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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 215, 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. $8,268
Aggregate market value of the voting stock held
by non-affiliates of the registrant
as of March 26, 1997: $ 136,784 (See Item 5)
Number of shares outstanding of registrant's Class A Common Stock, no par value,
as of March 24, 1997: 546,045
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format (check one): Yes__ No X
Exhibit index on consecutive page 11 Page 1 of 42 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.
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 (the "Exchange"). 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 Corp., an existing wholly-owned
subsidiary of the Company. On August 1, 1996, Capital Reserve Marketing Corp.
changed its name to Wall Street Investment Corp.
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.
2
<PAGE>
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.
CURRENT OPERATIONS
Until July, 1996, the Company's primary business was the rental of real
property. On July 3, 1996, the Company sold its only property, located at 7860
East Berry Place, Englewood, Colorado, for net proceeds of $501,276.
See Item 2. Description of Property.
Presently, the Company has no principal business.
At December 31, 1996, the Company had one wholly-owned subsidiary, Wall
Street Investment Corp. ("WSIC"). WSIC (as Capital Reserve Marketing Corp.)
formerly offered a cancer policy. The Company, through WSIC, is attempting to
start a financial consulting services company. Whether WSIC will prove to be
viable and a source of revenue is unknown.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries had 4
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 (the "East Berry Property"), for
$361,285. The land was comprised of .934 acres, more or less, and the building
contained approximately 13,479 square feet of rentable office space. First West
Life transferred the property to the Company on October 14, 1994 as an
extraordinary dividend to the Company by special warranty deed. On July 3, 1996,
the Company sold the East Berry Property, in an arms-length transaction, to
Westminster Associates, Ltd. ("Westminster"). Westminster is not affiliated with
Capital Reserve, any of its affiliates, or any director or officer of Capital
Reserve. Subsequent to the sale, the Company moved its offices from suite 120
and began leasing suite 215 in the East Berry Property. The Company has leased
this space through July, 1998, at an average rate of $1,375 per month.
3
<PAGE>
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 pertained 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 alleged that the
Company breached its contract with him by failing to pay him $150,000, and
further alleged that there were shares owed to him pursuant to the contract. Mr.
Flynn 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 sought 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 filed an answer to the
complaint, as well as a counterclaim against Mr. Flynn. The Company alleged
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 was
scheduled for June 24, 1996; however, in May 1996, the Company settled the
dispute with Mr. Flynn for $73,000 in cash and the issuance of a $123,000 note
payable. The Company had previously recorded a payable balance of $183,538, and
recorded an additional $12,462 expense as a result of the settlement. The
$123,000 note was paid from from the proceeds received upon the sale of the East
Berry Property.
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
"Premier Lawsuit"). The lawsuit related to the offer and sale of securities of
Premier, which was formerly a subsidiary of the Company, during the period of
approximately 1988 through 1992. The complaint generally alleged fraud in
connection with the sale of the securities of Premier and asserted liability
under the Racketeering Influenced and Corrupt Organizations Act ("RICO"), as
well as several common law theories. The Company vigorously defended the suit.
Plaintiffs sought damages against all defendants in an aggregate amount of up to
$2,400,000, together with interest, costs, and attorneys' fees. Subsequent to
the December 31, 1996, the Company reached a agreement in principle to settle
the lawsuit with the plaintiffs, for an initial cash payment in the amount of
$100,000, with an additional $80,000 to be paid to the plaintiffs in 18 monthly
installments of $5,000. No interest will be due on any outstanding installment
payments; however, the Company is entering into a Consent to Entry of Judgment
in the then outstanding amount of installment payments. As of the date of this
report, the settlement agreement had been signed by the plaintiffs, and was in
the process of being signed by the defendants.
In connection with the Premier Lawsuit, the Company agreed to indemnify
various defendants for their legal fees and expenses. Prior to December 31,
1996, the Company agreed to settle any indemnification claims Mr. Bates had
against the Company, in return for the Company's payment of one-half of Mr.
Bates expenses, up to a maximum of $20,000. Subsequent to December 31, 1996, the
Company agreed to indemnify Mr. Newton and Ms. Opfer for the full amount of
their legal fees and expenses incurred. Also, the Company agreed to indemnify
Mr. Hall for one-half of his legal fees, up to a maximum of $20,000, in
settlement of any claims of indemnification which he had against the Company.
The Company's financial statements for the year ending December 31, 1996,
reflect a liability of $30,000, relating to the settlements with Messrs. Bates
and Hall. See Item 6. Management's Discussion and Analysis or Plan of Operation
and Item 7. Financial Statements, including the Notes thereto.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
4
<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 1996 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>
<CAPTION>
BID OR TRADE PRICES
1996 FISCAL YEAR HIGH LOW
<S> <C> <C>
Quarter Ending 03/31/96................................... $ 0.015625 $ 0.015625
Quarter Ending 06/30/96................................... $ 0.015625 $ 0.0156
Quarter Ending 09/30/96................................... $ 0.015625 $ 0.015625
Quarter Ending 12/31/96................................... $ 0.015625 $ 0.0010
1995 FISCAL YEAR
Quarter Ending 03/31/95................................... $ 0.13 $ 0.13
Quarter Ending 06/30/95................................... $ 0.06 $ 0.06
Quarter Ending 09/30/95................................... $ 0.02 $ 0.02
Quarter Ending 12/31/95................................... $ 0.02 $ 0.02
</TABLE>
As of March 26, 1997, there was only one market maker in the Company's
shares and, therefore, the OTC Bulletin Board does not have an inside bid price
on the Company's shares. On March 26, 1997, the reported bid and ask price for
the Company's Common Stock, by the sole market maker, were $ 0.001 and $.50,
respectively, as reported by the OTC Bulletin Board. The last reported trade was
on November 19, 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 24, 1997 there were 658 record holders of the Company's
Common Stock, including shares held by the Company as treasury shares.
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
Due to the sale of the East Berry Property, the Company's financial
statements for the fiscal year ending December 31, 1996 reflect the Company's
rental operations as discontinued operations. Discontinued operations in the
statements of operations and cash flows have been reclassified for the year
ended December 31, 1995 in order to make them comparable to the current
financial statements. There is no effect on the net loss. See Note A of the
Notes to Financial Statements included with this report.
LIQUIDITY
The Company was 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. 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
5
<PAGE>
Company. The cost of this treasury stock was 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 had a recorded liability of $183,538 owed to
the last remaining claimant. In May 1996, the Company reached a settlement with
the third claimant in the amount of $198,000, and his 33,333 shares of Class A
common stock were returned to the Company. See Item 1. Description of Business,
Item 3. Legal Proceedings, and Item 7. Financial Statements, including the Notes
thereto. Item 12. Certain Relationships and Related Transactions.
As of December 31, 1996, the Company had recorded a liability of
$210,000 relating to the Premier Lawsuit for settlement expenses and
indemnification. Prior to December 31, 1996, the Company agreed to settle any
indemnification claims Mr. Bates had against the Company, in return for the
Company's payment of one-half of Mr. Bates expenses, up to a maximum of $20,000.
Subsequent to December 31, 1996, the Company agreed to indemnify Mr. Newton and
Ms. Opfer for the full amount of their legal fees and expenses incurred. Also,
the Company agreed to indemnify Mr. Hall for one-half of his legal fees, up to a
maximum of $20,000, in settlement of any claims of indemnification which he had
against the Company. The Company's financial statements for the year ending
December 31, 1996, reflect a liability of $30,000, relating to the settlements
with Messrs. Bates and Hall. See Item 3. Legal Proceedings and Item 7. Financial
Statements, including the Notes thereto.
Cash flows from continuing operations during 1996 and 1995 reflect net
cash used of $(363,240) and $(308,965), respectively, while cash flows provided
by (used for) investing activities for the same periods were $(33,733) and
$35,959, respectively.
At December 31, 1996, and 1995 the Company had working capital of
$99,254 and $245,017, respectively. This decrease is primarily due to increases
in current liabilities relating to the Premier Lawsuit, and the decrease in cash
associated with the Stock Exchange Agreement settlement payment. If the Company
should generate an operating loss for 1997 comparable to the loss incurred for
1996, virtually all 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.
ASSETS
At December 31, 1996 the Company had total assets of $421,607, compared
to total assets of $930,351 on December 31, 1995. This represents a decrease of
$508,744, which is attributable to the Company's loss for the fiscal year. The
Company sold the East Berry Property and used the proceeds to fund the Company's
operations and for the payment of settlement expenses.
RESULTS OF OPERATIONS
The Company's net operating loss for 1996 increased by approximately
81% due to litigation and settlement expenses and the extraordinary gain
recorded in 1995. This resulted in a $633,459 loss from continuing operations
before discontinued operations and extraordinary items in 1996, as compared to a
loss of $349,238 in 1995. In 1996, the Company recorded a $122,042 gain on the
sale of the East Berry Property, while in 1995, the Company recorded a $84,077
gain from the settlement of certain debt. Accordingly, the overall net loss for
1996 increased significantly (101%) as compared to 1995. See "Liquidity" above.
The Company's rental operations generated a loss of $9,818 for 1996, as
compared to a profit of $5,310 for 1995. The Company's other operating expenses,
were comprised primarily of salaries, payroll taxes, and employee benefits
($205,528); legal expenses ($143,590); and accounting and actuarial expenses
($18,522). While the Company has continued to received income (and losses) from
insurance residuals, interest and dividends, and investments, these items are
not a significant source of income compared to the Company's operating expenses.
Since the Company currently has no significant source of revenue, the Company's
working capital will continue to be depleted by operating expenses.
6
<PAGE>
The Independent Auditors' Report and Note H of the Notes to Financial
Statements accompanying this report state that substantial doubt has been raised
about the Company's ability to continue as a going concern. 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, and there can be no
assurance that the Company will be able to do so.
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.
Not Applicable.
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. 69 Chairman of the Board of Directors, President, and Class B
Director
Linda M. Opfer 47 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
last annual 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.
7
<PAGE>
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 and bonus for the last completed fiscal year did not exceed $100,000.
Accordingly, no other executive officers of the Company are included in the
table.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
OTHER RESTRICTED
NAME AND ANNUAL STOCK OP LTIP ALL OTHER
PRINCIPAL COMPEN AWARD(S) TIONS/SARS PAYOUTS ($) COMPEN
POSITION YEAR SALARY BONUS SATION ($) ($) ($) SATION ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ralph W. 1996 $ 100,000 -0- -0- -0- -0- -0- -0-
Newton, Jr. 1995 $ 96,000 $ 4,000 -0- -0- -0- -0- -0-
Chairman 1994 $ 94,500 $ 150,000 -0- -0- -0- -0- -0-
and Presi
dent
</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 direc
tors.
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.
8
<PAGE>
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 25, 1997, 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 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 COM
COMMON STOCK PREFERRED STOCK MON STOCK (1)<F1>
NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES CLASS (2)<F2> SHARES CLASS (3)<F3> SHARES CLASS (4)<F4>
<S> <C> <C> <C> <C> <C>
Ralph W. Newton, Jr. -0- -- 70,000 (5)<F5> 28.00% 56,000 7.51%
One Cleek Way
Littleton, CO 80123
Patricia L. Newton -0- -- 70,000 (5)<F5> 28.00% 56,000 7.51%
One Cleek Way
Littleton, CO 80123
Henry W. Hall -0- -- 55,425 22.17% 47,580 6.38%
1265 South Park Drive
Monument, CO 80132
Linda M. Opfer -0- -- -0- -- -0- --
Officers and Directors as a -0- -- 70,000 28.00% 56,000 7.51%
group (2 persons)
- ---------------
<FN>
<F1>
(1) As of the date of this Annual Report, no shares of Preferred Stock have been converted.
<F2>
(2) Based on 546,045 shares of Common Stock outstanding.
<F3>
(3) Based on 250,000 shares of Preferred Stock outstanding.
<F4>
(4) Based on 746,045 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.
<F5>
(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.
</FN>
</TABLE>
9
<PAGE>
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 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 was 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. At
December 31, 1995, the Company had a recorded liability of $183,538 owed to the
last remaining claimant. In May 1996, the Company reached a settlement with the
third claimant in the amount of $198,000, and his 33,333 shares of Class A
common stock were returned to the Company. See Item 1. Description of Business,
Item 3. Legal Proceedings, and Item 7. Financial Statements, including the Notes
thereto.
10
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
(a) Exhibits:
<CAPTION>
REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
<S> <C> <C>
2.1 Stock Purchase Agreement dated July 29, 1994 (1)<F1> N/A
3.1 Articles of Incorporation, as amended (2)<F2> N/A
3.2 Amended Bylaws (9)<F9> N/A
4.1 Form of Warrant Agreement (3)<F3> N/A
10.1 Stock Exchange Agreement dated April 29, 1988, between the Company N/A
and the selling shareholders of First West Financial Services, Inc. and First
West Life Insurance Company (4)<F4>
10.2 Supplemental Agreement dated June 17, 1988, between the Company and N/A
the selling shareholders of First West Financial Services, Inc. (4)<F4>
10.3 Order of John Kezer, Insurance Commissioner of the State of Colorado N/A
dated June 29, 1988 (4)<F4>
10.4 Supplemental Agreement (A) dated June 21, 1988, between the Company N/A
and the selling shareholders of First West Financial (4)<F4>
10.5 Promissory Note payable to Joseph T. Flynn, Dennis G. Haley, and Donald N/A
Yee (5)<F5>
10.6 Promissory Note payable to the Company from Joseph T. Flynn and N/A
Jacqueline M. Flynn (5)<F5>
10.7 Real estate conveyance documents for purchase of 7860 E. Berry Place (6)<F6> N/A
10.8 Stock Purchase Agreement with Philip A. Bates dated December 1, 1993 N/A
(7)<F7>
10.9 Settlement Agreement and Mutual General Release by and between Joseph N/A
T. Flynn, Jacqueline M. Flynn, Capital Reserve Corporation, and Ralph
Newton (8)<F8>
10.10 Contract to Buy and Sell Real Estate for sale of 7860 East Berry Place. (10)<F10> N/A
10.11 Office Lease (10)<F10> N/A
10.12 Settlement Agreement (11)<F11> 28
27 Financial Data Schedule 42
- ----------------------------
<FN>
<F1>
(1) Incorporated by reference to the Exhibits filed with the Company's Form 8-K dated October 14, 1994.
<F2>
(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.
<F3>
(3) Incorporated by reference to the Exhibits filed with the Company's Registration Statement on Form S-18,
Registration No. 33-21118-D.
11
<PAGE>
<F4>
(4) Incorporated by reference to the Exhibits filed with the Company's Form 8-K dated June 30, 1988.
<F5>
(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.
<F6>
(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.
<F7>
(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, 1993.
<F8>
(8) Incorporated by reference to the Exhibits previously filed with the
Company's Quarterly Report on Form 10- QSB for the quarter ended June
30, 1996.
<F9>
(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.
<F10>
(10) Incorporated by reference to the Exhibits previously filed with the
Company's Quarterly Report on Form 10- QSB for the quarter ended
September 30, 1996.
<F11>
(11) This exhibit is the subject of request for confidential treatment, and
is being filed separately with the Securities and Exchange Commission
pursuant to Reg. ss. 240.24b-2. Therefore, this exhibit has been
omitted from this filing pending a determination on the confidentiality
of such exhibit by the Securities and Exchange Commission. The page
number on the electronically filed version of this document do not take
into account the omission of this item.
</FN>
</TABLE>
(b) The following reports on Form 8-K were filed during the last
quarter of the period covered by this report: None
12
<PAGE>
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, 1997 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, 1997
Ralph W. Newton, Jr., Chairman of the Board of
Directors and President (Principal Executive,
Financial and Accounting Officer)
/s/Linda M. Opfer March 27, 1997
Linda M. Opfer, Director
14:1996.10K
13
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
CAPITAL RESERVE CORPORATION
DECEMBER 31, 1996
F-1
<PAGE>
C O N T E N T S
PAGE
INDEPENDENT AUDITORS' REPORTS 3
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET 4-5
STATEMENTS OF OPERATIONS 6
STATEMENTS OF STOCKHOLDERS' EQUITY 7
STATEMENTS OF CASH FLOWS 8-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10-14
F-2
<PAGE>
[LETTERHEAD OF JOHN M. HANSON & COMPANY, P.C.]
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, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1996 and 1995. 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.
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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Capital Reserve Corporation
as of December 31, 1996, and the results of its operations and its cash flows
for the years ended December 31, 1996 and 1995 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss from continuing operations of $633,459 for 1996
and it has incurred substantial net losses for each of the past three years. As
of December 31, 1996, the Company had no source of operating revenues. These
factors and the others discussed in Note H, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
/s/John M. Hanson & Company, P.C.
Denver, Colorado
February 25, 1997
F-3
<PAGE>
<TABLE>
<CAPTION>
CAPITAL RESERVE CORPORATION
CONSOLIDATED BALANCE SHEET (PAGE 1 OF 2)
DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS (NOTE G)
Cash and cash equivalents (Note A) $229,375
Marketable securities (Note A) 106,491
Other current assets 9,278
- -------------------------------------------------------------------------------------------------------------------
Total current assets 345,144
EQUIPMENT - AT COST
Furniture and fixtures 26,792
Automobiles 60,242
- -------------------------------------------------------------------------------------------------------------------
Total equipment 87,034
Less accumulated depreciation (Note A) (34,678)
- -------------------------------------------------------------------------------------------------------------------
Net equipment 52,356
OTHER ASSETS
Investments 24,107
- -------------------------------------------------------------------------------------------------------------------
Total assets $421,607
===================================================================================================================
<CAPTION>
The accompanying notes are an integral part of this statement
F-4
<PAGE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED BALANCE SHEET (PAGE 2 OF 2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 35,391
Accrued liabilities
Property taxes 499
Other (Note C) 210,000
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 245,890
COMMITMENTS AND CONTINGENCIES (NOTE C) -
STOCKHOLDERS' EQUITY (NOTES A AND D)
Class A common stock - authorized 20,000,000 shares
of no par value; issued and outstanding
546,045 shares 3,138,102
Class B preferred stock - authorized 250,000 shares
of no par value; issued and outstanding
250,000 shares 50,000
Accumulated deficit (3,012,385)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 175,717
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 421,607
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of this statement
F-5
<PAGE>
<TABLE>
<CAPTION>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Year Ended December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Revenue
Insurance residuals $ 18,293 $ 17,252
Interest and dividends 7,052 39,378
Investment (losses) (17,256) (35,721)
Other 179 5,804
- -------------------------------------------------------------------------------------------------------------------
Total revenues 8,268 26,713
Expenses
General and administrative 449,265 375,951
Other (Notes B and C) 192,462 -
- -------------------------------------------------------------------------------------------------------------------
Total expenses 641,727 375,951
- -------------------------------------------------------------------------------------------------------------------
Net (loss) from continuing operations (633,459) (349,238)
(Loss) income from discontinued rental
operations (Notes A and E) (9,818) 5,310
Gain on sale of building (Note E) 122,042 -
- -------------------------------------------------------------------------------------------------------------------
Net income from discontinued operations 112,224 5,310
Extraordinary item - gain on extinguishment
of debt (Note B) - 84,077
- -------------------------------------------------------------------------------------------------------------------
Net (loss) $(521,235) $(259,851)
Net (loss) per common share (Note A)
Continuing operations $ (1.13) $ (.57)
Discontinued operations .20 .01
- -------------------------------------------------------------------------------------------------------------------
(.93) (.56)
Extraordinary item - .14
- -------------------------------------------------------------------------------------------------------------------
Net (loss) per common share $ (.93) $ (.42)
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE>
<TABLE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class A Class B
Stock Stock
COMMON PREFERRED
Accumulated
Shares Amount Shares Amount Deficit
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
Redemption of common
stock (Note A) (33,333) (2,000) - - -
Net (loss) - - - - (521,235)
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1996 546,045 $3,138,102 250,000 $50,000 $(3,012,385)
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
F-7
<PAGE>
<TABLE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (PAGE 1 OF 2)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net (loss) from continuing operations $ (633,459) $ (349,238)
Reconciling adjustments:
Depreciation and amortization 7,678 9,184
Loss on equipment sales - (4,753)
Loss on investments 17,256 35,721
Changes in operating assets and liabilities:
Current assets 24,437 14,104
Accounts payable and accrued liabilities 220,848 (13,983)
- -------------------------------------------------------------------------------------------------------------------
Total adjustments 270,219 40,273
- -------------------------------------------------------------------------------------------------------------------
Net cash (used for) continuing operations (363,240) (308,965)
Discontinued operations:
Net cash provided by discontinued operations
and sale thereof 465,582 19,599
Investing activities:
Sale of certificates of deposit - 189,000
Purchase of investments (209,216) (315,268)
Proceeds from sale of investments 174,550 192,003
Proceeds from partnership investment 10,568 -
Purchase of property and equipment (9,635) (35,427)
Proceeds from sale of equipment - 5,645
- -------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by
investing activities (33,733) 35,953
<CAPTION>
The accompanying notes are an integral part of these statements
F-8
<PAGE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (PAGE 2 OF 2)
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financing activities:
Redemption of common stock (Note B) (2,000) (4,000)
Payment on notes payable - related party
(Note B) (183,538) (241,000)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used for) financing activities (185,538) (245,000)
- -------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (116,929) (498,413)
Cash and cash equivalents at beginning of year 346,304 844,717
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 229,375 $ 346,304
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
F-9
<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
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. The life insurance agency was retained, but is currently inactive. The
Company owned rental property until July 3, 1996 (see Note E).
The Company has no source of operating revenues after the sale of its rental
property. Management has started a financial consulting and public relations
firm under the name Wall Street Investment Corp. The new venture has no revenues
as of December 31, 1996. The Company entered into its first consulting agreement
in January, 1997. Management is also exploring various other future business
opportunities.
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.
COMPARABILITY OF FINANCIAL STATEMENTS
Discontinued operations in the statements of operations and cash flows have been
reclassified for the year ended December 31, 1995 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.
F-10
<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TREASURY STOCK
Treasury stock has been treated as common stock redeemed and cancelled,
consistent with the Colorado Revised Statutes.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share of common stock is computed based on the 558,522 and
616,273 weighted average number of common shares outstanding during the years
ended December 31, 1996 and 1995, 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 $508,615 as adjusted as of December 31, 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 was recorded as the cost of this stock redemption. An extraordinary gain
of $84,077 was recorded related to this settlement in 1995.
The Company paid the third stockholder, with a recorded liability at December
31, 1995 of $183,538, $198,000 during the year ended December 31, 1996, in full
satisfaction of all obligations and to acquire his stock in the Company. Two
thousand dollars was recorded as the cost of this stock redemption, and other
expense of $12,462 was recorded in 1996 related to this settlement.
F-11
<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE C - COMMITMENTS AND CONTINGENCIES
The Company leases office space under a non-cancellable operating lease expiring
July, 1998. Rent expense for the year ended December 31, 1996 is $7,238. Future
minimum rental payments are as follows:
1997 $ 16,443
1998 9,821
---------
$ 26,264
The Company is a defendant in a lawsuit filed by stockholders of a former
subsidiary corporation for alleged securities violations. The suit asks for
damages totaling $2.4 million. A verbal settlement agreement of the litigation
has been reached with all of the plaintiffs. As of December 31, 1996, the
Company has accrued other expenses of $180,000 to be paid to the plaintiffs, and
$30,000 of legal expense for indemnification claims.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
NOTE E - DISCONTINUED OPERATIONS
On July 3, 1996, the Company sold the office building from which it conducted
its business and rented out space. The net proceeds received by the Company were
$501,276.
<TABLE>
Discontinued operations are summarized as follows:
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
Revenues $ 48,946 $100,664
Expenses 58,764 95,354
--------- ---------
Net loss (earnings) $ (9,818) $ 5310
========= =========
</TABLE>
F-12
<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES
There is no federal or state income tax expense related to continuing operations
of the Company for the years ended December 31, 1996 and 1995. Capital loss
carryforwards of $100,000 were used for 1996. The Company has loss carryforwards
as follows:
<TABLE>
<CAPTION>
Net
Capital Operating
Expiration Years LOSSES LOSSES
<S> <C> <C>
1999 $1,200,000 $ -
2000-2004 - 900,000
2005-2009 - 200,000
2010 - 200,000
2011 - 400,000
-------------- -----------
$1,200,000 $1,700,000
========== ==========
The net deferred tax assets due to loss carryforwards are as follows:
1996 1995
------------ --------
Deferred tax asset $1,009,000 $ 858,000
Valuation allowance (1,009,000) (858,000)
---------- -----------
$ - $ -
============= =============
</TABLE>
F-13
<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE G - FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS
The Company has $136,000 of cash and cash equivalents in one bank account at
December 31, 1996.
MARKETABLE SECURITIES
The carrying amount of marketable trading securities in common stocks is equal
to its fair value. Cost, for purposes of calculating gains or losses, is
determined by specific identification.
<TABLE>
<CAPTION>
1996 1995
--------- -------
Investment (losses) gains are detailed as follows:
<S> <C> <C>
Realized gains (losses) on common stock $ 18,370 $ 9,076
Increase in unrealized (losses) gains
on common stock (35,626) (44,797)
--------- --------
Investment (losses) gains $(17,256) $(35,721)
======== ========
</TABLE>
OTHER INVESTMENTS
The carrying amount of other investments approximates fair value as estimated by
management.
- --------------------------------------------------------------------------------
NOTE H - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses in recent years. In addition, the Company has no sources of
operating revenues as of December 31, 1996. As stated in Note A "Organization",
management has started a financial consulting and public relations firm, and is
also exploring other future business opportunities.
F-14
<PAGE>
EXHIBIT 10.12
SETTLEMENT AGREEMENT
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENTS OF OPERATIONS, CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY, CONSOLIDATED STATEMENTS OF CASH FLOWS, AND
THE NOTES THERETO, WHICH MAY BE FOUND ON PAGES F-1 THROUGH F-14 OF THE COMPANY'S
FORM 10-KSB FOR THE PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 229,375
<SECURITIES> 106,491
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 345,144
<PP&E> 87,034
<DEPRECIATION> 34,678
<TOTAL-ASSETS> 421,607
<CURRENT-LIABILITIES> 245,890
<BONDS> 0
0
50,000
<COMMON> 3,138,102
<OTHER-SE> (3,012,385)
<TOTAL-LIABILITY-AND-EQUITY> 421,607
<SALES> 0
<TOTAL-REVENUES> 8,268
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 641,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (633,459)
<INCOME-TAX> 0
<INCOME-CONTINUING> (633,459)
<DISCONTINUED> 112,224
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (521,235)
<EPS-PRIMARY> (.93)
<EPS-DILUTED> (.93)
</TABLE>
