<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[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)
<PAGE>
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
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 10-KSB
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.
$1,342,783 based on the average of the bid and asked obtained from the National
Quotation Bureau, Inc. (ANQB") on June 30, 1997.
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 7,332,000 as of August 8,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format YES [ ] NO [X]
<PAGE>
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . .4
- --------------------------
PART I
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . 4
ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . .28
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . .44
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF
SECURITY HOLDERS . . . . . . . . . . . . . . .46
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . .46
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION . . . . . . . . . . . . . . .48
ITEM 7. FINANCIAL STATEMENTS. . . . . . . . . . . . . .62
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . .62
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a)OF THE EXCHANGE ACT. . . . . . . .62
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . .66
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . .67
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . .69
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . .72
3
<PAGE>
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking
statements. Such forward-looking statements are generally accompanied by words
such as Aintends," Aprojects," Astrategies," Abelieves," Aanticipates," Aplans,"
and similar terms that convey the uncertainty of future events or outcomes. The
forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in ITEM 6 of this
Report, the section entitled AMANAGEMENT's DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION --Factors That May Affect Future Results and Market Price of Stock."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof and
are in all cases subject to the Company's ability to, (1) to cure its severe
liquidity problems and secured loan defaults, which have given rise to
substantial doubts as to the Company's ability to continue as going concern, and
(2) to raise sufficient capital to commence and continue operations. There can
be no assurance that the Company will be able to cure its liquidity problems or
defaults or raise sufficient capital. Capitol Communities Corporation
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers
should carefully review the risk factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including without limitation those identified in the ARisk Factors" section of
the Company's Registration Statement filed with the SEC in September 1996 on
Form 10-SB.
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
4
<PAGE>
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 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
AExchange 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
Corporation common stock to Joe Vick ("Vick"), thereby transferring control of
the Predecessor Corporation to Vick. The Predecessor Corporation transferred
its interest in
5
<PAGE>
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 (ACharlie Corporation"), both of which were
then, and currently are, affiliates of Michael G. Todd, Herbert E. Russell and
John W. 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.
6
<PAGE>
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 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 gross sales proceeds of $2,394,473. Since the end of the Company's
1996 fiscal year and through the date of this Report, the Company has sold
approximately 69 acres of the Maumelle Property for aggregate gross sales
proceeds of $1,662,730.
The Maumelle Property was previously owned by Michael G. ToddTodd & 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 commentsed 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.
7
<PAGE>
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
represented 10% of the Company's outstanding Common Stock, as of September 30,
1996. See ITEM 12, ASECURITY 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 1,044 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 issued a $3,500,000 promissory note to Resure (the
"Resure Note II"), which is secured by approximately 343 acres of the 1,044
acres of residential property securing the Resure Loan I and a cash collateral
account containing approximately $675,000. See ITEM 2, "DESCRIPTION OF PROPERTY
- - RESURE DEBENTURE," and ITEM 6 "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION-LIQUIDITY AND CAPITAL RESOURCES--Indebtedness
8
<PAGE>
and Other Liquidity Requirements," and "-- Certain Recent Capital Raising
Transactions."
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.
RECENT BUSINESS DEVELOPMENT
Since the end of the Company's 1996 fiscal year, the Company has formed or
acquired two additional subsidiaries. In April 17, 1997, the Company formed
Capitol Resorts, Inc., an Arkansas corporation (the "Resort Subsidiary"), for
the purpose of conducting the Company's proposed vacation ownership interest
operations. See "Business of the Company," below.
On July 30, 1997, the Company acquired Capitol Resorts of Florida, Inc.
(the "Florida Resorts Subsidiary"), a newly formed Florida Corporation pursuant
to an Agreement and Plan of Reorganization between MLT Management Corp.("MLT"),
a corporation not affiliated with the Company. Under the agreement MLT
transferred its contract right to purchase approximately 35 acres of land and
improvements near Disney World in Osceola County, Florida (the "Florida Bible
College Property"). The Company acquired all of the outstanding stock in the
Florida Resorts Subsidiary in exchange for the issuance of 100,000 shares of
Company common stock to MLT. The Florida Resorts Subsidiary then closed the
purchase of the Florida Bible College Property July 30, 1997, at a purchase
price of $922,000 plus costs. See ITEM 2, "DESCRIPTION OF PROPERTY--CERTAIN
PROPERTY RECENTLY ACQUIRED OR TO BE ACQUIRED."
9
<PAGE>
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 also
intends to engage in vacation ownership operations consisting of the following:
(1) the acquisition, renovation, development and operation of vacation ownership
resorts, hotels and other vacation properties, (2) marketing and selling
vacation ownership interests ("VOIs") and vacation long-term leasehold interests
("LTLs") in such properties (collectively, "Vacation Intervals"), and (3)
providing financing for the purchase of Vacation Intervals at its properties.
The Company's real estate as of September 30, 1996, consisted of the
remaining unsold portion of the Maumelle Property consisting of approximately
1,840 acres. Approximately 69 acres of that real estate have been sold since
the end of the 1996 fiscal year end, and additional real property has been
acquired in Maumelle and in Florida since that date. See ITEM 2, "DESCRIPTION
OF PROPERTY" and "--CERTAIN PROPERTY RECENTLY ACQUIRED OR TO BE ACQUIRED."
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 in the 1996 fiscal year decided to shift the Company's primary focus
from selling land to the construction and sale of single-family homes and, since
the end of the 1996 fiscal year, has decided to expand its focus to include
vacation ownership operations, the Company has not yet commenced material
development, building or other operational activities and will require
substantial funding before it can do so. Moreover, the Company currently is
suffering severe liquidity problems which prevent the Company from conducting
any meaningful business operations and, unless cured, will prevent the Company
from realizing or consummating any of its business plans, objectives,
strategies, or transactions. The Company's independent auditor has expressed
substantial doubt as to the Company's ability to continue as a going concern.
See ITEM 7, "FINANCIAL STATEMENTS."
10
<PAGE>
There can be no assurance that the Company will be able to raise sufficient
capital to cure its liquidity problems and pursue the business plans,
objectives, strategies, or transactions discussed herein. See ITEM 3, "LEGAL
PROCEEDINGS" and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
The Maumelle Property is managed by Maumelle Enterprises, Inc. ("Maumelle
Enterprises"), a real estate management firm that was affiliated with certain
officers, directors and controlling shareholders of the Company until March,
1997, and as of the date of this Report is still affiliated with certain
officers 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 expects that, once developed, its vacation ownership resorts
will be managed, at least initially, by unaffiliated third parties.
PRINCIPAL PRODUCTS AND MARKETS.
RESIDENTIAL AND COMMERCIAL PROPERTIES. The Company plans to conduct its
single-family development and construction activities primarily in Arkansas,
through the Operating Subsidiary and/or the Home Construction Subsidiary. The
Company intends to construct single-family homes, apartments, and commercial
buildings on the land that it presently owns in Maumelle or may acquire in
Maumelle in the future. The developed properties will be sold to private home
purchasers and apartment or commercial building operators, as appropriate. See
ITEM 2, "DESCRIPTION OF PROPERTY--PROGRAM OF DEVELOPMENT."
The Company's initial focus in its home-building operations is to develop
single-family homes in the $125,000 to $200,000 price range on the approximately
3,500 unimproved single-family home lots it owns in Maumelle and on improved
lots it intends to acquire from third parties in Maumelle. The Company does not
expect to operate, manage or lease any of the single-family homes, apartment, or
commercial properties it may develop.
11
<PAGE>
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. Since the end of the fiscal year, the Company has sold some of its
real property to fund operating and debt expense. See ITEM 6 "MANAGEMENT's
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION-CLIQUIDITY AND CAPITAL RESOURCES--
Certain Recent Capital Raising Transactions." 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 in Maumelle.
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 $125,000 to $200,000 price range. There can be no assurance, however, as
to the existence of such demand or how long such demand will continue or that
the Company will be able to sell all of the homes it may build in Maumelle.
VACATION INTERVALS. The Company also intends to sell Vacation Intervals in
vacation ownership properties owned or to be acquired by the Company. The
Company intends, at least initially, to contract with unaffiliated third parties
to operate the vacation ownership properties it acquires or develops. The
Company plans to conduct its vacation ownership operations primarily through
individual subsidiaries to be owned by the Resort Subsidiary. See ITEM 2,
"DESCRIPTION OF PROPERTY--PROGRAM OF DEVELOPMENT," and "DESCRIPTION OF PROPERTY-
- -POLICIES WITH RESPECT TO CERTAIN ACTIVITIES."
VOIS AND LTLS. The purchase of a Vacation Interval typically entitles the
buyer to use a fully-furnished vacation residence, generally for a one-week
period each year, in perpetuity. Typically, the purchaser of a VOI acquires an
ownership interest in the vacation residence, which is often held
12
<PAGE>
as tenant in common with other buyers of interests in the property. The
purchaser of an LTL typically acquires a long-term leasehold interest in the
property, rather than an ownership interest.
The owners of Vacation Intervals typically manage the property through a
non-profit homeowners' association, which is governed by a Board consisting of
representatives of the developer and owners of Vacation Intervals at the resort.
The Board hires an agent, delegating many of the rights and responsibilities of
the homeowners' association to a management company, as described above,
including grounds landscaping, security, housekeeping and operating supplies,
garbage collection, utilities, insurance, laundry and repair and maintenance.
Each Vacation Interval owner typically is required to pay the homeowners'
association a share of all costs of maintaining the property. These charges can
consist of an annual maintenance fee plus applicable real estate taxes
(generally $300 to $700 per interval) and special assessments, assessed on an
as-needed basis. If the owner does not pay such charges, the owner's use rights
may be suspended and the homeowners' association may foreclose on the owner's
Vacation Interval.
THE VACATION OWNERSHIP INDUSTRY AND MARKET. The vacation ownership
industry has existed in the United States since the late 1960s and has during
the past few years become one of the fastest growing real estate and vacation
industries in the country, as reported by the Wall Street Journal in October
1996. According to the American Resort Development Association (the "ARDA"), a
trade association for the vacation ownership industry, it is estimated that
approximately 1.7 million United States families own VOI units worldwide and
that sales volume for 1996 in the United States was in excess of $2.0 billion
and in excess of $5.0 billion worldwide. The average VOI unit in the United
States sells for $10,000 for a one week ownership interval, according to
industry sources.
For many vacationers, particularly those with families, a lengthy stay at a
quality commercial lodging establishment can be very expensive, and the space
provided to the guest relative to the cost (without renting multiple rooms) is
not economical for
13
<PAGE>
vacationers. Also, room rates and availability at such establishments are
subject to change periodically. In addition to providing improved lifestyle
benefits to owners, vacation ownership presents an economical alternative to
commercial lodging for vacationers.
The Company believes that, based on published industry data, the following
factors have contributed to the increased acceptance of the vacation ownership
concept among the general public and the substantial growth of the vacation
ownership industry over the past 15 years:
. Increased consumer confidence resulting from consumer protection regulation
of the vacation ownership industry and the entrance of brand name national
lodging companies to the industry;
. Increased flexibility of vacation ownership due to the growth of
international exchange organizations;
. Improvement in the quality of both the facilities themselves and the
management of available vacation ownership resorts;
. Increased consumer awareness of the value and benefits of vacation
ownership including the cost savings relative to other lodging alternatives; and
. Improved availability of financing for purchasers of Vacation Intervals.
The vacation ownership industry traditionally has been highly fragmented
and dominated by a large number of local and regional resort developers and
operators, each with small resort portfolios generally of differing quality.
The Company believes that one of the most significant factors contributing to
the current success of the vacation ownership industry is the entry into the
market of some of the world's major lodging, hospitality and entertainment
companies. Such major companies which now operate or are developing Vacation
Interval resorts include Marriott Ownership Resorts, The Walt Disney Company,
Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts, and
Inter-Continental Hotels and Resorts, as well as Promus Hotel Corporation and
Westin Hotels & Resorts.
14
<PAGE>
The Company believes that national lodging and hospitality companies are
attracted to the vacation ownership concept because of the industry's rapid
historic growth rate and high profit margins. In addition, such companies
recognize that Vacation Intervals provide an attractive alternative to the
traditional hotel-based vacation and allow the hotel companies to leverage their
brands into additional resort markets where demand exists for accommodations
beyond traditional hotels.
According to information compiled by the ARDA for the year
ended December 31, 1994 (the most recent year for which statistics are
available), the prime market for Vacation Intervals is customers in the 40-55
year age range who are reaching the peak of their earning power and are rapidly
gaining more leisure time. The median age of a Vacation Interval buyer at the
time of purchase is 46. The median annual household income of current Vacation
Interval owners in the United States is approximately $63,000, with
approximately 35% of all Vacation Interval owners having annual household income
greater than $75,000 and approximately 17% of such owners having annual
household income greater than $100,000. Despite the growth in the vacation
ownership industry as of December 31, 1994, Vacation Interval ownership has
achieved only an approximate 3.0% market penetration among United States
households with income above $35,000 per year and 3.9% market penetration among
United States households with income above $50,000 per year.
According to the ARDA study, the three primary reasons cited by consumers
for purchasing a Vacation Interval are (i) the ability to exchange the Vacation
Interval for accommodations at other resorts through exchange networks (cited by
82% of Vacation Interval purchasers), (ii) the money savings over traditional
resort vacations (cited by 61% of purchasers) and (iii) the quality and appeal
of the resort at which they purchased a Vacation Interval (cited by 54% of
purchasers). Accorl buyers have a high rate of repeat purchasetion Interval
owners own more than one interval representing approximately 65% of the industry
inventory and approximately 51% of all owners who bought their first Vacation
Interval before 1985 have since purchased a second Vacation Interval. In
addition, customer satisfaction increases with length of ownership, age, income,
multiple location ownership and accessibility to Vacation Interval
15
<PAGE>
exchange networks.
The Company intends to take advantage of these demographic and other trends
if it is able to cure its current liquidity problems and obtain the necessary
funds to commence development. See "- - GROWTH STRATEGIES," below. The Company
expects the vacation ownership industry to continue to grow as the baby-boom
generation continues to enter the 40-55 year age bracket, the age group which
purchased the most Vacation Intervals in 1994.
MARKETING AND ADVERTISING.
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 intends to employ a variety of marketing programs to generate
prospects for Vacation Interval sales efforts, which would include targeted
mailings, overnight mini-vacation packages at the vacation ownership resorts or
hotels the Company intends to develop, gift certificates, seminars and various
destination-specific local marketing efforts. Additionally, the Company intends
to offer incentive premiums to guests to encourage resort tours, in the form of
entertainment tickets, hotel stays, gift certificates or free meals. The
Company also intends to employ the traditional direct mail channels of
marketing, as well as telemarketing organizations and major travel agents to
promote the sale of Vacation Intervals. The Company expects to use an on-site
sales force at the vacation ownership resorts it intends to develop to market
its Vacation Interval product.
The Company intends to commence its Vacation Interval marketing activities
by selling discount vacation packages, which would include stays at the hotel
that the Company intends to develop on the Florida Bible College Property near
Disney World in Osceola, Florida. See ITEM 2, "DESCRIPTION OF PROPERTY--CERTAIN
PROPERTY RECENTLY ACQUIRED OR TO BE ACQUIRED" and "--PROGRAM OF DEVELOPMENT."
The Company intends to employ sales
16
<PAGE>
representatives at the hotel to sell Vacation Intervals to the hotel guests.
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 long-term growth
strategies summarized below. The Company will not be able to implement any of
these strategies if it cannot cure its current liquidity problems and raise
substantial additional capital, of which there can be no assurance. See ITEM 6,
"MANAGEMENT's DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
DEVELOPMENT OF MAUMELLE PROPERTY AND VACATION OWNERSHIP OPERATIONS. The
------------------------------------------------------------------
Company intends, initially, to focus on the building and sale of single-family
homes in Maumelle, Arkansas, the construction and acquisition of vacation
ownership properties, and the sale and marketing of Vacation Interval interests
in such properties. The Company believes that such activities are the Company's
most significant growth opportunities.
Development of Maumelle Property. The Company's growth strategy with
--------------------------------
respect to the Maumelle Property is to focus on the building and sale of single-
family homes on improved lots it intends to acquire in Maumelle and on the
approximately 3,500 unimproved single-family home lots that are now part of the
Maumelle Property.
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 current 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 a dominant
position in the market for single-family home sites in
17
<PAGE>
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."
Vacation Ownership Operations. The Company's growth strategy with respect
-----------------------------
to its proposed vacation ownership business is to capitalize on the increasing
popularity of Vacation Intervals by identifying and pursuing attractive
acquisition, conversion, development and marketing opportunities in the
industry.
The Company intends to acquire and/or develop vacation ownership properties
in destinations where it discerns a strong demand. In evaluating whether to
acquire, convert or develop a vacation ownership property in a particular
location, the Company expects to analyze relevant demographic, economic and
financial data. Specifically, the Company intends to consider the following
factors, among others, in determining the viability of a potential new vacation
ownership resort or other property in a particular location: (i) supply/demand
ratio for the purchase of Vacation Intervals in the relevant market and for
Vacation Interval exchanges into the relevant market by other Vacation Interval
owners, (ii) the market's growth as a vacation destination, (iii) the ease of
converting a hotel or condominium property into a vacation ownership resort from
a regulatory and construction point of view, (iv) the availability of additional
land at or nearby the property for potential future development and expansion,
(v) competitive accommodation alternatives in the market, (vi) uniqueness of
location, and (vii) barriers to entry that would tend to limit competition.
If the Company can cure its current liquidity problems and raise sufficient
development capital, the Company intends to focus its initial vacation ownership
activities in Florida and Missouri by (1) renovating certain hotel buildings on
the Florida Bible College Property near Disney World in Osceola, Florida, and
marketing Vacation Intervals to guests at the hotel, and (2) constructing
vacation ownership units on the Bible College Property and on certain
undeveloped land the Company has agreed to acquire in Branson Missouri. See ITEM
2, "DESCRIPTION OF PROPERTY--CERTAIN PROPERTY RECENTLY ACQUIRED OR TO BE
ACQUIRED"
18
<PAGE>
and "--PROGRAM OF DEVELOPMENT." The American Resort Development
Association (the "ARDA") estimates that Florida has a higher concentration of
Vacation Intervals than any other state in the United States. See "--
COMPETITION," below.
The Company believes that an important part of its growth strategy will be
to obtain approval to obtain approval to have any vacation ownership properties
it develops participate in broad-based Vacation Interval exchange networks. In a
1995 study sponsored by the Alliance for Timeshare Excellence and the ARDA, the
exchange opportunity was cited by purchasers of Vacation Intervals as one of the
most significant factors in determining whether to purchase a Vacation Interval.
Participation in an exchange network would allow the Company's vacation
ownership customers to exchange in a particular year their occupancy right in
the unit in which they own a Vacation Interval for an occupancy right at the
same time or a different time in another participating resort, based upon
availability and the payment of a variable exchange fee. A member may exchange
his Vacation Interval for an occupancy right in another participating resort by
listing his Vacation Interval as available with the exchange organization and by
requesting occupancy at another participating resort, indicating the particular
resort or geographic area to which the member desires to travel, the size of the
unit desired and the period during which occupancy is desired.
Once the Company's first vacation ownership property has been developed,
the Company intends to apply to have its property included in a broad-based
Vacation Interval exchange network. There can be no assurance, however that any
future vacation ownership properties developed by the Company will be accepted
on Vacation Interval exchange. See ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION--RESULTS OF OPERATION--Factors That May Affect
Future Results and Market Price of Stock."
Another important component of the Company's growth strategy in the
vacation ownership industry will be the financing of Vacation Interval
purchases. The Company intends to offer financing to purchasers of Vacation
Intervals. The Company anticipates that this financing would be secured by a
first mortgage on the underlying Vacation Interval. The Company intends to
raise capital for its operation and/or debt servicing requirements by
securitizing and selling the promissory notes
19
<PAGE>
generated by this activity or using the notes as collated for future commercial
loans.
GEOGRAPHIC MARKETS DIVERSIFICATION. The Company believes that geographic
----------------------------------
diversity in its real property and vacation ownership development activities
will be a key factor in achieving long-term stability and growth. The Company
intends to work toward this diversity by considering real estate development and
vacation ownership opportunities throughout the United States and by forming
joint ventures with local developers.
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 sold the unimproved lots in October 1996.
PRODUCT DIVERSIFICATION. Although, initially, the Company's primary focus
-----------------------
will be on the construction of single-family homes and vacation ownership
properties, 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 and vacation ownership industries.
COMPETITION.
The real estate development and vacation ownership industries are highly
competitive. In Arkansas--the geographic area in which the Company initially
intends to commence its single-family home and commercial development--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
20
<PAGE>
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.
In the vacation ownership industry, the Company will be subject to
significant competition from other vacation ownership resort owners and
operators, many with extensive experience in the lodging, hospitality and
entertainment areas. Many of the world's most recognized lodging, hospitality
and entertainment companies have begun to develop and sell Vacation Intervals in
resort properties, including, among others, Marriott Ownership Resorts, The Walt
Disney Company, Hilton Hotels Corporation, Hyatt Corporation, Four Seasons
Hotels & Resorts, and Inter-Continental Hotels and Resorts. These entities
possess significantly greater development experience, financial, marketing,
personnel and other resources than those of the Company and may be able to grow
at a more rapid rate or more profitably as a result.
The Company currently has no material presence or reputation in Arkansas,
Florida, Missouri or any other area in the real estate development or vacation
ownership industries 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.
Although the Company intends to improve its ability to compete by entering into
joint venture or similar development agreements with established real estate and
vacation ownership developers and raising additional capital, there can be no
assurance of the success of any such agreements or attempts to raise capital.
RAW MATERIALS.
The main raw materials used in the construction of homes and vacation
ownership units 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
21
<PAGE>
acceptable to the Company. Since the Company has not commenced significant
construction activities, it does not yet have any principal suppliers.
GOVERNMENTAL REGULATIONS AND STATE GOVERNMENT APPROVAL OF VACATION INTERVAL
SALES.
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, architectur 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 venture agreements with experienced real estate developers and
other appropriate parties.
The vacation ownership operations of the Company will be subject to
extensive regulation by the federal government and the zoning and other laws in
the state, county and city jurisdictions where the Company's vacation ownership
properties will be located and where Vacation Intervals will be marketed and
sold. At the federal level, the Company may be subject to, among others, the
following legislation: the Federal Trade Commission Act, which prohibits unfair
or deceptive acts, the Truth-in-Lending Act, Regulation Z, the Equal Opportunity
Credit Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the
Real Estate Standards Practices Act, the Telephone Consumer Protection Act, the
Telemarketing and Consumer Fraud and Abuse Prevention Act, the Fair Housing Act
and the Civil Rights Acts of 1964 and 1968. In addition, most states including
Florida have adopted laws and regulations regarding the sale of Vacation
Intervals, including laws that will require the Company to file with a state
authority for its approval a detailed offering statement describing the Company,
all material aspects of the project and the sale of the Vacation Intervals.
Most states grant the right to purchasers to cancel a contract of purchase at
any time within a period of time, usually ranging from three to fifteen days.
Other
22
<PAGE>
applicable state laws include licensing requirements for sellers of real
estate and travel sellers, and anti-fraud and telemarketing laws, price, gift,
and sweepstake laws, and labor laws.
The Company's 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 that was developable land as of September
30, 1996, was already zoned for single-family homes. The current zoning allows
the Company to apply for building permits for the approximately 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 in Maumelle. The Company must apply for
building permits for each commercial property it develops in Maumelle 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. See "--ENVIRONMENTAL LAWS," below.
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,
23
<PAGE>
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, or change vacation ownership regulations,
which could result in a decrease in property values.
Under various state and federal laws governing housing and places of public
accommodation the Company is required to meet certain requirements related to
access and use by disabled persons. The Company is likely to incur substantial
costs complying with such laws which may have a material adverse effect on the
Company. Additional legislation may impose further burdens or restrictions on
owners with respect to access by disabled persons. The ultimate amount of the
cost of compliance with such legislation is not currently ascertainable.
Limitations or restriction arising from such laws may make it difficult for the
Company to develop its vacation ownership resort properties and may limit
application of the Company's growth strategy in certain instances or reduce
profit margins on the Company's operations.
The Company believes that, with adequate funding, it can comply with all
applicable laws regarding its real estate development and vacation ownership
operations. There can be no assurance, however, that the Company will be able to
comply with all such laws. The Company expects that the costs of complying with
governmental regulations will be very significant once it commences development
activities. There can be no assurance that the Company will be able to obtain
state approval to sell Vacation Intervals in all jurisdictions in which the
Company desires to sell such interests, or that the cost of complying will not
be so prohibitive as to make it unprofitable to commence vacation ownership
operations. Any failure to comply with applicable laws or regulations could
have a material adverse effect on the Company.
ENVIRONMENTAL LAWS.
24
<PAGE>
The Company is subject to various federal, state and local laws,
ordinances and regulations regarding environmental matters. Under these laws,
a current or previous owner or operator of real property may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at such property, and may be held liable to a governmental entity or to
third parties for property damage and the costs of investigation, removal and
decontamination incurred by such parties in connection with contamination. The
penalty is imposed whether or not the owner or operator was aware of, or
responsible for the hazardous or toxic substances, and the liability under such
laws has been interpreted to be joint and several unless the harm is divisible
and there is a reasonable basis for allocation or responsibility.
The costs of investigation, 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, rent, develop or use to secure debt financing. Persons who
arrange for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting form
environmental contamination emanating from a site. In connection with its
ownership and operation of real property, the Company potentially may be liable
for the foregoing costs.
Certain Federal, state and local laws, regulations and ordn or disturbance
of asbestos-containing materials ("ACMs") when such materials are in poor
condition or in the event of construction, remodeling, renovation or demolition
of a building. Such laws may impose liability for release of ACMs and may
provide for third parties to seek recovery from owners and operation of real
properties for personal injury associated with ACMs. In connection with its
25
<PAGE>
ownership and operation of its properties, the Company may be potentially liable
for such costs.
In addition, recent studies have linked radon, a naturally- occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to, radon in indoor air, the EPA and the Surgeon General recommend testing
residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (Pci/L) (the "Recommended Action Level"). The
presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's properties may adversely affect the
Company's ability to develop its residential and commercial properties or sell
Vacation Intervals at such properties, as well as the market value of such
property.
Recently-enacted federal legislation will eventually require the Company to
disclose to potential purchasers of Vacation Intervals at any Company resorts
that were constructed prior to 1978 any known lead-paint hazards and will impose
treble damages for failure to so notify. The buildings the Company intends to
renovate and convert to a hotel on the Florida Bible College Property were
constructed before 1978 and, therefore, are subject to this legislation.
Electric transmission lines are located in the vicinity of the Company's
properties. Electric transmission lines are one of many sources of electro-
magnetic fields ("EMFs") to which people may be exposed. Research into potential
health impacts associated with exposure to EMFs has produced inconclusive
results. Notwithstanding the lack of conclusive scientific evidence, some states
now regulate the strength of electric and magnetic fields emanating from
electric transmission lines, while others have required transmission facilities
to measure for levels of EMFs. In addition, the Company understands that
lawsuits have, on occasion, been filed (primarily against electric utilities)
alleging personal injuries resulting from exposure as well as fear of adverse
health effect. In addition, fear of adverse effects from transmission lines has
been a factor considered in determining property values in obtaining financing
and in condemnation proceedings in eminent domain brought by power
26
<PAGE>
companies seeking to construct transmission lines. Therefore, there is a
potential for the value of a property to be adversely affected as a result of
its proximity to a transmission line and for the Company to be exposed to damage
claims by person exposed to EMFs.
The Company had a Phase I investigation conducted on approximately 63% of
the Maumelle Property in July and August 1995 which found no evidence of soil or
ground water contamination on the studied property and recommended that a Phase
II study was not warranted. This Phase I assessment was carried out in
accordanconsisted of non-invasive investigations of environmental conditions at
the properties, including a preliminary investigation of the sites and
identification of publicly known conditions concerning properties in the
vicinity of the sites, physical site inspections, review of aerial photographs
and relevant governmental records where readily available, interviews of
knowledgeable parties, investigation for the presence of above ground and
underground storage tanks presently or formerly at the sites, a visual
inspection of potential lead-based paint and suspect friable ACMs where
appropriate, a radon survey, and the preparation and issuance of a written
report. 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. No environmental studies were conducted by the Company
on the Florida Bible College Property.
The Company is not aware of any environmental liability with respect to any
of its real property that the Company believes would have a material adverse
effect on the Company's business, assets, or results of operations.
Nevertheless, there can be no assurance, that the Company's real 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 or
liability arising from any such
27
<PAGE>
contamination. No assurance can be given that the environmental studies
conducted on the property reveal all environmental liabilities or that no prior
owner created any material environmental condition not known to the Company.
The Company believes that compliance with applicable environmental laws and
regulations will have a material adverse effect on the Company, its financial
condition and its results of operations unless the Company can raise substantial
additional capital to fund its operations. The Company believes that its
properties are in compliance in all material respects with all federal, state
and local laws, ordinances and regulations regarding hazardous or toxic
substances. The Company has not been notified by any governmental authority or
any third party, and is not otherwise aware, of any material noncompliance,
liability or claim relating to hazardous or toxic substances or petroleum
products in connection with any of its present properties.
NUMBER OF EMPLOYEES. The Company has one employee, its President, Michael
G. 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. At the
Company's fiscal year-end, the Maumelle Property consisted of approximately
1,304 acres of single-family sites (which included approximately 3,500 home
sites), approximately 51 acres of commercial property, approximately 30 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 commercial development. As of September 30,
1996, the Company's single-family home sites in the City of Maumelle represented
approximately 70% of all available vacant land in Maumelle zoned for single-
family homes.
As of the date of this Report, the Company's Maumelle Property consists of
approximately 1,237 acres of single-family
28
<PAGE>
zoned property (approximately 3,500 sites), approximately 54 acres of commercial
property, approximately 30 acres of multi-family sites, and approximately 446
acres of miscellaneous undevelopable property. The Company's single-family home
sites in the City of Maumelle represented, as of the date of this Report,
approximately 70% of the currently 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. Since the end of the fiscal year, the Company acquired additional
real property, including approximately 35 acres of land and improvements in
Osceola, Florida, discussed below. See "--CERTAIN PROPERTY RECENTLY ACQUIRED OR
TO BE ACQUIRED," below, and ITEM 1, "DESCRIPTION OF BUSINESS--RECENT BUSINESS
DEVELOPMENT." In addition, the Company recently entered into agreements to
acquire an aggregate of 21 acres of undeveloped land in Branson, Missouri, also
discussed below. See "--CERTAIN PROPERTY RECENTLY ACQUIRED OR TO BE ACQUIRED,"
below, and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--
LIQUIDITY AND CAPITAL RESOURCES--Certain Recent Events Relating to the Company's
Indebtedness and Liquidity Requirements."
The Operating Subsidiary also owns the Resure Debenture, which is described
below. See "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
other than the Osceola, Florida property discussed below, the Company does not
maintain any insurance coverage on most of its real property assets. The
Florida Bible College Property is covered by an insurance policy covering bodily
injury and property damage combined, in the amount of $1,000,000 per occurrence
and in the aggregate, and a $2,000,000 policy covering the buildings on the
property.
MAUMELLE PROPERTY
29
<PAGE>
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, a golf course and other recreational areas.
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 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%
30
<PAGE>
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, according to a Metroplan report. 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. As of the end of the 1996 fiscal year, the Large
Residential Tract was comprised of approximately 1,107 acres of undeveloped
residential land. Subsequent to the fiscal year end, the Company sold 67 acres
of this land. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS--LIQUIDITY AND
CAPITAL-- Certain Recent Capital Raising Transactions." Under current zoning,
the Company believes this land can be subdivided into approximately 3,000
single-family lots. The Large Residential Tract currently is zoned for
residential development.
The following summary of certain terms of the Resure Loans I and II is
qualified in its entirety by the fact that such Loans are in default as of the
date of this Report. As a result, under the terms of the Resure Loans I and II,
the entire balance of principal and interest of these Loans is now immediately
due and payable, and the Company currently does not have sufficient funds to pay
the amount due. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Certain Recent Events Relating to
the Company's Indebtedness and Liquidity Requirements."
The Operating Subsidiary has fee title to the Large Residential Tract, all
of which is subject to a first-priority mortgage securing the $3,500,000 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 and has not
made the principal payments required
31
<PAGE>
on April 1 and July 1, 1997, the current principal amount of the Resure Note I
is $3,500,000 as of the date of this Report. The Resure Note I may be prepaid at
anytime by the Company without incurring premiums or penalties.
As of September 30, 1996, approximately 407 acres of the Large Residential
Tract were 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 ITEM 2, "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 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.
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. There are, however, certain legal proceedings that may result in a
lien on the property. See ITEM 3, "LEGAL PROCEEDINGS." 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.
COMMERCIAL LOTS. The Commercial Lots are approximately 54 acres of lots
which have been zoned for commercial and multi-family use. The Company proposes
to develop these Commercial Lots for sale, either through joint ventures or
through its Home Construction Subsidiary. The Company, however, may sell
certain portions of the Commercial Lots prior to development 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, subject to the liens discussed
below.
32
<PAGE>
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, which is still pending. As of the date of this
Report, the Century Note I remains in default. Although the Company has entered
into a tentative settlement agreement regarding the Century foreclosure action,
the agreement requires the Company to make a $2,000,000 settlement payment to
Century by September 1, 1997 (or October 1, 1997, if a $25,000 extension fee is
paid), and the Company currently does not have the necessary funds to make the
payment. See ITEM 3, "LEGAL PROCEEDINGS," and ITEM 6, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES."
Approximately 28 acres of the Commercial Lots are subject to a lien in
favor of the Bank of Little Rock, as security for a $400,000 line of credit and
a $450,000 line of credit provided by that Bank, of which an aggregate of
$847,000 is outstanding as of the date of this Report. See ITEM 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND
CAPITAL RESOURCES--Certain Recent Events Relating to the Company's Indebtedness
and Liquidity Requirements. Each line of credit bears interest of a fixed rate
of 10% per annum. The $400,000 line of credit requires monthly interest payments
commencing May 10, 1997, until April 10, 1998, when a balloon payment consisting
of the entire principal balance and accrued interest under the line is due and
payable. This line is secured by approximately 11 acres of the Commercial
Property. The $450,000 line of credit requires no monthly payments of interest
or principal, but is payable on demand or November 5, 1997, whichever is sooner.
This line of credit is secured by approximately 19 acres of the Commercial
Property.
As of September 30, 1996, certain of the Commercial Lots had delinquent ad
valorem taxes for which a lien had been filed against the property. Subsequent
to the Company's fiscal year-end all ad valorem taxes were brought current.
33
<PAGE>
Thirty-six acres of the Commercial Lots are encumbered by a lien securing
payment of special improvement taxes assessed against the property to service a
$380,000 bond issuance by the City of Maumelle, Arkansas Multi-Purpose
Improvement District No. 2. The annual tax on the property is $92,430, payable
each October 10. In addition to the special improvement taxes, any ad valorem
taxes which may placed on the property in the future are secured by a senior
statutory lien on the properties. The Company does not hold any funds nor is
there any escrow or reserve account with respect to the special improvement
taxes.
MISCELLANEOUS TRACTS AND PROPERTIES. The Miscellaneous Tracts and
Properties are approximately 476 acres of land, including approximately 30 acres
of multi-family zoned land, and approximately 446 acres of wetlands. The
Operating Subsidiary has fee title to the Miscellaneous Tracts and Properties,
which are 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.
CERTAIN PROPERTY RECENTLY ACQUIRED OR TO BE ACQUIRED
FLORIDA BIBLE COLLEGE PROPERTY. As discussed above, the Company recently
acquired the Florida Bible College Property in Osceola, Florida. Fee title to
such property is held by the Florida Resorts Subsidiary. There are no liens on
the property, other than those for taxes not yet due. See ITEM 1, "DESCRIPTION
OF BUSINESS--RECENT BUSINESS DEVELOPMENT."
The Florida Bible College Property consists of buildings and other
improvements on approximately 35 acres of land near Disney World. The
improvements include two vacant two-story hotel buildings, totaling
approximately 49,450 square feet. The buildings contain 95 rooms, as well as a
lobby area, offices, a cafeteria, a kitchen, and meeting space. The
improvements also include a swimming pool, landscaping, irrigation, an asphalt
paved parking area and concrete walks and curbs. The improvements are in fair
condition, but need numerous repairs and cosmetic enhancements. The Company
intends to develop and renovate this portion of the property and, until such
renovations are made, the property will not be adequate or suitable for the
34
<PAGE>
Company's intended use of the property. See "--PROGRAM OF DEVELOPMENT," below.
Another portion of the property includes an office/education building, an
auditorium, an administrative building, and five single-family residences.
These improvements are in fair to good condition. The Company intends to sell
this portion of the property to a developer for commercial development.
THE BRANSON, MISSOURI PROPERTY. Subsequent to the end of the Company's
fiscal year, the Company agreed to purchase approximately 21 acres of
undeveloped land in Branson, Missouri, for approximately $4,200,000. Although
the purchase agreements relating to this property require the sale to close by
September 12, 1997, the Company does not have the funds necessary to close the
transaction. See AProspective Sources of Liquidity," below. If the property
can be acquired and sufficient capital raised, the Company intends to develop
vacation ownership units on the property.
PROGRAM OF DEVELOPMENT.
The Company will not be able to implement any of the following plans for
developing its properties if it cannot cure its severe liquidity problems and
raise substantial additional capital, of which there can be no assurance. See
ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
DEVELOPMENT OF PROPERTY IN MAUMELLE. The Company intends to commence its
initial home development activities by the first quarter of 1998 by acquiring
approximately 30 improved single-family lots from third-party property owners
and building its first homes on such property. The Company intends to build
approximately 250 homes on acquired single-family lots within the next 2 years,
to be sold for sales prices in the range of $125,000 to $160,000.
The Company expects that some of the improved single-family lots referred
to above will be acquired from DeHaven Todd Limited Partnership ("DTLP"). 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. See ITEM 12, "CERTAIN
35
<PAGE>
RELATIONSHIPS AND RELATED TRANSACTIONS." The Company estimates that the
aggregate cost for acquiring the approximately 100 single-family lots it wishes
to purchase from DTLP will be approximately $19,000 per lot and that the
aggregate cost of development of the homes it wishes to build on the sites will
be approximately $60 to $65 per square foot.
The Company intends to commence development activity on portions of the
property it now owns in Maumelle as soon as it can obtain the necessary funds to
do so. Management anticipates that the Company will begin developing its
existing inventory in Maumelle with the Pine Ridge Lots. The Company intends to
start home site improvements on at least one Pine Ridge subdivision in the third
quarter of 1998, assuming it is able to obtain necessary capital for such
development. The Company plans to commence single-family home construction on
the first Pine Ridge subdivision lots in the 1999 calendar year.
The Pine Ridge Lots are fully entitled with a preliminary subdivision plat
recorded 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. Management estimates that
construction costs for single-family homes built on the acquired lots and on the
Pine Ridge Lots will average approximately $50 to $53 per square foot. The
Company estimates that the aggregate cost of building and selling 487 homes on
the Pine Ridge Lots, inclusive of general and administrative expenses, sales and
marketing expenses, will be in the range of $75 to $85 per square foot.
The Company intends to build up to 3,000 moderately priced single-family
homes on the Large Residential Tract for sales prices in the range of $125,00 to
$200,000. The Company estimates that the cost for building and selling these
homes, inclusive of general and administrative expenses, sales and marketing
expenses, and closing costs, will be in the range of $100,000 to $160,000 per
home.
36
<PAGE>
Because the Company lacks experience in the home construction industry and
has only limited experience in the vacation ownership industry, the Company
believes it may be difficult to obtain conventional credit sources sufficient to
finance the foregoing development activity. The Company, therefore, believes it
may be necessary to enter into joint ventures with well capitalized real estate
developers to pursue the Company's building program.
The Company's estimated costs of development, on a per square foot cost
basis, 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, however,
that construction costs will not exceed the Company's estimates.
There are no current plans for the improvement or development of the
Commercial Lots or the Miscellaneous Tracts and Properties. These properties
are being held for the purpose of resale.
DEVELOPMENT OF VACATION OWNERSHIP PROPERTIES. The Company intends to
conduct vacation ownership operations initially in Florida and Missouri, either
on its own or with joint venture partners. Assuming the Company is able to
obtain the necessary capital or joint venture partner for such development, of
which there can be no assurance, the Company intends to begin vacation ownership
business development activities by renovating the two hotel buildings on the
Florida Bible College Property it recently acquired near Disney World, Florida,
and using the hotel in the Company's proposed Vacation Interval marketing
operations. See "--CERTAIN PROPERTY RECENTLY ACQUIRED OR TO BE ACQUIRED,"
above, and ITEM 1, "DESCRIPTION OF BUSINESS--RECENT BUSINESS DEVELOPMENT." The
Company intends to sell discount vacation tours to prospective Vacation Interval
purchasers, which would include a stay in the Company's renovated hotel, and
employ marketing representatives to sell Vacation Intervals to the hotel guests.
See ITEM 1, "DESCRIPTION OF BUSINESS--BUSINESS OF THE COMPANY--MARKETING AND
ADVERTISING." Management estimates that renovation of the hotel buildings and
related improvements on the Florida Bible College Property will cost
approximately $1,200,000 and will commence when the Company is able to obtain
the
37
<PAGE>
necessary financing. The Company intends to contract with an unaffiliated
management firm to manage the hotel.
After renovation of the hotel, the Company intends develop the property in
two phases. In the initial phase, the Company intends to construct 40
additional guest rooms in the hotel. The second phase would include the
construction of approximately 200 additional units which would be appropriate
for the sale of LTL Vacation Intervals. The timing and actual number of rooms
and LTL units built will depend on the demand for hotel space and Vacation
Intervals and the level of the Company's Vacation Interval pre-sales.
The Company intends to finance the renovation of the hotel buildings and
the construction of the VOI units on the Florida Bible College Property by
obtaining a loan secured by the property, which currently is unencumbered by
indebtedness for borrowed money. Although an unaffiliated third party appraised
the property in May 1997 at $3,385,000, there can be no assurance that the
Company will be able to obtain the necessary financing, given its current levels
of cash flow and liquidity problems.
The Company also intends to construct a vacation ownership resort on the
approximately 21 acres of undeveloped land that it agreed to acquire in Branson,
Missouri. The Company currently does not have sufficient funds to consummate
this acquisition, however. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Certain Recent Events
Relating to the Company's Indebtedness and Liquidity Requirements."
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
by Resure 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
38
<PAGE>
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.
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.
In February 1997, an Illinois court found that Resure was insolvent,
ordered that Resure be liquidated, and appointed the Illinois Director of
Insurance (the "Resure Liquidator") to oversee the liquidation. The Company
currently is negotiating with the Resure Liquidator to retire the Company's
obligations under the Resure Note II in return for cancellation of the Resure
Debenture, although no assurance can be given as to the outcome of such
negotiations. The Company believes that it may have certain causes of action
against Resure arising from Resure's sale of the Resure Debenture to the Company
and, therefore, may commence litigation against the Resure estate and others if
s settlement negotiations are not successful. The January and June
39
<PAGE>
1997 semi-annual payments due under the Resure Debenture have not been made.
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 future, except that any
construction activity will likely be conducted through the Home Construction
Subsidiary and any vacation ownership development will be conducted through
individual subsidiaries to be owned by the Resort Subsidiary. The Company
expanded its focus to include vacation ownership operations, because Management
believes that the vacation ownership industry has substantial growth potential.
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 and/or
subsidiaries to be owned by the Resort 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, which the Company now lacks.
40
<PAGE>
The Company intends to acquire or develop residential, commercial, and vacation
ownership properties primarily in the Maumelle area, Missouri and Florida, but
may pursue the acquisition or development of residential, commercial and
vacation ownership 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 Ainvestment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act").
Should management recommend prospective acquisitions in the 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 Maumelle Property inventory and Vacation Intervals.
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
41
<PAGE>
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
42
<PAGE>
of the interested director or officer must be counted in any such vote
of the shareholders; or
(c) The common directorship or office or financial interest is not known
to the director and officer at the time the 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 Company's real property is subject to the
highly competitive conditions of the real estate development and vacation
ownership industries. In Arkansas--the geographic area in which the Company
initially intends to commence its single-family home and commercial development-
- -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.
In the vacation ownership industry, the Company will be subject to
significant competition from other vacation ownership resort owners and
operators, many with extensive experience and
43
<PAGE>
market presence in the lodging, hospitality and entertainment areas. Many of the
world's most recognized lodging, hospitality and entertainment companies have
begun to develop and sell Vacation Intervals in resort properties, including,
among others, Marriott Ownership Resorts, The Walt Disney Company, Hilton Hotels
Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts, and Inter-
Continental Hotels and Resorts. These entities possess significantly greater
development experience, financial, marketing, personnel and other resources than
those of the Company and may be able to grow at a more rapid rate or more
profitably as a result.
The Company currently has no material presence or reputation in Arkansas,
Florida, Missouri, or any other area in the real estate or vacation ownership
development industry and due to its current illiquidity does not have sufficient
capital to commence significant development activities. For this and other
reasons discussed herein, the Company may experience difficulties in competing
with established developers.
The Company believes that its ownership of a substantial majority of the
available undeveloped single-family home properties in Maumelle will give the
Company an advantage in entering the single-family home construction market in
Maumelle, assuming it is able to obtain sufficient capital to commence
construction activities. Although the Company does not currently have
substantial vacation ownership industry expertise, Management believes that such
expertise can be acquired if the Company obtains the necessary capital to
attract experienced personnel.
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 (the
"Century lawsuit"). 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
44
<PAGE>
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 in
this litigation.
Subsequent to the end of the Company's fiscal year, the Company and Century
entered into a tentative settlement agreement concerning the aforementioned
litigation, which required a $2,000,000 settlement payment to Century on August
1, 1997. The agreement did not stay any of the legal proceedings between the
parties. The Company was not able to make that payment, but obtained an
extension of the due date for the $2,000,000 payment until September 1, 1997, in
return for the Company's payment of a $25,000 extension fee to Century. The
Company had the right to extend the due date of the settlement agreement until
October 1, 1997, for an additional $25,000 extension fee. This extension fee,
due on September 1, 1997, was not paid by the Company and the settlement
agreement expired. The Company has continued to negotiate a settlement, but
there can be no assurance that the Company will be able to successfully
negotiate acceptable terms and prevent foreclosure on the 36 acres of Commercial
Lots securing the Century Note I, or obtain other relief, given the Company's
present illiquidity.
As of the Company's fiscal year-end, the approximately 197-acre Pine Ridge
Lots were subject to a possible tax assessment by the Pine Ridge Addition
Residential Property Owners Multi-Purpose Improvement District No. 9 (the "Pine
Ridge Improvement District"). The Pine Ridge Improvement District is faced with
a possible judgment in the amount of $237,811 in a lawsuit unrelated to the
Company and has claimed the authority to levy taxes against the Company's Pine
Ridge Lots to satisfy any judgment. The Company had accrued the full amount of
the possible liability in its 1995 fiscal year financial statements in case the
Residential Lots became subject to a tax to satisfy any judgment.
After the end of the Company's 1996 fiscal year, the Company, as intervenor
in the foregoing lawsuit, was granted a summary judgment on March 13, 1997, that
released the Pine Ridge Improvement District's lien on the Pine Ridge Lots owned
by the Company. An appeal of this judgment is pending, and there can be no
assurance that the lower court's decision will be upheld.
45
<PAGE>
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.
PART II.
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.
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>
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>
46
<PAGE>
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 490, as of
September 30, 1996, and 529 as of August 1, 1997.
DIVIDENDS
During the fiscal year ended September 30, 1996 and the fiscal year ended
September 30, 1995, the Company did not declare 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
shift the focus of its primary business to developing single-family homes and
vacation ownership properties and in marketing and selling Vacation Intervals,
and has had no operational history in these new areas of business. There are no
material restrictions limiting, or restrictions that are likely to limit, the
Company's ability to pay dividends on its Common Stock in the future, except
that the articles of incorporation of the Company permit the board of directors
to approve the issuance of preferred stock having such rights as may be
designated by the board without shareholder approval. Such rights may include
preferences with respect to dividends as well as prohibitions against the
declaration of dividends on Common Stock under certain circumstances.
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.
47
<PAGE>
(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"), which was amended in
September 9, 1996. As consideration for the financial consulting services to be
rendered by Olsen, the Company agreed to issue 150,000 sharares of Common Stock.
The Company relied on Section 4(2) of the Securities Act in agreeing to issue
such securities.
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 and thereafter expanded its focus to include vacation
ownership operations (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 and vacation ownership 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
48
<PAGE>
position, and the Company's ability to develop or acquire
greater construction, sales and other real estate and vacation ownership
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
$1,109,053 compared with a loss of $885,918 for the year ended September 30,
1995. The difference in performance resulted primarily from an increase in
general and administrative costs of $327,427 from $283,393 in fiscal 1995 to
$610,820 in fiscal 1996, which was offset by an increase in interest income of
$232,688 from $13,207 to $245,905 as well as an increase in gross profit.
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.
From the year ended September 30, 1995 to the year ended September 30,
1996, operating expenses increased from $877,077 to $1,386,634, an increase of
$509,557. The increase in operating expenses resulted primarily from an
increase of $327,427 in general and administrative expenses from $283,393 to
$610,820 and an increase in interest expense of $182,130. 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
49
<PAGE>
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,
Mr. 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 Mr. 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 cure its current
illiquidity problems and to take advantage of an apparent increase in building
activity in the City of Maumelle in 1996, and the increase in sales nationally
of Vacation Intervals, which are 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.
One hundred and seventy-six permits were issued by the City of Maumelle for
the construction of new single-family homes during the 1995 calendar year. In
the calendar year of 1996, 200 permits have been issued for the construction of
new homes. Although there can be no assurance that such increase in activity
will continue 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.
50
<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 arise outside of the ordinary course of business, except for the
losses that would likely arise if the Company were to lose the approximately
1,044 acres of land secured by the Resure Note I, the Resure Note II, or the
Century Note I. The Century Note I and acreage securing that Note are currently
subject to a foreclosure proceeding and a tentative settlement agreement. See
ITEM 3, "LEGAL PROCEEDINGS." 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,
as well as the unsecured Century Note II. See "LIQUIDITY AND CAPITAL
RESOURCES," below.
Even if the Company's liquidity problems can be solved and the Company can
commence its home-building and vacation ownership operations, there may be some
seasonal variance in the flow of income from these operations. 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, from April through September in Florida, and snow
or rain from November through March in Missouri.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK. The
factors identified below are believed to be important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward looking statement made by
or on behalf of the Company, whether in this section or elsewhere in this Report
or in any other written or verbal statement of the Company
51
<PAGE>
or its officers or directors. Unpredictable or unknown factors not discussed
herein could also have material adverse effects on forward looking projections.
The Company does not intend to update these cautionary statements.
Severe Liquidity Problems. The Company currently is suffering severe
-------------------------
liquidity problems which prevent the Company from conducting any meaningful
business operations and, unless cured, will prevent the Company from realizing
or consummating any of its business plans, objectives, strategies, or
transactions. The Company has minimal operating income and its primary source
of funds to meet operating expenses for the last two years has been the
liquidation of its real property inventory. There can be no assurance that the
Company will be able to raise sufficient capital to cure its liquidity problems
and pursue the business plans, objectives, strategies, or transactions discussed
herein.
The home building and construction and vacation ownership resort industries
are capital-intensive and generally involve a high degree of leveraging and up-
front expenses to acquire land, improve it, and begin development. In order to
commence building or other development activities or implement any of its growth
strategies, the Company will need to raise substantial additional capital or
enter into joint venture or other development agreements with well-funded
development partners. There can be no assurance that the Company will be able
to raise sufficient additional capital or enter into joint venture or other
development agreements with developers under terms that are favorable to the
Company, or at all.
Secured Debt in Default. As of the date of this Report, approximately
-----------------------
$8,950,000 of Company debt has matured or is in default or claimed to be in
default. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--
LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and Other Liquidity Requirements."
Such debt is secured by parcels of the Maumelle Property having an aggregate
appraised value of approximately $13,300,000. Unless the Company can obtain
substitute financing or otherwise raise sufficient funds to pay off this debt
soon, the Company may lose a substantial portion of its real property assets in
foreclosure actions.
52
<PAGE>
Competition. The real estate development and vacation ownership industries
-----------
are 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.
In the vacation ownership industry, the Company is subject to significant
competition from other vacation ownership developers and operators, many with
extensive experience and market presence in the lodging, hospitality and
entertainment areas and significantly greater development and operating
experience and financial, marketing, personnel and other resources than those of
the Company. The ARDA estimates that Florida--the state in which the Company
intends to commence its vacation ownership development--has a higher
concentration of Vacation Intervals than any other state in the United States.
See ITEM 2, "DESCRIPTION OF PROPERTY--POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES--Competitive Conditions."
The Company currently has no material presence or reputation in Arkansas,
Florida, Missouri, or any other area in the real estate development or vacation
ownership industries and due to its current illiquidity does not have sufficient
capital to commence significant development activities. For this and other
reasons discussed herein, the Company may experience difficulties in competing
with established developers.
Lack of Experience. The Company has no operational experience in the real
------------------
estate development industry and has little experience in the vacation ownership
industry. Such inexperience may make it difficult for the Company to achieve
its business plans and objectives, particularly given the existence of
competition from more experienced and better capitalized companies.
Dependence on Vacation Interval Exchange Networks; Risk of Inability to
-----------------------------------------------------------------------
Qualify Resorts. The attractiveness of Vacation Interval ownership is enhanced
- ---------------
significantly by the availability
53
<PAGE>
of exchange networks that allow Vacation Interval owners to exchange in a
particular year the occupancy right in their Vacation Interval for an occupancy
right in another participating network resort. According to the ARDA, the
ability to exchange Vacation Intervals was cited by buyers as a primary reason
for purchasing a Vacation Interval. Several companies provide broad-based
Vacation Interval exchange services. Since the Company has not commenced
vacation ownership operations, the Company is not currently qualified for
participation in any exchange network.
No assurance can be given that the Company will be able to qualify its
future resorts for participation in any exchange network. Exchange networks are
under no obligation to include any resorts the Company may develop. If the
major exchange networks cease to function effectively, or if the Company's
resorts are not accepted as exchanges for other desirable resorts in such
networks, the Company will have difficulty selling Vacation Intervals. See
"Business--Participation in Vacation Interval Exchange Networks."
Interest Rates; Mortgage Financing. Demand for homes, as well as for
----------------------------------
commercial construction, is adversely affected by increases in interest rates.
If interest rates increase, demand for homes and other projects the Company may
develop may be significantly reduced due to prospective buyers' inability to
obtain financing. Changes in interest rate may also affect the Company's
ability to sell Vacation Intervals to consumers on credit. Any adverse changes
in the availability of Federal Housing Administration or Veterans Administration
mortgage financing may also adversely impact the Company's housing sales.
Many Factors Beyond The Company's Control. The nature of the real estate
-----------------------------------------
development and vacation ownership industries 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 or Vacation Interval demands, as well as
changes in government regulations. Developers are subject to a number of other
risks, including availability and cost of land, materials, and labor, weather
conditions, construction delays, costs controls, and increases in real property
taxes and local government fees. Any economic downturn in the United States
54
<PAGE>
could negatively affect the travel and tourism industry which could have a
material adverse effect on the Company's plans to develop vacation ownership
properties.
LIQUIDITY AND CAPITAL RESOURCES
INDEBTEDNESS AND OTHER LIQUIDITY REQUIREMENTS. 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
principal amount of the Company's total debt at September 30, 1996, included,
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 1,044-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.
55
<PAGE>
. $69,000 in ad valorem real property taxes, relating to all portions of
the Maumelle Property, due and payable as of December 31, 1996.
Of the foregoing debt, only the ad valorem real property taxes have been paid
since the end of the 1996 fiscal year.
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."
CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S INDEBTEDNESS AND LIQUIDITY
REQUIREMENTS. After the close of the Company's fiscal year, the Company and
Century entered into a tentative settlement agreement concerning the
aforementioned foreclosure complaint, which required a $2,000,000 settlement
payment to Century on August 1, 1997. The Company was unable to make this
payment, but obtained an extension of the due date for that payment until
September 1, 1997, in return for the Company's payment of a $25,000 extension
fee to Century. The due date may be extended to October 1, 1997, for an
additional $25,000 extension payment. There can be no assurance that the
Company will be able to fulfill the terms of the settlement agreement given the
Company's present illiquidity. See ITEM 3, "LEGAL PROCEEDINGS."
Subsequent to the end of the fiscal year, the Company defaulted under the
Resure Note I, by missing the four $101,591 quarterly principal and interest
payments that were due on October 1, 1996, and January 1, April 1, and July 1,
1997. Resure granted an extension of the October 1, 1996 payment to 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. See ITEM 11, "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." The Company has not yet made
56
<PAGE>
any of the foregoing payments. As a result, the Resure Liquidator now has the
right to foreclosure upon such shares, in addition to foreclosing on the real
property securing the Resure Note I and exercising its other rights and
remedies.
Because Resure failed to make the January and June 1997 semi-annual
payments due to the Company under the Resure Debenture, the Company had no funds
with which to make the $123,507 semi-annual payments due under the Resure Note
II, until May 1997, when the Company brought current the Resure Note II from
proceeds from the sale of the 67 acres of the Maumelle Property discussed below.
See "Certain Recent Capital Raising Transactions," below. However, the $123,507
Resure Note II payment due on June 30, 1997, remains unpaid, because the payment
of like amount that was due to the Company on or about that date under the
Resure Debenture had not been made. Given the Company's present illiquidity,
there can be no assurance the Company will be able to bring current the Resure
Note II or continue to make the payments required thereunder, particularly in
light of Resure's insolvency. Although Resure has defaulted under the Resure
Debenture, the Company is required nonetheless to continue to make payments
under the Resure Note II.
As discussed above, an Illinois court found in February 1997, that Resure
was insolvent and ordered that Resure be liquidated. See ITEM 2, "DESCRIPTION
OF PROPERTIES -- RESURE DEBENTURE. The Company currently is negotiating with
the Resure Liquidator to restructure and/or retire the Company's obligations
under the Resure Note I and the Resure Note II. The Company believes that it
has certain causes of action against Resure arising from Resure's sale of the
Resure Debenture to the Company and, therefore, may commence litigation against
the Resure estate and others if settlement negotiations are not successful.
There can be no assurance, however, that the Company will prevail in any such
litigation.
Subsequent to the end of the Company's fiscal year, on June 16, 1997, the
Company agreed to purchase approximately 21 acres of undeveloped land in
Branson, Missouri, for approximately $4,200,000. Although the purchase
agreements relating to this property require the sale to close by September 12,
1997, the Company does not have the funds necessary to close the transaction.
See "Prospective Sources of Liquidity," below. If
57
<PAGE>
the property can be acquired and sufficient capital raised, the Company intends
to develop vacation ownership units on the property.
Since the end of the 1996 fiscal year, the Company obtained two commercial
revolving lines of credit from the Bank of Little Rock, one in the amount of
$400,000 and the other in the amount of $450,000. Each bears interest at a
fixed rate of 10% per annum. The $400,000 line of required requires the Company
to pay interest only on a monthly basis, commencing May 10, 1997 until April 10,
1998, when the unpaid principal balance plus any accrued interest is due and
payable. This line of credit is secured by approximately 11 multi-family zoned
acres of the Maumelle Property. The $450,000 line of credit requires no monthly
interest or principal payments, but is payable on demand or November 5, 1997,
whichever is sooner. This line of credit is secured by approximately 19 multi-
family zoned acres of the Maumelle Property. The aggregate outstanding balance
of these lines of credit as of the date of this Report is approximately
$847,000. The proceeds were used to fund the purchase of approximately 35 acres
of land and improvements that the Company acquired in Osceola County, Florida.
See ITEM 1, "DESCRIPTION OF BUSINESS--RECENT BUSINESS DEVELOPMENT."
Between February 6 and May 6, 1997, the Company raised $977,706 in short-
term debt financing from private sources, with net proceeds to the Company of
$733,279 (collectively the "Bridge Loan"). Most of the promissory notes
evidencing the Bridge Loans (the "Bridge Notes") bear interest at a rate of 10%
per annum and mature nine months from the date of issuance of each note. The
Bridge Notes are covered by a guarantee bond obtained by the Company.
In addition to the foregoing debt and other liquidity requirements, the
Company will, within six months after the date of this Report, require general
working capital to cover overhead and administrative expenses in the amount of
at least $500,000.
CERTAIN RECENT CAPITAL RAISING TRANSACTIONS. Subsequent to the Company's
fiscal year end, the Company's general operating expenses and other short-term
liquidity requirements were met with funds raised in the following transactions:
58
<PAGE>
. As discussed above, the Company obtained short-term financing from
private sources between February 6, 1997, and May 6, 1997, with net
proceeds of $733,279.
. On December 31, 1996, the Company raised $110,000 from the sale of a
2-acre parcel of the Commercial Lots.
. In May 1997, the Company sold a 67 acre single-family parcel of the
Maumelle Property to an unaffiliated home developer for a gross sales
price of $1,552,730. $675,100 of the sale proceeds were placed in a
restricted cash collateral account as security for the Resure Note II
as a condition to the Resure Liquidator's consent to release the
acreage from the mortgage securing the Resure Note I and the Resure
Note II. Approximately $128,000 of the proceeds were used to pay
interest due on the Resure Note II, and $200,000 of the proceeds were
used to purchase approximately 4 acres of commercial property in
Maumelle from Maumelle Enterprises, an affiliated real estate
management firm. See ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
. As discussed above, the Company obtained two secured lines of credit
from the Bank of Little Rock.
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 entered into a tentative settlement agreement with Century
to give the Company time to raise additional funds to retire the Century Note I
and the Century Note II and release the mortgage on the 36 acres securing the
Century Note I. The Company is trying to obtain the funds by raising equity
from investors and/or 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 securing the Century Note I. See ITEM 3, "LEGAL PROCEEDINGS."
59
<PAGE>
The Company was in negotiations for an $18,400,000 loan from a European
lender as of the end of the fiscal year. Although discussions have not formally
terminated, the Company is currently no longer actively pursuing this option.
The Company's negotiations with an investment banking firm to arrange debt
and construction financing have not been successful. However, the Company is
currently negotiating with a mortgage banking firm to arrange debt and
construction financing in the amount of $15,000,000 (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
$5,000,000 to be secured by home construction. Such negotiations remain in the
initial stage and there is no assurance that the Company will able to obtain the
Construction Financing Loan on favorable terms or at all.
The Company's sale of an 11 acre parcel of Maumelle Property commercial
lots which, as of the fiscal year end, was expected to close on or before March
31, 1997, was canceled due to the buyer's inability to obtain the financing it
required. The Company has no current plans to sell these lots.
With respect to prospective long-term liquidity, the Company intends to
generate the bulk of its cash from operations by building and selling homes
initially in the City of Maumelle, as well as its proposed vacation ownership
operations. At present, management of the Company believes that the most likely
sources of substantial cash flow during the next two years are (1) the
development and sale of single-family home product in the $125,000 to $200,000
price range on the approximately 3,500 single-family home sites it owns in
Maumelle and on the improved lots it intends to acquire in Maumelle from the
third parties, and (2) the sale of Vacation Intervals and the installment
contracts generated from such sales. 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
60
<PAGE>
transactions. There can be no assurance, however, that such public or private
offerings will be successful.
The Company intends to meet home building and vacation ownership 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 $451,614 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 $966,080 from $1,403,862 for the
year ended September 30, 1995 to $437,782 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,
61
<PAGE>
Accounts Payable and Accrued Expenses increased by $906,631. 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, 1996, accrued interest
decreased by $212,276. The decrease resulted from the large interest payments
made in September 1995 as a result of refinancing the Century debt.
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/A at pages F1 to F20.
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.
62
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Date of Expiration of
Name Age Position Election Director Term
- ---- --- -------- -------- --------------
<S> <C> <C> <C> <C>
Michael G. Todd 47 Chairman, 7/95 1996 or until
President, successor
and Secretary elected
Ronald J. Campbell(1) 53 Director 3/94 Removed March
29, 1997
Herbert E. Russell 70 Director 3/94 1996 or until
successor
elected
Robert R. Neyland 42 Director 4/94 1996 or until
successor
elected
Thomas Blake(1) 62 Director 3/97 until successor
(Date elected
of
appoint-
ment)
David R. Paes 42 Vice President, 7/95 N/A
Treasurer and
Assistant
Secretary
</TABLE>
1) Subsequent to the 1996 fiscal year end, Ronald J. Campbell resigned as
Secretary on March 28, 1997. The Board of Directors appointed Michael G. Todd
secretary of the Company, effective March 29, 1997. Effective March 28, 1997,
shareholders of the Company holding more than two-thirds of the Company's common
stock removed Mr. Campbell from the board of directors without cause by written
consent. Effective March 31, 1997, a majority of the remaining directors voted
to appoint Thomas Blake as a director of the Company to fill the vacancy created
by Mr. Campbell's removal.
The following is a biographical summary of the experience of the directors
and executive officers of the Company:
63
<PAGE>
MICHAEL G. TODD. Chairman of the Board, President and Chief Executive Officer,
and Secretary of the Company. Todd also is the sole Director and President of
the Operating Subsidiary and the Florida Resorts Subsidiary. Todd is a general
partner of DeHaven Todd & Co., a merchant banking partnership he co-founded in
1985 with John W. 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. Upon the
resignation of Ronald J. Campbell as secretary of the Company, the Board of
Directors appointed Todd Secretary, effective March 29, 1997.
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
Home Capital 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.
THOMAS BLAKE. Director. Blake is the Director, Business/ Finance, of Glenwood
L. Garvey Associates, an urban planning and consulting firm. As Special Advisor
to Self-Cleaning Environments USA, Inc., a manufacturer of environmentally
friendly waste disposal units, Blake provides consulting services regarding
business planning, financing, and marketing. His the
64
<PAGE>
founder and former principal of Thomas C. Blake Consulting, an advisory service
firm, and was Chief Executive Officer of Interstate Group Administrators, Inc.,
a benefit services company. He is a director of West Coast Savings & Loan and
formerly was a director of various other financial institutions.
SIGNIFICANT EMPLOYEES
The Company's sole employee is Michael G. Todd, its Chairman, President,
Chief Executive Officer, and Secretary.
FAMILY RELATIONSHIPS
There are no family relationships between any directors or executive
officers of the Company, either by blood or by marriage.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
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.
65
<PAGE>
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
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name & Year Salary Bonus Other Res- Securi- LTIP All
Prin- or ($) ($) Annual tric- ties Pay- Other
cipal Period Compen- ted Under- outs Compen-
Position Ended sation Stock Lying sation
Options
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael 9/30/96 $240,000(1) 0 0 0 0 0 0
Todd,
Chairman/
President
David 9/30/96 0 0 0 0 0 0 0
Paes(2)
</TABLE>
_____________
(1) Michael G. 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.
66
<PAGE>
(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.
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, Campbell and Blake 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. For the fiscal
year ended September 30, 1996, the Company 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 August 15, 1997, 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 Anamed 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.
67
<PAGE>
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 38.89%
Common Stock John W. DeHaven(3)(4) 2,851,589 shares 38.89%
Common Stock Herbert E. Russell(3) 2,851,589 shares 38.89%
Common Stock Century Realty 700,000 shares 9.55%
Inc. (5)
Common Stock Jens Olsen(6) 500,000 shares 6.82%
Common Stock Robert R. Neyland 0 shares 0%
Common Stock Thomas Blake 0 shares 0%
Common Stock Directors and Executive
Officers as a Group 5,703,178 shares 77.78%
</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 Anamed 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."
68
<PAGE>
(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 John W. DeHaven. See ITEM 9,
"DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS."
(4) John W. 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., which 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 the
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 the date
hereof, 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.
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,
69
<PAGE>
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. As of September 30, 1996, Maumelle
Enterprises was owned primarily by officers and directors of the Company. It has
no clients other than the Company and DeHaven Todd Limited Partnership, an
Arkansas limited partnership (ADTLP"), which is owned almost entirely by Michael
G. Todd and John W. DeHaven. The stock of Maumelle Enterprises was owned by
officers, directors and security holders named in response to Item 403 of SEC
Regulation S-B, as follows: Michael G. Todd owned ten percent (10%); John W.
DeHaven owned ten percent (10%); and David R. Paes owned 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. Mary Peyton,
the President of the Resort Subsidiary, receives a salary of $39,600 per annum
as an officer of Maumelle Enterprises.
Subsequent to the Company's fiscal year end, in March 1997, Michael G.
Todd and John W. DeHaven agreed to cancel all of their shares of Maumelle
Enterprises common stock as partial consideration for Maumelle Enterprises=
agreement to sell approximately 4 acres of commercial property in the City of
Maumelle to the Company, as discussed below. After giving effect to the
cancellation of the shares owned by Mr. Todd and Mr. DeHaven, David Paes and
Mary Peyton each owns 50% of the outstanding shares of Maumelle Enterprises as
of the date of this Report.
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, 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
70
<PAGE>
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 Michael G. Todd and John W.
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.
ACQUISITIONS OF LAND FROM AFFILIATES
LAND ACQUISITION. The Company intends to purchase 121 improved single-
family lots from DTLP. John W. DeHaven, who is the sole general partner of
DTLP, owns 75% of DTLP, while Michael G. Todd owns 20% as a limited partner. In
addition to the 121 single-family lots, DTLP owns approximately 6 acres of
commercial property and approximately 135 single-family lots in the City of
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.
Subsequent to the Company's 1996 fiscal year end, on May 7, 1997, the
Company purchased approximately 4 acres of commercial property in the City of
Maumelle from Maumelle Enterprises for $200,000. The property was appraised at
$265,000 by an unaffiliated third-party appraiser in 1994.
71
<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.
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors. . . . . . . . . . .F-3
Balance Sheet as of September 30, 1996. . . . . . .F-4
Statements of Operations for the Years Ended
September 30, 1996 and 1995 . . . . . . . . . . . .F-5
Statements of Changes in Shareholders' Equity
September 30, 1996. . . . . . . . . . . . . . . . .F-6
Statements of Cash Flows for the Years Ended
September 30, 1996 and 1995 . . . . . . . . . . . .F-7
Notes to Financial Statements F-8
</TABLE>
72
<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.*
73
<PAGE>
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.*
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.*
74
<PAGE>
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 Joel S. Baum P.A.
See Financial Statements at F-1 To F-20.
* 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.
75
<PAGE>
(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
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
76
<PAGE>
EXHIBIT 11
CAPITOL COMMUNITIES CORPORATION
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
1996 1995
<S> <C> <C>
Shares Outstanding Beginning 7,000,000 2,227,004
Of Period
Shares Issued During Period 4,772,996
July 1, 1995
----------- ----------
Weighted average number of 7,000,000 3,416,984
shares outstanding
Shares deemed outstanding from assumed - -
exercise of stock options
----------- ----------
Total 7,000,000 3,416,984
Earnings (loss) applicable to $(1,109,053) $ (885,918)
common shares
Earnings (loss) per share of $ (0.158) $ (0.259)
common stock
</TABLE>
<TABLE> <S> <C>
<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 FINACNIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> (185,911)
<SECURITIES> 3,500,000
<RECEIVABLES> 1,057
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,090
<PP&E> 9,156,357
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,938,177
<CURRENT-LIABILITIES> 3,511,914
<BONDS> 0
0
0
<COMMON> 7,000
<OTHER-SE> 2,446,135
<TOTAL-LIABILITY-AND-EQUITY> 12,938,177
<SALES> 31,676
<TOTAL-REVENUES> 277,581
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 610,820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 775,814
<INCOME-PRETAX> (1,109,053)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,109,053)
<EPS-PRIMARY> (0.158)
<EPS-DILUTED> (0.158)
</TABLE>
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC.
AND SUBSIDIARIES
AUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
F-1
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-3
Financial Statements
Balance Sheets F-4
Statements of Operations F-5
Statements of Changes in Shareholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
</TABLE>
F-2
<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 position of Capital Communities
Corporation, Inc. and Subsidiaries as of September 30, 1996 and the results of
its operations and its cash flows for the years 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 it's 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, 1997
(Except for Note 20 which
is dated August 1, 1997)
/s/ Joel S. Baum, P.A., CPA
Coral Springs, Florida
F-3
<PAGE>
BALANCE SHEET
ASSETS
------
<TABLE>
<CAPTION>
September 30,
1996
-------------
<S> <C>
Current Assets
Account Receivable $ 1,057
Prepaid Assets 6,893
Accrued Interest 62,140
-----------
Total Current Assets 70,090
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 $12,938,177
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Cash Overdraft $ 185,911
Accounts Payable & Accrued Expenses 1,108,926
Accrued Interest 252,671
Notes Payable - Current Maturities 1,964,406
-----------
Total Current Liabilities 3,511,914
Notes Payable - Non Current 6,973,128
-----------
Total Liabilities 10,485,042
-----------
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 (2,317,973)
-----------
Total Shareholders' Equity 2,453,135
-----------
Total Liabilities and
Shareholders' Equity $12,938,177
===========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Years Ended September 30,
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Sales (Note 11) $ 31,676 $ 565,467
Cost of Sales - 0 - 587,525
----------- -----------
Gross Profit (Loss) 31,676 (22,058)
----------- -----------
Operating Expenses:
General & Administrative
Expenses 610,820 283,393
Interest Expense 775,814 593,684
----------- -----------
1,386,634 877,077
----------- -----------
Net Loss Before
Interest Income (1,354,958) (899,135)
Interest Income 245,905 13,217
----------- -----------
Net Loss (1,109,053) (885,918)
Accumulated Deficit (1,208,920) (323,002)
----------- -----------
$(2,317,973) $(1,208,920)
=========== ===========
Weighted Average
Common Shares Outstanding (.158) (0.259)
=========== ===========
</TABLE>
F-5
<PAGE>
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 - (1,109,053)
----------- ------- ---------- -----------
September 30, 1996 7,000,000 $ 7,000 $4,764,108 $(2,317,973)
=========== ======= ========== ===========
</TABLE>
F-6
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Operating
Activities:
Net Loss $(1,109,053) $ (885,918)
Adjustments to Reconcile
Net Loss to Net Cash Used
for Operating Activities:
Amortization 57,232 - 0 -
(Increase) in Receivables (38,191) (9,832)
(Increase) in Real Estate
Holdings (254,936) (90,935)
Increase (Decrease) in
Accrued Expenses 906,631 (137,766)
(Increase) Decrease in
Prepaid Assets 535 (7,557)
(Increase) in Loan
Origination Fees - 0 - (271,854)
----------- -----------
Net Cash (Used)
For Operations (437,782) (1,403,862)
Cash Flows From Financing
Activities:
Increase (Decrease)in
Long Term Debt (13,832) 1,639,169
----------- -----------
Net Increase (Decrease) in
Cash (451,614) 235,307
Cash - Beginning of Year 265,703 30,396
----------- -----------
Cash - (Overdraft) End of Year $ (185,911) $ 265,703
=========== ===========
</TABLE>
F-7
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT
----------------------------
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
F-8
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
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, an 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.
In February, 1994 Petro Source Energy Corporation transferred the
majority of its holdings in the common shares of the predecessor
corporation, AWEC Resources, Inc., to Prescott Investments Limited
Partnership and Charlie Corporation, both of which were then and
currently are affiliates of Michael Todd, Herbert Russell and John
DeHaven, the beneficial owners of the Company. These shares were
transferred in consideration for public relations services provided by
Prescott Limited Partnership and Charlie Corporation to Petro Source.
Such services were deemed by Petro Source to be integral and
indispensable to the concurrent acquisition of approximately 2,041
acres of land in Maumelle, Arkansas by the Company's Operating
Subsidiary. The Company was not a party to the transfer of shares. The
Company did not issue any new shares pursuant to the acquisition of
the land. Accordingly, the transfer of shares did not affect the
capitalization of the Company, and was non-dilutive to all other
shareholders.
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.
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.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
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
F-9
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
liabilities and their respective tax bases.
E. REVENUE RECOGNITION
-------------------
Revenue is recognized under the full accrual method of accounting upon
the completed sale of real property held for development and sale. All
costs incurred directly or indirectly in acquiring and developing the
real property are capitalized.
F. USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ
from those estimates.
G. CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents include cash on hand, cash in banks, and any
highly liquid investments with a maturity of three months or less at
the time of purchase.
The Company and its Subsidiaries maintain cash and cash equivalent
balances at several financial institutions which are insured by the
Federal Deposit Insurance Corporation up to $100,000. At September 30,
1996 there is no concentration of credit risk from uninsured bank
balances.
H. 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 and 10,273,558, respectively.
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.
F-10
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
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.
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 Company's future operations.
NOTE 4 - REFINANCING DEBT
----------------
During fiscal year ended September 30, 1995, 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 (See Note 10 for detailed explanation of the refinancing).
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1996
------------------
NOTE 5 - INVESTMENT - DEBENTURE
----------------------
On September 11, 1995, 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 bearing interest at a rate of 7% per annum. (See
Note 9, Mortgages)
F-11
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
The debenture is payable to the Company in semi-annual payments of
interest only commencing December, 1995 and ending in June, 2000, at
which time the principle of $3,500,000 is due. The debenture payments
generally match the amount of the semi-annual interest payments,
payable by the Company to Resure, Inc. under Resure Note II. If the
Company defaults on its obligation under Resure Note II, Resure may
withhold the semi-annual interest payment due the Company on the
debenture. (See Note 20 B, Subsequent Events, for current status of
the subordinated surplus debenture).
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.
Currently the Company has an oral agreement with Maumelle Enterprise,
Inc. (Maumelle), an affiliated company, to provide management, sales
and administrative services for the Company's inventory of property.
Under this oral agreement, payment to Maumelle 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, Maumelle
has agreed to defer payment of its fees.
For the fiscal year ended September 30, 1995, the Company paid
Maumelle $74,381 and the Company has accrued the unpaid fees to
Maumelle, in the aggregate amount of $198,230, for fiscal years ended
September 30, 1996 and 1995. Management intends to formalize this
agreement in writing in as yet to be determined terms and conditions.
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. (See note 20 F, Subsequent Events, for current status of
this contingency).
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. Payments to retire
improvement bond debt arising from tax delinquencies are accounted for
as additions to the cost basis of the related property.
Specifically, company owned property was subject to a special tax
levied by the residential improvement district for 1992,
F-12
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
1993 and 1994. The revenues from the special tax were pledged by the
District to the payment of the bonds. The property was acquired by the
Company in February, 1994 subject to the special tax. It was sold in
December, 1994 under terms requiring that a "bond release price" be
paid to the bond trustee to release the property from future levies of
the special tax. The total amount paid to release the property, and to
satisfy delinquent taxes levied on the property prior to 1994, was
$148,356. This amount was an addition to basis, and consequently, a
cost of sales, since it was for payment of an improvement tax levied
for the purpose of paying the bond issue which provided the funds to
improve the property. This resulted in the classification of the tax
payments as a capital expenditure.
Currently the Company does not hold any funds, and has not deposited
money in any escrow accounts on behalf of any lot owners, with respect
to the improvement taxes referred to in the previous paragraphs.
However, the Company has accrued a liability in the amount $200,000 in
its fiscal year end 1995 financial statements because certain
properties located in Pine Ridge have been indentured to pay any taxes
levied by the Pine Ridge Improvement District in order to satisfy a
potential judgement against the Pine Ridge Improvement District
arising from the suit discussed in Note 7.
NOTE 9 - MORTGAGES
---------
On September 11, 1995, the Company entered into a promissory note with
Resure, Inc. for $3,500,000, bearing interest at 10% per annum,
payable in full on July 1, 2000 and secured by a 701.3 acre tract of
land in Maumelle, Arkansas. 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 including principal and interest at 10% per annum, will be
paid quarterly with the first payment due October 1, 1996. The
remaining unpaid balance on this note after quarterly installments is
subjected to a final balloon payment. All payments shall be applied
first to interest, then to principal. The Company has not made the
quarterly payment due on October 1, 1996, in the amount of
$101,591.16, on the aforementioned Note, but on November 25, 1996 it
was granted an extension of time 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 share holders. Under this extension of the time
agreement, Resure, Inc. has agreed to waive all rights, powers and
remedies it may have had on November 25, 1996, with respect to any
breach or default, including waiving any right to default due to the
Century Note default (see Note 14). See Note 20 B, Subsequent Events,
for a discussion of the current status of default by the Company due
to its inability to pay the Resure Note I, January payment and, as a
result its default on Note II under the cross-default provisions.
As discussed in Note 5, as part of the debenture agreement the Company
also entered into a second loan agreement with Resure,
F-13
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
Inc. as lender and the Corporation as borrower, borrowing $3,500,000
from the lender and granting a mortgage on an approximate 409.73 acre
residential tract of land 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 701.3
acres of property, of which $2,500,000 was paid directly to Century
Realty, $1,400,000 and $350,000 in promissory notes with Century
Realty, and issued 700,000 shares of the Company's common stock which
amounted to $3,321,794, representing $2,487,000 of the balance of the
original mortgage, $186,562.50 taxes, and $648,231.75 accrued
interest. The refinancing note from Resure, Inc. is cross
collateralized with a debenture and investment note for $3,500,000
discussed in Note 5. The proceeds of the investment note purchased a
$3,500,000 investment in Resure, Inc. (See Note 14 with regard to
foreclosure litigation on the Century debt).
The Company issued the Above mentioned 700,000 shares to Century
Realty in November of 1995 from Treasury Shares that had been
contributed to the Company by Michael Todd and John DeHaven, in the
amount of 350,000 shares from each shareholder, which therefore
resulted in no change to the capital structure of the Company during
the year ended September 30, 1996.
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.
NOTE 12 - LEASE AGREEMENT
---------------
The Company is subleasing office space from Dehaven & Todd Co., in
which Mike 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 - EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
The Company has a five-year written agreement with Michael Todd to
perform the duties of President. Under the agreement, which
F-14
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
became effective on October 1, 1995, Michael 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 & Capitol Communities Corporation,
Inc. in an action for foreclosure of a lien on approximately 36 acres
of commercial property for the non-payment of the entire unpaid
principal balances of promissory Note 1 and Note 2 previously
discussed in Note 10, 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. (See Note 20 A, Subsequent Events,
for current status of foreclosure litigation.)
NOTE 15 - GOING CONCERN
-------------
The Company currently is unable to meet its liquidity requirements
consisting of such items as taxes, interest payments, debt reduction,
assessments and general operating expenses. As discussed in Note 9,
the Company did not make the $101,591.16 October 1, 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 and Charlie
Corporation. 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. (See Note 20 B, Subsequent Events, for a
discussion of the current status of this debt.)
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.
F-15
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
The Company raised $110,000 from the sale of one 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 necessary
financing to implement an orderly build-out program that will generate
cash flow.
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.
NOTE 16 - NOTES PAYABLE
-------------
Notes payable consist of the following:
<TABLE>
<CAPTION>
9/30/1996 9/30/1995
--------- ----------
<S> <C> <C>
Note Payable -Century Realty
----------------------------
Secured 9% per annum due
January 9, 1996 (Notes 10
and 14) $1,400,000 $1,400,000
Note Payable - Century Realty
-----------------------------
Unsecured 10% per annum due
September 11, 1998, deemed
current under default agreement
(notes 10 and 14) 350,000 - 0 -
Note Payable - Davister
-----------------------
Unsecured 9% per annum due
January 9, 1996 200,000 200,000
Notes Payable
-------------
Miscellaneous Short-Term 906 1,366
Note Payable - Resure Mortgage 13,500 - 0 -
------------------------------ ---------- ----------
Total Current Maturities 1,964,406 1,601,366
---------- ----------
Note Payable - Century Realty
-----------------------------
Unsecured 10% per annum due
</TABLE>
F-16
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
<TABLE>
<S> <C> <C>
September 11, 1998 (Note 10) - 0 - 350,000
Note Payable - Resure Mortgage
------------------------------
Secured 10% per annum due
July 01, 2000 - Quarterly
payments beginning 10/01/96
for $101,591 (Note 9) 3,473,128 3,500,000
Note Payable -Resure Debenture
------------------------------
Secured 7% semi-annually due
June 30, 2000 (Notes 9 & 10) 3,500,000 3,500,000
---------- ----------
Total Non-Current 6,973,128 7,350,000
---------- ----------
Total Notes Payable $8,937,533 $8,951,366
========== ==========
</TABLE>
NOTE 17 - LOAN ORIGINATION FEES
---------------------
Loan origination fees were incurred in connection with the Resure,
Inc. debt refinancing September 11, 1995 as discussed in Notes 9 and
10. Said costs included attorney, consult, title, appraisal and survey
fees and are being amortized over 57 months on a straight-line basis.
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, was credited to
the Company by Monterra for prepaid consulting fees.
NOTE 19 - SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
<TABLE>
<CAPTION>
Year End 1996 1995
---- ----
<S> <C> <C>
Interest Paid $775,814 $593,684
</TABLE>
NOTE 20 - SUBSEQUENT EVENTS
-----------------
A. The Company has entered into a tentative settlement agreement with
Century, which required a substantial payment on August 1, 1997. The
Company was unable to make this payment, but negotiated an extension
of the agreement to September 1, 1997 for a fee of $25,000. The
Company had the right to extend the due date of the settlement
agreement until October 1, 1997, for an additional $25,000 fee. This
extension fee, due on September 1, 1997, was not paid by the Company
and the settlement agreement expired. The Company has continued to
negotiate a settlement, but there can be no assurance that the Company
will be able to negotiate acceptable terms and prevent foreclosure on
the 36 acres of Commercial Lots securing the Century Note I, or obtain
other relief, given the Company's present liability.
F-17
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
B. Resure Note I and Resure Note II
a. The Company continues to be in technical default under the Resure
Note I, having not made the $101,591 quarterly payments due on
January 1, 1997 and April 1, 1997 nor the extension payment due
April 1, 1997. The extension payment originally due October 1,
1996 in the amount of $101,591.16 was extended 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 Investment Limited Partnership.
b. On February 22, 1997, Mark Boozell, Director of Insurance of the
State of Illinois was appointed liquidator for Resure, Inc., due
to concerns about Resure's liquidity. The Company is currently
negotiating with Resure's liquidator to bring the technical
defaults current. If such negotiations are not successful, the
Company may commence litigation against the Resure assets or
estate violations the Company believes were committed by Resure
in connection with Resure's sale of the Resure Debenture to the
Company.
c. In May, 1997, Resure's liquidator agreed to release 67 acres he
held as collateral under the Resure Note I, to permit the Company
to sell the property. Approximately $128,000 of the sales
proceeds were used to pay interest due on the Resure Note II, and
$675,100 of the proceeds were placed in a restricted cash
collateral account as substitute collateral for the 67 acres.
d. Resure has not paid the semi-annual interest payment due on the
Resure Debenture. As a result, the Company was not able to make
the payment due to Resure in January and June, 1997 under the
Resure Note II. However, the Company made the January 1997
payment under the Resure Note II in May 1997, using the proceeds
from the sale of the 67 acres of the Maumelle Property released
by the Resure liquidator. The Company has not yet made its June
1997 payment due under the Resure Note II and is in technical
default under this Note.
e. Although Resure is in technical default under the Resure
Debenture and a liquidator has been appointed to oversee
liquidation of Resure, Company management believes that the
Resure Debenture should not yet be considered impaired and that
no actual deficit exists on the related $3,500,000 note, because
of negotiations that are currently taking place between the
Company and the Resure Liquidator. Based on such negotiations,
the Company believes that the Resure Liquidator is agreeable to a
settlement which would require the cancellation of the $3,500,000
Resure Debenture in exchange for the cancellation of the
$3,500,000 Resure Note II. However, there can be no assurance
that such a settlement will be reached
C. Subsequent to the Company's fiscal year-end, it obtained $977,706 in
short-term debt financing from private sources, with net proceeds to
the Company of $733,279 (collectively the "Bridge Loan"). The Majority
of the promissory notes interest
F-18
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
at a rate of 10% per annum and mature nine months from the date of
issuance of each note. The Bridge Notes are unsecured, however the
Company has provided a guarantee approximately 10% of the gross
proceeds received from the Bridge Loan. The Company has paid to the
investment banking firm that assisted the Company in obtaining the
Bridge Loan a fee equal to 15% of the Bridge Loan gross proceeds
received. As of June 30, 1997, the Company has accrued $8,138.39 in
interest on the Bridge Notes. The Company is using the proceeds for
general operating purposes.
D. On March 31, 1997, the Company obtained a fixed rate commercial
revolving line of credit from the Bank of Little Rock in the amount of
$400,000, bearing an interest rate of 10.00% per annum, payable
monthly, and maturing on May 10, 1998. The line is secured by
approximately 10.7999 multi-family zoned acres of the Company's
Maumelle Property. On July 29, 1997, the Company obtained a second
commercial revolving line of credit from the Bank of Little Rock, in
the amount of $450,000, also bearing interest at the rate of 10.00%
per annum, payable principal and interest on demand or at maturity,
November 5, 1997. This line is secured by approximately 19 multi-
family zoned acres of the Company's Maumelle Property. As of August
10, 1997, the Company has drawn a total of $847,000 against the lines.
The proceeds were used to complete the purchase of the property in
Osceola County, Florida. (See H below)
E. On May 20, 1997, the Company closed the sale of 67 acres of its
Maumelle single-family property for a total sales price of $1,552,730.
Resure agreed to release the 67 acres as collateral under the Resure
Note I in exchange for the Company agreeing to place $675,100 of the
sale proceeds in a restricted cash collateral account for the benefit
of Resure.
F. On March 13, 1997 the Chancery Court of Pulaski County, Arkansas,
Second Division granted a summary judgement in favor of the Company,
relieving it of any liability arising from assessment or tax levy in
the matter of Robert Holloway, Inc. vs. Pine Ridge Residential
Property Owners Improvement District. The Plaintiff has filed a Notice
of Appeal to the Supreme Court of Arkansas.
G. In March, 1997, Michael G. Todd, a director and controlling
shareholder of the Company and James DeHaven, a beneficial shareholder
of the Company, together relinquished an aggregate of 200 shares of
Maumelle Enterprises' common stock, an affiliate of the Company, as
consideration for the agreement of Maumelle Enterprises to sell 3.829
acres of commercial property in the City of Maumelle to the Company.
The Maumelle Enterprise property was purchased for a total cost of
$200,665.
H. On July 30, 1997, The Company acquired Capitol Resorts of Florida,
Inc. ("CRF") in a stock exchange in which the Company exchanged
100,000 shares of its common stock for 1,000 shares of CFR common
stock, a newly formed corporation whose sole asset was the right
to purchase approximately 34.7 acres of land and improvements in
Osceola County, Florida. The Company entered into a reorganization
agreement with MLT Management Corp., the parent of CRF, with the
Company acquiring all of the stock. On the same day, CRF closed on the
contract to acquire
F-19
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
------------------------------------------------------
NOTES TO FINANCIAL STATEMENT (CONTINUED)
----------------------------
SEPTEMBER 30, 1996
------------------
the Property for $922,000.
I. Since the end of the Company's last fiscal year, the Company has
expanded its business focus to include the development, sale and
operation of vacation ownership interest ("VIP") properties. The
Company has signed agreements on June 16, 1997 to purchase
approximately 21 acres of undeveloped land in Branson, Missouri, by no
later than September 12, 1997. The aggregate purchase price for the
property is approximately $4,200,000. The Company intends to develop
VOI units on the property. The Company does not currently have the
financing necessary to purchase the property.
F-20
