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, 1997
|_| 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.)
6732 WEST COAL MINE AVENUE, #504, LITTLETON, COLORADO 80128
(Address of principal executive offices including zip code)
Issuer's telephone number, including area code: (303) 794-3155
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 be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[X]
Issuer's revenues for its most recent fiscal year. $53,770
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 26, 1998: $0.00 (See Item 5)
Number of shares outstanding of registrant's Class A Common Stock, no par value,
as of March 20, 1998: 546,045
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format (check one): Yes No X
Exhibit index on consecutive page 12 Page 1 of 29 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
During 1995 through June, 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. As of March 20,
1998, the Company was seeking a merger or acquisition opportunity. See Item 1.
Description of Business.
At December 31, 1997, 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. For the year ended December 31, 1997,
Wall Street contributed $21,935 in gross revenue to the Company, but the Company
incurred an operating loss of $6,615 from Wall Street operations.
On October 22, 1997, Wall Street entered into a sub-contracting
agreement with Columbia Financial Group ("Columbia") pursuant to which Wall
Street has agreed to provide public relations services in connection with
Columbia's contract with Winner's Internet Network, Inc. ("Winners"). In
consideration for Wall Street's services, Columbia agreed to transfer to Wall
Street stock purchase warrants for 50,000 shares of Winner's stock, with a
purchase price of $2.50 per share, exercisable for 12 months. As of March 25,
1998, the Company had not received the stock purchase warrants from Columbia.
Columbia transferred 10,000 shares of free trading Winner's common stock to Wall
Street, but failed to make any subsequent transfers. As of March 25, 1998, the
Company had sold all of the Winner's shares it received from Columbia.
Management does not anticipate receiving any additional shares from Columbia.
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries had no
full-time employees. As of March 20, 1998, Ralph Newton, the Company's president
was serving without compensation.
3
<PAGE>
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
the Company, any of the Company's affiliates, or any director or officer of the
Company. Subsequent to the sale, the Company moved its offices from suite 120
and began leasing suite 215 in the East Berry Property. The Company had leased
this space through July, 1998, at an average rate of $1,375 per month. During
December 1997, the Company terminated its lease with Westminster. As of March
20, 1998, the Company was using the residence of Mr. Newton, a director and
President of the Company, as its principal offices.
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 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 and a settlement was reached with all of the plaintiffs in
February 1997. The Company made an initial cash payment in the amount of
$100,000, and has made monthly payments to the plaintiffs totaling $45,000. As
of December 31, 1997, the Company owed an additional $35,000 to the plaintiffs,
which is to be paid in seven monthly installments of $5,000. No interest will be
due on any outstanding installment payments; however, the Company has entered
into a Consent to Entry of Judgment in the then outstanding amount of
installment payments.
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. During 1997, the Company
agreed to indemnify Mr. Newton and Ms. Opfer for the full amount of their legal
fees and expenses incurred in connection with the Premier Lawsuit. The Company
also 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 he had against
the Company. The Company's financial statements for the for the fiscal years
ending December 31, 1997, and
4
<PAGE>
December 31, 1996, reflect a liability of $35,000 and $210,000, respectively,
relating to the settlements and with Messrs. Bates and Hall, the indemnification
of Mr. Newton and Ms. Opfer, and the settlement in the Premier Lawsuit. 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.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock traded on the over-the-counter market
from July 25, 1988 until April 4, 1997. 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 1997 and 1996, as
reported by the OTC Bulletin Board, is as follows:
<TABLE>
<CAPTION>
BID OR TRADE PRICES
1997 FISCAL YEAR HIGH LOW
<S> <C> <C>
Quarter Ending 03/31/97....................................................... $0.001 $0.001
Quarter Ending 06/30/97....................................................... $0.001 $0.001
Quarter Ending 09/30/97....................................................... N/A N/A
Quarter Ending 12/31/97....................................................... N/A N/A
1996 FISCAL YEAR HIGH LOW
Quarter Ending 03/31/96....................................................... $ 0.015625 $ 0.015625
Quarter Ending 06/30/96....................................................... $ 0.015625 $ 0.015600
Quarter Ending 09/30/96....................................................... $ 0.015625 $ 0.015625
Quarter Ending 12/31/96....................................................... $ 0.015625 $ 0.001000
</TABLE>
As of March 25, 1998, there were no market makers in the Company's
shares. The last reported trade by the OTC Bulletin Board 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 18, 1998, there were 655 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.
5
<PAGE>
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. See Note 5 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 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, 1997, the Company had recorded a liability of
$35,000 relating to the Premier Lawsuit for settlement expenses and
indemnification as compared to $210,000 at December 31, 1996. 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. During 1997, 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 1997 and 1996 reflect
net cash used of $(278,176) and $(363,240), respectively, while cash flows
provided by (used for) investing activities for the same periods were $57,499
and $(33,733), respectively.
At December 31, 1997, and 1996 the Company had working capital of
$(9,996) and $99,254, respectively. This decrease is primarily due to
insufficient revenue and payments relating to the settlement of the Premier
Lawsuit. If the Company should generate an operating loss for 1998 comparable to
the loss incurred for 1997, 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, 1997 the Company had total assets of $70,812,
compared to total assets of $421,607 at December 31, 1996. This represents a
decrease of $350,795, which is attributable to the Company's loss for the fiscal
year.
6
<PAGE>
RESULTS OF OPERATIONS
The Company's net operating loss for 1997 decreased by approximately
71% due to decreases in litigation and settlement expenses and employee related
expenses. This resulted in a $153,917 loss from continuing operations before
discontinued operations and extraordinary items in 1997, as compared to a loss
of $633,459 in 1996. In 1996, the Company recorded a $122,042 gain on the sale
of the East Berry Property and a loss from rental operations of $9,818.
Accordingly, the overall net loss for 1997 decreased significantly as compared
to 1996. See "Liquidity" above.
The Company's operating expenses were comprised primarily of
salaries, payroll taxes, and employee benefits ($76,744); legal expenses
($64,055); and accounting and actuarial expenses ($7,355). 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.
During 1997, the Company took significant measures to lower its
operating expenses. The Company terminated its lease and relocated its offices
to reduce its administrative expenses. In addition, as of June, 1997, Mr. Newton
no longer received compensation for his services. See Item 1. Description of
Business and Item 2. Description of Property.
The Independent Auditors' Report and Note 8 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. As of March 20,
1998, the Company was seeking a merger or acquisition opportunity. See Item 1.
Description of Business.
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. 70 Chairman of the Board of Directors, President, and Class B
Director
Linda M. Opfer 48 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
7
<PAGE>
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.
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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
No directors, officers, or beneficial owners of more than ten
percent of securities of the Company reported to the Company any transactions
involving the securities during the fiscal year ended December 31, 1997.
Accordingly, there is no disclosure of any such transactions contained in this
report.
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. 1997 $26,000 -0- -0- -0- -0- -0- -0-
Newton, Jr. 1996 $100,000 -0- -0- -0- -0- -0- -0-
Chairman 1995 $96,000 $4,000 -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.
8
<PAGE>
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.
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 20, 1998,
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>
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
9
<PAGE>
<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>
Harding, Shultz & Downs(6)<F6> -0- -- 74,125 29.65% 59,300 7.95%
800 Lincoln Square
121 South 13th Street
Lincoln, Nebraska 68501
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.
<F6>
(6) Shares transferred from Mr. Hall and Mr. Bates pursuant to the Settlement
Agreement. See Item 3. Legal Proceedings.
</FN>
</TABLE>
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.
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
10
<PAGE>
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.
11
<PAGE>
<TABLE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<CAPTION>
REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
<S> <C> <S>
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, N/A
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> N/A
10.13 Sub-Contracting Agreement with Columbia Financial Group (12)<F12> N/A
27 Financial Data Schedule 28
- ----------------------------
<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.
12
<PAGE>
<F3>
(3) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-18, Registration No. 33-21118-D.
<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) Incorporated by reference to the Exhibits previously filed with the
Company's Annual Report on Form 10- KSB/A Amendment No. 1 for the
fiscal year ended December 31, 1996.
<F12>
(12) Incorporated by reference to the Exhibits previously filed with the
Company's Quarterly Report on Form 10- QSB for the quarter ended
September 30, 1997.
</FN>
</TABLE>
(b) The following reports on Form 8-K were filed during
the last quarter of the period covered by this report:
None
13
<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, 1998 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, 1998
Ralph W. Newton, Jr., Chairman of the Board of
Directors and President (Principal Executive,
Financial and Accounting Officer)
/s/Linda M. Opfer March 27, 1998
Linda M. Opfer, Director
14:1997.10K
<PAGE>
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
CAPITAL RESERVE CORPORATION
December 31, 1997
F-1
<PAGE>
C O N T E N T S
PAGE
INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET F-4
STATEMENTS OF OPERATIONS F-5
STATEMENTS OF STOCKHOLDERS' EQUITY F-6
STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 TO F-13
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Capital Reserve Corporation
We have audited the accompanying consolidated balance sheet of Capital
Reserve Corporation as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1997. 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 audit. The consolidated statements of Capital
Reserve Corporation as of December 31, 1996, were audited by other auditors
whose report dated February 25, 1997, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement 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, 1997, and the results of its operations and its cash flows
for the year ended December 31, 1997, 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 $153,917 for 1997
and it has incurred substantial net losses for each of the past three years. As
of December 31, 1997, the Company had no source of operating revenues. These
factors and the others discussed in Note 8, 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/BRADEEN, CAMPBELL & CLARR CPA'S, P.C.
Denver, Colorado
February 25, 1998
F-3
<PAGE>
<TABLE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS (NOTE 7)
CASH AND CASH EQUIVALENTS (NOTE 1) $ 8,748
MARKETABLE SECURITIES (NOTE 1) 29,917
OTHER CURRENT ASSETS 351
-----------
TOTAL CURRENT ASSETS 39,016
-----------
EQUIPMENT - AT COST
FURNITURE AND FIXTURES 34,901
LESS ACCUMULATED DEPRECIATION (NOTE 1) (14,280)
NET EQUIPMENT 20,621
-----------
OTHER ASSETS
INVESTMENTS 11,175
-----------
TOTAL ASSETS $ 70,812
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 13,293
ACCRUED LIABILITIES 719
OTHER (NOTE 3) 35,000
-----------
TOTAL CURRENT LIABILITIES 49,012
-----------
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY (NOTES 1 AND 4)
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 (3,166,302)
-----------
TOTAL STOCKHOLDERS' EQUITY 21,800
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 70,812
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
----------- -----------
REVENUE
INSURANCE RESIDUALS $ 17,938 $ 18,293
INTEREST AND DIVIDENDS 1,776 7,052
INVESTMENT GAIN (LOSSES) 27,565 (17,256)
LOSS ON SALE OF FIXED ASSETS (13,397) -
OTHER 19,888 179
----------- -----------
TOTAL REVENUES 53,770 8,268
----------- -----------
EXPENSES
GENERAL AND ADMINISTRATIVE 207,687 449,265
OTHER (NOTES 2 AND 3) - 192,462
----------- -----------
TOTAL EXPENSES 207,687 641,727
----------- -----------
NET (LOSS) FROM CONTINUING OPERATIONS (153,917) (633,459)
----------- -----------
(LOSS) FROM DISCONTINUED RENTAL
OPERATIONS (NOTES 1 AND 5) - (9,818)
GAIN ON SALE OF BUILDING (NOTE 5) - 122,042
----------- -----------
NET INCOME FROM DISCONTINUED OPERATIONS - 112,224
----------- -----------
NET (LOSS) $ (153,917) $ (521,235)
=========== ===========
NET (LOSS) PER COMMON SHARE (NOTE 1)
CONTINUING OPERATIONS (.28) (1.13)
DISCONTINUED OPERATIONS - .20
----------- -----------
NET (LOSS) PER COMMON SHARE $ (.28) $ (.93)
=========== ===========
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<TABLE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, AND 1996
<CAPTION>
Class A CLASS B
Stock STOCK
Common PREFERRED
------------------------- ------------------------
ACCUMULATED
Shares AMOUNT SHARES AMOUNT DEFICIT
<S> <C> <C> <C> <C> <C>
December 31, 1995 579,378 $ 3,140,102 250,000 $ 50,000 $ (2,491,150)
Redemption of common
stock (Note 1) (33,333) (2,000) - - -
Net (loss) - - - - (521,235)
----------- ------------- ---------- ---------- -------------
December 31, 1996 546,045 3,138,102 250,000 50,000 (3,012,385)
Net (loss) - - - - (153,917)
----------- ------------- ---------- ---------- -------------
December 31, 1997 546,045 $ 3,138,102 250,000 $ 50,000 $ (3,166,302)
=========== ============= ========== ========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
<TABLE>
CAPITAL RESERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
NET (LOSS) FROM CONTINUING OPERATIONS $ (153,917) $ (633,459)
------------ -----------
RECONCILING ADJUSTMENTS
DEPRECIATION AND AMORTIZATION 9,947 7,678
LOSS ON EQUIPMENT SALES 13,397 -
(GAIN) LOSS ON INVESTMENTS (27,565) 17,256
CHANGES IN OPERATING ASSETS AND LIABILITIES
CURRENT ASSETS 76,840 24,437
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (196,878) 220,848
------------ -----------
TOTAL ADJUSTMENTS (124,259) 270,219
------------ -----------
NET CASH (USED FOR) CONTINUING OPERATIONS (278,176) (363,240)
------------ -----------
DISCONTINUED OPERATIONS:
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
AND SALE THEREOF - 465,582
------------ -----------
INVESTING ACTIVITIES:
PURCHASE OF INVESTMENTS (47,545) (209,216)
PROCEEDS FROM SALE OF INVESTMENTS 96,653 185,118
PURCHASE OF PROPERTY AND EQUIPMENT (8,109) (9,635)
PROCEEDS FROM SALE OF EQUIPMENT 16,500 -
------------ -----------
NET CASH (USED FOR) PROVIDED BY
INVESTING ACTIVITIES 57,499 (33,733)
------------ -----------
FINANCING ACTIVITIES:
REDEMPTION OF COMMON STOCK (NOTE 2) - (2,000)
PAYMENT ON NOTES PAYABLE - RELATED PARTY
(NOTE 2) - (183,538)
------------ -----------
NET CASH (USED FOR) FINANCING ACTIVITIES - (185,538)
------------ -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (220,677) (116,929)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 229,375 346,304
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,748 $ 229,375
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CAPITAL RESERVE CORPORATION
Notes to Consolidated Financial Statements
December 31, 1997
Note 1 - Summary of Significant Accounting Policies
This summary of significant accounting policies of Capital Reserve Corporation
(CRC) is presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of Company's
management who is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and have
been consistently applied in the preparation of the financial statements.
ORGANIZATION
The Company 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 5).
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
subsidiary, Wall Street Investment Corporation (Wall Street). 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, 1997, 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.
F-8
<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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 546,045 and
558,522 weighted average number of common shares outstanding during the years
ended December 31, 1997, and 1996 respectively. Fully diluted earnings per share
are not presented because they are anti-dilutive.
NOTE 2 - TRANSACTIONS - 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.
During 1997, the Company sold an automobile to an officer of the Company and
recognized a loss on this transaction.
F-9
<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company leased office space under a non-cancellable operating lease which
was to expire July 1998. In December 1997, the Company and the landlord agreed
to terminate the lease on February 28, 1998. Rent expense for the year ended
December 31, 1997, is $15,757.
The Company was 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 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. At December 31, 1997, the total amount
due to the plaintiffs was $35,000.
NOTE 4 - 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 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 5 - 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.
Discontinued operations are summarized as follows:
1996
----------
Revenues $ 48,946
Expenses (58,764)
----------
Net loss (earnings) $ (9,818)
==========
F-10
<PAGE>
CAPITAL RESERVE CORPORATION
Notes to Consolidated Financial Statements, Continued
December 31, 1997
Note 6 - Income Taxes
There is no federal or state income tax expense related to continuing operations
of the Company for the years ended December 31, 1997, and 1996. Capital loss
carryforwards of $20,000 were used for 1997 and 1996. The Company has loss
carryforwards as follows:
Net
Capital Operating
Losses Losses
------------ ------------
Expiration Years
1999 $ 1,100,000 $ -
2000-2004 - 900,000
2005-2009 - 200,000
2010 - 200,000
2011 - 400,000
2012 - 150,000
------------ ------------
$ 1,100,000 $ 1,850,000
============ ===========
The net deferred tax assets due to loss carryforwards are as follows:
1997 1996
------------ ------------
Deferred tax asset $ 1,055,000 $ 1,009,000
Valuation allowance (1,055,000) (1,009,000)
------------ ------------
$ - $ -
============ ============
F-11
<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
NOTE 7 - FINANCIAL INSTRUMENTS
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.
1997 1996
---------- ----------
Investment (losses) gains are detailed as follows:
Realized gains (losses) on common stock $ 24,384 $ 18,370
Increase in unrealized gains (losses)
on common stock 4,181 (35,626)
---------- ----------
Investment gains (losses) $ 27,565 $ (17,256)
========== ==========
OTHER INVESTMENTS
The carrying amount of other investments approximates fair value as estimated by
management.
NOTE 8 - 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, 1997. As stated in Note 1 "Organization,"
management has started a financial consulting and public relations firm, and is
also exploring other future business opportunities. (See Note 9.)
NOTE 9 - SUBCONTRACTING AGREEMENT
On October 22, 1997, Wall Street entered into a sub-contracting agreement with
Columbia Financial Group (Columbia) pursuant to which Wall Street has agreed to
provide public relations services in connection with Columbia's contract with
Winner's Internet Network, Inc. (Winners). In consideration for Wall Street's
services, Columbia has agreed to transfer to Wall Street stock purchase warrants
for 50,000 shares of Winner's stock, with a purchase price of $2.50 per share,
exercisable for 12 months. The Company has not received the stock purchase
warrants from Columbia. Columbia has transferred 10,000 shares of free trading
Winner's common stock to Wall Street. Columbia must also transfer an additional
6,000 shares of Winner's common stock to Wall Street, at a rate of 1,000 shares
every thirty days, beginning December 6, 1997.
F-12
<PAGE>
CAPITAL RESERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1997
NOTE 9 - SUBCONTRACTING AGREEMENT, CONTINUED
As of the date of this report, Wall Street has received only 10,000 shares of
Winner's Common Stock.
F-13
<PAGE>
Exhibit 27
Financial Data Schedule
<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-13 OF THE COMPANY'S
FORM 10-KSB FOR THE PERIOD ENDED DECEMBER 31, 1997, 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 8,748
<SECURITIES> 29,971
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,016
<PP&E> 34,901
<DEPRECIATION> 14,280
<TOTAL-ASSETS> 70,812
<CURRENT-LIABILITIES> 49,012
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0
50,000
<COMMON> 3,138,102
<OTHER-SE> (3,166,302)
<TOTAL-LIABILITY-AND-EQUITY> 70,812
<SALES> 0
<TOTAL-REVENUES> 53,770
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 207,687
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (153,917)
<INCOME-TAX> 0
<INCOME-CONTINUING> (153,917)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (153,917)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
