<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment 1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES AND EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the transition period from _____ to_____
Commission File No. 001-12171
CAPITOL COMMUNITIES CORPORATION
(Name of Small Business Issuer as specified in its charter)
Nevada 88-0361144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25550 Hawthorne Boulevard
Suite 207
Torrance, CA 90505
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 375-2266
Securities to be registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock ($.01 Par Value)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
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. $4,139,299
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.
$4,682,166 based on the average of the bid and asked obtained from the National
Quotation Bureau, Inc. ("NQB") on April 15, 1998.
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 7,419,500 as of April 15,
1998.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format YES [ ] NO [X]
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS, "BUSINESS DEVELOPMENT."
Correction on page 7, paragraph 2, line 13 of the 1997 Annual Report on
Form 10-KSB, the reference to Century Note II should read: Century Note I.
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 below and elsewhere in this Report, the
Company needs to convert into long-term debt, or extend, replace or retire its
current short-term debt obligations in order to remain liquid and raise
additional capital to commence significant operations.
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 vacation interval operations (all as discussed in
more detail herein), although no meaningful development operations have
commenced. 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 interval
activities will depend in large part on its ability to extend, replace, convert
into long-term debt or retire its current short-term debt and raise sufficient
capital to commence meaningful development operations, and the Company's ability
to develop or acquire greater construction, sales and other real estate and
interval development expertise than the Company now possesses.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED SEPTEMBER 30, 1997 TO YEAR ENDED SEPTEMBER 30,
1996. For the year ended September 30, 1997, the Company experienced a loss of
$143,768 compared with a loss of $1,109,053 for the year ended September 30,
1996. The difference in performance resulted primarily from revenues of
$4,139,299 in the year ended September 30, 1997. In comparison revenues for the
year ended September 30, 1996 were $31,676. The cost of sales for the year
ended September 30, 1997, amounted to $1,895,825, resulting in a gross profit of
$2,243,474 or an increase of $2,211,798 over 1996 results. This increase in
gross profits more than offset an increase of $1,076,509 in selling, general and
administrative expenses over the comparable expenses for 1996 of $610,820.
Sales increased by $4,107,623 for the year ended September 30, 1997, from
$31,676 for the year ended September 30, 1996, as a result of the sale of a 67
acre single family parcel of land at a price of $1,552,730, the sale of a two
acre commercial parcel for $110,000, the sale of a small tract of residential
property for $30,000, the sale of 40 acres of commercial property to Century
Realty
2
<PAGE>
for $2,192,583, and the sale of timber from the undeveloped single family
portion of the Maumelle Property for $235,864. The dissolution of the joint
venture with The Monterra Group also provided revenues of $18,122 from the net
proceeds of the sale of lots. Gross profits for the year ended September 30,
1997 was $2,243,474. Gross profits for the year ended September 30, 1996 was
$31,676.
From the year ended September 30, 1996 to the year ended September 30,
1997, operating expenses increased from $610,820 to $1,687,329, an increase of
$1,076,509. The increase in operating expenses resulted primarily from increased
expenses for financial consulting, legal fees, amortization of loan costs on
short term borrowings and recognition of the uncollectible accrued interest due
from the Resure Debenture. A major portion of the increase resulted from an
increase in management and consulting fees from $49,944 for the year ended
September 30, 1996, to $564,074, an increase of $514,130. However, of this
increase, $163,983 was accrued for management fees to Maumelle Enterprises. An
increase of $226,000 in consulting fees to two consultants was not paid in cash
but credited against the exercise price of certain stock options granted to the
consultants. Amortization expenses increased to $291,271 in the year ended
September 30, 1997, from a total of $57,232 in the prior year, an increase of
$234,039. This resulted from expensing the remaining capitalized loan costs on
the $3,500,000 Resure Note II and amortization of loan fees on various short
term notes. The Company also realized an expense of $123,893 as an allowance for
accrued interest due from Resure which was not collected under the Settlement
Agreement with Resure. There were no corresponding expenses in the year ended
September 30, 1996. In the year ended September 30, 1997, travel expenses
increased a total of $33,844, legal expenses increased a total of $45,377, and
the Company expensed $27,603 in deposits paid on two projects which the Company
determined were not recoverable. The Company continues to accrue management and
consulting fees to Maumelle Enterprises, a unrelated party. A total amount of
$240,000 representing the accrued salary for the fiscal year ended September 30,
1997, for Michael G. Todd, the Company's President, was forgiven and added to
paid in capital. The Company continues to accrue Mr. Todd's salary for fiscal
year 1998. Maumelle Enterprises and Mr. Todd 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. The Company had not
previously recognized any benefit from the accumulated tax loss carry forward of
$2,023,737 as of September 30, 1996, resulting from prior years operating
losses. However, in the current year, the Company did utilize a benefit of
$14,000 from the tax loss carry forward. Recognizing the perceived risks and
uncertainties and the cyclical nature generally associated with the primary
business of the Company. Management has elected to only calculate the potential
benefit to the Company of the applicable portion of the tax loss carry forward
for the next two years. This has resulted in the Company recognizing an ordinary
gain of $69,425 for the fiscal year ended September 30, 1997, from the tax
benefit of the change in prior years valuation allowance.
The Company believes that its results of operations can improve in the
future if it is able to raise sufficient additional capital to extend, replace
or retire its short-term debt, or convert such debt into long-term debt, and
commence significant development operations 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.
3
<PAGE>
Two hundred and twenty permits were issued by the City of Maumelle for the
construction of new single-family homes during the 1996 calendar year. During
the first six months of 1997, 142 permits have been issued for the construction
of new homes and a total of 350 permits are projected for the 12 month period.
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 1996, 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.
(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. As of September 30, 1997, this development has approximately 450
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.
(4) Since May 1997, 750 new jobs have been created in the City of Maumelle
as a result of continuing industrial expansion. Since 1992, City of Maumelle has
added 4,000 new jobs and expects this growth to continue, although there can be
no assurance that the city will continue to see such job expansion.
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 becomes unable to liquidate
property or obtain the necessary capital to retire its existing short-term debt
if the Company is unable to extend, replace or convert such debt into long-term
debt. See "LIQUIDITY AND CAPITAL RESOURCES," below.
Even if the Company can extend, replace, convert into long-term debt or
retire its existing short-term debt, obtain construction loans and/or raise
sufficient capital to commence its home-building and interval 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.
4
<PAGE>
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 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.
Liquidity Issues. As of April 15, 1998, the Company has approximately
----------------
$3,127,661 in short term debt that will mature during fiscal year ended
September 30, 1998 and which may prevent the Company, unless extended, replaced
retired or converted into long-term debt, from realizing or consummating any of
its business plans, objectives, strategies, or transactions. Except for the
short-term debt, 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 extend, replace, convert the short term debt into long-
term debt, raise sufficient capital to retire the debt, or generate sufficient
revenues to pursue the business plans, objectives, strategies, or transactions
discussed herein.
The home building and construction and interval 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. The Company intends
to commence Vacation Interval activities by renovating and offering for sale LTL
units in the Ocean Villas Property located in Pompano Beach, Florida in the
third quarter of 1998. The Company further intends to commence building a hotel
on its Florida Bible College during the fiscal year 1998, assuming it can obtain
a construction loan collaterized by the property, which is currently
unencumbered. The Company also intends to commence single-family home
development in Maumelle in the first quarter of 1998. There can be no assurance,
however, that the Company will be able to obtain such loans. In addition, the
Company will need to raise substantial additional capital, or enter into joint
ventures or other development agreements with well-funded development partners
to implement its growth strategies in the vacation industry. 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.
Competition. The real estate development and vacation interval 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 interval industry, the Company is subject to significant
competition from other interval 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 interval
5
<PAGE>
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 interval
industries and 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 interval
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 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 interval 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 rates 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 interval 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
6
<PAGE>
States could negatively affect the travel and tourism industry which could have
a material adverse effect on the Company's plans to develop interval properties.
LIQUIDITY AND CAPITAL RESOURCES
INDEBTEDNESS AND OTHER LIQUIDITY REQUIREMENTS. The principal amount of the
Company's total debt at September 30, 1997, included, without limitation, the
following (see ITEM 2, "DESCRIPTION OF PROPERTY--MAUMELLE PROPERTY" for
descriptions of encumbered properties referenced below):
. $3,500,000 Resure Note I, the amended recourse note, payable to
Resure, matures September 1, 1999, secured by the approximately 701-
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.
. $200,000 recourse note payable to Davister Corp. (the "Davister
Note"), matured January 9, 1996, unsecured; 9% interest payable at
maturity.
. $977,706 in non-secured short-term debt financed by private sources.
The promissory notes generally bear interest at a rate of 10% to 10.9%
per annum and mature nine months from the date of issuance of each
note. As of April 15, 1998, the balance of the promissory notes
amounted to $1,680,008.
. $400,000 in a commercial revolving line of credit from the Bank of
Little Rock (the "Little Rock Credit Line I"), secured by 11 acres of
the multi-family Maumelle Property. The Little Rock Credit Line I
bears interest at a fixed rate of 10% per annum. The Company is
required to pay interest only on a monthly basis until the credit line
matures on April 10, 1999, when the unpaid principal balance plus any
accrued interest is due and payable. As of April 15, 1998, the balance
of the Little Rock Credit Line I is $395,524.
. $450,000 in a commercial revolving line of credit from the Bank of
Little Rock (the "Little Rock Credit Line II"), secured by 19 acres of
the multi-family Maumelle Property. The Little Rock Credit Line II
bears interest at a fixed rate of 10% per annum and matured November
5, 1997 or on demand. The credit line's maturity date has been
extended to until May 5, 1998, or on demand, whichever is sooner, at
which time the interest and principal is due and payable. As of April
15, 1998, the balance of the Little Rock Credit Line II is $450,000.
. $25,000 in ad valorem real property taxes, relating to all portions of
the Maumelle Property, due and payable as of December 31, 1997. As of
April 15, the Company has paid the ad valorem a timely manner.
The Company is current on all of the foregoing debt, except the Davister
Note. Although the Davister Note has matured, the lender has not demanded
payment or instituted collection
7
<PAGE>
proceedings. The Company intends to retire this debt in fiscal year 1998, from
debt financing or generated revenues. The Company intends to timely pay the ad
valorem real property taxes for the fiscal year 1997, in the amount of $18,476
that is due on or before October 1, 1998.
CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S INDEBTEDNESS AND LIQUIDITY
REQUIREMENTS.
Since the end of the 1997 fiscal year, the Company obtained a revolving
line of credit with the Bank of Atkins in the amount of $1,750,000 at a fixed
rate of interest of 10% per annum. The revolving line of credit matures May 27,
1998, at which time the principal and all accrued interest) is due. This line of
credit is secured by approximately 344 acres of the Large Residential Tract of
the Maumelle Property. As of April 15, 1998, the outstanding balance of the
revolving line of credit is $1,750,000. The funds were used to complete the
acquisition of the Ocean Palms Resorts Property, the Ocean Villas Property, to
pay off certain accounts payable and for working capital.
Under the Resure Settlement Agreement, the Company is required to pay a
Developer's Fee of $2,000 for each lot sold in the approximately 1,045 acres of
the Large Residential Tract of the Maumelle Property, with such Developer's Fees
not to exceed $2,000,000. The Developer's Fees is secured by written amendment
to the loan mortgage securing the Resure Note I, which is recorded solely
against 701 acres of the Large Residential Tract of the Maumelle Property. No
fees are to be paid unless and until any lots or land are sold.
Since September 30, 1998, the Company obtained an additional $702,302 in
unsecured short-term debt from private sources.
On February 12, 1998, Capitol Development of Arkansas, Inc. (the "Operating
Subsidiary"), obtained a $150,000 loan from Bank of Atkins, secured by the 344
acres of the Large Residential Tract of the Maumelle Property, which also
secures the $1,750,000 line of credit from the bank. Interest is payable at a
fixed rate of 10% per annum. The loan matures on May 27, 1998, at which time all
principal and accrued interest is due and payable. This loan was paid in full on
April 15, 1998, from funds advanced under the line of credit from the
Transflorida Bank.
On April 17, 1998, the Operating Subsidiary, exercised its option under the
Century Settlement to purchase 36 acres of Commercial Property, ("Tract D"); a
3.8 acre tract of land adjoining Tract D, ( the "Corner Lot;"); and 700,000
shares of the Company's voting common stock owned by Century. In addition to
five option payments of $17,500 made by the Operating Subsidiary from November
17, 1997 through March 17, 1998, the Operating Subsidiary made a final payment
in the amount of $2,132,057.39 on April 17, 1998. The Operating Subsidiary, on
April 15, 1998, obtained a $1,900,000 loan from First Arkansas Valley Bank to
assist it in purchasing the property. The loan is secured by Tract D and 3.5
acres of commercial land in Maumelle, Arkansas. In addition, the Operating
Subsidiary pledged 700,000 shares of the Company's common stock as collateral
for the loan. The First Arkansas Valley Bank loan bears interest at the rate of
10 percent per annum and matures on October 12, 1998, when the entire principal,
plus all accrued interest is due and payable. The balance owing on the First
Arkansas Valley Bank loan as of April 16, 1998 was $1,900,000.
8
<PAGE>
On April 10, 1998, Capitol Resorts of Florida, Inc. (the "Resorts
Subsidiary"), obtained a $1,000,000 line of credit from Transflorida Bank,
secured by the 36.3 acres of the Florida Bible College Property, located in
Orlando, Florida. The line of credit is guaranteed by the Company. The
Transflorida Bank line bears interest at a variable interest rate of 1.00% in
excess of the prime rate as determined by Sun Trust Banks of Florida, Inc. The
initial interest rate is 9.50% and is adjustable at the time the prime rate
changes. The Resorts Subsidiary is required to pay interest only on a monthly
basis until the line of credit matures on April 1, 1999, at which time the
entire principal balance plus any accrued and unpaid interest is due and
payable. As of April 15, 1998, the Resorts Subsidiary has drawn $560,186 of the
line of credit which was used as partial consideration to exercise the Company's
option under the Century Settlement Agreement, to pay a $150,000 loan from the
Bank of Adkins, and to pay current interest due on the line of credit.
On March 10, 1998, the Operating Subsidiary obtained a $250,000 loan from
the Bank of Little Rock (the "Little Rock Credit Line III") secured by 19 multi-
family acres of the Maumelle Property, which also secures the Little Rock Credit
Line II, discussed above. The $250,000 loan bears interest at a rate of 10% per
annum and is payable on demand. If there is no demand from the Bank of Little
Rock, the Operating Subsidiary is obligated to commence making interest only
payments on April 10, 1998, and continuing monthly thereafter until September
10, 1998 when the entire unpaid principal balance, plus any accrued interest is
due and payable. The proceeds of the loan were used for general operating
purposes The balance owing on the loan as of April 15, 1998 was $250,000.
In addition the debt stated above, the Company's debt, due to recent
acquisitions, now includes the following:
. $1,158,000 note ("Ocean Palms Resort Note"), payable to various trusts
and individuals (the "Ocean Palms Mortgagee"), secured by an
assignment of the Ocean Palms Paper and the conditional assignment of
the Ocean Palms Ground Lease; 12.75% interest per annum, with interest
only payments made monthly until May 1, 1998, at which time it is the
note is payable interest and principal each month until it matures on
April 1, 1999. The note can be extended by one additional year upon
the payment of a 1% extension fee of the then outstanding principal
balance of the note on or before March 1. As of April 15, 1998, the
balance of the note amounted to $1,132,209.
. $375,000 note ("First Ocean Villas Note"), payable to Onofrio Biviano
and secured by collateral assignments of the non-recourse installment
notes (the "Ocean Villas Paper"); 10.5% interest, payable interest and
principal monthly until the note matures on September 17, 2001.
. $150,000 note ("Second Ocean Villas Note"), payable to Domenick Greco,
Trustee and Leonard Gross, and secured by collateral assignments of
the Ocean Villas Paper; 12% interest, payable interest only per month,
commencing January 9, 1998, until the note matures on December 9,
1998.
9
<PAGE>
. Ocean Palms Resort Ground Lease is payable yearly in the amount of
$76,200 until March 1, 2064.
. Ocean Villas First Ground Lease is payable every six months in the
amount of $2,614.18 until July 20, 2063.
. Ocean Villas Second Ground Lease is payable every six months in the
amount of $2,848.55 until July 20, 2063.
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 CAPITAL RAISING TRANSACTIONS. During the fiscal year ended 1997,
the Company obtained capital through the following transactions:
. 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 part of the Resure Settlement, the funds were released from the
restricted cash collateral account and used to bring current the
payments due under the Resure Note I. $200,000 of the proceeds were
used to purchase approximately 3.8 acres of commercial property (the
"Corner Tract") in Maumelle from Maumelle Enterprises an affiliated
real estate management firm. The deed to the Corner Tract has been
delivered to an escrow agent as part of the Century Settlement. See
ITEM 2, "DESCRIPTION OF PROPERTY," and ITEM 12, "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."
. As discussed above, the Company obtained two secured lines of credit
from the Bank of Little Rock.
Subsequent to the Company's fiscal year end, the Company raised additional
capital for the purpose of acquisitions and working capital through the
following transactions:
. As discussed above, the Company obtained a revolving line of credit in
the amount of $1,750,000, which matures on May 27, 1998.
. The Company borrowed an additional $702,302 in non-secured short-term
debt from private investors. The promissory notes generally bear
interest at a rate of 10% to 10.9% per annum and mature nine months
from the date of issuance of each note.
10
<PAGE>
. The Company obtained a $1,000,000 line of credit, which matures April
1, 1999. See discussion set forth above.
. The Company obtained a line of credit in the amount of $1,900,000,
which matures October 12, 1998. See discussion set forth above.
. The Company obtained a line of credit in the amount of $250,000, which
matures September 10, 1998. See discussion set forth above.
PROSPECTIVE SOURCES OF LIQUIDITY. Current operating cash flows will be
sufficient to service the Company's existing debt. However, the Company
currently has insufficient funds to retire its short-term debt if agreements to
extend the present bank credit lines cannot be obtained or if the Company is
unable to raise additional equity and/or debt capital.
The Company's negotiations with a mortgage banking firm to arrange debt and
construction financing have not been successful.
However, the Company is currently negotiating with two mortgage banking
firms to arrange debt financing in the amount of $15,000,000 (the "Debt
Financing Loan"). If the Debt Financing Loan is obtained, the Company will use
the proceeds to retire its short-term debt and for working capital.
The Company is currently negotiating with two mortgage banking firms 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.
In addition, the Company is negotiating with a commercial bank and other
institutional investors to obtain a construction loan in the amount of
$14,000,000, to be secured by the Florida Bible College Property (the "Florida
Bible College Construction Loan"). The Florida Bible College Construction Loan
proceeds will be used to construct a 264 room hotel.
There can be no assurance, however, that the Company will be able to
negotiate terms acceptable to the Company on any or all of these loans, 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
11
<PAGE>
its cash from operations by building and selling homes initially in the City of
Maumelle, as well as its proposed interval 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, (2) the sale of Vacation
Intervals and the installment contracts generated from such sales, and (3) the
liquidation of property which Management considers unsuitable for the Company's
purposes or as required. See ITEM 1, "DESCRIPTION OF BUSINESS--BUSINESS OF THE
COMPANY--GROWTH STRATEGIES."
The Company intends to raise operating capital by selling debt and/or
equity securities to the public or in private transactions. There can be no
assurance, however, that such public or private offerings will be successful.
The Company intends to meet home building and interval 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, 1997 TO YEAR ENDED SEPTEMBER 30,
1996. At September 30, 1997, the Company had total assets of $10,234,292, a
decrease of $2,703,885 or 20.90% from the Company's total assets as of the
fiscal year ended September 30, 1996. The Company had cash of $227,162 at
September 30, 1997, compared to a negative cash position on September 30, 1996,
an increase of $413,073. This improvement resulted from sales of land, timber
royalties and the secured short term debt financing. See "LIQUIDITY AND CAPITAL
RESOURCES" above.
Prepaid assets increased from $6,893 on September 30, 1996, to $202,674 on
September 30, 1997, an increase of $195,781. This increase was primarily due to
the prepayment of amounts owed under a financial consulting contract. The
contract extends through September 30, 1998, and the prepaid portion of the
contracted amounted to $150,000. The prepayment of these amounts did not result
in a decrease in cash. The consultant was given credit against the exercise
price of certain stock options granted to them pursuant to the consulting
contract.
Investments decreased from $3,500,000 as of September 30, 1996, to $0 as of
September 30, 1997. This represented the cancellation of the Resure Debenture.
The carrying value of the Company's real estate holdings increased by
$312,280 during the year, from $9,156,357 to $9,468,637. The net increase was a
result of various transactions. One component was the decrease resulting from
the elimination of $208,172 of Special Taxes of certain Maumelle Property
commercial tracts. These Special Taxes were for the repayment of Municipal Bonds
issued for infrastructure construction of the site. The Company therefore
capitalized the cost, thus reducing the carrying value of the property. A second
component was the decrease resulting from the dismissal of the Holloway Lawsuit
against the Pine Ridge District. The Company had accrued a liability of $200,000
which was capitalized as a part of the cost of the tract. Upon
12
<PAGE>
dismissal of the suit, this liability was eliminated and the carrying value of
the land was reduced. The sale of one of the commercial sites in December, 1996
resulted in a net reduction of $28,361. The sale of a 67 acre single-family
parcel resulted in a reduction of real estate holdings of $322,256. The sale of
40 acres of commercial property to Century resulted in a reduction of real
estate holdings of $1,435,309, representing the allocated cost of the property.
The major addition to real estate holdings resulted from the acquisition of the
property in Orlando, Florida. The acquisition cost and additional capitalized
expenditures through September 30, 1997 amounted to a total of $2,062,888. Other
additions to real estate holdings resulted from expenditures of $63,070 in
connection with the renewal of a purchase contract for the acquisition of the
West Little Rock, Capitol Lakes Estates project. The contract was renewed after
an appeal and subsequent reversal of the Little Rock City Council's prior denial
of zoning changes and annexation into the City. On April 15, 1997, the Company
paid a fee of $10,000 for a six month extension on the agreement to October 14,
1997, and subsequently to October 14, 1998. Additional capitalized costs
totaling $95,706 were added to real estate holdings, primarily for pre-
development costs on four different properties in Maumelle. Other additions to
real estate holdings resulted from pre-acquisition costs on properties in
Branson, Missouri and in North Carolina of $31,800. Non-current assets were
increased by $69,425 for a deferred tax asset resulting from the tax benefit of
a change in prior years valuation allowance.
Total liabilities of the Company as of September 30, 1997, decreased by a
total of $4,417,217 from the September 30, 1996 total of $10,485,042. The
liability for accrued interest decreased to $59,810 at September 30, 1997 from
$252,712. This decrease of $192,861 resulted from the settlements with Century
and Resure, which resulted in the cancellation of the Century notes and Resure
Note II, and the payment of all interest due on the Resure Note II. The current
liability for notes payable increased by $135,567 during the year from
$1,964,406 to $2,099,973. This increase included the $977,706 of secured short
term loans obtained during the year and a $49,665 reclassification of notes
payable to current liabilities for principal payments due within one year of
September 30, 1997. New short term lines with an aggregate balance owing of
$849,024 were also obtained during the year. The Century notes totaling
$1,750,000 in short term notes payable were retired.
Accounts payable and accrued expenses decreased by $591,932, from
$1,108,926 as of September 30, 1996 to $516,994 as of September 30, 1997.
Accrued Special Taxes decreased by $208,172 in the year. The decrease was a
result of the bond refinancing by the Improvement District encompassing the bulk
of the Company's commercial land. A decrease in the Pine Ridge District
liability of $200,000 resulted from the dismissal of the lawsuit filed against
the District. As sole property owner in the Pine Ridge District, any liability
of the District would impact on the Company. Accrued real estate taxes payable
also decreased by $55,890, which represents the difference between new accruals
of $59,990 and payment of taxes totaling $115,880. Accrued Officers salaries of
$240,000 at September 30, 1996 were forgiven at September 30, 1997 and
reclassified as Additional Paid in Capital. Shareholders' Equity increased by
$1,713,332 or 69.84% in the year. The increase is a result of the net loss of
$143,768 for the year ended September 30, 1997, the issuance of 188,000 new
shares of the Company's common stock at $2.00 per share, pursuant to the
Consultants stock options discussed above, the issuance of 100,000 of the
Company's common stock in relation to the Company's acquisition of the Orlando,
Florida property, and the forgiveness of a total of $480,000 in accrued salaries
for the fiscal years ended September 30, 1996 and September 30, 1997, by Michael
G. Todd, the Company's president.
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, there unto
duly authorized.
CAPITOL COMMUNITIES CORPORATION
By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief Executive Officer
14
<PAGE>
CAPITOL COMMUNITIES CORPORATION
AND SUBSIDIARIES
AUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Stockholders
of Capitol Communities Corporation and Subsidiaries
We have audited the accompanying balance sheets of Capitol Communities
Corporation and Subsidiaries as of September 30, 1997 and the related statements
of income and accumulated deficit, stockholders equity and cash flows for the
years ended September 30, 1997, and 1996. 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 Capitol Communities
Corporation, Inc. and Subsidiaries as of September 30, 1997 and the results of
its operations and its cash flows for the years ended September 30, 1997 and
1996 in conformity with generally accepted accounting principles.
December 23, 1997
Amended
May 6, 1997
Coral Springs, Florida
17
<PAGE>
December 23, 1997
Coral Springs, Florida
CAPITAL COMMUNITIES CORPORATION AND SUBSIDIARIES
-----------------------------------------------
BALANCE SHEET
-------------
September 30, 1997
------------------
<TABLE>
<CAPTION>
ASSETS
------
1997
----
<S> <C>
Current Assets:
Cash and Cash Equivalents $ 227,162
Accounts Receivable 12,096
Prepaid Assets 202,674
-----------
Total Current Assets 441,932
-----------
Fixed Assets:
Furniture and Fixtures
(Net of accumulated depreciation of $2,412) 36,260
-----------
Non-Current Assets:
Deposits 62,679
Real Estate Holdings 9,468,637
Loan Origination Fees
(Net of accumulated amortization of $295,597) 155,359
-----------
Deferred Tax Asset (Note 1) 69,425
-----------
Total Non-current Assets 9,756,100
-----------
Total Assets $10,234,292
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
Current Liabilities:
Accounts Payable & Accrued Expenses $ 516,994
Accrued Interest 59,810
Notes Payable 2,099,973
-----------
Total Current Liabilities 2,676,777
Non-Current Liabilities:
Notes Payable 3,377,048
-----------
Deferred Taxes Payable 14,000
-----------
Total Liabilities 6,067,825
-----------
Shareholders' Equity:
Preferred Stock, $.01 par value, none
issued and outstanding - 0 -
Common Stock, $.001 par value; 40,000,000
shares authorized; 7,312,000
shares issued and outstanding 7,312
Additional Paid in Capital 6,620,896
Accumulated Deficit (2,461,741)
-----------
Total Shareholders' Equity 4,166,467
-----------
Total Liabilities and Shareholders' Equity $10,234,292
===========
</TABLE>
See Accompanying Notes to the Financial Statements
18
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
STATEMENTS OF OPERATIONS AND RETAINED DEFICIT
---------------------------------------------
Years Ended September 30, 1997 AND 1996
---------------------------------------
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Revenues:
Sales (Note 11) $ 31,676 $ 4,139,299
Cost of Sales - 0 - 1,895,825
----------- -----------
Gross Profit 31,676 2,243,474
Operating Costs and Expenses:
Selling, General &
Administrative 610,820 1,687,329
----------- -----------
Income (Loss) Before
Interest Income (Expense) (579,144) 556,145
Interest Income 245,905 71,543
Interest Expense (775,814) (826,881)
----------- -----------
Net (Loss) Before Provision
For Income Taxes (1,109,053) (199,193)
Provision for Income Taxes (Note 1)
Tax Benefit of Change in
Prior Year Valuation Allowance - 0 - 69,425
Deferred Taxes - 0 - (14,000)
----------- -----------
- 0 - 55,425
----------- -----------
Net (Loss) (1,109,053) (143,768)
Accumulated Deficit - Beginning of Year (1,208,920) (2,317,973)
----------- -----------
Accumulated Deficit - End of Year $(2,317,973) $(2,461,741)
=========== ===========
Income (Loss) Per Common Share (0.158) (.02)
=========== ===========
Weighted Average
Common Shares Outstanding 7,000,000 7,171,014
=========== ===========
</TABLE>
See Accompanying Notes to the Financial Statements
19
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
---------------------------------------------
September 30, 1997
------------------
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
# SHARES AMOUNT CAPITAL DEFICIT
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
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)
Additional Paid-In
Capital Attributed to
Forgiveness of Debt - 0 - - 0 - 480,000 - 0 -
Additional Stock
Issued (Net) 312,000 312 1,376,788 - 0 -
Net (Loss) - 0 - - 0 - - 0 - (143,768)
---------- ------------ ---------- -----------
September 30, 1997 7,312,000 $ 7,312 $6,620,896 $ (2,461,741)
========== ============ ========== ===========
</TABLE>
See Accompanying Notes to the Financial Statements
20
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
---------------------------------------
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (143,768) $(1,109,053)
Adjustments to Reconcile Net
Income (Loss) to Cash Used in
Operating Activities:
Depreciation 2,412 - 0 -
Amortization 155,344 57,232
Forgiveness of Accrued
Compensation Credited To
Additional Paid in Capital 480,000 - 0 -
(Increase) Decrease in Accounts
Receivable (11,039) (38,191)
(Increase) Decrease in Prepaid
Assets (195,781) 535
(Increase) Decrease in Accrued
Interest Receivable 62,140 - 0 -
(Increase) Decrease in Deposits (62,550) - 0 -
(Increase) Decrease in Real
Estate Holdings (312,280) (254,936)
(Increase) Decrease in Loan
Obligation Fees (99,102) - 0 -
(Increase) Decrease in Investments 3,500,000 - 0 -
Increase (Decrease) in Accounts
Payable and Accrued Expenses (784,793) 906,631
Increase (Decrease) in Short
Term Notes Payable 135,567 - 0 -
(Increase) in Deferred Tax Asset (69,425) - 0 -
Increase in Deferred Taxes Payable 14,000 - 0 -
----------- -----------
Net Cash Provided (Used) in Operating Activities 2,670,725 (437,782)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Furniture and Fixtures (38,672) - 0 -
----------- -----------
Net Cash Provided (Used) in Investing Activities (38,672) - 0 -
----------- -----------
1997 1996
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Long Term Debt (3,596,080) (13,832)
Issuance of Common Stock 312 - 0 -
Proceeds of Additional Paid in Capital 1,376,788 - 0 -
----------- -----------
Net Cash Provided (Used) by Financing Activities (2,218,980) (13,832)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 413,073 (451,614)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR (185,911) 265,703
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 227,162 $ (185,911)
=========== ===========
</TABLE>
See Accompanying Notes to the Financial Statements
21
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report 17
Financial Statements
Balance Sheet 18
Statements of Operations and Retained Deficit 19
Statements of Changes in Shareholders' Equity 20
Statements of Cash Flows 21
Notes to Financial Statements 7 - 14
</TABLE>
22
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1997
------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
A. BACKGROUND
----------
The Company was originally incorporated in the State of New York on
November 8, 1968 under the name of Century Cinema Corporation. In
1983, the Company merged with a privately owned company, Diagnostic
Medical Equipment Corp. and as a result changed its name to that of the
acquired company. By 1990, the Company was an inactive publicly held
corporation. In 1993, the Company changed its name to AWEC Resources,
Inc. and commenced operations. On February 11, 1994 the Company formed
a wholly owned subsidiary AWEC Development Corp, 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.
23
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1997
------------------
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 FASB 109, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The
Company has NOL's of approximately 2,000,000 expiring in the years 2009
through 2012.
Deferred Tax Benefit $688,000
Valuation Allowances 618,575
--------
$ 69,425
========
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,
1997 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, 1997 and 1996 were
7,171,014 and 7,000,000, respectively.
24
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1997
------------------
NOTE 2 - CAPITAL TRANSACTIONS
--------------------
Net changes in common stock consisted of the following transactions:
# Shares Date Description of Transaction
-------- ---- --------------------------
38,000 10/7/96 Stock option exercised for
performance of consulting fees
150,000 11/12/96 Stock option exercised for
performance of consulting fees
(38,000) 4/17/97 Stock certificate canceled
(19,000) 4/25/97 Stock certificate canceled
(19,000) 5/7/97 Stock certificate canceled
100,000 7/29/97 Stock issued as consideration
for acquisition (see Note 13)
100,000 7/29/97 Stock issued for employe compensation
=======
312,000
=======
NOTE 3 - AGREEMENTS
----------
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.
During the fiscal year ended September 30, 1997, the Company paid
Maumelle a total of $198,081 for fees accrued from prior years and
$33,367 for fees due for 1997. As of September 30, 1997, a balance of
$130,616 remained accrued and unpaid for fiscal 1997.
NOTE 4 - CONTINGENCIES
-------------
A. There was 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
subsidiaries were not a party to the action; however, as owner of the
property, any
25
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1997
------------------
judgement against the property could be a liability to the Company.
B. On March 12, 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. Robert Holloway, Inc. subsequently
appealed the summary judgment. The Company has not accrued a liability
for this contingency.
NOTE 5 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. Effective September 30, 1997, the Company entered
into a modification of the promissory note with Resure, Inc. The
principal becomes due and payable in full, on October 1, 1999.
Payments are due in the amount of $101,591.16 including principal and
interest at 10% per annum, payable quarterly. The next payment is due
January 1, 1998.
NOTE 6 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 $1,900 per month. The lease expires September
30, 1998.
The lease commitment is as follows: Year ended September 30,1998
Total Minimum 22,800
Rental Payments $22,800
=======
As of September 30, 1997, all amounts due under this agreement have
been paid.
NOTE 7 EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
The Company has a five-year written agreement with Michael Todd to
perform the duties of President. Under the agreement, which 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.
Michael Todd has forgiven all liability of the Company, under the
agreement for the periods ending September 30, 1996 and 1997.
26
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1997
------------------
NOTE 8 NOTES PAYABLE
-------------
Notes payable consist of the following: 9/30/1997
---------
Note Payable - Bank of Little Rock
----------------------------------
Secured 10% Line of Credit 10% per annum;
maturing April 10, 1999 $ 399,024
Note Payable - Bank of Little Rock
----------------------------------
Secured 10% Line of Credit 10% per annum; 450,000
maturing May 5, 1998
Note Payable - Davister
-----------------------
Unsecured 9% per annum due 200,000
January 9, 1996
Notes Payable
-------------
Various Notes payable
---------------------
Unsecured notes with interest rates ranging
from 10% to 12% with maturities not to exceed
nine months.
Note Payable - Resure Mortgage 49,665
------------------------------
Total Current Maturities $2,099,973
----------
Note Payable - Resure Mortgage
------------------------------
Secured 10% per annum due
September 1,1999 - Quarterly
payments beginning 1/1/98
for $101,591 3,377,048
Total Non-Current 3,377,048
----------
Total Notes Payable $5,477,021
==========
Maturing of Long Term Debt
--------------------------
Fiscal Year Ended September 1999 $ 71,129
Fiscal year Ended September 2000 3,305,919
----------
$3,377,048
==========
27
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1997
------------------
NOTE 9 LOAN ORIGINATION FEES
---------------------
Loan origination fees were incurred in connection with the Resure, Inc.
debt refinancing September 11, 1995. These costs are being amortized on
a straight-line basis over fifty-seven months, or upon satisfaction of
note.
During the year, one of the notes have been satisfied, thus the loan
origination costs related to that note were written off. The costs for
the remaining debt is being amortized over the life of the note
obligation remaining.
NOTE 10 SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Year End 1997 1996
Interest Paid $826,881 $775,814
On July 29, 1997, the company issued 100,000 shares for an acquisition
(See Note 13).
As of September 30, 1997, the President forgave $240,000 of accrued
compensation and credited it as additional paid in capital.
NOTE 11 SETTLEMENT
----------
On October 20, 1997, Capitol Communities Corporation, Capital
Development of Arkansas, Inc., a wholly-owned subsidiary of the Company
and Century Realty, Inc. entered into a Settlement and Release
Agreement effective September 30, 1997. The Settlement Agreement was
entered to settle the foreclosure action instituted by Century, on
August 12, 1996 against Operating Subsidiary and the Company in the
Chancery Court of Pulaski County and to settle the counterclaim filed
by the Company. In the foreclosure action, Century was seeking to
foreclose on 36 acres of the commercial lots, known as Tract D, located
in Maumelle, Arkansas, which secured a $1,400,000 Century promissory
note. As a result of cross-default provisions, an unsecured (Century
Note 1) $350,000 Century promissory note (Century Note 2) was also in
default.
Under the provisions of the Settlement Agreement, the Company paid
$17,500 to Century simultaneous to the execution of the Settlement
Agreement and delivered to an escrow agent a Warranty Deed conveying to
Century Tract D and an approximately 3.5 acre track of land adjoining
Tract D. In return, Century acknowledged that all obligations due
Century pursuant to the Century Note 1 and the Century Note 2 were
satisfied. Under the Settlement Agreement the Company has the option to
repurchase Tract D and the Corner Tract, and the 700,000 shares of the
Company's stock owned by Century. See Discussion in Note 14.
28
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1997
------------------
NOTE 12 REFINANCING DEBT
----------------
Effective September 30, 1997, Capitol Communities Corporation, Capital
Development of Arkansas, Inc., a wholly-owned subsidiary of the Company
and Mark Boozell, Director of Insurance of the State of Illinois
liquidator for Resure, Inc entered into a Debt Settlement and Release
Agreement. On October 24, 1997, Judge Ellis E. Reid of the Circuit
Court of Cook County, Illinois County Department, Chancery Division,
approved the Settlement Agreement.
Under the provisions of the Settlement Agreement, the Liquidator
modified and amended the $3,500,000 recourse note payable to Resure to
become due and payable in full on September 1, 1999. Resure applied the
amount of $525,460, to the Company's four quarterly payments that were
due October 1, 1996, January 1, 1997, April 1, 1997, and October 1,
1997. The approximately $150,000 remaining in the Resure cash
collateral account was retained by the Liquidator. As part of the
Settlement Agreement, the Liquidator released 342.22 acres of the
Company's single-family residential property of the original 1,044
acres of residential property that secured the Resure Note I. The
remaining 701.03 acres of single-family residential property was
retained by the Liquidator as collateral on the modified Resure Note I.
The Settlement Agreement further provided that: (a) Resure terminate
the $3,500,000 Resure Note II and Contribution Agreement and deliver
the same to the Company. (b) The Company terminate the Resure Debenture
issued in connection with the Resure Note II and the Contribution
Agreement and deliver the same to Resure.
As additional consideration to the Liquidator to enter into the
Settlement Agreement, the Company agreed to pay a developer's fee of
$2,000 for each lot sold in Parcel 1 and Parcel 2. The Developer's fee
is secured by a written amendment to the loan mortgage securing the
Resure Note I.
NOTE 13 ACQUISITIONS
------------
On July 30, 1997, the Company acquired Capitol Resorts of Florida, Inc,
a Florida Corporation formed on July 22, 1997, whole sole asset was the
right to purchase a 36.301 acre parcel of land in Osceola County,
Florida formerly known as the Florida Bible College property. On July
30, 1997, the Company entered into a reorganization agreement with MLT
Management Corp., the parent of CRF. Under the terms of the agreement
the Company acquired all of the issued and outstanding capital shares
of CRF in exchange for 100,000 shares of the Company's voting common
stock. Upon acquisition of the CRF stock, its sole director resigned
and Michael G. Todd, president and director of the Company, was
appointed the sole director of CRF. On the same day, CRF closed on the
contract to acquire Florida Bible College property for $922,000 plus
costs. The property was appraised by a third party on May 12, 1997 at a
value of $3,385,000. A subsequent appraisal by another qualified third
party appraiser, dated December 5, 1997, valued the property at
$4,570,000. A portion of the property (14.24 acres in two parcels) is
developed with a 95 room hotel and various structures.
29
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
SEPTEMBER 30, 1997
------------------
NOTE 14 OPTION
------
The Company has the option to repurchase Tract D, the 3.5 acre parcel
tract adjoining Tract D and 700,000 shares of the Company's common
stock owned by Century. The option requires the Company to make 5
monthly option payments of $17,500 commencing November 17, 1997 and a
final payment of $2,138,087.39 on April 17, 1998.
NOTE 15 SUBSEQUENT EVENT
----------------
A. On April 17, 1998, the Company's Operating Subsidiary exercised its
option under the Century Settlement Agreement to purchase 36 acres of
Commercial Property, known as Tract D, the 3.5 acre tract of land
adjoining Tract D, and the 700,000 shares of the Company's voting
common stock owned by Century. The purchase price was $2,132,057.39
paid on April 17, 1998. In addition, the Company had already made five
option payments between November 17, 1997, and March 17, 1998, in the
amount of $17,500 per option payment.
B. On December 9, 1997, Capitol Resorts of Florida, Inc., a wholly owned
subsidiary of the Company, acquired the lease rights to 120 feet of
beachfront land and improvement located in Pompano Beach, Florida. The
improvements known as Ocean Palms Resort, include a 53 unit residential
complex and other common area facilities. The Company also acquired the
interest of the previous owner in several long-term tenant leases,
approximately $2,500,000 in Promissory Notes derived from the sale of
long term leasehold interests in the units to various owners and the
right to manage and operate the on-going rental of the units as hotel
rooms on behalf of the owners. The Resort Subsidiary acquired the
property, the Promissory Notes and the other rights for approximately
$868,000 in cash, the issuance of 33,500 shares of the Company's common
stock and the assumption of a $1,158,000 mortgage encumbering the
ground lease.
C. On December 9, 1997, Capitol Resorts of Florida, Inc. acquired all the
issued and outstanding stock of OPV Development Inc. OPV's primary
asset is the ground lease rights to a four lot parcel of land and
improvements located in Pompano Beach, Florida. The improvements, known
as Ocean Villas, consist of 16 residential units and common area. The
Company also acquired approximately $244,000 in Promissory Notes
derived from the prior sale of four of the units. The cost of the
acquisitions of OPV was approximately $107,000 in cash, the assumption
of a first mortgage of $375,000 and a second mortgage of $150,000
encumbering the ground leases.
30
<PAGE>
EXHIBIT 11
CAPITOL COMMUNITIES CORPORATION
Computation of Earnings Per Share
Fiscal Year Ended
September,
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Shares Outstanding Beginning 7,000,000 7,000,000
Of Period
Shares Issued During Period
October 7, 1996 38,000
November 12, 1996 150,000
April 17,1997 (38,000)
April 25, 1997 (19,000)
May 6, 1997 (19,000)
July 29,1997 200,000
Weighted average number of 7,312,000 7,000,000
shares outstanding
Total 7,171,014 7,000,000
Shares deemed outstanding from
assumed exercise of stock options - -
---------- -----------
Total 7,171,014 7,000,000
Earnings (loss) applicable to $ (143,768) $(1,109,053)
common shares
Earnings (loss) per share of $ (0.020) $ (0.158)
common stock
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 227,162
<SECURITIES> 0
<RECEIVABLES> 12,096
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 441,932
<PP&E> 9,468,637
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,234,292
<CURRENT-LIABILITIES> 2,676,777
<BONDS> 0
0
0
<COMMON> 7,312
<OTHER-SE> 4,159,155
<TOTAL-LIABILITY-AND-EQUITY> 10,234,292
<SALES> 4,139,299
<TOTAL-REVENUES> 4,210,842
<CGS> 1,895,825
<TOTAL-COSTS> 1,895,825
<OTHER-EXPENSES> 1,687,329
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 826,881
<INCOME-PRETAX> (199,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (143,768)
<EPS-PRIMARY> (0.020)
<EPS-DILUTED> (0.020)
</TABLE>
