trading portfolio of equity securities. As a consequence of
such sale, gains previously recognized for appreciation therein did not recur.

                  Advertising and selling expenses increased by $71,371, or
72.3%, to $170,075 in 2000 from $98,704 in 1999. As a percentage of home-site
sales, these expenses decreased slightly by 1.9% to 13.5% in 2000 from 15.4%
in 1999. Substantially all of the dollar increase is attributable to sales
commissions which increased by $64,247, or 132.4%, to $112,780 in 2000 from
$48,533 in 1999.

                  Officers' salaries decreased by $120,000, or 28.6% to $300,000
in 2000 from $420,000, reflecting a decrease in bonus of $60,000 for each
officer. Employment agreements provide for a base annual salary of $200,000 for
each officer.

                  General and administrative expenses increased by $104,157 or
27.2% to $486,887 in 2000 from $382,730 in 1999. However as a percentage of
home-site sales, these expenses decreased considerably by 21% to 38.7%
in 2000 from 59.7% in 1999. Management fees paid to Rainbow Canyon Realty &
Development, Inc., a company controlled by the son of one of the Company's
officer/principal stockholders, were constant at $46,500 pursuant to the related
agreement.


                                       8
<PAGE>

                  Interest charged to expense was $693 in 2000 and $75 in 1999,
representing miscellaneous interest charges not incurred on the Company's
interest-bearing debt. All of such other interest charges, aggregating $42,428
in 2000 and $62,087 in 1999 were capitalized as part of land inventory.

                  The Company provides an allowance for foreclosure losses,
which equals the excess of the unpaid mortgage balance and unpaid but accrued
interest over the cost of the lot, which cost is returned to inventory. One
foreclosure occurred in 2000, resulting in a loss of $16,566 being charged
against the allowance. The allowance is provided at two percent of the
aggregate contractual mortgage balances outstanding; the Company's historical
loss experience has shown this percentage to be adequate. The provision for
such losses was increased by $18,240 in 2000, due principally to the
write-off. In 1999 the provision was reduced by $3,177.

                  As a result of the above, but mostly due to the increase in
gross profit on home-site sales, pre-tax loss fell by $254,240,
or 53.2%, to $223,707 in 2000 from $477,947 in 1999.

                  The Company recognized no current income tax benefit from
the loss in 2000 as it had previously carried back losses to the fullest
extent possible. A deferred tax benefit of $13,700 was recorded in 2000
attributable to the sale of substantially all of the Company's trading
portfolio of equity securities. In 1999, a current $19,100 benefit from net
operating loss carryback was recognized, while appreciation in the Company's
trading portfolio of equity securities resulted in a deferred tax expense of
$3,100. The Company has available approximately $750,000 of net operating
losses which may be carried forward through 2020 to offset against future
taxable income. Such carryforward results in a deferred tax asset of
approximately $255,000, against which the Company has provided a 100%
deferred tax valuation allowance.

                  Net loss was accordingly $210,007 in 2000 and $461,947 in
1999. Basic and diluted loss per share was $0.31 in 2000 and $0.67 in 1999.
The Company has no common stock equivalents.

Liquidity and Capital Resources:

                  At May 31, 2000 the Company's cash and equivalents,
mortgages, accrued interest and other receivables, and equity securities
totaled $1,985,000, approximately three and three-quarters times the total of
liabilities of $532,000. The Company's cash and cash equivalents totaled
$834,000.

                  Historically the Company's cash requirements not provided
internally have been funded by bank borrowings. Apart from borrowings and
related repayments, the Company's principal source and needs for cash are
home-sites sales and related mortgage collections and developmental
expenses including capitalized interest for land improvements and related costs.
For the nine months ended May 31, 2000,

                                       9
<PAGE>

the Company's operating activities provided $311,000, investing activities
required $2,000 and financing activities required $538,000 for a net aggregate
use of $229,000. The principal operating inflow was $438,000 from the sale of
home-sites, net of a $52,000 increase in mortgages and accrued interest
receivable. The financing outflow was entirely attributable to new bank
borrowings, net of repayments. For the nine months ended May 31, 1999, operating
activities used $175,000, essentially to fund the net loss, investing activities
used $5,000 and financing activities used $304,000, all for debt repayments.

                                       10
<PAGE>

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company. The
Company and its representatives may from time to time make written or oral
statements that are "forward-looking", including statements contained in this
report and other filings with the Securities and Exchange Commission, any
reports to the Company's shareholders and news releases. All statements that
express expectations, estimates, forecasts and projections are forward-looking
statements within the meaning of the Act. In addition, other written or oral
statements which constitute forward-looking statements may be made by or on
behalf of the Company. Words such as "expects", "anticipates", "intends",
"plans", "believes", "seeks", "estimates", "projects", "forecasts", "may",
"should", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in or suggested by such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.

A wide range of factors could materially affect future developments and
performance of the Company, including the following: (i) the level of demand for
building lots in Prescott, Arizona; (ii) possible future litigation and
governmental proceedings; (iii) the availability of financing and financial
resources in the amounts, at the times and on the terms required to support the
Company's future business; and (iv) economic, business conditions and changes
including general economic and business conditions that are less favorable than
expected. This list of factors that may effect future performance and the


                                       11
<PAGE>

accuracy of forward-looking statements is illustrative, but by no means
exhaustive. Accordingly, all forward-looking statements should be
evaluated with the understanding of their inherent uncertainty.






                                       12
<PAGE>

Part F/S of the Registration Statement, Financial Statements, is amended to
read in its entirety as follows:

                                   PART F/S


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                 Page
                                                                 ----
<S>                                                              <C>
Annual Financial Statements:

Independent Auditor's Report                                      F-1
Consolidated Balance Sheet as of August 31, 1999                  F-2
Consolidated Statements of Operations and Retained
 Earnings for the Years Ended August 31, 1999 and 1998            F-3
Consolidated Statements of Cash Flows for the Years
 Ended August 31, 1999 and 1998                                   F-4
Notes to Consolidated Financial Statements                        F-5

Interim Financial Statements (Unaudited):

Consolidated Balance Sheet as of May 31, 2000                    F-11
Consolidated Statements of Operations for the Nine-Month
 Periods Ended May 31, 2000 and May 31, 1999                     F-12
Consolidated Statements of Cash Flows for the Nine-Month
 Periods Ended May 31, 2000 and May 31, 1999                     F-13
Notes to Consolidated Financial Statements                       F-14
</TABLE>


<PAGE>

                            INDEPENDENT AUDITOR'S REPORT




To The Board of Directors
Yavapai Hills, Inc.
Roslyn, New York


I have audited the accompanying consolidated balance sheet of Yavapai Hills,
Inc., and Subsidiaries as of August 31, 1999 and the related consolidated
statements of operations and retained earnings, and cash flows for each of the
years in the two-year period then ended.  These financial statements are the
responsibility of the Company's management.  My responsibility is to express an
opinion on these financial statements based on my audit.

I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I  believe that my audit provides a reasonable basis for my opinion.

In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Yavapai Hills, Inc.
and Subsidiaries as of August 31, 1999 and the results of their operations and
their cash flows for each of the years in the two-year period then ended, in
conformity with generally accepted accounting principles.




/S/ MARVIN JARET
Certified Public Accountant
Delray Beach, Florida
October 25, 1999, except as to the last paragraph
of Note 6 for which the date is December 8, 1999)


                                         F-1

<PAGE>

                        YAVAPAI HILLS, INC. AND SUBSIDIARIES
                             CONSOLIDATED BALANCE SHEET
                                  AUGUST 31, 1999

<TABLE>
                              ASSETS
                              ------
<S>                                                    <C>
Cash and cash equivalents (Note 1)                     $1,063,160
Mortgages receivable, net (Notes 1 & 2)                 1,079,998
Accrued interest and other receivables                     15,632
Investments in equity securities (Notes 1 & 3)             42,903
Income tax refunds receivable                              38,264
Land and home inventory (Notes 1 & 4)                   3,204,288
Land held for investment (Note 1)                         971,514
Property and equipment, net (Notes 1 & 5)                 128,921
Refundable utility deposits and other assets              291,220
                                                       ----------

TOTAL ASSETS                                           $6,835,900
                                                       ==========

                    LIABILITIES AND SHAREHOLDERS' EQUITY
                    ------------------------------------

LIABILITIES:
  Notes payable (Note 6)                               $  939,178
  Accounts payable and accrued expenses                   173,509
  Deferred income taxes (Notes 1 & 8)                      13,750
  Escrow deposits payable                                   8,966
                                                       ----------

TOTAL LIABILITIES                                       1,135,403
                                                       ----------

COMMITMENTS AND CONTINGENCIES (Notes 8, 9 & 10)              -

SHAREHOLDERS' EQUITY:
  Common stock, $1 par value; 850,000 shares
    authorized, 734,128 shares issued                     734,128
  Additional paid-in capital                            5,267,079
  Accumulated deficit                                    (158,480)
  Treasury stock, at cost: 47,410 shares                 (142,230)
                                                       ----------

TOTAL SHAREHOLDERS' EQUITY                              5,700,497
                                                       ----------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY             $6,835,900
                                                       ==========
</TABLE>


                  See Notes to Consolidated Financial Statements.
                                        F-2

<PAGE>

                        YAVAPAI HILLS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                    FOR THE YEARS ENDED AUGUST 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                   1999              1998
                                                   ----              ----
<S>                                             <C>               <C>
REVENUES:
 Sales of home-sites (Note 1)                   $ 892,890         $ 951,580
 Gain on sale of land held for investment            -              681,161
 Interest income, mortgages (Note 1)              100,109           137,999
 Interest income, temporary investments            39,532            65,457
 Dividend and other income                         14,405            19,123
                                                ---------         ---------

TOTAL REVENUES                                  1,046,936         1,855,320
                                                ---------         ---------

COSTS AND EXPENSES:
 Cost of sales, home-sites (Note 1)               409,641           384,140
 Advertising and selling expenses                 143,267           162,737
 Officers' salaries (Note 9B)                     560,000           600,000
 General and administrative expenses              575,399           608,544
 Interest expense, net of capitalized
   interest of $81,798 in 1999 and
   $37,641 in 1998 (Notes 1 & 6)                       75             2,415
  Reduction in allowance for foreclosure
  losses on mortgage defaults (Note 1)             (3,302)           (4,719)
                                                ---------         ---------

TOTAL COSTS AND EXPENSES                        1,685,080         1,753,117
                                                ---------         ---------

INCOME (LOSS) BEFORE INCOME TAXES                (638,144)          102,203
                                                ---------         ---------

 INCOME TAX PROVISION (BENEFIT)(Notes 1 & 8):
 Current                                          (14,600)           20,100
 Deferred                                           2,800             1,000
                                                ---------         ---------

TOTAL INCOME TAX PROVISION (BENEFIT)              (11,800)           21,100
                                                ---------         ---------

 NET INCOME (LOSS)                               (626,344)           81,103

 RETAINED EARNINGS - BEGINNING OF YEAR            467,864           386,761
                                                ---------         ---------

RETAINED EARNINGS (ACCUMULATED DEFICIT) -
  END OF YEAR                                   $(158,480)        $ 467,864
                                                =========         =========

EARNINGS (LOSS) PER SHARE (Note 1)              $    (.91)        $     .12
                                                =========         =========

Number of weighted average common
 shares outstanding during the year               686,718           686,718
                                                =========         =========
</TABLE>


                  See Notes to Consolidated Financial Statements.
                                        F-3

<PAGE>

                        YAVAPAI HILLS, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                    FOR THE YEARS ENDED AUGUST 31, 1999 AND 1998

<TABLE>
<CAPTION>

                                                   1999              1998
                                                   ----              ----
<S>                                             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                              $(626,344)        $  81,103
                                                ---------         ---------
Adjustments to reconcile net income (loss)
 to net cash used by operating activities:
  Gain on sale of land held for investment           -             (681,161)
  Depreciation                                      7,392             7,344
  Deferred income taxes                             2,800             1,000
  Decrease in mortgages receivable                155,802           212,406
  Decrease in accrued receivables                  74,006            17,780
  Increase in equity securities                    (7,291)           (2,826)
  Decrease in income tax refunds receivable        42,039            23,177
  Decrease (increase) in land inventory           170,835        (1,829,411)
  Decrease (increase) in other assets             253,928          (280,710)
  Increase (decrease) in accounts payable
   and accrued expenses                          (240,379)          161,639
  Increase (decrease) in income taxes payable      (4,809)            4,636
                                                ---------         ---------

TOTAL ADJUSTMENTS                                 454,323        (2,366,126)
                                                ---------         ---------

NET CASH USED BY OPERATING ACTIVITIES            (172,021)       (2,285,023)
                                                ---------         ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Sale proceeds, land held for investment               -             693,805
Increase in property and equipment                 (1,942)             -
Decrease in land held for investment              (12,122)             -
                                                ---------         ---------

NET CASH PROVIDED (USED) BY INVESTING
 ACTIVITIES                                       (14,064)          693,805
                                                ---------         ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable                             -           1,200,000
Repayments of notes payable                      (271,712)           (2,178)
                                                ---------         ---------

NET CASH PROVIDED (USED) BY FINANCING
 ACTIVITIES                                      (271,712)        1,197,822
                                                ---------         ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS        (457,797)         (393,396)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR    1,520,957         1,914,353
                                                ---------         ---------

CASH AND CASH EQUIVALENTS, END OF YEAR         $1,063,160        $1,520,957
                                               ==========        ==========

ADDITIONAL CASH FLOW INFORMATION (Note 11):
Non-Cash Investing and Financing Activities
 Cost of land transferred to inventory         $       -         $   75,862
                                               ==========        ==========
 Cost of land held for investment sold         $    -            $   12,644
                                               ==========        ==========
</TABLE>


                  See Notes to Consolidated Financial Statements.
                                        F-4

<PAGE>

                        YAVAPAI HILLS, INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             AUGUST 31, 1999 AND 1998


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A)    Organization and Basis of Presentation:

Yavapai Hills, Inc. was incorporated in Delaware in 1973.  The Company develops
and sells building sites for single family homes in Prescott, Arizona.  The
consolidated financial statements include the accounts of the Company and its
four subsidiaries, all of which are wholly-owned.  All significant intercompany
balances and transactions have been eliminated.

(B)    Cash Equivalents:

Cash equivalents, consisting of United States Treasury Bills and money market
funds, are stated at cost (amortized cost for Treasury Bills) which approximates
market value.

(C)    Home-Site Sales:

The Company sells home-sites and requires a minimum 20% downpayment.  Home-sites
are deeded to customers and the Company receives a first mortgage for the unpaid
balance, which is to be paid over five years, amortized over 30 years with a
balloon payment at the end of the fifth year.

Home-site sales contracts are recorded as sales at the time of closing.
Payments received prior to closing are recorded as deposits.  The Company
recognizes income on the full accrual basis.  On such basis, the full sales
price of a home-site is included in revenues at the time the sale is recorded.
Related costs, consisting of land and improvement costs, are charged against
income at that time.  For sales which are seller financed at below-market
mortgage interest rates, the sales price is reduced for the difference between
the present value of the mortgage at the contract mortgage interest rate and the
market interest rate for similar instruments.  Interest on these mortgage notes,
calculated using the interest (constant-rate) method, is reflected in income on
the accrual basis as earned.

It is the general policy to foreclose a home-site mortgage when no payment has
been received on the mortgages for approximately four months.  Under extenuating
circumstances, the Company may extend this delinquency period.  For all periods
through August 31, 1999, foreclosures and delinquencies have been insignificant.

The Company provides an allowance for foreclosure losses. Such losses equal the
excess of the unpaid mortgage balance and unpaid but accrued interest over the
cost of the lot, which cost is returned to inventory.  Interest ceases to accrue
when foreclosure proceedings are initiated.  The allowance  is provided at two
percent of the aggregate contractual mortgage balances outstanding; the
Company's historical loss experience has shown this percentage to be adequate.


                                        F-5
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

(D)    Equity Securities:

The Company's equity securities, all classified as trading, are carried at their
fair value based upon quoted market prices at year-end.  Accordingly, unrealized
gains and losses are included in results of operations.  Such gains were $7,291
in 1999 and $2,826 in 1998.

(E)    Land Inventory:

The Company capitalizes direct costs attributable to land acquisition and
development.  Interest, real estate taxes, and certain other indirect costs are
capitalized when property is undergoing improvement for intended sale and in the
case of interest, when interest cost is being incurred.  Interest of $81,798 and
$37,641, incurred on the Company's notes payable, was capitalized in 1999 and
1998, respectively.  (See Note 6).  Land costs are allocated to individual
home-sites based upon the estimated relative sales value of home-sites within
each development subdivision.

(F)    Land Held for Investment:

Land held for investment is stated at cost and represents undeveloped land which
the Company is holding for investment purposes and does not intend to sell as
retail land.

(G)    Property and Equipment:

Property and equipment is recorded at cost.  Depreciation is computed using
principally the straight-line method over the assets estimated useful lives.
Maintenance and repair costs are charged to expense as incurred.  Upon sale or
other disposition of the assets, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is reflected in
the statement of operations.

(H)    Income Taxes:

Income taxes are recognized during the year in which transactions enter into the
determination of financial statement income, with deferred taxes provided for
temporary differences between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by income tax laws.

(I)    Earnings (Loss) Per Share:

Earnings (loss) per share are calculated by dividing net income or loss by the
weighted average number of common shares outstanding.  The Company has  no other
classes of capital stock and no stock purchase warrants or options
issued or outstanding.

(J)    Other Comprehensive Income (Loss):

The Company has no items of other comprehensive income (loss).


                                        F-6

<PAGE>

NOTE 2 - MORTGAGES RECEIVABLE

This account consists of the following at August 31, 1999:

<TABLE>
<S>                                                            <C>
  Gross mortgages receivable                                   $1,102,545
  Less: Allowance for foreclosure losses on
        mortgage defaults                                          22,547
                                                               ----------
       Net mortgages receivable                                $1,079,998
                                                               ==========
</TABLE>

Mortgages receivable from home-site sales are evidenced by mortgage notes with
stated annual interest rates ranging from 5% to 10% and are discounted to yield
market rates for accounting and profit recognition purposes.  At August 31,
1999, substantially all mortgages receivable are being repaid in accordance with
note terms.

Estimated collections of principal on mortgages receivable without giving effect
to possible defaults or prepayments, are approximately as follows:

<TABLE>
<CAPTION>
       Year Ending August 31,                                       Amount
       ----------------------                                       ------
       <S>                                                       <C>
                 2000                                            $  258,700
                 2001                                               136,900
                 2002                                               350,500
                 2003                                               103,200
                 2004                                               278,000
                                                                 ----------
              Sub-total                                           1,127,300
              Adjustment for reduction to market interest rates     (24,755)
                                                                 ----------
                                                                 $1,102,545
                                                                 ==========
</TABLE>

NOTE 3 - INVESTMENTS IN EQUITY SECURITIES

Cost and fair value of equity securities, included in the Company's trading
portfolio at August 31, 1999 are as follows:

<TABLE>
<S>                                                              <C>
Equity Securities:
  Cost                                                           $    6,231
  Gross unrealized gains                                             36,672
                                                                 ----------
  Fair value                                                     $   42,903
                                                                 ==========
</TABLE>

NOTE 4 - LAND AND HOME INVENTORY

<TABLE>
<S>                                                              <C>
Improved land and land under improvement
  available for homesite sales                                   $3,002,366
Improved land available for town homes                               80,449
Model home under construction                                       121,473
                                                                 ----------
                                                                 $3,204,288
                                                                 ==========
</TABLE>

NOTE 5 - PROPERTY AND EQUIPMENT

<TABLE>
<S>                                                              <C>
  Furniture and equipment                                        $   36,598
  Sales office                                                      141,208
                                                                 ----------
                                                                    177,806
  Less:  Accumulated depreciation                                    48,885
                                                                 ----------
                                                                 $  128,921
                                                                 ==========
</TABLE>


                                         F-7

<PAGE>

NOTE 6 - NOTES PAYABLE

<TABLE>
<S>                                                              <C>
Purchase money mortgage given in connection with the
purchase of a small tract of land adjacent to Yavapai,
due in annual payments of $2,178, with interest on
the unpaid balance at 7% per annum.                              $    8,712

Note payable on a revolving line of credit of
$1,200,000 for land development payable at maturity
on December 31, 1999, with interest on the unpaid
balance payable monthly at prime plus 0.5%.                         930,466
                                                                 ----------
                                                                 $  939,178
                                                                 ==========
</TABLE>

All of the interest expense incurred on these obligations in 1999 and 1998 was
capitalized. Notes payable of the Company mature in fiscal years as follows:
2000: $932,644; 2001-2003: $2,178 each year.

On November 30, 1999, the Company entered into a development loan agreement for
a $1,000,000 line of credit with a new lender due in payments of $40,000 for
each lot sold for cash and the remaining outstanding principal payable on June
1, 2002 with interest on the unpaid balance due monthly at prime plus 1%.
Approximately $632,000 was drawn against the new credit line on December 7, 1999
to pay off the balance of the existing line.

NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash and cash equivalents,
mortgages receivable, accrued interest and other receivables, investments in
equity securities and notes payable.  The fair value of all of these approximate
their carrying amounts due to the following reasons: cash and equivalents - the
nature of the item; equity securities - the reporting is at fair value;
mortgages receivable - the carrying value has been adjusted to fair value for
below-market interest rates; notes payable - approximate  fair value as they
bear a market interest rate; other - approximate fair value due to a relatively
short maturity.

NOTE 8 - INCOME TAXES

The income tax provision (benefit) for the years ended August 31, 1999 and 1998
consists of the following:

<TABLE>
<CAPTION>
                                                           1999         1998
                                                           ----         ----
<S>                                                      <C>           <C>
Currently payable (refundable):
 Federal                                                 $(13,550)     $14,000
 States                                                    (1,050)       6,100
                                                         --------      -------
Total currently payable (refundable)                      (14,600)      20,100
                                                         --------      -------

Deferred:
 Federal                                                    2,300          800
 States                                                       500          200
                                                         --------      -------
Total deferred                                              2,800        1,000
                                                         --------      -------
Total income tax provision (benefit)                     $(11,800)     $21,100
                                                         ========      =======
</TABLE>


                                        F-8

<PAGE>

NOTE 8 - INCOME TAXES - CONTINUED

The effective income tax rate for these years differs from the statutory federal
income tax rate as follows:

<TABLE>
<CAPTION>
                                                    1999                1998
                                                    ----                ----
<S>                                              <C>                  <C>
Income (loss) before income tax (benefit)        $(638,144)           $102,203
                                                 =========            ========
Federal tax (benefit) at statutory rate          $(217,000)           $ 34,700
Decrease (increase) in tax (benefit) due to:
   Interest income not taxable                      (6,300)             (6,400)
   State taxes, net of federal benefit                (300)             (2,100)
   Net operating loss carryover                    186,400                -
   Statutory and lower bracket rate difference
    on operating loss carryback                     11,700                -
   Other, net                                       13,700              (5,100)
                                                 ---------            --------
                                                 $ (11,800)           $ 21,100
                                                 =========            ========
</TABLE>

The income tax effect arising primarily from the differences between the bases
of equity securities for financial and tax reporting resulted in increases in
deferred tax expense for the years ended August 31, 1999 and 1998 of $2,800 and
$1,000, respectively.  At August 31, 1999, equity securities result in a
deferred tax liability of $13,750.

At August 31, 1999 the balance of the net operating loss from the current year
of approximately $548,400 is available for carryforward to future years.  The
loss carryforward expires in 2019.  This item results in a gross deferred tax
asset of $186,400, which is fully offset by a deferred tax valuation allowance.
At August 31, 1998, there were no deferred tax assets or related valuation
allowances.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

(A)    Minimum Operating Lease Commitments:

Certain of the property used in the Company's business is leased.  Rental
expenses charged to operations for the years ended August 31, 1999 and 1998
amounted to $52,434 and $47,753, respectively.

Approximate minimum rental commitments for real and personal property under
non-cancelable leases total $31,129 at August 31, 1999 and are payable in future
fiscal years as follows: 2000: $14,544; 2001: $9,477; 2002: $7,108.

(B)    Employment Agreements:

The Company's co-founders and largest stockholders continue to serve as its two
principal officers.  Employment agreements between the Company and these two
individuals provide for an annual salary to each of $200,000.  The agreements
expire June 1, 2001.  Death benefit provisions aggregating $2,200,000 for each
officer are payable over fifteen years at the rate of $200,000 for the first
seven years following death and $100,000 for the succeeding eight years.


                                        F-9
<PAGE>

NOTE 9 - COMMITMENTS AND CONTINGENCIES - CONTINUED

(C)    Management Agreement:

The Company's on-site operations are managed by a related party pursuant to a
consulting contract.  The agreement presently provides for an annual fee of
$62,000 plus reimbursement of reasonable expenses.  The agreement expires June
30, 2000 and is automatically renewable for annual periods thereafter unless
sixty days' prior written notice of non-renewal is given by either party.

In the event of a sale of all or a portion of the property, the balance of the
management fee for the contract year is payable, together with an additional fee
of $100,000 in the event all remaining property is sold, or a proportion thereof
based on the acreage sold if less than all is sold.  This latter fee is payable
even if the sale is made subsequent to termination of the consulting contract if
the consultant showed the property to the buyer.  (See Note 10).

NOTE 10 - RELATED PARTY TRANSACTIONS

(A)    Management Agreement:

The Company's consulting agreement for management services is with a company
controlled by the son of one of the Company's founders/executive officers.  The
related fee aggregated $62,000 in 1999 and $52,000 in 1998.

(B)    Directors' Fees:

Each of the Company's six directors, including its two executive officers, are
paid annual director's fees of $1,500.  Directors' fees aggregated $9,000 in
each of fiscal 1999 and 1998.

NOTE 11 - ADDITIONAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                    1999               1998
                                                    ----                ----
 <S>                                              <C>                 <C>
 Interest paid during the year                    $81,873             $38,556
                                                  =======             =======
 Income taxes paid during the year                $33,107             $ 5,107
                                                  =======             =======
</TABLE>


                                        F-10

<PAGE>

                      YAVAPAI HILLS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  MAY 31, 2000
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                     ASSETS
<S>                                                                  <C>
Cash and cash equivalents                                             $  833,847
Mortgages receivable, net                                              1,132,191
Accrued interest and other receivables                                    15,926
Investments in equity securities                                           2,956
Land and home inventory                                                2,713,693
Land held for investment                                                 973,019
Property and equipment, net                                              123,713
Refundable utility deposits and other assets                             226,818
                                                                      ----------

TOTAL ASSETS                                                          $6,022,163
                                                                      ==========

</TABLE>

<TABLE>
<CAPTION>
                      LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                                                <C>
LIABILITIES:
  Notes payable                                                     $   401,140
  Accounts payable and accrued expenses                                 121,517
  Deferred income taxes                                                      50
  Escrow deposits payable                                                 8,966
                                                                    -----------
TOTAL LIABILITIES                                                       531,673
                                                                    -----------

COMMITMENTS AND CONTINGENCIES                                              --

SHAREHOLDERS' EQUITY:
   Common stock, $1 par value; 850,000 shares
      authorized, 734,128 shares issued                                 734,128
   Additional paid-in capital                                         5,267,079
   Accumulated deficit                                                 (368,487)
   Treasury stock, at cost:  47,410 shares                             (142,230)
                                                                    -----------
TOTAL SHAREHOLDERS' EQUITY                                            5,490,490

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                          $ 6,022,163
                                                                    ===========

</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-11


<PAGE>

                      YAVAPAI HILLS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE NINE MONTHS ENDED MAY 31, 2000 AND 1999
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                      2000               1999
                                                      ----               ----
<S>                                               <C>               <C>
REVENUES:
   Sales of homesites                             $ 1,258,618       $   641,289
   Interest income,mortgages                           74,105            76,644
   Interest income,temporary investments               21,241            30,743
   Dividend and other income                            3,028            13,658
                                                  -----------       -----------

TOTAL REVENUES                                      1,356,992           762,334
                                                  -----------       -----------

COSTS AND EXPENSES:
   Cost of sales, homesites                           604,804           341,949
   Advertising and selling expenses                   170,075            98,704
   Officers' salaries                                 300,000           420,000
   General and administrative expenses                486,887           382,730
   Interest expense, net of capitalized
     interest of $42,428 in 2000 and
     $62,087 in 1999                                      693                75
   Provision for (reduction in) allowance
     for foreclosure losses on mortgage
     defaults                                          18,240            (3,177)
                                                  -----------       -----------

TOTAL COSTS AND EXPENSES                            1,580,699         1,240,281
                                                  -----------       -----------

LOSS BEFORE INCOME TAXES                             (223,707)         (477,947)
                                                  -----------       -----------

INCOME TAX PROVISION (BENEFIT):
   Current                                               --             (19,100)
   Deferred                                           (13,700)            3,100
                                                  -----------       -----------

TOTAL INCOME TAX PROVISION (BENEFIT)                  (13,700)          (16,000)
                                                  -----------       -----------

NET LOSS                                          $  (210,007)      $  (461,947)
                                                  ===========       ===========

LOSS PER SHARE                                    $      (.31)      $      (.67)
                                                  ===========       ===========

Number of weighted average common
  shares outstanding during the period                686,718           686,718
                                                  ===========       ===========

</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-12


<PAGE>

                      YAVAPAI HILLS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE NINE MONTHS ENDED MAY 31, 2000 AND 1999
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        2000              1999
                                                        ----              ----
<S>                                                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                            $  (210,007)      $  (461,947)
                                                    -----------       -----------
Adjustments to reconcile net loss to net
 cash provided (used) by operating activities:
   Depreciation                                           5,846             5,508
   Deferred income taxes                                (13,700)            3,100
   Decrease (increase) in mortgages
    receivable                                          (52,193)          150,521
   Decrease (increase) in accrued interest
    and other receivables                                  (294)           41,773
   Decrease (increase) in equity securities              39,947            (8,033)
   Decrease (increase) in income tax refunds
    receivable                                           38,264           (19,057)
   Decrease in land inventory                           490,595           258,527
   Decrease in refundable utility deposits
    and other assets                                     64,402           196,798
   Decrease in accounts payable and
    accrued expenses                                    (51,992)         (336,727)
   Decrease in income taxes payable                        --              (5,906)
                                                    -----------       -----------

TOTAL ADJUSTMENTS                                       520,875           286,504
                                                    -----------       -----------

NET CASH PROVIDED (USED) BY OPERATING
 ACTIVITIES                                             310,868          (175,443)
                                                    -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in land held for investment                     (1,505)           (5,460)
Increase in property and equipment                         (638)             --
                                                    -----------       -----------

NET CASH USED BY INVESTING ACTIVITIES                    (2,143)           (5,460)
                                                    -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable                               632,428              --
Repayments of notes payable                          (1,170,466)         (304,048)
                                                    -----------       -----------

NET CASH USED BY FINANCING ACTIVITIES                  (538,038)         (304,048)
                                                    -----------       -----------

NET DECREASE IN CASH AND CASH EQUIVALENTS              (229,313)         (484,951)

CASH AND CASH EQUIVALENTS, BEGINNING OF
 PERIOD                                               1,063,160         1,520,957
                                                    -----------       -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD            $   833,847       $ 1,036,006
                                                    ===========       ===========

ADDITIONAL CASH FLOW INFORMATION:
 Interest paid during the period                    $    43,121       $    62,162
                                                    ===========       ===========
 Income taxes paid during the period                $      --         $     1,222
                                                    ===========       ===========

</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-13

<PAGE>

                      YAVAPAI HILLS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2000 AND 1999
                                   (UNAUDITED)

(1)  The accompanying unaudited interim consolidated financial statements have
     been prepared in accordance with generally accepted accounting principles
     for interim financial information and with the instructions in Item 310(b)
     of Regulation S-B. Accordingly, they do not include all of the information
     and notes required by generally accepted accounting principles for complete
     financial statements. In the opinion of management, all adjustments
     (consisting only of normal recurring accruals) considered necessary for a
     fair presentation have been made. Operating results for the nine month
     period ended May 31, 2000 are not necessarily indicative of the results
     that may be expected for the year ending August 31, 2000. For further
     information, refer to the annual consolidated financial statements
     preceding these interim financial statements.

(2)  Loss per share is calculated by dividing net loss by the weighted average
     number of common shares outstanding. The Company has no other classes of
     capital stock and no stock purchase warrants or options issued or
     outstanding.

(3)  The Company has no components of comprehensive income (loss) other than net
     income (loss).

(4)  On November 30, 1999, the Company entered into a development loan agreement
     for a $1,000,000 line of credit with a new lender due in payments of
     $40,000 for each lot sold for cash and the remaining outstanding principal
     payable on June 1, 2002 with interest on the unpaid balance due monthly at
     prime plus 1%. Approximately $632,000 was drawn against the new credit line
     on December 7, 1999 to pay off the balance of the existing line.

(5)  In June 2000, the management agreement was renewed through June 30, 2001.

(6)  On July 12, 2000, the Company filed with the U.S. Securities and Exchange
     Commission, Form 10-SB, General Form for Registration of Securities of
     Small Business Issuers under Section 12(g) of The Securities Exchange Act
     of 1934. At such time as this filing becomes effective pursuant to
     applicable regulations or is declared effective by the Commission, the
     Company will become subject to the periodic reporting required by the
     Exchange Act. In addition, at such time as the Company clears Commission
     comments applicable to such filing, the Company will be eligible to apply
     to have market quotations of its common stock to again be listed on the
     NASD OTC Bulletin Board. NASD OTC regulations applicable to non-reporting
     public companies required the removal of the Company's common stock from
     the Bulletin Board listings in June 2000.

                                      F-14

<PAGE>

                                   SIGNATURES

                  Pursuant to the requirements of Section 12 of the
Securities Exchange Act of 1934, the Registrant has duly caused this
amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                   YAVAPAI HILLS, INC.
                                        (Registrant)

Date: August 15, 2000             By: /s/ Aaron W. Weingarten
                                      -------------------------------------
                                       Aaron W. Weingarten
                                       Chairman and Chief
                                         Executive Officer






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