CAPITOL COMMUNITIES CORP, 10KSB, 1997-01-14

CAPITOL COMMUNITIES CORP
10KSB, 1997-01-14
REAL ESTATE

Previous: ORYX TECHNOLOGY CORP, 10QSB, 1997-01-14

Next: TEMPLETON GLOBAL INVESTMENT TRUST, 497, 1997-01-14

<PAGE>

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

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934

For the fiscal year ended September 30, 1996

[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934

For the transition period from _____ to _____

Commission File No. 001-12171

CAPITOL COMMUNITIES CORPORATION
(Name of Small Business Issuer as specified in its charter)

Nevada 88-0361144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

25550 Hawthorne Boulevard
Suite 207
Torrance, CA 90505
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (310) 375-2266

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

Securities registered under Section 12(g) of the Act:

Common Stock ($.01 Par Value)
(Title of Class)

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
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] YES [_] NO
<PAGE>

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10K-SB
or any amendment to this Form 10-KSB. [X]

State the issuer's revenues for its most recent fiscal year. $31,676

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked price of such, as of a specified date within the past 60 days.
$2,784,041 based on the average of the bid and asked obtained from the National
Quotation Bureau, Inc. ("NQB") on December 31, 1996.

State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 7,188,000 as of December 31,
1996.

DOCUMENTS INCORPORATED BY REFERENCE
NONE

Transitional Small Business Disclosure Format YES [_] NO [X]

2
<PAGE>

TABLE OF CONTENTS

PART I

ITEM 1. DESCRIPTION OF BUSINESS.................................... 4

ITEM 2. DESCRIPTION OF PROPERTIES.................................. 13

ITEM 3. LEGAL PROCEEDINGS.......................................... 23

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.......... 23

PART II.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.................................................... 23

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.................................................. 25

ITEM 7. FINANCIAL STATEMENTS....................................... 32

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 32

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT........................................ 32

ITEM 10. EXECUTIVE COMPENSATION..................................... 34

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 35

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................................... 36

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................... 38

3
<PAGE>

PART I.

ITEM 1. DESCRIPTION OF BUSINESS.

BUSINESS DEVELOPMENT

Capitol Communities Corporation, a Nevada corporation (the "Company"), was
formed on August 21, 1995. It is the successor-by-merger to AWEC Resources,
Inc., a New York corporation (the "Predecessor Corporation"). Unless the
context otherwise requires, all references to the "Company" in this Report
include the Predecessor Corporation, and all references to the Company's
business and properties include the business and properties of Capitol
Communities Corporation and its two wholly-owned subsidiaries discussed in more
detail below.

The Predecessor Corporation was incorporated in the State of New York as
Century Cinema Corporation in November 1968. In 1969, the Predecessor
Corporation conducted its initial public offering of common stock, pursuant to a
Form S-2 registration statement filed with the Securities and Exchange
Commission (the "SEC"). From 1970 to 1971, the Predecessor Corporation filed
annual reports under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). From 1972 until the Company's filing of its Registration
Statement on Form 10-SB on September 16, 1996, neither the Predecessor
Corporation nor its successor, Capitol Communities Corporation, complied with
the reporting requirements under the Exchange Act.

By 1983, current management of the Company believes that the Predecessor
Corporation had virtually no assets and was essentially dormant. In April 1984,
the Predecessor Corporation acquired the business of Diagnostic Medical
Equipment Corporation ("DMEC") (the "DMEC Acquisition"). In June 1983, the
Predecessor Corporation changed its name to Diagnostic Medical Equipment Corp.
After the DMEC Acquisition, the Predecessor Corporation was in the
pharmaceutical, medical equipment and surgical supplies business. In August
1987, the Predecessor Corporation filed a registration statement with the SEC on
Form S-18 for a proposed offering of securities. The registration statement
never became effective and was deemed abandoned by the SEC, as of August 1991.
The Company's management believes that, by December 1992, the Predecessor
Corporation had virtually no assets.

In February 1993, Charles L. Silengo Sr. and certain affiliates and related
persons (the "Silengo Group") sold all of the outstanding shares of Lion Coal
Co. ("Lion Coal") to the Predecessor Corporation in return for the issuance of
shares of common stock representing a majority interest in the Predecessor
Corporation. In August 1993, the Silengo Group sold most of its Predecessor

4
<PAGE>

Corporation common stock to Joe Vick ("Vick"), thereby transferring control of
the Predecessor Corporation to Vick. The Predecessor Corporation transferred
its interest in Lion Coal to Charles L. Silengo, for nominal consideration, in
connection with the Silengo Group's sale of its Predecessor Corporation common
stock to Vick.

In October 1993, the Predecessor Corporation formed a wholly-owned
subsidiary, Resource Equity Corporation, a Texas corporation ("Resource
Equity"), to hold options on oil and gas properties purchased by the Predecessor
Corporation from PetroSource Energy Corporation ("PetroSource"), a company
controlled by Vick. The Predecessor Corporation issued shares of common stock
representing a controlling interest in the corporation to PetroSource as
consideration for the options. Although, at the time of the purchase, the board
of directors of the Predecessor Corporation valued the options at $1,395,356,
the amount of cash that PetroSource paid for the options, the options were later
discovered to be worthless. Resource Equity was subsequently dissolved on
February 13, 1996, by the State of Texas for failure to pay State franchise
taxes.

On November 29, 1993, the Predecessor Corporation filed a Form 10
registration statement with the SEC to register its common stock pursuant to
Section 12(g) of the Exchange Act. The Predecessor Corporation later withdrew
the registration statement, for reasons which are unknown to current management
of the Company.

On December 20, 1993, the Predecessor Corporation changed its name to AWEC
Resources, Inc. On February 11, 1994, the Predecessor Corporation formed a
wholly-owned subsidiary, AWEC Development Corporation, an Arkansas corporation,
which later changed its name on January 29, 1996, to Capitol Development of
Arkansas Inc. (the "Operating Subsidiary").

In February 1994, PetroSource transferred the majority of its shares of
Predecessor Corporation common stock to Prescott Investments Limited
Partnership, a Nevada limited partnership ("Prescott LP"), and Charlie
Corporation, a Nevada corporation ("Charlie Corporation"), both of which were
then, and presently are, affiliates of Michael G. Todd ("Todd"), Herbert E.
Russell ("Russell") and John W. DeHaven ("DeHaven"). See ITEM 11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The shares were
transferred as payment for public relations services provided by Prescott LP and
Charlie Corporation to the Predecessor Corporation.

On February 15, 1994, the Operating Subsidiary purchased approximately
2,041 acres of land in Maumelle, Arkansas (the "Maumelle Property") from Century
Realty, Inc. ("Century") for an aggregate purchase price of $8,430,000. The
purchase price was comprised of $1,693,000 paid in cash at the closing of the
sale and

5
<PAGE>

a promissory note payable to Century in the original principal amount of
$6,737,000, secured by a first priority security interest in a portion of the
Maumelle Property. The cash paid at the closing was obtained from the proceeds
of Maumelle Property lot sales to third parties that occurred concurrently with
the Operating Subsidiary's acquisition of the Maumelle Property. Since
purchasing the Maumelle Property, the Operating Subsidiary has sold, as of
September 30, 1996, approximately 196 acres of the Maumelle Property, for
aggregate sales of $2,394,473.

The Maumelle Property was previously owned by Todd and DeHaven, through a
general partnership known as DeHaven, Todd & Company ("DTC"), for approximately
five years, from 1988 to 1993. In an uncontested foreclosure action, DTC
transferred the Maumelle Property to Century successor to the Resolution Trust
Corporation (the "RTC"), which then was receiver for San Jacinto Savings
Association, the holder of a DTC promissory note secured by the Maumelle
Property. Century acquired rights to its claims on the Maumelle Property from
the RTC in February, 1993.

On February 17, 1994, the Predecessor Corporation filed another Form 10
registration statement with the SEC, but later withdrew it because of
significant comments from the SEC and the Predecessor Corporation's lack of
sufficient resources to satisfactorily respond to the SEC's comments. To the
knowledge of the Company's present management, the Company has filed no reports
or registration statements with the SEC since the aforementioned Form 10
registration statement.

In May 1994, the Predecessor Corporation formed a wholly-owned subsidiary,
AWEC Homes, Inc., an Arkansas corporation (the "Home Construction Subsidiary"),
for the purpose of building single family homes on lots owned by the Predecessor
Corporation. The Home Construction Subsidiary, which later changed its name to
Capitol Homes, Inc. on January 29, 1996, has had no construction operations.

In November 1994, Vick and PetroSource sold their remaining shares of the
Predecessor Corporation common stock to Charlie Corporation and Prescott LP in
consideration of strategic planning services.

The Operating Subsidiary refinanced its $6,737,000 Century promissory note
in September 1995 by (a) borrowing $3,500,000 from Resure, Inc., an Illinois
Insurance Exchange member syndicate ("Resure"), to make a cash payment of
$2,500,000 to Century (the "Resure Loan I"), (b) issuing two promissory notes to
Century, in the amount of $1,400,000 (the "Century Note I") and $350,000 (the
"Century Note II"), respectively, to replace the original Century promissory
note, and (c) issuing 700,000 shares of Common Stock to Century which then
represented 10% of the Company's outstanding Common Stock, as of September 30,
1996. See ITEM 12, "SECURITY

6
<PAGE>

OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." In consideration of the
cash payment, promissory notes, and stock, Century released all of the real
property securing the original promissory note and accepted approximately 36
acres of Maumelle Property commercial lots as collateral to secure the
$1,400,000 Century Note II. The Resure Loan I is evidenced by a promissory note
(the "Resure Note I") which is secured by approximately 1,111 acres of the
Maumelle Property residential acreage. See ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and
Other Liquidity Requirements."

Concurrently with the Resure Loan I, Resure issued to the Operating
Subsidiary a subordinated surplus debenture in the original principal amount of
$3,500,000 (the "Resure Debenture"). As consideration for the Resure Debenture,
the Operating Subsidiary delivered a $3,500,000 promissory note to Resure (the
"Resure Note II"), which is secured by approximately 410 acres of the 1,111
acres of residential property securing the Resure Loan I. See ITEM 2,
"DESCRIPTION OF PROPERTY -- RESURE DEBENTURE."

In order to effectuate a change in domicile and name change approved by a
majority of the Predecessor Corporation shareholders, the Predecessor
Corporation merged, effective January 30, 1996, into Capitol Communities
Corporation, a Nevada corporation formed in August 1995 solely for the purpose
of the merger. Under the terms of the merger, each share of Predecessor
Corporation common stock was converted to a single share of Capitol Communities
Corporation common stock (the "Common Stock"), and Capitol Communities
Corporation succeeded to all of the assets, rights, obligations and liabilities
of the Predecessor Corporation.

BUSINESS OF THE COMPANY

GENERAL. The Company is in the business of developing and selling real
estate, primarily in the City of Maumelle, Arkansas, a 5,000 acre planned
community located on the Arkansas River, across from the western Little Rock
area and fifteen miles from downtown Little Rock, Arkansas. The Company's real
estate as of September 30, 1996, consisted of the remaining unsold portion of
the Maumelle Property (approximately 1,840 acres). See ITEM 2, "Description of
Property."

In the last three years, the Company's business has consisted primarily of
selling unimproved residential and commercial lots from its Maumelle Property
inventory to private individuals and other developers. Although management of
the Company recently decided to shift the Company's primary focus from selling
land to the construction and sale of single-family homes, the Company has not
yet commenced material development or building activities and will require
substantial funding before it can do so. Moreover, the Company is currently
suffering severe liquidity problems which prevent the Company from

7
<PAGE>

conducting any meaningful business activities. There can be no assurance that
the Company will be able to raise sufficient capital to cure its liquidity
problems and pursue the business plan and objectives discussed herein. See Item
3, "LEGAL PROCEEDINGS", and Item 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES."

The Maumelle Property is managed by Maumelle Enterprises, Inc. ("Maumelle
Enterprises"), a real estate management firm affiliated with certain officers,
directors and controlling shareholders of the Company. The Company expects that
Maumelle Enterprises will continue in the foreseeable future to manage the
Maumelle Property and any other Maumelle-area real property the Company may
acquire. In other geographic areas, the Company expects to engage local
unaffiliated brokers to manage its properties. See ITEM 12, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS--SERVICES PROVIDED BY AFFILIATED
COMPANIES."

The Company also intends to enter into the business of providing financial
services and products, particularly insurance-related services and products, by
trying to acquire an existing company that provides such services, although the
Company is not presently in negotiations with any company. See "Growth
Strategies -- Strategic Acquisitions," below.

PRINCIPAL PRODUCTS AND MARKETS. The Company intends to construct single-
family homes, apartments and commercial buildings on the land that it presently
owns or may acquire in the future. The developed properties will be sold to
private home purchasers or apartment or commercial building operators, as
appropriate. The Company's initial focus will be to develop single-family homes
in the $115,000 to $200,000 price range on the approximately 3,500 single-family
home lots it owns in Maumelle. The Company does not expect to operate, manage
or lease any properties it may develop.

The Company intends to sell vacant property from its real estate inventory
only as needed to meet liquidity requirements or if Company management
determines that a particular property is not appropriate for development by the
Company. The Company expects that any such land sold in the future likely will
be land which has been zoned for commercial or multi-family use, since the
Company wishes to retain as many single-family home lots as it can for
development and sale by the Company. Company management expects that any such
commercial or multi-family properties sold will be purchased by other real
estate developers, who may compete with the Company in any development activity
undertaken by the Company.

The Company plans to conduct its development and construction activities
primarily in Arkansas, through the Operating Subsidiary and/or the Home
Construction Subsidiary. When appropriate, the Company may acquire and/or
develop properties with joint venture

8
<PAGE>

partners, and may acquire and/or develop properties in other areas of the United
States. See ITEM 2, "DESCRIPTION OF PROPERTY--POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES."

The Company intends to develop a marketing and advertising plan, with
emphasis on the print media, to promote the sale of homes built by the Company
on the Maumelle Property. The Company also plans to build, decorate, furnish
and landscape model homes to facilitate sales on the Maumelle Property. The
Company intends to use community, regional and cooperative brokers to sell the
homes and other properties it develops.

The Company had taken initial steps to develop property in California
through its joint venture with the Monterra Group, Inc. (the "Monterra Group"),
a California real estate developer. The joint venture was formed in August
1996, and purchased six single-family improved lots in Calexico, California.
The Company and the Monterra Group intended to construct and sell homes on the
lots, but received an offer to sell them in October 1996. Prior to the
completion of the sale, the Company deeded its interest in the lots to the
Monterra Group. The amount of $20,000 has been credited to the Company by the
Monterra Group as part of the Company's profits in the venture. The $20,000 is
being utilized to pay consulting and management fees incurred by the Monterra
Group.

GROWTH STRATEGIES. The Company's primary business objective is to increase
long-term total returns to shareholders through appreciation in value of the
Common Stock. The Company intends to achieve this objective by implementing the
following long-term growth strategies:

Initial Focus on Maumelle Development Opportunities. The Company believes
---------------------------------------------------
that, at present, its most significant growth opportunity is the development of
the Maumelle Property, particularly the building and sale of single-family homes
on the approximately 3,500 single-family home lots that are part of the Maumelle
Property. Accordingly, the Company intends to focus initially on the building
and sale of single-family homes on the Maumelle Property, assuming it can raise
sufficient capital to do so, and overcome its present illiquidity.

Based on current sales trends as evidenced by building permits issued,
recent improvement bond refinancing and renewed efforts of the Maumelle City
staff to attract industrial development, Management of the Company believes that
there is substantial unmet demand in the Maumelle area for single-family homes
in the $115,000 to $200,000 price range. Although there can be no assurance as
to how long such demand will continue or that the Company will be able to sell
all of the homes it may build in Maumelle, the Company believes there will be
sufficient demand in Maumelle to support

9
<PAGE>

Company sales of new homes in the $115,000 to $200,000 price range at a rate of
200 homes per year, for 17 years.

Of the approximately 5,000 single-family vacant sites in the City of
Maumelle, approximately 1,500 sites are not owned by the Company. The Company
plans to acquire some of these single-family sites, including some that are
owned by affiliates of the Company, if it can raise sufficient funds to do so.
Given the Company's ownership of a majority of available home sites in Maumelle,
and the fact that under Maumelle's Master Land Use Plan little or no new
property can be added to the City of Maumelle without public hearings regarding
any proposed annexation of land by the City and the subsequent approval by the
City's Board of Directors, the Company believes it can achieve virtual dominance
in the market for single-family home sites in Maumelle. Management expects that
this dominance will enable the Company to implement an orderly build-out program
designed to maximize the selling prices of the homes it sells. See ITEM 12,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--POSSIBLE ACQUISITIONS OF LAND
FROM AFFILIATES."

Geographic Markets Diversification. The Company believes that geographic
----------------------------------
diversity in its real property development activities will be a key factor in
achieving long-term stability and growth. The Company may achieve this
diversity by developing single family homes in other geographic areas such as
California and by forming joint ventures.

Product Diversification. Although, initially, the Company's primary focus
-----------------------
will be on the construction of single-family homes, the Company intends to
diversify its portfolio and income sources by developing for sale the commercial
and multi-family properties it currently owns or may acquire in the future.

Strategic Acquisitions. The Company intends to make strategic acquisitions
----------------------
of businesses in geographic areas outside of Arkansas, particularly in the home
construction industry.

The Company also wishes to diversify into financial services, primarily the
insurance industry, by carefully targeting companies that carry excess and
surplus lines coverage and reinsurance services. The Company has no plans to
acquire any company at this time.

COMPETITION. The real estate development industry, especially the home
building sector, is highly competitive. In Arkansas--the geographic area in
which the Company initially intends to build homes--there are numerous large
national and regional firms with significantly greater experience and financial
resources than the Company currently possesses. Such firms will likely compete
with the Company in the acquisition of land for development, the hiring of sub-
contractors, experienced management personnel, construction

10
<PAGE>

workers and other employees, and the sale of product. The Company also will
compete for residential sales with the resale market for existing homes, multi-
family home sales, including townhouses and condominiums, and with available
rental properties.

The Company currently has no material presence or reputation in Arkansas or
any other area in the real estate development industry and due to its current
illiquidity does not have sufficient capital to commence significant development
activities. As a result, the Company may experience difficulties in competing
with established developers. The Company intends to improve its ability to
compete by entering into joint venture or similar development agreements with
established real estate developers and raising additional capital, although
there can be no assurance of the success of any such agreements or attempts to
raise capital.

The Company believes that its ownership of a substantial majority of the
available undeveloped single-family home properties in Maumelle will assist it
in its entry in the home building market in Maumelle, assuming it is able to
obtain sufficient capital to commence construction activities. The Company has
submitted a proposal to two qualified joint venture partners to develop 735
homes in Maumelle over the next three to four years. Discussions with these
sources are preliminary, however, and there is no assurance the Company will be
successful in consummating the proposal.

RAW MATERIALS. The main raw materials used in the construction of homes
are concrete and lumber. In addition, the Company will use a variety of other
construction material, including glass and sheetrock. For commercial
construction the primary materials are steel, concrete and glass. The Company
intends to use materials that are commercially available on competitive terms
from a variety of sources, but there can be no assurance that such materials
will be available on terms that are acceptable to the Company. Since the
Company has not commenced significant construction activities, it does not yet
have any principal suppliers.

GOVERNMENTAL REGULATIONS. The building industry is subject to extensive
and complex regulations. The Company, its subcontractors and any joint venture
partners must comply with various federal, state and local laws, ordinances,
rules and regulations regarding zoning, architectural design, construction,
population density, availability and installation of utility services, such as
water, electricity, gas, and waste disposal, the preservation of the natural
terrain, and other related matters, which requires resources and expertise
which, for the most part, the Company currently lacks. The Company intends to
obtain such resources and expertise by raising additional capital, hiring
appropriate sub-contractors, and entering into consulting agreements and/or
joint

11
<PAGE>

venture agreements with experienced real estate developers and other appropriate
parties.

The Maumelle Property is subject to the City of Maumelle's Master Land Use
Plan. Under this Plan, approximately 1,307 acres of the approximately 1,392
acres of the Maumelle Property which is developable land is already zoned for
single-family homes. The current zoning allows the Company to apply for
building permits for the 3,500 single-family home sites located on this acreage.
Although much of the Company's property is currently zoned for single-family
homes, none of the developable land acreage is subdivided and the Company will
be required to incur a significant additional cost to subdivide the property
into individual lots. The Company believes it can satisfy all anticipated
governmental requirements involved in the subdivision process, if it obtains
adequate additional funding and expertise.

The Company must seek building permits from the City of Maumelle Building
Inspector for each home it builds. The Company must apply for building permits
for each commercial property it develops from the Maumelle City Planning
Commission and the City's Board of Directors. Although the Company believes it
can satisfy all necessary requirements to obtain building permits, at the
present time, the Company is not seeking building permits and does not intend to
do so until it raises additional capital.

The Company may be required to mitigate any environmental impact on its 446
acres of wetlands in Maumelle that may be caused by the Company's proposed
development activities in Maumelle. Although the Company is not currently aware
of any such mitigation requirements, the Company will be required to obtain
approval from the Army Corp of Engineers of any required mitigation efforts.
The Company may incur additional costs and delays in seeking such approvals and
performing such mitigation.

Delays in obtaining governmental permits and approvals may increase
development costs to the Company. Zoning requirements and restrictions could
become more restrictive in the future, resulting in additional time and money
being spent to obtain approvals for development of the Company's properties.

The Company also may be subject to periodic delays or may be precluded from
developing projects due to building moratoriums or slow-growth or no-growth
initiatives that could be implemented in the future in the areas which it does
business. In addition, governmental authorities could change the zoning of all
or some of the Company's properties, which could result in a decrease in value.

ENVIRONMENTAL LAWS. The Company is subject to various federal, state and
local laws, ordinances and regulations regarding

12
<PAGE>

environmental matters. Under these laws, an owner or operator of real property
may be liable for the costs of removal or decontamination of certain hazardous
or toxic substances on or in its property. The penalty is imposed whether or
not the owner or operator was aware of, or responsible for the hazardous or
toxic substances. The costs of inquiry, removal or decontamination of such
substances could be substantial. If such substances are found on real property
or there is a failure to properly remove or decontaminate the area, the property
could be difficult to sell, develop or use to secure debt financing. In
connection with its ownership of real property, the Company potentially may be
liable under such laws and could incur costs relating to the removal or
decontamination of such substances.

With respect to the Maumelle Property, the Company has had studies
conducted on approximately 63% of the property by an environmental engineering
company. Environmental Scientists Incorporated conducted a Phase I investigation
in July and August 1995 and found no evidence of soil or ground water
contamination on the studied property and recommended that a Phase II study was
not warranted. In 1986, an Environmental Protection Agency ("EPA")
representative stated in a letter to a previous owner of the Maumelle Property,
that although part of the Maumelle Property had been used by the United States
government during World War II as a munitions ordnance facility until 1950, the
entire site had been decontaminated by the U.S. government prior to its sale in
1961. In the letter, the EPA characterized the property as not having any
further environmental concerns. There can be no assurance, however, that the
Maumelle Property does not contain hazardous or toxic substances particularly on
the property which has not been subjected to a Phase I investigation, or that
the Company will not incur costs associated with the decontamination of any such
substances.

NUMBER OF EMPLOYEES. The Company has one employee, its President, Michael
Todd, who is a full-time employee.

ITEM 2. DESCRIPTION OF PROPERTY.

GENERAL

The Company's principal asset is the Maumelle Property, located in
Maumelle, Arkansas, title to which is held by the Operating Subsidiary. The
Maumelle Property consists of approximately 1,307 acres of single-family sites
(which includes approximately 3,500 home sites), approximately 51 acres of
commercial property, approximately 32 acres of multi-family sites, and
approximately 450 acres of miscellaneous undevelopable property. The Maumelle
Property is currently zoned under the City of Maumelle Master Land Use Plan for
various development uses, including single-family residences, multi-family
units, and

13
<PAGE>

commercial development. As of September 30, 1996, the Company's single-family
home sites in the City of Maumelle represent approximately 70% of all available
vacant land in Maumelle zoned for single-family homes.

The Maumelle Property can be divided into four categories: (1) the Large
Residential Tract, (2) the Pine Ridge Lots, (3) the Commercial Lots, and (4)
the Miscellaneous Tracts and Properties. Each category of Maumelle Property
will be discussed separately below after the following overview of the City of
Maumelle.

The Operating Subsidiary also owns the Resure Debenture, which is described
below. See "DESCRIPTION OF PROPERTY--RESURE DEBENTURE," below.

Except as otherwise noted, the Company believes that its real property
assets are in good condition and are suitable and adequate for the uses
indicated. Since there are no insurable improvements on the Company's
properties, the Company does not maintain any insurance coverage on its real
property assets.

MAUMELLE PROPERTY

THE CITY OF MAUMELLE. The City of Maumelle is a 5,000 acre planned
community located off Interstate 40 on the Arkansas River. Fifteen miles from
downtown Little Rock, the capital of Arkansas, Maumelle is patterned after other
"new town" communities such as Reston, Virginia, Irvine Ranch in Orange County,
California and Columbia, Maryland.

Under the Master Plan, Maumelle cannot add new property to the city for
residential development without public hearings regarding any proposed
annexation of land by the City and the subsequent approval by the City Board of
Directors. From Maumelle's inception in 1966 to 1996, approximately $120
million has been spent on infrastructure, including sewer and water capacity for
a city of up to 25,000 residents and a system of designated common areas
including pathways, parks, lakes, golf course and other recreational uses. The
City of Maumelle was incorporated as a city in 1985. It is governed by a mayor
and city council and has police, fire, and emergency services.

The population of Maumelle has grown at a faster rate than that of
neighboring Little Rock, Arkansas. From 1990 to 1996, Maumelle had a 13%
increase in its population; whereas Little Rock grew at only a 2% rate. The
community of Maumelle appears to be attracting more highly educated residents
than does Little Rock. The U.S. Department of Commerce and the Little Rock
Metropolitan Planning Commission ("Metroplan"), a government planning agency,
stated that in 1990, 92.6% of Maumelle residents had completed high school, with
38.8% having four or more years of college. During

14
<PAGE>

the same period, only 76.6% of Little Rock residents had completed high school
and 20.4% had four years or more of college. Maumelle also exceeds the national
average for high school and college attendance. As of 1990, only 75.2% of U.S.
citizens had completed high school and 20.3% had four or more years of college.

Since 1979, Maumelle has attracted some major companies to its industrial
areas, including Target Distribution Center, Kinney Shoe Distribution Center,
Carrier (a manufacturing facility), Kimberly Clark (a manufacturing facility),
Ace Hardware Distribution Center, Family Dollar Distribution Center, and Lamb
Packaging and Iskco (both manufacturing facilities). The job growth rate in the
City of Maumelle has increased by 7.5% from 1990 to 1995; during the same period
Little Rock had a job growth rate increase of 14%.

As of June 30, 1996, the average new home price in Maumelle was $152,551
and in Little Rock was $162,339. The number of building permits issued by
Maumelle has increased 112% between 1990 and 1995, according to Metroplan.
During the same period, Little Rock experienced a growth rate in building permit
issuances of 58%.

LARGE RESIDENTIAL TRACT. The Large Residential Tract is comprised of
approximately 1,111 acres of undeveloped residential land, which, under current
zoning, can be subdivided into approximately 3,000 single-family lots. The
Large Residential Tract currently is zoned for residential development.

The Operating Subsidiary has fee title to the Large Residential Tract,
which is subject to a first-priority mortgage securing the Resure Loan I.
Commencing January 1, 1997, principal and interest on the Resure Note I is
payable in quarterly installments of $101,591.16 each until the note matures on
July 1, 2000. Prior to that date, interest-only payments were required on a
quarterly basis. The balance due at maturity, assuming payment of all scheduled
principal and interest payments and no pre-payments, will be $3,248,756. The
Resure Note I bears interest at a rate of 10% per annum. Since the Company has
not made the initial payment of principal due on January 1, 1997, the current
principal amount of the Resure Note I is $3,500,000. The Resure Note I may be
prepaid at anytime by the Company without incurring premiums or penalties.

Approximately 410 acres of the Large Residential Tract is subject to a lien
securing the $3,500,000 Resure Loan II, which matures July 1, 2000. Payments of
interest only at a rate of 7% per annum are required semi-annually on each June
30 and December 31, which coincide with substantially concurrent and equal
payments payable to the Company by Resure pursuant to the Resure Debenture. See
"DESCRIPTION OF PROPERTY--RESURE DEBENTURE." The balance due upon maturity of
the Resure Note II, assuming payment of all scheduled interest payments and no
pre-payments, will be $3,500,000. On maturity of the Resure Note II, there will
be a

15
<PAGE>

concurrent $3,500,000 payment due to the Company from Resure under the Resure
Debenture. The Company may pre-pay the Resure Loan II without incurring premiums
or penalties. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and other Liquidity
Requirements."

PINE RIDGE LOTS. The Pine Ridge Lots are comprised of approximately 197
acres, including 487 single-family lots which have a preliminary plat filed with
the City of Maumelle. The property is zoned for residential development. The
Operating Subsidiary has fee title to the Pine Ridge Lots. There are no
mortgages or liens for indebtedness or any other material encumbrances on the
property. The Company, through its Home Construction Subsidiary or joint
ventures anticipate constructing single-family homes on the Pine Ridge Lots in
the third quarter of 1997, assuming it can raise sufficient capital. There are,
however, certain legal proceedings that may affect the property. See ITEM 3,
"LEGAL PROCEEDINGS."

COMMERCIAL LOTS. The Commercial Lots are approximately 51 acres of lots
which have been zoned for commercial and multi-family use. The Company proposes
to develop these Commercial Lots either through joint ventures or through its
Home Construction Subsidiary. The Company, however, may sell certain portions
of the Commercial Lots as required to meet liquidity requirements or if the
Company's Management determines that a particular property is not appropriate
for development by the Company.

The Operating Subsidiary has fee title to these lots, although
approximately 36 acres of the property are subject to a mortgage for the benefit
of Century, as security for the $1,400,000 Century Note I. The Century Note I,
bearing an interest rate of 9% per annum, matured January 9, 1996 and the entire
outstanding principal balance of the Note was payable on that date. Century
filed a foreclosure action against the Operating Subsidiary, and the property on
August 12, 1996. See ITEM 3, "LEGAL PROCEEDINGS."

In addition, certain of the Commercial Lots have delinquent ad valorem
taxes for which a lien has been filed against the property. These delinquent ad
valorem taxes total approximately $42,250, as of December 31, 1996.
Approximately 11 acres of the Commercial Lots are in escrow for sale to an
unaffiliated third party for a purchase price of $542,000 and 2 acres of the
Commercial Property was sold to an unaffiliated third party on December 31, 1996
for a purchase price of $110,000. Part of the proceeds from the sale of these
Commercial Lots will be used to pay the delinquent ad valorem taxes. See ITEM
6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND
CAPITAL RESOURCES--Prospective Sources of Liquidity."

16
<PAGE>

Thirty-six acres of the Commercial Lots are encumbered by a lien securing
payment of a $380,000 bond issuance. Ad valorem taxes and Special Improvement
Taxes constitute a senior lien on the properties in the event of the liquidation
of such properties. The Company does not hold any funds nor is there any escrow
account for the benefit of the lot owners with respect to the Special
Improvement Taxes.

MISCELLANEOUS TRACTS AND PROPERTIES. The Miscellaneous Tracts and
Properties are approximately 477 acres of land, including approximately 7 acres
of miscellaneous commercial tracts, 19 acres of multi-family land, approximately
2 acres of easements property, 2 acres of utility property, and approximately
446 acres of wetlands. The Operating Subsidiary has fee title to the
Miscellaneous Tracts and Properties and it is held free of any encumbrances or
liens. The Company has no current development plans for such property. The
wetlands property is located in the Arkansas River and, therefore, is unsuitable
for development.

PROGRAM OF DEVELOPMENT. The Company intends to commence development
activity on portions of its Maumelle Property within the next two years,
assuming it can raise sufficient capital to do so. The Company intends
initially to acquire improved single-family lots from third-party property
owners, including the DeHaven Todd Limited Partnership ("DTLP"), and focus its
initial development activities on such property. See ITEM 12, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS." The Company intends to build
approximately 250 homes on acquired single-family lots. The Company intends to
build moderately priced single-family homes on the Residential Tract for sales
prices in the range of $115,00 to $200,000, inclusive of general and
administrative expenses, sales and marketing expenses, and closing costs.
Because the Company lacks experience in the home construction industry,
Management believes the Company may find it difficult to obtain conventional
credit sources sufficient to finance the construction of that amount of homes.
Management, therefore, believes it may be necessary to enter into joint ventures
with well capitalized real estate developers to pursue the Company's building
program.

Management believes that the Company cannot commence substantial single-
family home development on the Maumelle Property unless it raises additional
capital or otherwise obtains revolving construction financing in the approximate
amount of $5,000,000. In addition, the Company will require general working
capital to cover overhead and administrative expenses in the amount of at least
$500,000, not including expenses already incurred through December 31, 1996.

Management anticipates that the Company will begin developing its existing
inventory with the Pine Ridge Lots. The Pine Ridge Lots are fully entitled with
a preliminary subdivision plat recorded

17
<PAGE>

with the City of Maumelle. The Pine Ridge Lots are comprised of 487 lots in
four subdivisions, averaging approximately 120 lots each. The improvement
district in which the Pine Ridge Lots are located is already partially improved,
with a roughly graded roadway. Because the Pine Ridge Lots were partially
improved prior to the Company's acquisition, the Company expects its cost to
develop an improved lot will be less in Pine Ridge than the other Maumelle
Property. The Company intends to start home site improvements on at least one
Pine Ridge subdivision in the third quarter of 1997, assuming it is able to
obtain necessary capital for such development.

Management plans to commence single-family construction on the first Pine
Ridge subdivision lots in the 1998 calendar year. Management estimates that
construction costs on single-family homes built on the acquired lots and on Pine
Ridge Lots will average approximately $44 per square foot. This is higher than
the national average and is reflective of the Company's inexperience in the home
construction industry. Given such inexperience and likelihood of price
fluctuations over time, no assurance can be given that construction costs will
not exceed the Company's estimates.

The Company expects to obtain capital for improvements on the Large
Residential Tract through credit extensions or from the Company's cash flow or
joint ventures with well-capitalized real estate developers, or from an equity
offering. The Company cannot now estimate when it will commence improvements on
the Large Residential Tract.

RESURE DEBENTURE.

On September 1, 1995, the Operating Subsidiary acquired the Resure Debenture
in connection with the $3,500,000 Resure Loan I. See ITEM 1, "DESCRIPTION OF
BUSINESS--BUSINESS DEVELOPMENT," and ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and
Other Liquidity Requirements." The Resure Debenture was issued to the Operating
Subsidiary as consideration for the $3,500,000 Resure Note II. The Operating
Subsidiary is entitled to receive semi-annual payments of principal and interest
on the Resure Debenture, which generally match the amount and timing of the
semi-annual principal and interest payments payable by the Company to Resure
under the Resure Note II. The principal and interest payments received by the
Company under the Resure Debenture are used to pay the semi-annual payments due
to Resure under the Resure Note II. The Company accounts for such income from
the Resure Debenture as interest income. The semi-annual principal and interest
payments commenced December 1995 and will terminate in June 2000. Interest
under the Resure Debenture accrues at a rate of 7% per annum.

18
<PAGE>

Neither principal nor interest under the Resure Debenture can be paid except
after prior authorization from the Board of Trustees ("Board of Trustees") of
the Illinois Insurance Exchange (the "Exchange"), which authorization cannot be
reasonably withheld under the terms of the Resure Debenture, as acknowledged by
the Exchange. However, the Resure Debenture provides that it shall be
considered reasonable for the Board to withhold authorization for any payment of
principal or interest if such payment of principal or interest (i) would render
Resure out of compliance with Exchange regulations, or (ii) would constitute the
principal cause for the Exchange suffering regulatory sanctions in any state.
In addition, the Debenture permits payment of principal or interest only with
the approval of the Board of Trustees when the Board of Trustees is satisfied
that the financial condition of Resure warrants such payment, but, absent
specific identifiable conditions, approval may not be withheld by the Board of
Trustees if Resure shall have satisfactory evidence that such repayment of
principal or interest would not reduce policyholder surplus of the Company to
less than $5,000,000.

Resure can withhold payment of the semi-annual installments under the Resure
Debenture in the event the Operating Subsidiary fails to make its installment
payments under the Resure Note II. However, the Operating Subsidiary must
continue to make payments under the Resure Note II despite any failure by Resure
to make payments on the Resure Debenture. The Company is currently in default on
the January Resure Note I payment. If Resure withholds the payment of its semi-
annual installment under the Resure Debenture, the Company likely would not have
any source of income to pay the installment payments required under the Resure
Note II. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION,"--"LIQUIDITY AND CAPITAL RESOURCES."

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

GENERAL. The following is a discussion of investment policies, financing
policies, conflict of interest policies, and policies with respect to certain
other activities of the Company. The policies with respect to these activities
have been determined by the Company's Board of Directors and may be amended or
revised from time to time at the discretion of the Board without a vote of the
shareholders of the Company, except that changes in certain policies with
respect to conflicts of interest must be approved by a majority of the
independent directors and otherwise be consistent with legal requirements.

INVESTMENT POLICIES.

Investments in Real Estate or Interests in Real Estate. The Company
------------------------------------------------------
generally conducts all of its investment activities through the Operating
Subsidiary and intends to do so for the foreseeable

19
<PAGE>

future, except that any construction activity will likely be conducted through
the Home Construction Subsidiary. The Company's investment objective is to
increase long-term total returns to shareholders through appreciation in the
value of the Common Stock. The Company's policy is to acquire or develop assets
where the Company believes that favorable investment opportunities exist based
on market conditions at the time of the investment.

The Company expects to pursue its investment objectives primarily through
the direct ownership of properties by the Operating Subsidiary, although, as
discussed below, the Company may also pursue indirect property ownership
opportunities, particularly if it is necessary or advisable to do so in order to
acquire the development resources and expertise which the Company now lacks.
The Company intends to acquire or develop residential and commercial properties
primarily in the Maumelle area and in California, but may pursue the acquisition
or development of residential and commercial properties in other areas of the
United States.

Future development or investment activities will not be limited by the
governing documents of the Company or its subsidiaries to any geographic area,
product type or specified percentage of the Company's assets. It is the
Company's policy to acquire assets primarily for possible capital gain.

Securities of or Interests in Persons Primarily Engaged in Real Estate
----------------------------------------------------------------------
Activities and Other Issuers. The Company also may invest in securities of
- ----------------------------
other entities engaged in real estate activities or invest in securities of
other issuers, including investments by the Company for the purpose of
exercising control over such entities. No such investments will be made,
however, unless the Board of Directors determines the proposed investment would
not cause the Company to be an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act").
Should management recommend prospective acquisitions in the financial services
industry to the Company's Board of Directors, it will be the policy to enumerate
a correlation between the strategic objectives of the Company and the
prospective acquisition, or a plan to enhance shareholder value as measured by
future book value or earnings per share.

Investments in Mortgages. The Company does not own any mortgages and has no
------------------------
immediate plans to invest in mortgages, or to engage in originating, servicing,
or warehousing mortgages. However, the Company may determine that it is in its
best interests to engage in such activities as a means of providing enhanced
service to its home buying customers. Furthermore, while the Company does not
intend to purchase mortgages, it may hold mortgages generated from the sale of
its real property inventory.

20
<PAGE>

FINANCING POLICIES. The organizational documents of the Company and its
subsidiaries impose no limits on the amount of indebtedness they may incur. The
Company will from time to time determine its borrowing policies in light of
then-current economic conditions, relative costs of debt and equity capital,
market value of the Company's real estate assets, growth and acquisition
opportunities, and other factors.

The Company intends to raise additional capital through equity offerings,
debt financing, or a combination thereof, although there can be no assurance
that the Company will be able to raise such capital on favorable terms or at
all.

The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on the Company's
portfolio as a whole.

CONFLICTS OF INTEREST POLICIES. The Board of Directors is subject to
certain provisions of Nevada law that are designed to eliminate or minimize
certain potential conflicts of interest. There can be no assurances, however,
that these policies always will be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made that
might fail to reflect fully the interest of all shareholders. See ITEM 12,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

Under Nevada law, each director is subject to restrictions on the
misappropriation of corporate opportunities to himself or his affiliates of
which he becomes aware solely as a result of his service as a director. The
Company may transact business with one or more of its directors or officers or a
corporation, firm or association in which one or more of its directors or
officers are directors, officers or are financially interested, provided any of
the following requirements are satisfied:

(a) The interested directors or officers must disclose the common
directorship, office or financial interest to the board of directors,
have it noted in the minutes, and a majority of the disinterested
directors must approve or ratify the contract or transaction; or

(b) The interested directors or officers must disclose the common
directorship, office or financial interest to the shareholders, and
the shareholders must approve by a majority vote the contract or
transaction. The votes of the interested director or officer must be
counted in any such vote of the shareholders; or

21
<PAGE>

transaction is brought before the board of directors and therefore is
not disclosed; or

(d) The contract or transaction is fair as to the Company at the time it is
authorized or approved.

CERTAIN POLICIES WITH RESPECT TO OTHER ACTIVITIES. The Company and its
subsidiaries have authority to offer their securities and to repurchase and
otherwise acquire their securities, and they are likely to engage in such
activities. In the future, the Company and its subsidiaries may make loans to
joint ventures in which they participate in order to meet working capital needs.
The Company and its subsidiaries have not engaged in trading, underwriting,
agency distribution, or sale of securities of other issuers and do not intend to
do so. The Company and its subsidiaries intend to make investments in a manner
such that they will not be treated as an investment company under the Investment
Company Act.

COMPETITIVE CONDITIONS. The real estate development industry, especially the
home building sector, is highly competitive. In Arkansas the geographic area in
which the Company initially intends to build homes--there are numerous large
national and regional firms with significantly greater experience and financial
resources than the Company currently possesses. Such firms will likely compete
with the Company in the acquisition of land for development, the hiring of sub-
contractors, experienced management personnel, construction workers and other
employees, and the sale of product. The Company also will compete for
residential sales with the resale market for existing homes, multi-family home
sales, including townhouses and condominiums, and with available rental
properties.

22
<PAGE>

ITEM 3. LEGAL PROCEEDINGS.

On August 12, 1996, a foreclosure action was instituted against the
Operating Subsidiary and the Predecessor Corporation, AWEC Resource, Inc., as
guarantor, by Century in the Chancery Court of Pulaski County, Arkansas.
Century is seeking to foreclose on 36 acres of the Commercial Lots of the
Maumelle Property securing the $1,400,000 Century Note I, which currently is in
default. As a result of cross-default provisions of the $350,000 Century Note
II, Century alleges that the Century Note II is also in default.

On September 16, 1996, the Company filed an answer and counterclaim against
Century claiming that the Century Note I and the Century Note II are usurious.
There can be no assurance, however, that the Company will prevail on its
counterclaim or that it will be able to negotiate a favorable settlement with
Century prior to any foreclosure.

The approximately 197-acre Pine Ridge Lots may be affected by a judgment
against the Pine Ridge Addition Residential Property Owners Multi-Purpose
Improvement District No. 9 (the "Pine Ridge Improvement District") in the amount
of $237,811. The Pine Ridge Lots have been indentured to pay any taxes levied
by the Pine Ridge Improvement District in order to satisfy the judgment.

The Company believes that the Pine Ridge Improvement District has held
discussions with the plaintiff in this matter regarding settling the judgment at
a reduced amount. However, the Company has accrued the full amount of the
liability in its fiscal year 1995 financial statements in case the Residential
Lots become subject to a tax to satisfy the judgment.

PART II.

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

No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

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

The Common Stock is listed for trading in the over-the-counter market on the
NASDAQ electronic bulletin board under the symbol "CPCY"; however, the market
for shares of the Common Stock is extremely limited. There can be no assurance
that the present limited market for the Company's common stock will become more
active or even be sustained. In addition, any future sale of the Company's stock
by any of the controlling shareholders may have a substantial adverse impact on
any such public market.

23
<PAGE>

The high and low bid prices for shares of common stock of the Company for
each quarter within the last two fiscal years are as follows:

<TABLE>
<CAPTION>
BID

Quarter Ending High Low
- -------------- ---- ---
<S> <C> <C>
September 30, 1994 5/16 1/8

December 31, 1994 1/4 1/32

March 31, 1995 1/16 1/32

June 30, 1995 1/16 1/32

September 30, 1995 1 1/16 1/16

December 30, 1995 5/8 3/8

March 31, 1996 2 1/2 2 1/2

June 30, 1996 2 3/4 1 3/4

September 30, 1996 2 1 1/4
</TABLE>

These bid prices were obtained from the National Quotation Bureau, Inc.
("NQB"), and reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not reflect actual transactions.

HOLDERS

The number of record holders of the Company's common stock was 608, as of
December 31, 1996.

DIVIDENDS

During the fiscal year ended September 30, 1996 and the fiscal year ended
September 30, 1995, the Company has not declared any cash dividends with respect
to its Common Stock. The Company does not expect to declare dividends in the
foreseeable future. The future dividend policy of the Company cannot be
ascertained with any certainty, particularly since the Company has decided to
focus its primary business in the home construction industry, and has had no
operational history as a home builder. There are no material restrictions
limiting, or provisions that are likely to limit, the Company's ability to pay
dividends on its Common Stock in the future.

The following issuances of unregistered securities occurred during the
fiscal year ended September 30, 1996:

(1) In November 1995, the Predecessor Corporation issued 700,000 shares of
Common Stock to Century in connection with the refinancing of the original
$6,737,000 Maumelle Property acquisition promissory note. The shares were issued
as consideration for the payment of $3,321,794 of such debt. Such shares were
issued to Century in reliance on Section 4(2) of the Securities Act.

(2) In January 1996, the Predecessor Corporation merged into the Company for
the sole purpose of changing its state of domicile and effectuating a name
change. Each outstanding share of the Predecessor Corporation was converted into
a single share of Common Stock of the Company pursuant to such merger. The
shares of the Company issued to the former Predecessor Corporation shareholders
pursuant to this merger were issued pursuant to Section 3(a)(9) of the
Securities Act.

(3) In July 1996, the Company entered into a financial consulting agreement
with Olsen & Associates Consulting, Inc. ("Olsen Agreement"), which was amended
in September 9, 1996. As consideration for the financial consulting services to
be rendered by Olsen, the Company was obligated to issue 150,000 shares of
Common Stock to Olsen, as well as an option to purchase up to 350,000 shares of
Common Stock. The Company was to issue such securities pursuant to Section 4(2)
of the Securities Act. The Olsen Agreement was terminated on October 5, 1996,
without any services being rendered by Olsen & Associates and without the shares
and option being issued by the Company. With the cancellation of the Olsen
Agreement, the Company was relieved of its obligations to issue the option and
the shares thereunder.

24
<PAGE>

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

OVERVIEW

The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing in Item 7 of this Report (the
"Financial Statements"). As noted in the Financial Statements, there is
substantial doubt about the Company's ability to continue as a going concern due
to its current illiquidity.

During the period covered by the financial statements, the Company
significantly changed the nature of its business activities from land sales to
real estate development (all as discussed in more detail herein). As a result,
the Company's management does not believe the historical financial information
presented in the Financial Statements is indicative of likely future results of
operations. The Company believes that its ability to generate revenues in the
future from real estate development activities will depend in large part on its
ability to solve its current illiquidity problems, the success of the Company's
future capital-raising efforts to overcome its present illiquidity position, and
the Company's ability to develop or acquire greater construction, sales and
other real estate development expertise than the Company now possesses.

RESULTS OF OPERATIONS

COMPARISON OF YEAR ENDED SEPTEMBER 30, 1996 TO YEAR ENDED SEPTEMBER 30,
1995. For the year ended September 30, 1996, the Company experienced a loss of
$765,334 compared with a loss of $885,918 for the year ended September 30, 1995.
The difference in performance resulted primarily from an increase in interest
income of $232,688 from $13,207 to $245,905, as well as an increase in gross
profit and a partially offsetting increase in general and administrative costs
as discussed in more detail below.

Sales decreased from $565,467 for the year ended September 30, 1995, to
$31,676 for the year ended September 30, 1996, as a result of a shift in the
Company's business plan and activities from selling vacant lots out of existing
real property inventory to retaining lots in the expectation of developing and
building homes and commercial properties on the lots. This decrease had a
negligible effect on net income because of the high cost of sales of the
properties sold during the year ended September 30, 1995. The gross profit for
the year ended September 30, 1996 was $31,676 derived from timber sales and $0
resulting from land sales. This was an increase of $53,734 in gross profit from
the year ended September 30, 1995.

25
<PAGE>

From the year ended September 30, 1995 to the year ended September 30, 1996,
general and administrative expenses increased from $877,077 to $1,042,915, an
increase of $165,838. The increase in general and administrative costs resulted
primarily from an increase of $187,967 in interest expenses from $586,888 to
$774,855. Management and consulting fees decreased from $180,416 in the year
ended September 30, 1995 by $130,472 to $49,944 for the year ended September 30,
1996. This resulted from reduced fees to Maumelle Enterprises. In addition,
during the year ended September 30, 1996, the Company accrued general and
administrative expenses such as officers' salaries, office lease and directors'
fees, that had not previously been accrued prior to September 30, 1995. No
general and administrative expenses were invoiced or accrued to the Company
prior to the period ended September 30, 1995. Although the Company continues to
accrue expenses to related parties, including compensation of $20,000 per month
to the President of the Company, Michael G. Todd, under his employment agreement
and management and consulting fees to Maumelle Enterprises, Todd and Maumelle
Enterprises have represented to the Company that it is their intention to allow
the Company to accrue such fees until the Company is financially in the position
to pay the fees. There can be no assurance, however, that Todd or Maumelle
Enterprises will continue to allow the Company to accrue their fees.

The Company believes that its results of operations can improve in the
future if it is able to raise sufficient additional capital to take care of its
current illiquidity problems and to take advantage of an apparent increase in
building activity in the City of Maumelle in 1996, which is summarized below.

There can be no assurance, however, that such trends will continue or that
the Company will be able to capitalize on these trends. In the 1995 calendar
year, 176 permits were issued by the City of Maumelle for the construction of
new homes. In the calendar year of 1996, 220 permits have been issued for the
construction of new homes. Although there can be no assurance that such increase
in activity constitutes a trend, the Company believes that the level of home
development activity in Maumelle will continue to increase in the future, as
compared to 1995, for the following reasons:

(1) In June 1995, three of the outstanding improvement bond issues in the
City of Maumelle, to which 558 improved lots in the City of Maumelle were
subject, were refinanced with a new bond issue whose terms of indenture were
more favorable to homeowners. The Company believes that such bond issue will
result in an increase in the availability of building capital, because
management believes that home loan lenders are more likely to make loans if they
are secured by property that has no bond assessments.

26
<PAGE>

(2) In June 1996, two additional improvement bond issues to which
approximately 655 Maumelle improved lots were subject were refinanced with a new
issue, again on more favorable terms.

(3) The Country Club of Arkansas, a golf-oriented development in Maumelle,
has completed improvements and opened its new golf course to the public in the
Fall of 1996. This development has approximately 500 home sites remaining to be
developed. The owner/developer of the Country Club of Arkansas has placed
substantial amounts of advertising and promotion into local print media which
may produce a positive effect for future development activity in Maumelle.

The Company does not foresee any significant elements of income or loss that
would not arise from its ordinary course of business, except for the losses that
would likely arise if the Company were to lose the approximately 1,110.76 acres
of land secured by the Resure Note I, the Resure Note II, and the Century Note
II, which is in foreclosure action. As set forth elsewhere in this Report, the
Company is in default, or is claimed to be in default, under all of the
foregoing Notes, and the Company has no immediate source of cash for bringing
its obligations current.

Assuming that the Company's liquidity problems can be solved, there may be
some seasonal variance in the flow of income as the Company executes its plan to
build homes in Maumelle. Such variances could arise, for example, from the
impact of weather on any construction in progress. Typically, substantial
rainfall is experienced in Central Arkansas from November through March.

The nature of the home building industry is cyclical and is affected by
various factors beyond the Company's control, including changes in the general
and local economy, employment, availability of financing, interest rates,
changes in demographics, housing demands, as well as changes in government
regulations. The home building industry is capital intensive and can involve
significant expenses in acquiring and improving land and the subsequent
development. Developers are subject to a number of other risks, including
availability and cost of land, materials, and labor, weather conditions,
construction delays, costs of building moratoriums and environmental controls,
and increases in real property taxes and other local government fees. Any or all
of these factors could have an adverse material effect on the Company's results
of operations.

27
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

INDEBTEDNESS AND OTHER LIQUIDITY REQUIREMENTS. The principal amount of the
Company's total debt at September 30, 1996 (except where noted otherwise),
includes, without limitation, the following (see ITEM 2, "DESCRIPTION OF
PROPERTY--MAUMELLE PROPERTY" for descriptions of encumbered properties
referenced below):

$1,400,000 recourse note ("Century Note I") payable to Century, matured
January 9, 1996, secured by approximately 36 acres of the Commercial
Lots; 9% interest payable at maturity.

$350,000 recourse note ("Century Note II") payable to Century, matures
September 11, 1998, but is deemed due and payable as of January 9,
1996, by its terms, as a result of the Century Note I default;
unsecured; 10% interest, paid semi-annually on each June 30 and
December 31.

$3,500,000 Resure Note I, recourse note, payable to Resure, matures
July 1, 2000, secured by the approximately 1,111-acre Large Residential
Tract; 10% interest, paid quarterly until October 1, 1996, then
quarterly payments of principal and interest in the amount of
$101,591.15 are required.

$3,500,000 Resure Note II, non-recourse, payable to Resure, matures
July 1, 2000, secured by approximately 410 acres of the Large
Residential Tract; 7% interest, paid semi-annually on each June 30 and
December 31.

$200,000 recourse note payable to Davister Corp. (the "Davister Note"),
matured January 9, 1996, unsecured; 9% interest payable at maturity.

$69,000 in ad valorem real property taxes, relating to all portions of
the Maumelle Property, due and payable as of December 31, 1996.

In addition to the foregoing debt, the Company will, within the next six
months, require general working capital to cover overhead and administrative
expenses in the amount of at least $500,000. Unless the Company's debt, most of
which is currently in default, can be refinanced or restructured, the Company's
status as a viable going business concern will remain in doubt.

The Century Note I matured January 9, 1996, and remains unpaid. Based on
cross-default provisions in the Century Note II, Century claims that the Century
Note II is also now in default. Century filed a foreclosure complaint against
the Company with respect to this debt on August 12, 1996. On September 16, 1996,
the Company filed an answer and counterclaim against Century claiming the
Century Note I and the Century Note II were usurious. There can be no assurance,
however, that the Company will prevail in this litigation. See ITEM 3, "LEGAL
PROCEEDINGS."

The Company did not make the $101,591.16 October 1, 1996 payment under the
Resure Note I, but was granted an extension until

28
<PAGE>

April 1, 1997, in consideration of a pledge of 200,000 shares of the Company's
common stock by two of the Company's major shareholders, Charlie Corporation and
Prescott Investments Limited Partnership (the "Pledge Agreement"). See ITEM 11,
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." The Company
has not made the $101,591.16 quarterly payment due January 1, 1997, and does not
expect to be able to make such payment unless it liquidates additional property
inventory or can otherwise raise capital. Under the November 25, 1996 Pledge
Agreement, Resure agreed to waive all rights, powers and remedies it may have
had on November 25, 1996, with respect to any breach or default, whether known
or unknown, including waiving any right to default due to the Century Note
default. However, due to the Company's present inability to pay the Resure
Note I January payment, the Company is again in default under the Resure Note I
and, as a result of cross-default provisions, is in default under the Resure
Note II. See "Prospective Sources of Liquidity," below.

Due to this default, Resure may withhold the semi-annual interest payments
on the Resure Debenture that are paid to the Company. If this were to occur,
the Company likely would not have any source of income to pay the installment
payments required under the Resure Note II.

PROSPECTIVE SOURCES OF LIQUIDITY. Current operating cash flows will be
insufficient to service the Company's existing debt or the Company's anticipated
future operating cash needs.

The Company has been negotiating with representatives of Century to extend
the defaulted Century Note I and Century Note II. At this time the Company has
been unable to meet Century's proposed refinance terms, due to the Company's
lack of liquidity. The Company currently is attempting to raise additional
funds to retire these Notes by using unencumbered portions of the Maumelle
Property to secure new debt, although there can be no assurance that such
attempts will be successful or that additional funds can be raised prior to
Century's foreclosure on the 36 acres of the Commercial Lots.

The Company expects to repay the $200,000 note payable to Davister Corp.,
referred to above, by utilizing funds obtained from any additional debt
financing secured to satisfy the Century Note I and the Century Note II.

The Company has continued negotiations for an $18,400,000 loan from a
European lender, which were not successful. Although discussions have not
formally terminated, the Company is currently no longer actively pursuing this
option.

The Company is in negotiations with an investment banking firm to arrange
debt and construction financing in the total amount of

29
<PAGE>

$20,000,000 (the "Construction Financing Loan"). If the Construction Financing
Loan is obtained, the Company intends to use the net proceeds to begin
operations as a home builder and to service existing debt. The Company intends
to use part of the unsecured portions of the Maumelle Property to secure
$10,000,000 of the loan, with the remaining $10,000,000 to be secured by home
construction.

The Company is negotiating with private sources to secure bridge financing
for a $600,000 loan, for which the Company would receive net proceeds of
$500,000 (the "Bridge Financing Loan"). $200,000 of the net proceeds will be
used to service existing debt. The Bridge Financing Loan will be contingent upon
the Company securing a firm letter of commitment for the Construction Financing
Loan. Management believes that, assuming the parties can reach agreement on the
terms of the Bridge Financing Loan, such bridge financing would be available
within fifteen days after the issuance of a firm letter of commitment for the
Construction Financing Loan. There can be no assurance, however, that the
Company will be able to obtain the Construction Financing Loan or the Bridge
Financing Loan on terms that are favorable to the Company or at all.

The Company raised $110,000 from a sale of a 2-acre parcel of the Commercial
Lots, which closed on December 31, 1996. The Company expects to raise $542,000
from the pending sale of another 11 acre parcel of the Commercial Lot portion of
the Maumelle Property. The parcel is expected to close on or before March 31,
1997, with net proceeds of approximately $500,000. Sale proceeds will be used
to pay accrued interest on the Resure Note I, to pay existing debts and for
general corporate purposes.

With respect to prospective long-term liquidity, the Company intends to
generate the bulk of its cash from operations by building and selling homes. At
present, management of the Company believes that the most likely source of
substantial cash flow during the next two years is the development of single-
family home product in the $115,00 to $200,000 price range on the approximately
3,500 single-family home sites it owns in Maumelle, assuming the Company can
obtain the necessary financial resources to undertake substantial building
operations on the Maumelle Property. Although there can be no assurance that
the Company can obtain such resources, the Company believes that its ownership
of a majority of the undeveloped home sites in Maumelle will enable the Company
to attract the necessary financing to implement an orderly build-out program
that will generate cash flow. See ITEM 1, "DESCRIPTION OF BUSINESS--BUSINESS OF
THE COMPANY--Growth Strategies."

The Company intends to raise operating capital by selling debt and/or equity
securities to the public or in private transactions. There can be no assurance,
however, that such public or private offerings will be successful.

30
<PAGE>

The Company intends to meet home building operating capital requirements by
obtaining development financing in the form of secured credit line facilities
from lenders, although there can be no assurance that such financing can be
obtained on attractive terms, or at all. See ITEM 2, "DESCRIPTION OF PROPERTY."

COMPARISON OF YEAR ENDED SEPTEMBER 30, 1996 TO YEAR ENDED SEPTEMBER 30,
1995. Cash decreased $454,151 during the year ended September 30, 1996
compared to an increase of $235,307 during the year ended September 30, 1995.
The difference was the result of cash used to pay quarterly interest payments on
the Resure Note I in the year ended September 30, 1996, and the decrease in
sales revenue during that period.

Net cash used for operations decreased by $963,543 from $1,403,862 for the
year ended September 30, 1995 to $440,319 for the year ended September 30, 1996.
This difference is due primarily to the change in net loss and differences in
adjustments to reconcile Net Income to Net Cash Applied to Operating Activities
between the two fiscal periods. Among the differences for the year ended
September 30, 1995, is an increase of $90,935 in real estate holdings which
resulted from the capitalization of Special Improvement District Taxes on
certain of the Commercial Lots. During the same period in 1996, there was an
increase in real estate holdings of $254,936. This increase was not due to
acquisition of new property, but a result of capitalizing Special Improvement
District Taxes on the Commercial Lots. During the year ended September 30,
1996, accrued interest increased by $48,536 for interest earned on the Resure
Debenture. During the year ended September 30, 1995, accrued interest increased
$13,217 for interest earned on the Resure Debenture.

Another significant difference between the two fiscal years was the change
in Accounts Payable and Accrued Expenses. In the year ended September 30, 1995,
these accrued expenses decreased by $137,766. This decrease included an
decrease in accrued ad valorem taxes of $37,410 and a decrease in accrued
Special Taxes payable of $89,039. For the years ending September 30, 1996,
Accounts Payable and Accrued Expenses increased by $559,775. This increase
included increases of $169,835 for Special Improvement District Taxes Payable
and $58,868 for ad valorem taxes payable. The amount payable to Maumelle
Enterprises increased by $90,630 for advances to, or payments made on behalf of,
the Company. Additionally, approximately $279,800 was accrued during the period
by the Company for officers' salaries, directors' fees and office lease.

Accrued Interest was also a significant difference between these two fiscal
year periods. During the year ended September 30, 1995, accrued interest
decreased by $314,696. The decrease resulted from the large interest payments
made in September 1995 as a result of refinancing the Century debt.

31
<PAGE>

Cash flows from financing activities increased by $1,639,169 during the year
ended September 30, 1995, compared to a decrease of $13,832 for the year ended
September 30, 1996. The increase in the year ended September 30, 1995 resulted
from the refinancing of the Century debt and an increase in long-term debt.
This increase arose from an increase in the original Maumelle Property
acquisition note to Century in the amount of $186,563, which was used for
payment of Special Improvement District Taxes on the Commercial Lots.

ITEM 7. FINANCIAL STATEMENTS.

The audited financial statements of the Company are included in this Annual
Report on Form 10-KSB at pages F1 to F6.

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

The Company has not changed accountants during the last two fiscal years;
nor has the Company had any disagreements with the accountants on any matter of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedures.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS
Date of Director Term
Name Age Position Election Expires
- ---- --- -------- -------- -------------
<S> <C> <C> <C> <C>

Michael G. Todd 47 Chairman and 7/95 1996
President

Ronald J. Campbell 53 Director and 3/94 1996
Secretary

Herbert E. Russell 70 Director 3/94 1996

Robert R. Neyland 42 Director 4/94 1996

David R. Paes 42 Vice President, 7/95 N/A
Treasurer and
Assistant Secretary
</TABLE>

The following is a biographical summary of the experience of the directors
and executive officers of the Company:

MICHAEL G. TODD. Chairman of the Board, President and Chief Executive Officer
of the Company. Todd also is the sole Director and President of the Operating
Subsidiary. Todd is a general

32
<PAGE>

partner of DeHaven Todd & Co., a merchant banking partnership he co-founded in
1985 with DeHaven. Todd has extensive experience in the banking industry,
having been the President and Chief Executive Officer of two Southern California
banks, Orange City Bank and Bay Cities National Bank.

RONALD J. CAMPBELL. Director and Secretary. Campbell is the President of
Financial Economic Research & Counsel, a research and business consulting firm
he founded in 1993. Campbell also has 26 years experience as an executive in
the banking industry.

HERBERT E. RUSSELL. Director. Russell is the President of Charlie Corporation,
a Nevada corporation, which is a controlling shareholder of the Company.
Russell is also President of Hermico Corporation, a company founded by Russell
and engaged in the business of prospecting and producing precious metal
concentrates. Prior to forming Hermico, Russell owned and operated an oil field
trucking company and a cotton farm.

ROBERT R. NEYLAND. Director. Neyland also serves on the Board of Directors of
HomeCapital Investment Corporation, a public company. Since 1993, Neyland has
been the Chief Financial Officer for Select Switch Systems, Inc., a privately-
held Texas company. He was also a partner in Living Suite, a weekly and monthly
residential rental company, from 1990 to 1996.

DAVID R. PAES. Vice President, Treasurer, and Assistant Secretary. Paes is
Executive Vice President and a controlling shareholder of Maumelle Enterprises,
a real estate management company that currently provides management and
administrative service to the Company. See ITEM 12, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--SERVICES PROVIDED BY AFFILIATED COMPANIES." He has been
involved in real estate development as a chief financial officer of two real
estate land companies since 1977, and is a certified public accountant.

SIGNIFICANT EMPLOYEES

The Company's sole employee is Michael G. Todd, its Chairman, President and
Chief Executive Officer.

FAMILY RELATIONSHIPS

There are no family relationships between any directors or executive
officers of the Company, either by blood or by marriage.

33
<PAGE>

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

Except as set forth below, during the past five years, no director, person
nominated to become a director, executive officer, promoter or control person of
the Company:

(1) was a general partner or executive officer of any business against which
any bankruptcy petition was filed, either at the time of the bankruptcy or two
years prior to that time;

(2) was convicted in a criminal proceeding or named subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);

(3) was subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; or

(4) was found by a court of competent jurisdiction (in a civil action), the
SEC or the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been reversed,
suspended or vacated.

ITEM 10. EXECUTIVE COMPENSATION.

EXECUTIVE COMPENSATION

The following table sets forth certain information with respect to the
compensation that was paid in 1996 fiscal year to the Company's executive
officers.

The following table sets forth the aggregate compensation paid by the
Company for services rendered during the periods indicated:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION

ANNUAL COMPENSATION AWARDS PAYOUTS

(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name & Principal Position Year or Salary Bonus Other Restricted Securities LTIP All Other
Period ($) ($) Annual Stock Underlying Payouts Compensation
Ended Compensation Options

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael Todd, 9/30/96 $240,000(1) 0 0 0 0 0 0
Chairman/President

David Paes(2) 9/30/96 0 0 0 0 0 0 0
</TABLE>
_____________

(1) Michael Todd has been employed as President of the Company since November
1994. Todd received no salary from the Company for the period November 1994
through September 30, 1995. The amount of salary shown represents deferred
salary owed to Todd for the period October 1, 1995 through September 30,
1996. Todd has received no other compensation.

(2) David Paes has been Vice-President of the Company since July 1995 but has
not devoted any significant amount of time to its operations. Paes has
received no salary or other compensation from the Company from July 1995
through September 30, 1996.

<PAGE>

The Company does not have any qualified or non-qualified stock or option
plans for its employees. The Board of Directors has proposed initiating a stock
option plan and a nonqualified stock option plan for key employees, directors
and other employees that contribute materially to the success of the Company.
As of September 30, 1996, the terms of the plans have not been defined by the
board; however the Company anticipates that such plans will be adopted within
the next six months.

The Company has a five-year written agreement with Todd to perform the
duties of President. Under the agreement, which became effective on October 1,
1995, Todd is to be compensated at a rate of $20,000 per month. The agreement
expires on September 30, 2000. The Company is not party to any other employment
agreements.

DIRECTOR COMPENSATION

Outside directors are compensated for their services in the amount of $500
per month. Outside directors, Neyland, Russell, and Campbell, have agreed to
defer such compensation until the Treasurer of the Company determines that
sufficient funds are available to make such payments. Such compensation has
been deferred since April 1994, and continues to be deferred. The Company for
the fiscal year ended September 30, 1996, had a deferred liability in the amount
of $18,000 for outside directors' compensation.

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

The following table sets forth the beneficial ownership of shares of Common
Stock as of December 31, 1996, for (i) each person who is known by the Company
to be the beneficial owner of more than a 5% interest in the Company, (ii)
directors of the Company, (iii) the sole "named executive officer" of the
Company, as defined in Item 402(a)(2) of SEC Regulation S-B, and (iv) the
directors and named executive officer of the Company as a group. Unless
otherwise indicated in the footnotes, all such interests are owned directly, and
the indicated person or entity has sole voting and investment power. Addresses
are provided only for 5% or greater owners.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

<TABLE>
<CAPTION>
Name and
Title of Class address of Amount and Percent of
beneficial nature of bene- class
owner(1) ficial owner
<S> <C> <C> <C>
Common Stock Michael G. Todd(2) 2,851,589 shares 37.83%

Common Stock John W. DeHaven(3)(4) 2,851,589 shares 37.83%

Common Stock Herbert E. Russell(3) 2,851,589 shares 37.83%

Common Stock Century Realty Inc. (5) 700,000 shares 9.29%

Common Stock Jens Olsen(6) 500,000 shares 6.63%

Common Stock Ronald J. Campbell 0 shares 0%

Common Stock Robert R. Neyland 0 shares 0%

Common Stock Directors and Executive
Officers as a Group 5,703,178 shares 75.38%
</TABLE>
- -----------

(1) Unless otherwise indicated, the address of the beneficial owner is 25550
Hawthorne Boulevard, Suite 207, Torrance, California 90505.

(2) All of these shares are owned by Prescott Investments, L.P. Michael G.
Todd is the sole managing member of Granite Industries LLC, which is the
managing general partner of Prescott LP. Todd is the sole "named executive
officer" of the Company, as defined in Item 402(a)(2) of SEC Regulation S-
B. See ITEM 9, "DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS."

(3) All of these shares are owned by Charlie Corporation, of which Herbert E.
Russell, as grantor and trustee of an irrevocable trust, owns 100% of the
outstanding stock. John W. DeHaven is the sole income beneficiary of the
trust, but Russell has sole investment and voting power over the trust.
The trust terminates on the death of DeHaven. See ITEM 9, "DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS."

(4) DeHaven disclaims beneficial ownership of these shares.

(5) Century Realty, Inc. The Company believes that Century Realty is a wholly-
owned subsidiary of Transcontinental Realty Investors, Inc., who is the
beneficial owner of these shares. Transcontinental Realty's address is
10670 North Central Expressway, Suite 300, Dallas, Texas 75231.

(6) Jens Olsen was granted the right to purchase up to 500,000 shares of he
Company's Common Stock at a price ranging from $2.00 to $4.00 per share in
a financial consultant agreement dated October 7, 1996. As of December 31,
1996, Olsen has exercised his right to purchase 150,000 shares, and has the
right to exercise his option to purchase up to 300,000 shares of Common
Stock within sixty days of this Report. Olsen's address of record is 230
Park Avenue, Suite 1000, New York City, New York 10169.

35
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SERVICES PROVIDED BY AFFILIATED COMPANIES

The Company has paid fees or expects to pay fees to certain affiliated
companies for various types of services, and will continue to do so in the
future. These arrangements are summarized below.

MAUMELLE ENTERPRISES, INC. AGREEMENT. The Company has an oral agreement
with Maumelle Enterprises, Inc. to provide management and administrative
services for the Maumelle Property. Currently, Maumelle Enterprises manages the
Company's inventory of property, oversees any sale of property, and manages
administrative matters such as ensuring payment of taxes, mortgages and other
expenditures incurred in management of the property. Maumelle Enterprises also
represents the Company at local and state hearings that may affect the Company's
property. Maumelle Enterprises is owned primarily by officers and directors of
the Company and has no clients other than the Company and DeHaven Todd Limited
Partnership, an Arkansas limited partnership ("DTLP"), which is owned almost
entirely by Todd and DeHaven. The stock of Maumelle Enterprises is owned by
officers, directors and security holders named in response to Item 403 of SEC
Regulation S-B, as follows: Todd owns ten percent (10%); DeHaven owns ten
percent (10%); and Paes owns forty percent (40%). Paes is also an officer and
director of Maumelle Enterprises and receives a salary in the amount of $48,000
per year from Maumelle Enterprises. Ann Alridge ("Alridge"), an officer of the
Company's subsidiaries, is employed by Maumelle Enterprises and receives a
salary of $30,000 per year.

Under the oral management and administrative services agreement, payment to
Maumelle Enterprises for management services depends upon the actual services
rendered in a given month and the current liquidity of the Company. If funds are
not available,

36
<PAGE>

Maumelle Enterprises has agreed to defer payment of its fees. For the fiscal
year ended September 30, 1995, the Company paid Maumelle Enterprises $74,381 and
the Company had accrued unpaid fees to Maumelle Enterprises of $198,230 for the
fiscal year ended September 30, 1996.

The Company intends to formalize its management agreement with Maumelle
Enterprises in writing. The duration, terms and conditions of the contract have
not yet been determined and will be subject to approval by the independent
directors of the Company.

SUBLEASING OF OFFICE SPACE. The Company is currently subleasing its
principal office space in Torrance, California from DTC, a California
partnership. The partnership, owned equally by Todd and DeHaven, charges the
Company $1,800 per month. The Company owes DTC $21,600 in rental payments for
the fiscal year ended September 30, 1996.

The majority of the disinterested board of directors on October 1, 1995,
voted to approve the oral agreement between the Company and DTC for the
subleasing of office space from DTC to the Company.

The Company plans to continue to sublease its office space from DTC until at
least September 30, 1998.

POSSIBLE ACQUISITIONS OF LAND FROM AFFILIATES

LAND ACQUISITION. The Company intends to purchase 121 improved single-
family lots from DTLP. DeHaven, who is the sole general partner of DTLP, owns
75% of DTLP, while Todd owns 20% as a limited partner. In addition to the 121
single-family lots, DTLP owns approximately acres of commercial property and
approximately 16 acres of industrial property in Maumelle.

The Company expects to purchase any lots it acquires from DTLP at fair
market value, to be determined at the time of purchase. Such fair market value
will be established by an unaffiliated certified appraiser. Any future
transactions between the Company and its officers, directors and affiliates will
be approved by a majority of the Company's outside directors or will be
consistent with policies approved by such outside directors.

37
<PAGE>

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

(a) FINANCIAL STATEMENTS AND EXHIBITS

FINANCIAL STATEMENTS

CAPITOL COMMUNITIES CORPORATION, INCLUDING PREDECESSOR CORPORATION AND
SUBSIDIARIES.

Report of Independent Auditors .................................F-1

Balance Sheet as of September 30, 1996 .........................F-2

Statements of Operations for the Years Ended September
30, 1996 and 1995...............................................F-3

Statements of Changes in Shareholders' Equity September
30, 1996 .......................................................F-4

Statements of Cash Flows for the Years Ended September
30, 1996 and 1995 ..............................................F-5

Notes to Financial Statements .................................F-6

38
<PAGE>

EXHIBITS

The following Exhibits are filed as part of this Report. (Exhibits
numbers correspond to the exhibits required by Item 601 of Regulation S-B for an
annual report on Form 10-KSB)

2.1.1 Articles of Merger, filed with State of Nevada, dated November 29, 1995,
merging AWEC Resources into Capitol Communities Corporation.*

2.1.2 Agreement of Merger, filed with State of Nevada, dated November 15, 1995,
between AWEC Resources, Inc., and Capitol Communities Corporation.*

2.2 Certificate of Merger, filed with State of New York, dated January 5,
1996, merging AWEC Resources, Inc., into Capitol Communities
Corporation.*

3.1.1 Articles of Incorporation of Capitol Communities Corporation, dated
August 18, 1995.*

3.1.2 Certificate of Amendment of Articles of Incorporation of Capitol
Communities Corporation, dated February 6, 1996.*

3.2 Bylaws of Capitol Communities Corporation, dated August 22, 1995.*

10.1 Contribution Agreement, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*

10.2 Subordinated Surplus Debenture, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*

10.3 Non-Recourse Promissory Note, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*

10.4 Non-Recourse Mortgage, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*

10.5 Security Agreement, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*

10.6 Environmental Indemnity Agreement, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*

10.7 Loan Agreement, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*

10.8 Promissory Note, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*

10.9 Mortgage, dated September 11, 1995 between AWEC Development Corporation
and Resure, Inc.*

39
<PAGE>

10.10 Environmental Indemnity Agreement, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*

10.11 Agreement for Refinance of Secured Note, dated September 11, 1995 between
Century Realty, Inc., AWEC Resources, Inc., and AWEC Development
Corporation.*

10.12 Promissory Note, dated September 11, 1995, between AWEC Development
Corporation and Century Realty, Inc. in the amount of $1,400,000.*

10.13 Mortgage, dated September 11, 1995, between AWEC Development Corporation
and Century Realty, Inc. in the amount of $350,000.*

10.14 Promissory Note, dated September 11, 1995, between AWEC Development
Corporation and Century Realty, Inc.*

10.15 Guaranty, dated September 11, 1995, between AWEC Development Corporation
and Century Realty, Inc.*

10.16 Stock Option Agreement, dated September 11, 1995, between Century Realty,
Inc., and AWEC Development Corporation.*

10.17 Release Deed, dated September 9, 1995, between Century Realty, Inc., and
AWEC Development Corporation.*

10.18 Employment Agreement, dated July 14, 1995 between the Company and Michael
G. Todd.*

10.19 Olsen Consultant Agreement, dated October 7, 1996 between the Company and
Jens Olsen.**

21. List of Subsidiaries.*

23. Consent of Consent of Joel S. Baum P.A.

See Financial Statements at F-1 To F-6.

* Exhibit(s) incorporated by reference from the Registration on Form 10-
SB of the Company, Registration No.915636 filed on September 16, 1996.

** Exhibit incorporated by reference from the Current Report on Form 8-K,
Commission File No. 915636 filed on October 18, 1996.

(b) REPORTS ON FORM 8-K

The following reports on Form 8-K were filed by the Company during the
fiscal quarter ended September 30, 1996.

None

40
<PAGE>

SIGNATURES

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

CAPITOL COMMUNITIES CORPORATION

By: /s/ Michael G. Todd
-----------------------------
Michael G. Todd, Chairman,
President and Chief Executive
Officer

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.

<TABLE>
<CAPTION>
Signature Title Date
--------------- --------------- ----------------
<S> <C> <C> <C>
/s/ Robert Neyland Director January 14, 1997

/s/ Herbert Russell Director January 14, 1997

/s/ Ronald Campbell Director January 14, 1997

/s/ David Paes Vice President, January 14, 1997
Treasurer
</TABLE>
<PAGE>

INDEX TO FINANCIAL STATEMENTS

CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------

AUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 1996

Independent Auditor's Report ...............................F-1

Financial Statements

Balance Sheet..........................................F-2

Statements of Operations...............................F-3

Statements of Changes in Shareholders Equity...........F-4

Statements of Cash Flows...............................F-5

Notes to Financial Statements..........................F-6
<PAGE>

INDEPENDENT AUDITOR'S REPORT
----------------------------

To the Board of Directors and Stockholders
of Capitol Communities Corporation, Inc. and Subsidiaries

We have audited the accompanying balance sheets of Capitol Communities
Corporation, Inc. and Subsidiaries as of September 30, 1996 and the related
statements of income and accumulated deficit, stockholders equity and cash flows
for the years ended September 30, 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 audit.

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 presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial condition of Capital Communities
Corporation, Inc. and Subsidiaries as of September 30, 1996 and the results of
its operations and the related statements of income and accumulated deficit,
stockholders equity and cash flows for the periods ended September 30, 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 discussed in note 15 to the
financial statements, the Company has suffered recurring losses from operations
and has net capital deficiencies that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 15. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

January 8, 1996
Coral Springs, Florida

F-1
<PAGE>

CAPITAL COMMUNITIES CORPORATION, INC AND SUBSIDIARIES
-----------------------------------------------------
BALANCE SHEET
-------------
SEPTEMBER 30, 1996
------------------

ASSETS
------
<TABLE>
<CAPTION>
1996
----
<S> <C>
Current Assets

Cash in Bank $ (188,448)

Account Receivable 357
Prepaid Assets 6,893
Accrued Interest 62,140
-----------
Total Current Assets (119,058)

Loan & Origination Fees,
Net of Amortization (60,253) 211,601

Other Assets
Deposits 129
Real Estate Holdings 9,156,357
Investments 3,500,000
-----------
Total other Assets 12,656,486
-----------
Total Assets $12,749,029
===========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities

Accounts Payable & Accrued Expenses $ 761,970
Accrued Interest 252,671
Note Payable 1,964,406
-----------
Total Current Liabilities 2,979,047

Notes Payable 6,973,128
-----------

Total Liabilities 9,952,175

Shareholders' Equity

Preferred Stock, $.01 par value
none issued and outstanding 0
Common Stock, $.001 Par Value;
Authorized 40,000,000 Shares;
Issued and Outstanding - 7,000,000 7,000
Additional Paid in Capital 4,764,108
Accumulated Deficit (1,974,254)
-----------

Total Shareholders' Equity 2,796,854

Total Liabilities and
Shareholders' Equity $12,749,029
===========
</TABLE>
See Accompanying Auditor's Report and Notes.

F-2
<PAGE>

CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF OPERATIONS
------------------------
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
---------------------------------------
<TABLE>
<CAPTION>

1996 1995
------------ ------------
<S> <C> <C>

Revenues:

Sales (Note 11) $ 31,676 $ 565,467

Cost of Sales 0 587,525
----------- -----------

Gross Profit 31,676 (22,058)

Operating Expenses:

General & Administrative
Expenses 1,042,915 877,077
----------- -----------

Net Income (Loss) Before
Interest Income (1,011,239) (899,135)

Interest Income 245,905 13,217
----------- -----------

Net Income (Loss) Before
Extraordinary Item (765,334) (885,918)

Accumulated Deficit (1,208,920) (323,002)
----------- -----------

$(1,974,254) $(1,208,920)
=========== ===========
Weighted Average
Common Shares Outstanding (.109) (.086)
=========== ===========

</TABLE>
See Accompanying Auditor's Report and Notes

F-3
<PAGE>

CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
---------------------------------------------
SEPTEMBER 30, 1996
------------------

<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
# SHARES AMOUNT CAPITAL DEFICIT
-------- ------ ------- -------
<S> <C> <C> <C> <C>
September 30, 1994 11,135,018 $11,135 $1,438,191 $ (323,002)

Reverse Stock
Split (July, 1995) (8,908,014) (8,908) 8,908 0

Additional Stock
Issued 4,772,996 4,773 3,317,009 0

Net (Loss) 0 0 0 (885,918)
---------- ------- ---------- -----------

September 30, 1995 7,000,000 7,000 4,764,108 (1,208,920)

Net (Loss) 0 0 0 (765,334)
---------- ------- ---------- -----------

September 30, 1996 7,000,000 $ 7,000 $4,764,108 $(1,974,254)
========== ======= ========== ===========
</TABLE>
See Accompanying Auditor's Report and Notes

F-4
<PAGE>

CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
---------------------------------------

<TABLE>
<CAPTION>
1996 1995
---------- ---------------
<S> <C> <C>
Cash Flows From Operating
Activities:

Net (Loss) $(765,334) $ (885,918)

Amortization 57,232 0

Adjustments to Reconcile
Income to Net Cash Used
for Operating Activities:

(Increase) Decrease in
Receivables (37,491) (9,832)
(Increase) Decrease in
Real Estate Holdings (254,936) (90,935)
Increase (Decrease) in
Accrued Expenses 559,775 (137,766)
(Increase) Decrease in
Prepaid Assets 535 (7,557)
(Increase) Decrease in
Loan Origination Fees 0 (271,854)
--------- -----------
Net Cash (Used)
For Operations (440,319) (1,403,862)

Cash Flows From Financing
Activities:
Increase (Decrease)in Long Term
Debt (13,832) 1,639,169
--------- -----------
Net Increase (Decrease) in
Cash (454,151) 235,307

Cash - Beginning of Year 265,703 30,396
--------- -----------

Cash - End of Year $(188,448) $ 265,703
========= ===========

</TABLE>

See Accompanying Auditor's Report and Notes.

F-5
<PAGE>

CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1996
------------------

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------

A. BACKGROUND
----------

The Company was originally incorporated in the State of New York on November 8,
1968 under the name of Century Cinema Corporation. In 1983, the Company merged
with a privately owned company, Diagnostic Medical Equipment Corp. and as a
result changed its name to that of the acquired company. By 1990, the Company
was an inactive publicly held corporation. In 1993, the Company changed its
name to AWEC Resources, Inc. and commenced operations. On February 11, 1994 the
Company formed a wholly owned subsidiary AWEC Development Corp, and Arkansas
Corporation, which later changed its name to Capitol Development of Arkansas.
The Company is currently in the business of developing and selling real estate
properties.

B. PRINCIPLES OF CONSOLIDATION
---------------------------
The Consolidated financial statements include accounts of its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated.

C. REAL ESTATE HOLDINGS
--------------------

Real estate investments are stated at the lower of cost or market. Acquisition
costs are allocated to respective properties based on appraisals of the various
properties acquired in the acquisition.

D. INCOME TAXES
------------

In February 1992, the Financial Accounting Standards Board issued Statement on
Financial Accounting standards 109 of "Accounting for Income Taxes." Under
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.

F-6
<PAGE>

E. REVENUE RECOGNITION
-------------------

The full accrual method is used to determine the recognition of revenue, in
which both the earning price is virtually complete. The profit is determined
when both of these criteria are met; revenue is recognized.

F. EARNINGS/LOSS PER SHARE
-----------------------

Primary earnings per common share are computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. The number of shares used for the
fiscal years ended September 30, 1996 and 1995 were 7,000,000.

NOTE 2 - CAPITAL TRANSACTIONS
--------------------

A. In May 1993, the Company executed a 15 to 1 reverse stock split.

B. In September 1993, the company issued an additional 4,282,126 shares of
common stock to existing stockholders.

C. In October 1993, the Company issued to Petro Source 6,079,000 shares of
common stock to acquire royalty interests in oil and gas properties owned
by Petro Source Energy Corp.

D. In July 1995, the Company executed a 5 to 1 reverse stock split.

E. In July 1995, the Company issued an additional 4,772,996 shares of common
stock to existing stockholders.

NOTE 3 - INVESTMENT IN OIL AND GAS PROPERTIES AND LITIGATION
---------------------------------------------------

On October 20, 1993, the Company incorporated Resource Equity Corporation, a
wholly-owned subsidiary. The purpose of that subsidiary was to acquire royalty
interests in oil and gas producing properties.

During November, 1993, Resource Equity Corporation acquired what it believed
were deposits to acquire royalty rights in producing oil and gas fields located
in the State of Texas for a total cost of $1,360,567.

F-7
<PAGE>

In 1994, the Company's corporate counsel determined that these rights were
fraudulently conveyed. A lawsuit was initiated to recover such funds. Although
the threatened lawsuit succeeded in obtaining a settlement with summary judgment
against the party who had conveyed these rights and received the deposit
proceeds, the Company's corporate counsel does not believe any efforts to
collect on the judgement will be successful. Accordingly, the Company has
concluded that this asset be written off as a non-recurring loss.

On February 13, 1996, Resource Equity Corporation was dissolved by the State of
Texas for failure to pay state franchise taxes. The dissolution has no material
impact on the companies future operations.

NOTE 4 - REFINANCING DEBT
----------------

Capitol Development of Arkansas, Inc., a wholly owned subsidiary of the
Corporation, negotiated with Century Realty to eliminate a portion of the
debt -- $3,321,794 of the balance owed was converted into 700,000 common shares
representing 10% of the outstanding common stock of the corporation, as of
September 30, 1996.

NOTE 5 - INVESTMENT - DEBENTURE
----------------------

The Corporation entered into a contribution agreement with Resure, Inc.
contributing to Resure, Inc. a note from the corporation in the principal amount
of $3,500,000 secured by approximately 409.73 acre residential tract of land in
the city of Maumelle, Pulaski County, Arkansas, in exchange for which Resure,
Inc. issued to the Corporation a subordinated surplus debenture in the amount of
$3,500,000.

NOTE 6 - AGREEMENTS
----------

The Corporation entered into an agreement with Century 21 Metro, Inc. for
managerial and agency services. This agreement was terminated as of September
30, 1994.

NOTE 7 - CONTINGENCIES
-------------

There is a lawsuit pending in the amount of $200,000 with interest at 5% per
annum dated February 9, 1994 against Pine Ridge Improvement District, filed by
Robert D. Holloway, Inc. for engineering services, planning, and surveying.
Capitol Communities Corporation, Inc. and its subsidiary are not a party to the
action; however, as owner of the property, any judgement against the property is
a liability of the Company. Negotiations are currently taking place in order to
settle this lawsuit.

F-8
<PAGE>

NOTE 8 LIENS
-----

The special improvement district taxes constitute a lien on the commercial
tracts that is superior to mortgage liens in the event a delinquency causes the
improvement district to foreclose on the property for nonpayment of the special
tax. The Company maintains no escrow account for the special improvement
district taxes.

NOTE 9 MORTGAGES
---------

On September 11, 1995, the Company entered into a promissory note with Resure,
Inc. for $3,500,000 at ten percent interest per annum, payable in full on
July 1, 2000. Payments of accrued interest only are due for 1 year, payable
quarterly on the unpaid principal balance, first payment due October 1, 1995.
Then payments in the amount of $101,591.16 will be paid quarterly with the first
payment due October 1, 1996, until the entire balance of this note is paid in
full. All payments shall be applied first to interest, then to principal.

The Company entered into a loan agreement with Resure, Inc. as lender and the
Corporation as borrower, borrowing $3,500,000 from the lender and granting a
mortgage on an approximate 701.03 acre tract of land and an approximate 409.73
acre residential tract of land all in the City of Maumelle, Pulaski County
Arkansas.

NOTE 10 REFINANCING DEBT
----------------

The Company refinanced the promissory note to Century Realty as follows:
obtained a $3,500,000 loan from Resure, Inc. secured by 1,111 acres of the
residential property, of which $2,500,000 was paid directly to Century Realty,
$1,400,000 promissory note with Century Realty, and issued 700,000 shares of the
Company's common stock which amounted to $3,321,794. The refinancing note from
Resure, Inc. is cross collateralized with a debenture and investment note for
$3,500,000. The proceeds of the investment note purchased a $3,500,000
investment in Resure, Inc.

NOTE 11 REVENUE
-------

For the year ending September 30, 1996, the only revenue that was generated was
from the receipt of timber royalties from the residential lots.

F-9
<PAGE>

NOTE 12 LEASE AGREEMENT
---------------

The Company is subleasing office space from Dehaven & Todd Co., in which
Michael G. Todd, is a partner. The monthly lease payment began on October 1,
1995 and is $1,800 per month. The lease expires September 30, 1998.

The lease commitment is as follows:

<TABLE>
<CAPTION>
Year ended September 30
<S> <C>
1996 $21,600
1997 21,600
1998 21,600
-------
Total Minimum
Rental Payments $64,800
=======
</TABLE>

As of September 30, 1996, all amounts due under this agreement have been
accrued.

NOTE 13 AGREEMENTS
----------

The Company has a five-year written agreement with Todd to perform the duties of
President. Under the agreement, which became effective on October 1, 1995, Todd
is to be compensated at a rate of $20,000 per month. The agreement expires on
September 30, 2000. The Company is not a party to any other employment
agreements.

NOTE 14 FORECLOSURE LITIGATION - CENTURY
--------------------------------

On August 12, 1996 Century Realty Inc. entered into a lawsuit against Capitol
Development of Arkansas, Inc., and Capitol Communities Corporation, in an action
for foreclosure of a lien on approximately 36 acres of commercial property for
the non-payment of the entire unpaid principal balance of promissory Note 1 and
Note 2, together with all accrued and unpaid interest, which became due and
payable in full on January 9, 1996.

On September 16, 1996 a counter claim was filed against Century Realty, Inc. for
the complaint to be dismissed and that the Company have judgement against
Century for double the amount of interest paid on both the February 15, 1994
note and the September 11, 1995 note. The basis of the complaint was that
Century Realty, Inc. mislabeled other charges and interest exceeded the lawful
amount allowable in an effort to avoid Arkansas usury law.

F-10
<PAGE>

NOTE 15 GOING CONCERN
-------------

The Company currently is unable to meet the its liquidity requirements
consisting of such items as taxes, interest payments, debt reduction,
assessments and general operating expenses.

The Company did not make the $101,591.16 October 31, 1996 payment under the
Resure Note I, but was granted an extension until April 1, 1997 in consideration
of a pledge of 200,000 shares of the Company's common stock by two of the
Company's major shareholders, Prescott Investments Limited Partnership and
Charlie Corporation. The Company has not made the $101,591.16 quarterly
payment due January 1, 1995, and does not expect to be able to make such payment
unless it liquidates additional property inventory or can otherwise raise
capital.

The Company is in negotiations with an investment banking firm to arrange debt
and construction financing in the total amount of $20,000,000 (the "Construction
Financing Loan"). If the Construction Financing Loan is obtained, the Company
intends to use the net proceeds to begin operations as a home builder and to
service existing debt. The Company intends to use part of the unsecured potions
of the Maumelle Property to secure $10,000,000 of the loan, with the remaining
$10,000,000 to be secured by home construction.

The Company is negotiating with private sources to secure bridge financing of
approximately $600,000, of which the Company would receive net proceeds of
$500,000. $200,000 of the net proceeds will be used to service existing debt.

The Company raised $110,000 from the sale of one 2-acre commercial lot on
December 31, 1996. The Company expects to raise $542,000 from pending sale of
another 11 acre commercial parcel of the Maumelle Property. The parcel is
expected to close on or before March 31, 1997, with net proceeds of
approximately $500,000. Sale proceeds will be used to pay accrued interest on
the Resure Note I, and for general corporate purposes.

With respect to prospective long-term liquidity, the Company intends to generate
the bulk of its cash from operations by building and selling homes. At present,
management of the Company believes that the most likely source of substantial
cash flow during the next two years is the development of single-family home
product in the $115,000 to $200,000 price range on the approximately 3,500
single family home sites it owns in Maumelle, assuming the Company can obtain
the necessary financial resources to undertake substantial building operations
on the Maumelle Property. Although there can be no assurance that the Company
can obtain such resources, the Company believes that its ownership of a majority
of the undeveloped home sites in Maumelle will enable the Company to attract the

F-11
<PAGE>

necessary financing to implement an orderly build-out program that will generate
cash flow.

NOTE 16 NOTES PAYABLE
-------------

Notes payable consist of the following:

<TABLE>
<CAPTION>
9/30/1996
----------
<S> <C>
Note Payable -Century Realty
- ----------------------------
Secured 9% per annum due
January 9, 1996 $1,400,000

Note Payable - Century Realty
- -----------------------------
Unsecured 10% per annum due
September 11, 1998 350,000

Note Payable - Davister
- -----------------------
Unsecured 9% per annum due
January 9, 1996 200,000

Notes Payable
- -------------
Miscellaneous Short-Term 906

Note Payable - Resure Mortgage 13,500
- ------------------------------ ----------

Total Current Liabilities 1,964,406

Note Payable - Century Realty
- -----------------------------
Unsecured 10% per annum due
September 11, 1998 0

Note Payable - Resure Mortgage
- ------------------------------
Secured 10% per annum due
July 01, 2000 - Quarterly
payments beginning 10/01/96
for $101,591 3,473,128

Note Payable -Resure Debenture
- ------------------------------
Secured 7% semi-annually due
June 30, 2000 3,500,000
----------

Total Non-Current 6,973,128
----------

Total Notes Payable $8,937,533
==========
</TABLE>

F-12
<PAGE>

NOTE 17 SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------

YEAR END 1996 1995

Interest Paid $ 775,814 $ 593,684

NOTE 18 JOINT VENTURE
-------------

The Company formed a joint venture in August 1996 with the Monterra Group and
purchased 6 lots on 1-1/2 acres of land in Calexico, California for an aggregate
purchase price of approximately $100,000. The Company and the Monterra Group
intended to build and sell homes on the Calexico Property, but received an offer
to sell the lots. The sale of the lots was completed in October 1996. Prior to
the completion of the sale, the Company deeded its interest to Monterra, and 50%
of the sale profits, approximately $20,000 is being credited and utilized to pay
consulting and management fees incurred by the Monterra Group.

F-13
<PAGE>

INDEX TO EXHIBITS

23. Consent of Joel Baum P.A

27. Financial Data Schedule - Article 5

<PAGE>

EXHIBIT 23

JOEL S. BAUM P.A. Member
American Institute of Certified Public Accountants
Florida Institute of Certified Public Accountants
AICA SEC. & Private Companies Division

Capitol Communities Corporation
25550 Hawthorne Blvd.
Suite 207
Torrence, CA. 90505

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We consent to the use of our firm's audited financial statements by reference
in the Registration Statement Form S-8 of Capitol Communities Corporation (the
"Company"). Such audited financial statements have been incorporated by
reference from the Company's Annual Report filed on 10K-SB for the fiscal year
ended September 30, 1996.

January 9, 1997
Coral Springs, Florida

/s/ Joel Baum, P.A.
-------------------
Joel Baum, P.A.

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> (188,448)
<SECURITIES> 3,500,000
<RECEIVABLES> 357
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> (119,058)
<PP&E> 9,156,357
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,749,029
<CURRENT-LIABILITIES> 2,979,047
<BONDS> 0
0
0
<COMMON> 7,000
<OTHER-SE> 476,108
<TOTAL-LIABILITY-AND-EQUITY> 12,749,029
<SALES> 31,676
<TOTAL-REVENUES> 31,676
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,042,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 275,905
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (765,334)
<EPS-PRIMARY> (.109)
<EPS-DILUTED> (.109)

</TABLE>