CAPITAL RESERVE CORP, 10KSB, 1996-04-01

CAPITAL RESERVE CORP
10KSB, 1996-04-01
LIFE INSURANCE

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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

Commission file number: 0-17232

CAPITAL RESERVE CORPORATION
(Name of small business issuer in its charter)

COLORADO 84-0888594
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

7860 E. BERRY PLACE, SUITE 120, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices including zip code)

Issuer's telephone number, including area code: (303) 220-5030

Securities registered under Section 12(b) of the Exchange Act: NONE

Securities registered under Section 12(g) of the Exchange Act:
Title of class: CLASS A COMMON STOCK, NO PAR VALUE
COMMON STOCK PURCHASE WARRANTS

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 the filing requirements for the past 90 days. Yes No X
--- ---

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will not 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.[ ]

Issuer's revenues for its most recent fiscal year. $117,916

Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 12, 1996: $8,531.95

Number of shares outstanding of registrant's Class A Common Stock, no par value,
as of March 7, 1996: 579,378

Documents incorporated by reference: NONE

Transitional Small Business Disclosure Format (check one): Yes No X

Exhibit index on consecutive page 13 Page 1 of Pages

<PAGE>

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

Capital Reserve Corporation (the "Company") was incorporated under the laws
of the State of Colorado on August 3, 1982, for the purpose of operating as a
financial services holding company.

On April 20, 1988, the Company completed its public offering of 6,000 units
of equity securities (the "Units"), each Unit consisting of 50 shares of Common
Stock and a variable number of Warrants. Each Warrant entitled the holder to
purchase one-tenth of one share of Common Stock at a price of $1.00 until
September 22, 1991. A total of 4,002 Units (consisting of 200,100 shares of
Common Stock and 1,250,250 Warrants) were sold at a price of $500 per Unit,
resulting in gross proceeds and net proceeds of $2,001,000 and $1,715,931,
respectively. However, as of September 30, 1989, the Company had not received
uncollected stock subscriptions totalling $15,000 for 30 Units (1,500 shares of
Common Stock and 6,000 Warrants). This amount was reduced from stockholders'
equity; therefore, the total number of Warrants exercisable was 1,244,250. The
Warrants expired September 22, 1991 without any being exercised.

Effective June 29, 1988, the Company acquired 100% of the outstanding stock
of First West Financial Services, Inc. and its subsidiary, First West Life
Insurance Company, ("First West Life") in exchange for 100,000 shares of the
Company's Common Stock with an estimated fair market value of $10.00 per share,
$931,304 cash, and a liability to the former shareholders of First West Life of
$459,000. In addition, in connection with the acquisition of First West Life,
the Company agreed to pay the former shareholders of First West Life an
additional $150,000 ($50,000 to each of the three shareholders) if a certain
price ($20.00 per share) and marketability of the stock issued in the Exchange
was not attained at the end of two years after the date of the Exchange (June
29, 1990). See Item 3. Legal Proceedings, Item 12. Certain Relationships and
Related Transactions, and Item 7. Financial Statements herein and the Notes
included therein. The Company also incurred acquisition costs of $26,585 for
legal and actuarial fees. This transaction was accounted for using the purchase
method of accounting. See "Sale of First West Life" below.

During the quarter ended September 30, 1988, the Company invested $30,000
in 300,000 shares (100%) of the Class B common stock of Premier Capital
Investment Corporation, a Colorado corporation ("Premier"). The holders of the
shares of Class B common stock had the right to elect a majority of the Board of
Directors of Premier. On August 31, 1990, Premier completed a private offering
of its common stock and common stock purchase warrants, resulting in gross
proceeds of $1,272,500 and net proceeds of $1,235,738. It was proposed to use
such capital to acquire business opportunities, primarily in the financial
services industry. On June 10, 1992, the Company sold 2,500 shares of its
ownership of Premier Class B common stock and converted the remaining 297,500
shares of Class B common stock into 2,677,500 shares of Class A common stock of
Premier (approximately 34% of the total outstanding Class A common stock). See
Item 3. Legal Proceedings and Item 6. Management's Discussion and Analysis or
Plan of Operation.

Effective December 31, 1988, First West Financial Services, Inc. was merged
into the Company, and First West Agency, Inc., a subsidiary of First West Life,
was merged into Capital Reserve Marketing Corporation, an existing wholly-owned
subsidiary of the Company.

From September 10, 1990 to November 30, 1990, the Company offered in a
private placement 9-1/4% Senior Convertible Subordinated Notes due October 31,
1995 (the "Notes"). Notes in the total principal amount of $65,500 were sold in
1990. The Company sold additional Notes in the principal amounts of $500 and
$6,000 in 1991 and 1992, respectively. The Notes were in registered form and
were convertible into shares of the Company's Common Stock at any time through
October 31, 1995, at a conversion price of $9.09 per share, subject to
adjustment. Interest was payable semi-annually, commencing May 1, 1991. The
Company redeemed all of the Notes on November 30, 1994. The Notes were
unsecured and subordinated to all indebtedness for money borrowed.

<PAGE>

From May 18, 1993 to December 31, 1993, the Company offered in a private
placement 8.25% Senior Convertible Subordinated Notes due December 31, 1998.
Notes in the total principal amount of $10,000 were sold in 1993. The Notes
were in registered form and were convertible into shares of the Company's Common
Stock at any time through December 31, 1998, at a conversion price of $9.09 per
share, subject to adjustment. Interest was payable semi-annually, commencing
January 1, 1994. The Company redeemed all of the Notes on November 30, 1994.
The Notes were unsecured and subordinated to all indebtedness for money
borrowed.

During the quarter ended September 30, 1990, First West Life Insurance
Company of New Mexico ("FWLNM") was formed by First West Life as a wholly-owned
subsidiary. FWLNM applied for a certificate of authority to solicit life and
accident and health insurance on August 14, 1990. Final approval was received
on March 8, 1991. FWLNM offered the same kinds of insurance as First West Life.

Effective October 1, 1990, the Company implemented a 1-for-10 reverse stock
split of the Company's Class A Common Stock and changed the par value of both
the Class A Common Stock and Class B Preferred Stock from $.01 par value to no
par value. The share amounts stated herein have been adjusted to reflect this
reverse stock split.

On December 31, 1992, the Company sold 50.2% of its investment in the
common stock of First Guaranty Income Corporation ("FGI") (formerly Capital
Reserve Investment Corporation) to Premier for $1,760 of debt forgiveness.
Accordingly, the Company changed its method of accounting for its investment in
Premier and FGI to the equity method from that of consolidating the accounts of
Premier and FGI with the accounts of the Company. See Item 6. Management's
Discussion and Analysis or Plan of Operation.

As of December 1, 1993, the Company sold its remaining interest in FGI to
Philip A. Bates for $100 cash and converted the $22,076 debt owed by FGI to the
Company into 11,038 shares of FGI Class B Preferred Stock. See Item 6.
Management's Discussion and Analysis or Plan of Operation and Item 12. Certain
Relationships and Related Transactions.

As of August 17, 1994, the Company dissolved Flexible Benefits, Inc., which
was a wholly-owned subsidiary. This company had been a third party
administrator of plans under Section 125 of the Internal Revenue Code.

SALE OF FIRST WEST LIFE

On October 14, 1994, the Company sold the issued and outstanding capital
stock of First West Life to Old Reliance Insurance Company, an Arizona domiciled
insurance company ("Old Reliance") for $1,227,301 in cash. The purchase price
was the result of arm's length negotiation between the Company and Old Reliance.
Old Reliance is not affiliated with Capital Reserve, any of its affiliates, or
any director or officer of Capital Reserve. The sale of First West Life
included the sale of FWLNM. As a condition to closing, approvals were obtained
from the Department of Insurance for the States of Colorado, New Mexico, and
Arizona.

The Company determined that it could not maintain capital and surplus
requirements for First West Life and therefore sold First West Life for the best
price possible. An administrative proceeding was initiated in May 1993 before
the Division of Insurance for the State of Colorado against First West Life to
determine whether its license should be revoked or suspended. Among other
things, it was alleged that First West Life failed to meet the minimum capital
and surplus requirements required by statute for life insurance companies as of
March 31, 1993. On October 6, 1993, First West Life entered into a Confidential
Stipulation for Final Agency Order which allowed First West Life to increase its
capital and surplus over an extended period of time to meet statutory
requirements. Management of First West Life deemed this resolution to be
favorable to the Company.

Accordingly, at December 31, 1995, the only wholly-owned subsidiary of the
Company was Capital Reserve Marketing Corporation. Capital Reserve Marketing
Corporation formerly offered a cancer policy. This subsidiary is currently
inactive, but continues to receive income from the renewals of the cancer
policies it previously sold.

The principal business activity of the Company is renting real property.
See Item 2. Description of Property.

3
<PAGE>

EMPLOYEES

As of December 31, 1995, the Company and its subsidiary had 3 full-time
employees.

ITEM 2. DESCRIPTION OF PROPERTY.

On November 7, 1991, First West Life purchased the building and land at
7860 East Berry Place, Englewood, Colorado, for $361,285. The land is comprised
of .934 acres, more or less, and the building contains approximately 13,479
square feet of rentable office space. The building currently houses all of the
operations of the Company, which occupy 750 square feet. First West Life
transferred the property to the Company on October 14, 1994 as an extraordinary
dividend to the Company by special warranty deed. There are no mortgages,
liens, or encumbrances against this property. In the opinion of management of
the Company, the property is adequately covered by insurance.

The rental of this property is the main activity of the Company. The
Company utilizes the services of a property management company, which handles
all aspects of managing the property: leasing, repairs and maintenance. The
Company pays the property management company a management fee of $500 per month
in addition to hourly fees for repair and maintenance work.

As of March 25, 1996, approximately 84% of the property was occupied,
including the space used by the Company. Five tenants each occupied ten percent
or more of the rentable space as follows:

<TABLE>
<CAPTION>
BUSINESS OF TENANT AMOUNT OF SQUARE FOOTAGE TERMS OF LEASE
RENTED
<S> <C> <C>
Computer consulting 1,946 Lease expires 7/31/98;
Base rent of $1,702.75 per month

Financial public relations 1,846 Lease expires 4/30/96;
Base rent of $1,344.73 per month

Architectural firm 1,641 Lease expires 1/31/98;
Base rent of $1401.68 per month

Energy company 1,396 Lease expires 12/31/96;
Base rent of $1,083.79 per month

Mortgage company 1,347 Lease expires 2/28/97;
Base rent of $1,094.44 per month
</TABLE>

The average effective annual rental per square foot of the leased space is
$9.73. The average effective rental per square foot of the entire building is
$7.61.

The following sets forth the lease expirations through 1998:

<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR ENDING # OF TENANTS # OF SQUARE FEET ANNUAL RENTAL GROSS ANNUAL
WHOSE LEASES REPRESENTED BY REPRESENTED BY RENTAL REPRESENTED
EXPIRE EXPIRING LEASES EXPIRING LEASES BY EXPIRING LEASES
<S> <C> <C> <C> <C>
1996 3(1) 4,406 $41,364 40%
1997 1 1,347 $13,133 13%
1998 2 3,587 $37,253 36%
</TABLE>

4
<PAGE>

(1) A lease covering 1,830 square feet of space expired in January 1996 and is
not included in this table. Another tenant occupying 900 square feet of space
is on a month-to-month basis and is not included in this table.

The federal tax basis used for taking depreciation on this property is
$239,285, at the rate of $7,980, based on a life of 30 years. The Company uses
the straight-line method to take depreciation.

Annual realty taxes are $22,819 based on a mill levy rate of 137.274.

ITEM 3. LEGAL PROCEEDINGS.

On March 10, 1995, Joseph T. Flynn initiated a lawsuit in the District
Court in the City and County of Denver, State of Colorado, against the Company
and Ralph W. Newton, Jr. The suit pertains to the Stock Exchange Agreement,
pursuant to which the Company acquired First West Life in 1988. See Item 13.
Certain Relationships and Related Transactions. Mr. Flynn alleges that the
Company breached its contract with him by failing to pay him $150,000, and
further alleges that there are shares owed to him pursuant to the contract. Mr.
Flynn has further alleged against the Company a claim for specific performance,
deceit based on fraud, breach of duty of good faith and fair dealing, unjust
enrichment, and conversion. Mr. Flynn is seeking appointment of a receiver for
the Company, compensatory and consequential damages, punitive damages, interest,
and an award of his costs and attorney's fees. The Company has filed an answer
to the complaint, as well as a counterclaim against Mr. Flynn. The Company
alleges misrepresentation by Mr. Flynn in the negotiation for the sale of First
West Life, fraudulent concealment of certain liabilities, breach of fiduciary
duty, a constructive trust of certain funds, negligent misrepresentation during
the course of Mr. Flynn's employment as an actuary for the Company, and
negligence in the performance of his duties as an actuary for the Company.
Trial is scheduled for June 24, 1996.

The other parties to the Stock Exchange Agreement, Dennis Haley and Donald
Yee, who were the other former owners of First West Life, previously threatened
to file lawsuits similar to Mr. Flynn's, but settled with the Company during the
quarters ended June 30, 1995 and September 30, 1995, respectively. Mr. Haley
was paid $117,000 in full satisfaction of all obligations and to acquire his
stock in the Company. Mr. Yee was paid $128,000 in full satisfaction of all
obligations and to acquire his stock in the Company. Since the Company's
financial statements had reflected a liability of $325,077 owed to Messrs. Haley
and Yee, the Company recognized an extraordinary gain during 1995 related to
this settlement. See Item 6. Management's Discussion and Analysis or Plan of
Operations - Liquidity.

On September 29, 1995, various individuals filed a suit in the United
States District Court for the District of Nebraska against Premier Capital
Investment Corporation, Capital Reserve Corporation, Ralph W. Newton, Jr., Henry
W. Hall, Philip A. Bates, Donald Yee, Linda M. Opfer, and Dennis G. Haley. The
litigation relates to the offer and sale of securities of Premier Capital
Investment Corporation ("PCIC"), which was formerly a subsidiary of the Company,
during the period of approximately 1988 through 1992. The complaint generally
alleges fraud in connection with the sale of the securities of PCIC and asserts
liability under the Racketeering Influenced and Corrupt Organizations Act
("RICO"), as well as several common law theories. The Company is vigorously
defending the suit. Plaintiffs are seeking damages against all defendants in an
aggregate amount of up to $2,400,000, together with interest, costs, and
attorneys' fees. The Company has filed a motion to dismiss the suit, which is
still pending. As of the date of this report, no trial date has been set.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

5
<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock has traded on the over-the-counter market since
July 25, 1988. From May 30, 1989 to July 13, 1992, the Company's Common Stock
was traded on NASDAQ, under the symbol "CRCOA". The range of high and low bid
prices for each fiscal quarter for 1994 and for the month of January 1995, and
the range of actual trading prices for the remainder of 1995, as reported by the
OTC Bulletin Board, is as follows:

<TABLE>
BID OR TRADE PRICES
1994 FISCAL YEAR HIGH LOW
<S> <C> <C>
Quarter Ending 03/31/94. . . . . . . . . . . . . . $ 0.25 $ 0.25
Quarter Ending 06/30/94. . . . . . . . . . . . . . $ 0.13 $ 0.06
Quarter Ending 09/30/94. . . . . . . . . . . . . . $ 0.25 $ 0.13
Quarter Ending 12/31/94. . . . . . . . . . . . . . $ 0.06 $ 0.06

1995 FISCAL YEAR

Quarter Ending 03/31/95. . . . . . . . . . . . . . $ 0.13 $ 0.06
Quarter Ending 06/30/95. . . . . . . . . . . . . . $ 0.02 $ 0.02
Quarter Ending 09/30/95. . . . . . . . . . . . . . $ 0.13 $ 0.06
Quarter Ending 12/31/95. . . . . . . . . . . . . . $ 0.02 $ 0.02

</TABLE>

The last reported bid prices for the Company's Common Stock were both
$0.125 in January 1995, as reported by the OTC Bulletin Board. The last
reported trade was on March 12, 1996 at $0.015625 per share.

The above quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.

As of March 7, 1996 there were 658 record holders of the Company's Common
Stock.

During the last two fiscal years, no cash dividends have been declared on
the Company's Common Stock.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

GENERAL

6
<PAGE>

Due to the sale of First West Life, the statements of operations and cash
flows were restated for the year ended December 31, 1993 to recognize the
operations discontinued during 1994. The statements of stockholders' equity
were adjusted at January 1, 1993 and the net loss for the year ended December
31, 1993 was restated for prior period adjustments.

As part of the Company's preparation of audited financial statements as of
and for the year ended December 31, 1994, the Company was to have audited the
financial statements of First West Life through the date of sale. However, the
books and records of First West Life were turned over to the purchaser (which is
located out of state) at the time of sale, thereby making it burdensome and
expensive to audit the First West Life financial statements. Given the
Company's limited resources, management of the Company determined not to audit
the First West Life financial statements for 1994 through date of sale.
Accordingly, the financial statements of the Company as of and for the year
ended December 31, 1994 are not complete.

In addition, the Company discovered that its December 31, 1993 life
insurance reserves and related actuarial items may not have been calculated in
accordance with generally accepted accounting principles. The Company does not
know whether this problem is material. It cannot quantify the calculation
discrepancies without having to re-calculate reserves and other actuarial items
going back several years. Again, given the Company's limited resources,
management of the Company has determined not to perform the re-calculation.

LIQUIDITY

As a result of the sale, certain assets which previously had been held by
the insurance subsidiary were retained by the Company, primarily consisting of a
commercial office building used for rental purposes as well as the Company's
office, and a mortgage loan from a related party in the amount of $90,000 (which
was paid in December 1994).

The Company has been sued in connection with the Stock Exchange Agreement,
pursuant to which the Company acquired First West Life in 1988. Prior to
adjustment, the balance of the liabilities incurred in connection with the
acquisition was $559,000 plus $196,137 in accrued interest. The Company is
contesting these liabilities as of December 31, 1995. Interest expense of
$114,445, that was previously recorded, was reversed as other income in 1994.
Payments made in 1991 through 1994 totaling $41,385, which were previously
recorded as reductions to accrued interest, were adjusted to reduce the notes
payable. During 1995, the Company paid two of the claimants, with a recorded
liability of $325,077, $245,000 in full satisfaction of all obligations and to
acquire their stock in the Company. The cost of this treasury stock has been
recorded as $4,000 and an extraordinary gain of $84,077 was recorded related to
this settlement in 1995. At December 31, 1995, the Company has a recorded
liability of $183,538 owed to the last remaining claimant. See Item 3. Legal
Proceedings and the financial statements filed with this report.

Cash flows from continuing operations during 1995 and 1994 reflect net cash
used of $(256,220) and $(420,278), respectively, while cash flows provided by
(used for) investing activities for the same periods were $2,807 and $(61,402),
respectively.

At December 31, 1995, the Company had working capital of $245,017. If the
Company should generate an operating loss for 1996 comparable to the loss
incurred for 1995, a substantial portion of the Company's remaining cash and
working capital will be depleted. See " Results of Operations" below. The
Company presently has no external sources of cash.

CAPITAL RESOURCES

The Company issued senior convertible subordinated Notes with interest
rates ranging from 8-1/4% to 9-1/4% under various private placement offerings.
Due dates of these notes ranged from October 31, 1995 to December 31, 1998. At
December 31, 1993, the Company had outstanding Notes of $82,000. These Notes
were redeemed on November 30, 1994.

7
<PAGE>

RESULTS OF OPERATIONS

PRIOR PERIOD ADJUSTMENTS AND CHANGES IN ESTIMATES

As indicated in Note B of Notes to Consolidated Financial Statements and
Item 12. Certain Relationships and Related Transactions, adjustments were made
to the liabilities incurred in connection with the acquisition of First West
Life. Interest expense of $114,445, which had been recorded improperly, was
recorded as miscellaneous income in 1994. Payments made in 1991 through 1994
totaling $41,385, which had been recorded as reductions to accrued interest,
have been adjusted to reduce the principal amount of the note payable.

FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994

The Company's net operating loss for 1995 decreased by approximately 18.8%
due to increased rental revenues and decreased operating expenses. However, the
decreased 1995 net operating loss was offset by reduced other income of only
$9,461, as compared to $124,006 in 1994. This resulted in a $343,928 loss from
continuing operations before extraordinary items in 1995, as compared to a loss
of $310,926 in 1994. As explained above, other income for the 1994 fiscal year
included $114,445, which related to an adjustment of interest expense recorded
previously. In 1995, the Company recorded a $84,077 gain from the settlement of
certain debt, while in 1994, the Company recorded a $217,552 loss from
discontinued operations and the disposal of First West Life. Accordingly, the
overall net loss for 1995 decreased significantly (50.8%) as compared to 1994.
See "Liquidity" above.

The Company's rental operations generated a profit of $5,310 for 1995, as
compared to a loss of $44,967 for 1994. The profit in 1995, however, was not
sufficient to cover the Company's other operating expenses, which were comprised
primarily of salaries, payroll taxes, and employee benefits ($179,288); legal
expenses ($101,951); and accounting and actuarial expenses ($46,360). These
expenses items are expected to continue at 1995 levels during 1996. Revenues
are also expected to continue at 1995 levels during 1996. Accordingly, the
Company expects to incur an operating loss comparable to that of 1995.

The Company's present business operations do not generate sufficient
revenues to cover its operating expenses. The Company would have to obtain
other business operations or severely reduce its operating expenses to remain
viable.

ITEM 7. FINANCIAL STATEMENTS.

Please refer to pages beginning with F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

On December 1, 1994, the Company engaged John M. Hanson & Company, P.C. to
audit the Company's financial statements for the year ending December 31, 1994.
The Company did not consult with John M. Hanson & Company, P.C. on any matters
during the two most recent fiscal years and the subsequent interim period
preceding the engagement of this firm.

At the same time, the Company dismissed Miller and McCollom, which had
audited the Company's financial statements for the years ending 1988 through
1993. None of the reports on the financial statements for the last two years
contained an adverse opinion or a disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope, or accounting principles. The decision
to change accountants was approved by the Company's board of directors. Except
for the situation described below, during the two most recent fiscal years and
the subsequent interim period preceding the change, there was no disagreement
with the former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of the former accountants,
would have caused it to make a reference to the subject matter of the
disagreement in connection with its reports.

8
<PAGE>

The Company discovered that its December 31, 1993 life insurance reserves
and related actuarial items may not have been calculated in accordance with
generally accepted accounting principles. The Company does not know whether
this problem is material. It cannot quantify the calculation discrepancies
without having to re-calculate reserves and other actuarial items going back
several years. Given the Company's limited resources, management of the Company
has determined not to perform the re-calculation. In light of these
circumstances, Miller and McCollom has declined to reissue its report related to
the 1993 financial statements.

9
<PAGE>
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 the names and ages of all directors and
executive officers of the Company as of the date of this report, indicating all
positions and offices with the Company held by each such person:

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Ralph W. Newton, Jr. 68 Chairman of the Board of Directors, President,
and Class B Director

Linda M. Opfer 46 Class B Director

</TABLE>

Linda M. Opfer is the daughter of Ralph W. Newton, Jr.

Class A directors are elected by the holders of the Company's Class A
Common Stock. As a class, the holders of the Common Stock have the right to
elect one less than a majority of the directors. Class B directors are elected
by the holders of the Company's Class B Preferred Stock. As a class, the
holders of Preferred Stock have the right to elect a majority of the directors.
Cumulative voting for directors is not permitted in either Class. The term of
office of both Class A directors and Class B directors of the Company ends at
the next annual meeting of the Company's shareholders or when the successors are
elected and qualify. The annual meeting of shareholders is specified in the
Company's bylaws to be held on the fourth Friday in August of every year and the
1993 meeting was held on August 27, 1993. The term of office of each officer of
the Company ends at the next annual meeting of the Company's Board of Directors,
expected to take place immediately after the next annual meeting of
shareholders, or when his successor is elected and qualifies. Except as
otherwise indicated below, no organization by which any officer or director
previously has been employed is an affiliate, parent, or subsidiary of the
Company.

RALPH W. NEWTON, JR. has been the Chairman of the Board of Directors of the
Company since August 1982 and the President since November 1992. He was the
Chairman of the Board of Directors of First West Life until its sale in October
1994. Since he founded it in 1969, he has been president of Mountain Pacific
Investment Company, a former investment banking firm which is in existence, but
which became inactive in April 1985. Mr. Newton received a B.S.B.A. degree in
accounting from Geneva College in 1965 and an M.Ed. degree in education from
Westminster College in 1968. Mr. Newton was a member of the National
Association of Securities Dealers, Inc. between 1969 and 1985.

LINDA M. OPFER has been a director of the Company since April 1986, was the
Executive Vice President of the Company from April 1986 to August 1990, and was
the Assistant Secretary from August 1987 to August 1990. She also has been vice
president of Mountain Pacific Investment Company since 1979 which company became
inactive in 1985. She has been a homemaker for several years. Ms. Opfer was a
principal member of the National Association of Securities Dealers, Inc. from
1977 to 1985. She is the daughter of Ralph W. Newton, Jr.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

No directors, officers, or beneficial owners of more than ten percent of
securities of the Company engaged in any transactions involving the securities
during the fiscal year ended December 31, 1995. Accordingly, there were no
Forms 3, 4, or 5 filed by such persons during the fiscal year ended December 31,
1995.

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth information for the Chief Executive Officer
("CEO") of the Company, Ralph W. Newton, Jr. No disclosure need be provided for
any executive officer, other than the CEO, whose total annual salary

10
<PAGE>

and bonus for the last completed fiscal year did not exceed $100,000.
Accordingly, no other executive officers of the Company are included in the
table.

LONG TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- -----------------------------------------
OTHER RESTRICTED
NAME AND ANNUAL STOCK LTIP ALL OTHER
PRINCIPAL COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
POSITION YEAR SALARY BONUS ($) ($) ($) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ralph W. Newton, Jr. 1995 $96,000 $4,000 -0- -0- -0- -0- -0-
Chairman and President 1994 $94,500 $150,000 -0- -0- -0- -0- -0-
1993 $96,974 -0- -0- -0- -0- -0- -0-

</TABLE>

There are no outstanding stock options.

There are no employment agreements with any of the Company's executive
officers.

The Company does not pay non-officer directors for their services as such
nor does it pay any director's fees for attendance at meetings. Directors are
reimbursed for any expenses incurred by them in their performance as directors.

STOCK OPTION PLANS

The Company has adopted an Incentive Stock Option Plan ("ISOP") and Non-
Qualified Stock Option Plan ("Non-Qualified Plan"). Both the ISOP and the Non-
Qualified Plans permit the Board of Directors or a committee of directors (the
"Committee") to grant stock options to key management employees of the Company.
Such individuals will be selected from employees (excluding directors who are
not full-time employees of the Company) who have technical, managerial,
supervisory, or professional responsibilities.

It is intended that all options granted under the ISOP will qualify as
incentive stock options under Section 422A of the Internal Revenue Code of 1986,
as amended. Options for up to 18,000 shares of Common Stock may be issued under
the ISOP. If any such options are issued, they may be exercised at a price that
is not less than 110% of the fair market value of the stock on the day the
option is granted.

Options granted under the Non-Qualified Plan which are presently
exercisable, are not intended to qualify as incentive stock option plans under
the Internal Revenue Code of 1986, as amended. The aggregate number of shares
of Common Stock which may be subject to options under the Non-Qualified Plan is
18,000. If any such options are issued, they are to be exercised at a price of
$5.00 per share.

As of the date of this Annual Report, no options have been granted under
either plan.

Under both Plans, the Board of Directors grants options only to individuals
who, in the judgment of the Committee, have made significant contributions to
the Company. There is no formula for determining the number of options to be
granted under the Plans. Options are anticipated to be granted on the basis of
annual performance reviews. Any grants of options will reflect the Committee's
judgment (in its sole discretion) of the relative value of the contribution of
the grantee in respect to such matters as revenue production and expense
control.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information, as of March 7, 1996, with
respect to the beneficial ownership of the Company's Common Stock and Preferred
Stock by each person known by the Company to be the beneficial owner

11
<PAGE>

of more than five percent of the outstanding Common Stock and Preferred Stock,
by each of the Company's officers and directors, and by the officers and
directors of the Company as a group. Information is also provided regarding
beneficial ownership of Common Stock if the Preferred Stock is converted to
Common Stock (at a ratio of .8 shares of Common Stock for every share of
Preferred Stock):

<TABLE>
<CAPTION>
IF ALL SHARES OF PREFERRED
STOCK ARE CONVERTED TO
COMMON STOCK PREFERRED STOCK COMMON STOCK(1)

NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS(2) SHARES CLASS(3) SHARES CLASS(4)
<S> <C> <C> <C> <C> <C> <C>
Ralph W. Newton, Jr. -0- -- 70,000(5) 28.00% 56,000 7.19%
One Cleek Way
Littleton, CO 80123

Patricia L. Newton -0- -- 70,000(5) 28.00% 56,000 7.19%
One Cleek Way
Littleton, CO 80123

Henry W. Hall -0- -- 55,425 22.17% 47,580 6.10%
1265 South Park Drive
Monument, CO 80132

Joseph T. and 33,333 5.75% -0- -- 33,333 4.28%
Jacqueline M. Flynn
499 Estudillo Avenue
San Leandro, CA 94577

Linda M. Opfer -0- -- -0- -- -0- --

Officers and Directors as a 33,333 5.75% 70,000 28.00% 89,333 11.46%
group (2 persons)

</TABLE>

_______________

(1) As of the date of this Annual Report, no shares of Preferred Stock have
been converted.

(2) Based on 579,378 shares of Common Stock outstanding.

(3) Based on 250,000 shares of Preferred Stock outstanding.

(4) Based on 779,378 shares of Common Stock outstanding, assuming the
conversion of all shares of Preferred Stock at a ratio of .8 shares of
Common Stock for every share of Preferred Stock.

(5) Patricia L. Newton is the wife of Ralph W. Newton, Jr. Ms. Newton has sole
voting and dispositive power with respect to her 70,000 shares of Preferred
Stock and Mr. Newton has sole voting and dispositive power with respect to
his 70,000 shares of Preferred Stock. For this reason, the shares of Mr.
Newton and Ms. Newton are not attributed to the other.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

TRANSACTIONS WITH FIRST WEST LIFE INSURANCE COMPANY

After negotiations which began on April 21, 1988, the Company acquired 100%
of the outstanding stock of First West Financial Services, Inc. ("FWFS") and its
subsidiary, First West Life, on June 10, 1988, in exchange for 100,000 shares of
the Company's Common Stock with an estimated fair market value of $10.00 per
share, $931,304 cash, and a liability to the former shareholders of First West
Life of $459,000. The due date of the liability to the former shareholders of
FWFS is contingent upon the Company selling those shares purchased from First
West Life under the Stock Exchange Agreement back into treasury of First West
Life at the time of effecting further surplus relief in the amount of $300,000,
or more, through the existing modified coinsurance contract with Beneficial Life
Insurance Company upon terms acceptable to the Commissioner of Insurance, or the
sale of the life insurance business book at no less than $1.8 million, or
effectuation of not less than $1.4 million of surplus relief through a
replacement insurance or coinsurance contract with Security Life Insurance
Company, or another reinsurer. In connection with the Exchange, the Company
agreed to pay the former shareholders of First West Life an additional $150,000
($50,000 to each of the

12
<PAGE>

three shareholders) if certain price ($20.00 per share) and marketability of the
stock issued in the Exchange was not attained by June 29, 1990. At December 31,
1989, the Company reduced the value of the Common Stock issued for the
acquisition and recorded the additional $150,000 due the former shareholders of
First West Life as a liability (the "Additional Liability").

Prior to adjustment, the balance of the liabilities incurred in connection
with the acquisition was $559,000 plus $196,137 in accrued interest. The
Company is contesting these liabilities as of December 31, 1995. Interest
expense of $114,445, that was previously recorded, was reversed as other income
in 1994. Payments made in 1991 through 1994 totaling $41,385, which were
previously recorded as reductions to accrued interest, were adjusted to reduce
the notes payable. After adjustment, the balance of the liabilities was
$508,615 and no accrued interest. In 1995, the Company settled with two of the
three original shareholders of First West Life by paying a total of $245,000
cash. The shareholders returned their shares of the Company's Common Stock. At
December 31, 1995, the Company's balance sheet reflected a liability of $183,538
owed to the remaining original shareholder of First West Life. See Item 1.
Description of Business, Item 3. Legal Proceedings, and Item 7. Financial
Statements, including the Notes thereto. See "Transactions with Officers,
Directors, and Shareholders" below.

TRANSACTIONS WITH OFFICERS, DIRECTORS, AND SHAREHOLDERS

On December 31, 1992, the Company entered into a Termination Agreement with
Donald Yee and Sheung K. Yee as a result of the termination of Mr. Yee's
employment with the Company and First West Life. The Company agreed to pay Mr.
Yee accrued vacation and sick leave in the sum of $12,996 and severance pay of
$12,800. With respect to the Additional Liability described in "Transactions
with First West Life Insurance Company" above, the Company agreed to pay Mr.
Yee's share of the Additional Liability, $50,000, at the rate of $3,000 per
month beginning February 28, 1993 and continuing monthly thereafter. Interest
accrued on that amount at the rate of 9% per annum from June 29, 1990. Mr. Yee
submitted his resignation as a director of the Company and all of its
subsidiaries at the time of the Termination Agreement. The Company and Mr. Yee
provided mutual releases to each other. Beginning April 4, 1994, the Company
suspended the payments of $3,000 per month. This obligation was settled during
the quarter ended September 30, 1995, together with Mr. Yee's claim in
connection with the Stock Exchange Agreement. See Item 3. Legal Proceedings and
"Transactions with First West Life Insurance Company" above in this Item 12.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

<TABLE>
<CAPTION>
REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
<S> <C> <C>
2.1 Stock Purchase Agreement dated July 29, 1994 (1) N/A

3.1 Articles of Incorporation, as amended (2) N/A

3.2 Amended Bylaws (9) N/A

4.1 Form of Warrant Agreement (3) N/A

10.1 Stock Exchange Agreement dated April 29, 1988, N/A
between the Company and the selling shareholders of
First West Financial Services, Inc. and First West
Life Insurance Company (4)

10.2 Supplemental Agreement dated June 17, 1988, between the N/A
Company and the selling shareholders of First West
Financial Services, Inc. (4)

10.3 Order of John Kezer, Insurance Commissioner of the N/A
State of Colorado dated June 29, 1988 (4)

13
<PAGE>

REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
<S> <C> <C>
10.4 Supplemental Agreement (A) dated June 21, 1988, between N/A
the Company and the selling shareholders of First West
Financial (4)

10.5 Promissory Note payable to Joseph T. Flynn, Dennis G. N/A
Haley, and Donald Yee (5)

10.6 Promissory Notes payable to the Company from Donald Yee N/A
and Sheung Yee (5)

10.7 Promissory Note payable to the Company from Joseph T. N/A
Flynn and Jacqueline M. Flynn (5)

10.8 Real estate conveyance documents for purchase of N/A
7860 E. Berry Place (6)

10.9 Termination Agreement with Donald Yee and Sheung K. Yee N/A
dated December 31, 1992 (7)

10.10 Stock Purchase Agreement with Philip A. Bates dated N/A
December 1, 1993 (8)

10.11 Agreement of Non-Adjudicated Settlement with N/A
Dennis G. Haley (10)

10.12 Settlement Agreement and Mutual General Release by and N/A
K. Yee, Capital Reserve Corporation, and Ralph Newton (11)

27 Financial Data Schedule ---
</TABLE>
_______________________________

(1) Incorporated by reference to the Exhibits filed with the Company's Form 8-K
dated October 14, 1994.

(2) Incorporated by reference to the Exhibits previously filed with the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1990.

(3) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-18, Registration No. 33-21118-D.

(4) Incorporated by reference to the Exhibits filed with the Company's Form 8-K
dated June 30, 1988.

(5) Incorporated by reference to the Exhibits previously filed with the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1988, as amended by Form 8 Amendment No. 1, dated May 15, 1989.

(6) Incorporated by reference to the Exhibits previously filed with the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1991.

(7) Incorporated by reference to the Exhibits previously filed with the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992.

(8) Incorporated by reference to the Exhibits previously filed with the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1993.

(9) Incorporated by reference to the Exhibits previously filed with the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1994.

14
<PAGE>

(10) Incorporated by reference to the Exhibits previously filed with the
Company's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1995.
(11) Incorporated by reference to the Exhibits previously filed with the
Company's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1995.

(b) The following reports on Form 8-K were filed during the last quarter
of the period covered by this report: None

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

CAPITAL RESERVE CORPORATION

Dated: March 27, 1996 By: /s/ Ralph W. Newton, Jr.
--------------------------------
Ralph W. Newton, Jr., President

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

/s/ Ralph W. Newton Jr. March 27, 1996
- ---------------------------------------------- -----------------------------
Ralph W. Newton, Jr., Chairman of the Board of
Directors and President (Principal Executive,
Financial and Accounting Officer)

/s/ Linda M. Opfer March 27, 1996
- ---------------------------------------------- -----------------------------
Linda M. Opfer, Director

14:1995.10K

15
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITORS' REPORT

CAPITAL RESERVE CORPORATION

DECEMBER 31, 1995

<PAGE>

C O N T E N T S

PAGE

INDEPENDENT AUDITORS' REPORTS 3-4

CONSOLIDATED FINANCIAL STATEMENTS

BALANCE SHEET 5-6

STATEMENTS OF OPERATIONS 7

STATEMENTS OF STOCKHOLDERS' EQUITY 8

STATEMENTS OF CASH FLOWS 9-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11-15

<PAGE>

[LETTERHEAD]

Board of Directors
Capital Reserve Corporation

INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Capital
Reserve Corporation as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

Except as discussed in the following paragraph, we conducted our audits in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audits 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 presentations. We believe that our
audits provide a reasonable basis for our opinion.

As part of the Company's preparation of audited financial statements as of
and for the year ended December 31, 1994, the Company was to have audited the
financial statements of First West Life Insurance Company through the date of
sale. However, the books and records of First West Life were turned over to the
purchaser (which is located out of state) at the time of sale, thereby making it
burdensome and expensive to audit the First West Life financial statements.
Given the Company's limited resources, management of the Company has determined
not to audit the First West Life financial statements for 1994 through date of
sale. We were therefore unable to obtain audited financial statements
supporting the loss from operations and disposal of the life insurance segment
stated at $217,552 for the year ended December 31, 1994.

The Company has been informed that there is strong reason to suspect that
the December 31, 1993, life insurance reserves and related actuarial items were
not calculated in accordance with generally accepted accounting principles.
This potential discrepancy could not be quantified. If these items were
misstated at December 31, 1993, the loss from operations and disposal of the
life insurance segment for the year ended December 31, 1994, would also be
misstated.

<PAGE>

The Company has not separately disclosed the loss from operations, and the
loss from disposal of the life insurance segment as required by generally
accepted accounting principles. The Company has excluded all footnote
disclosures related to the discontinued life insurance operations, which are
also required by generally accepted accounting principles.

In our opinion, except for the effects of such adjustments, if any, as
might have been determined to be necessary had we been able to examine evidence
regarding the life insurance segment, and except for the omission of information
discussed in the preceding paragraph, the financial statements referred to in
the first paragraph above present fairly, in all material respects, the
financial position of Capital Reserve Corporation as of December 31, 1995, and
the results of its operations and its cash flows for the years ended December
31, 1995 and 1994 in conformity with generally accepted accounting principles.

John M. Hanson & Company, P.C.

Denver, Colorado

February 10, 1996

<PAGE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED BALANCE SHEET (PAGE 1 OF 2)
DECEMBER 31, 1995

ASSETS

CURRENT ASSETS (NOTE G)

Cash and cash equivalents (Note A) $346,304

Accounts receivable

Tenants $ 5,967
Insurance operations 41,100
---------
47,067

Less allowance for doubtful accounts (14,558) 32,509
---------
Marketable securities (Note A) 89,081

Other current assets 8,522
--------
476,416
RENTAL PROPERTY AND EQUIPMENT - AT COST

Rental real estate 433,829
Furniture and fixtures 17,157
Automobiles 60,242
---------
511,228
Less accumulated depreciation (Note A) (92,734) 418,494
---------

OTHER ASSETS
Investments 35,441
--------
Total assets $930,351
--------
--------

The accompanying notes are an integral part of this statement

<PAGE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED BALANCE SHEET (PAGE 2 OF 2)
DECEMBER 31, 1995

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Notes payable - related party (Notes B and G) $ 183,538
Accounts payable 23,077
Accrued liabilities
Property taxes $ 23,399
Other 1,385 24,784
-------- ----------
Total current liabilities 231,399

COMMITMENTS AND CONTINGENCIES (NOTE C) -

STOCKHOLDERS' EQUITY (NOTE D)
Class A common stock - authorized 20,000,000 shares
of no par value; issued and outstanding
579,378 shares 3,140,102
Class B preferred stock - authorized 250,000 shares
of no par value; issued and outstanding
250,000 shares 50,000
Accumulated deficit (2,491,150)
----------
698,952
----------
Total liabilities and stockholders' equity $ 930,351
----------
----------

The accompanying notes are an integral part of this statement

<PAGE>

CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,
--------------------------
1995 1994
---------- -----------
Revenue
Rental $ 100,664 $ 63,036
Insurance residuals 17,252 16,492
---------- -----------
117,916 79,528
Operating expenses
General and administrative 375,951 406,457
Rental 95,354 108,003
---------- -----------
471,305 514,460
---------- -----------
Net operating (loss) (353,389) (434,932)
Other income (expense)
Interest and dividend income 39,378 7,938
Investment (losses) gains (Note G) (35,721) 7,368
Other income (Note B) 1,051 128,166
Interest expense - (12,844)
---------- -----------
Gain (loss) on property dispositions 4,753 (6,622)
---------- -----------
9,461 124,006
(Loss) from continuing operations before
extraordinary items (343,928) (310,926)
Discontinued operations - (loss) from operations
and disposal of life insurance segment
(Note E) - (217,552)
---------- -----------
(343,928) (528,478)
Extraordinary item-gain on extinguishment
of debt (Note B) 84,077 -
---------- -----------
Net (loss) $ (259,851) $ (528,478)
---------- -----------
---------- -----------

Net (loss) per common share (Note A)
Continuing operations $ (.56) $ (.48)
Discontinued operations - (.34)
---------- -----------
(.56) (.82)
Extraordinary item .14 -
---------- -----------
Net (loss) $ (.42) $ (.82)
---------- -----------
---------- -----------

The accompanying notes are an integral part of these statements

7
<PAGE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
Class A Class B Unrealized
Stock Stock Loss
Common Preferred on Equity Accumulated
-------------------- ------------------
Shares Amount Shares Amount Securities Deficit
------- ---------- ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
January 1, 1994 646,044 $3,144,102 250,000 $ 50,000 $241,527 $(1,702,821)
Adjust unrealized
investment gain - - - - (241,527) -

Net (loss) - - - - - (528,478)
------- ---------- -------- ------- --------- -----------
December 31, 1994 646,044 $3,144,102 250,000 50,000 - (2,231,299)

Redemption of
common stock
(Note A) (66,666) (4,000) - - - -

Net (loss) - - - - - (259,851)
------- ---------- -------- ------- --------- -----------
December 31, 1995 579,378 $3,140,102 250,000 $50,000 $ - $(2,491,150)
------- ---------- -------- ------- --------- -----------
------- ---------- -------- ------- --------- -----------

</TABLE>

The accompanying notes are an integral part of these statements

<PAGE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (PAGE 1 OF 2)

Year Ended December 31,
----------------------------
1995 1994
------------ -----------
Cash flows from operating activities:
Net (loss) from continuing operations $ (343,928) $ (310,926)

Reconciling adjustments:

Depreciation and amortization 33,043 28,157
(Gain) loss on property dispositions (4,753) 6,622
Loss (gain) on investments 35,721 (7,368)
Changes in assets and liabilities:
Current assets 8,393 14,576
Accounts payable and accrued liabilities 15,304 (151,339)
----------- ----------
Total adjustments 87,708 (109,352)
----------- ----------
Net cash (used for) continuing operations (256,220) (420,278)

Cash flows from discontinued operations:

Net cash provided by discontinued operations
and sale thereof - 1,405,779

Cash flows from investing activities:

Sale/purchase of certificates of deposit 189,000 (189,000)
Purchase of investments (315,268) (19,118)
Proceeds from sale of investments 192,003 71,031
Proceeds from related party loan - 90,000
Purchase of property and equipment (68,573) (14,315)
Proceeds from sale of equipment 5,645 -
----------- ----------
Net cash provided by (used for)
investing activities 2,807 (61,402)

The accompanying notes are an integral part of these statements

<PAGE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (PAGE 2 OF 2)

Year Ended December 31,
-------------------------
1995 1994
----------- -----------
Cash flows from financing activities:

Redemption of common stock (Note B) (4,000) -
Payment on senior convertible subordinated notes - (83,340)
Payment on notes payable - related party
(Note B) (241,000) (9,000)
-------- --------
Net cash (used for) financing activities (245,000) (92,340)
-------- --------
Net change in cash and cash equivalents (498,413) 831,759
Cash and cash equivalents at beginning of year 844,717 12,958
-------- --------
Cash and cash equivalents at end of year $346,304 $844,717
-------- -------
-------- -------

Interest paid $ - $13,951
-------- -------
-------- -------

The accompanying notes are an integral part of these statements

<PAGE>

CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION
The Company (CRC) was incorporated in Colorado in 1982, and operated an
insurance agency and a life insurance company. The insurance business was sold
in 1994, (See Note E). The life insurance agency was retained, but is currently
inactive. At December 31, 1995, the main activity of CRC is renting real
property in Englewood, Colorado, to eight tenants with monthly rents from $900
to $1,494.

USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in these financial statements
and accompanying notes. Actual results could differ from those estimates.

BASIS OF CONSOLIDATION
The consolidated financial statements include CRC, and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. The activity of subsidiaries disposed of in 1994 has been
identified as discontinued operations in the consolidated statements of
operations and cash flows.

COMPARABILITY OF FINANCIAL STATEMENTS
Certain items in the statements of operations and cash flows have been
reclassified for the year ended December 31, 1994 in order to make them
comparable to the current financial statements. There is no effect on the net
loss.

DEPRECIATION
Depreciation has been provided in amounts sufficient to relate the costs of
depreciable assets to operations over their estimated useful lives principally
on the straight-line method. Real estate is depreciated over thirty to thirty-
nine years, and other property is depreciated over three to seven years.

CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or less to be
cash equivalents.

MARKETABLE SECURITIES
The Company's securities investments that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities. Trading securities are recorded on the balance sheet in current
assets at their fair value as quoted by the broker. The change in fair value
during the year is included in earnings.

<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

MARKETABLE SECURITIES (CONTINUED)
Certain securities investments held at January 1, 1994, were classified as
available for sale. These securities were liquidated in 1994, and the change in
the unrealized gain was adjusted to stockholders' equity.

TREASURY STOCK
Treasury stock has been treated as common stock redeemed and cancelled
consistent with Colorado Revised Statutes.

EARNINGS (LOSS) PER SHARE
Earnings (loss) per share of common stock is computed based on the 616,273 and
646,044 weighted average number of common shares outstanding during the years
ended December 31, 1995 and 1994, respectively. Fully diluted earnings per
share are not presented because they are anti-dilutive.

NOTE B - NOTES PAYABLE - RELATED PARTY

Effective June 29, 1988, the Company acquired 100% of the outstanding stock of
First West Financial Services and its subsidiary, First West Life Insurance
Company, in exchange for 100,000 shares of the Company's Class A common stock
with an estimated fair market value of $1,000,000. The Company paid $931,304 in
cash and recorded a liability to the three stockholders of the life insurance
company of $459,000, accruing interest at 9%. The due date of this liability
was contingent upon the life insurance company creating a minimum stated surplus
or a sale of certain business assets at a minimum stated amount. The life
insurance company was sold in October, 1994 (see Note E).

In connection with the original acquisition of the life insurance company, the
Company had agreed to pay the sellers an additional $150,000 if a certain price
and marketability of the stock issued in the acquisition was not attained at the
end of two years following the date of purchase.

The Company was contesting these liabilities as of December 31, 1994. All
interest previously accrued was reversed and miscellaneous income was credited
for $114,445 in 1994.

The Company paid two of these stockholders, with a recorded liability of
$325,077, $245,000 during the year ended December 31, 1995, in full satisfaction
of all obligations and to acquire their stock in the Company. Four thousand
dollars has been recorded as the cost of this stock redemption. An
extraordinary gain of $84,077 was recorded related to this settlement in 1995.

The third stockholder, with a recorded liability of $183,538, has filed a civil
action naming the Company as defendant seeking to recover approximately $354,000
for various claims. The Company intends to vigorously defend these claims, and
believes the risk of liability for the total amount is slight.

<PAGE>

CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995

NOTE C - COMMITMENTS AND CONTINGENCIES

The Company owns an office building from which it conducts its business and
rents out space. Lease agreements expire from December, 1995 through July,
1998. Future amounts to be received under these leases are as follows at
December 31, 1995:

1996 $ 72,000
1997 37,500
1998 13,300
--------
$122,800
--------
--------

See Note B related to note payable contingency.

The Company is a defendant in a lawsuit filed by stockholders of a subsidiary
corporation for alleged securities violations. The suit asks for damages
totaling $2.4 million. The Company believes the suit lacks substantial merit
and intends to vigorously defend its position.

NOTE D - STOCKHOLDERS' EQUITY

The holders of the shares of Class A common stock and Class B preferred stock
are entitled to one vote per share, and each class shares equally in any
dividends declared. Neither class of stock has preemptive rights. In the event
of dissolution or liquidation of the Company, the holders of shares of Class A
common stock shall be paid a liquidation price of $.10 per share before any
assets are distributed to the holders of shares of Class B preferred stock. Any
remaining amount shall be distributed pro rata to the holders of shares of both
Class A common stock and Class B preferred stock. The holders of shares of
Class B preferred stock shall have the right to elect a majority of the
directors of the Company. Each share of Class B preferred stock may be
converted into .8 share of Class A common stock (with appropriate adjustment of
the conversion ratio for any stock splits, stock dividends or recapitalization)
at the option of the holders of the majority of the Class B preferred stock.

<PAGE>

CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995

NOTE E - DISCONTINUED OPERATIONS

On July 15, 1994, the Company adopted a formal plan to sell its life insurance
operations to an outside party. All of the issued and outstanding stock of
First West Life Insurance Company and its wholly owned subsidiary, First West
Life Insurance Company of New Mexico, was sold on October 14, 1994. The
proceeds received by the Company were $1,227,301. As of December 31, 1994,
there were no remaining assets or liabilities of the discontinued activity.

The loss reserves and related actuarial items were not calculated in accordance
with generally accepted accounting principles as of the date of sale.
Consequently, the Company is unable to separately state loss from operations,
and loss on disposal, of the life insurance segment.

The Company's current actuary has indicated that there is strong reason to
suspect that the December 31, 1993, reserves and actuarial items were not
calculated in accordance with generally accepted accounting principles. The
potential 1993 discrepancy could not be quantified and the impact on the
financial statements is unknown.

The loss reserves and related actuarial items have no effect on the balance
sheet as of December 31, 1995 and 1994, and the results from continuing
operations for the years ended December 31, 1995 and 1994 because all of these
items related to discontinued operations.

NOTE F - INCOME TAXES

There is no federal or state income tax expenses related to continuing
operations of the Company for the years ended December 31, 1995 and 1994. The
Company filed its income tax return excluding its life insurance subsidiaries.
Net operating losses of $67,000 were used for 1994. The Company has loss
carryforwards as follows:

Net
Capital Operating
Expiration Years Losses Losses
----------- -----------
1996-1998 $ 70,000 $ -
1999 1,230,000 -
2000-2004 - 900,000
2005-2009 - 200,000
2010 - 200,000
---------- ----------
$1,300,000 $1,300,000
---------- ----------
---------- ----------

<PAGE>

CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995

NOTE F - INCOME TAXES (CONTINUED)

The net deferred tax asset due to loss carryforwards at December 31, 1995 is as
follows:

Deferred tax asset $858,000
Valuation allowance (858,000)
---------
$ -
---------
---------

NOTE G - FINANCIAL INSTRUMENTS

CASH AND CASH EQUIVALENTS
The Company has $300,000 cash and cash equivalents in one brokerage account at
December 31, 1995.

ACCOUNTS RECEIVABLE
Generally, the Company does not require collateral or other security to support
customer receivables.

MARKETABLE SECURITIES

The carrying amount of marketable trading
securities in common stocks is equal to
its fair value.

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Investment (losses) gains are detailed as follows:

Realized gains (losses) on common stock $ 9,076 $ (514)
Increase in unrealized (losses) gains
on common stock (44,797) 7,882
-------- ------
Investment (losses) gains $(35,721) $7,368
-------- ------
-------- ------
</TABLE>

OTHER INVESTMENTS
The carrying amount of other investments approximates fair value as estimated by
management.

NOTES PAYABLE
See disclosure at Note B, the amount of the liability is in dispute.

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 346,304
<SECURITIES> 89,081
<RECEIVABLES> 47,067
<ALLOWANCES> (14,558)
<INVENTORY> 0
<CURRENT-ASSETS> 476,416
<PP&E> 511,228
<DEPRECIATION> (92,734)
<TOTAL-ASSETS> 930,351
<CURRENT-LIABILITIES> 231,399
<BONDS> 0
0
50,000
<COMMON> 3,140,102
<OTHER-SE> (2,491,150)
<TOTAL-LIABILITY-AND-EQUITY> 930,351
<SALES> 0
<TOTAL-REVENUES> 117,916
<CGS> 0
<TOTAL-COSTS> 95,354
<OTHER-EXPENSES> 375,951
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (343,928)
<INCOME-TAX> 0
<INCOME-CONTINUING> (343,928)
<DISCONTINUED> 0
<EXTRAORDINARY> 84,077
<CHANGES> 0
<NET-INCOME> (259,851)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> 0

</TABLE>