<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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.
CAPITOL COMMUNITIES CORPORATION
(Exact 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
Check whether the issuer (1) filed all reports required to be filed by
Section 12, 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
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock ($.01 Par Value) 7,384,500
(Title of Class) Shares Outstanding as of January 20, 1998
Transitional Small Business Disclosure Format: [ ] YES [X] NO
<PAGE>
CAPITOL COMMUNITIES CORPORATION
Form 10-QSB
QUARTER ENDED December 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(Unaudited).........................................................3
Consolidated Balance Sheet
December 31, 1997...................................................3
Consolidated Statement of Cash Flows
For the Three Months Ended December 31, 1997 and 1996...............4
Consolidated Statement of Operations
For the Three Months ended December 31, 1997 and 1996...............5
Notes to Consolidated Financial Statements
December 31, 1997...................................................6
Item 2. Management's Discussion And Analysis or Plan of Operation...........10
PART II. OTHER INFORMATION
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K....................................17
Signatures....................................................................18
Index to Exhibits
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
--------------------------------
Capitol Communities Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and September 30, 1997
UNAUDITED
<TABLE>
<CAPTION>
December 31, 1997 September 30,1997
----------------- -----------------
<S> <C> <C>
Current Assets:
Cash in Bank $ 349,891 $ 227,162
Accounts Receivable 18,084 12,096
Prepaid Assets 260,748 202,674
Accrued Interest 29,249
----------- -----------
Total Current Assets 657,972 441,932
Fixed Assets:
Furniture and Fixtures 76,211 36,260
(Net of accumulated depreciation)
Notes Receivable
Net of Discount of $255,852 2,490,137
Non-Current Assets
Deposits 160,914 62,679
Real Estate Holdings 10,164,265 9,468,637
Loan Origination Fees
(Net of accumulated amortization) 171,046 155,359
Organization Costs 1,200
----------- -----------
Total Non-Current Assets 10,497,425 9,686,675
Total Assets $13,721,745 $10,164,867
=========== ===========
Current Liabilities:
Accounts Payable & 508,953 516,994
Accrued Expenses
Accrued Interest 172,717 59,810
Notes Payable 5,316,571 2,099,973
----------- -----------
Total Current Liabilities 5,998,241 2,676,777
Deferred Gross Profit, Installment Sales 22,254
Non-Current Liabilities
Notes Payable 3,739,738 3,377,048
----------- -----------
Total Liabilities 9,760,233 6,053,825
Shareholders' Equity
Preferred Stock 0 0
Common Stock 7,385 7,312
Additional Paid in Capital 6,748,055 6,380,896
Accumulated Deficit (2,793,927) (2,277,166)
Total Shareholders' Equity 3,961,512 4,111,042
----------- -----------
Total Liabilities and
Shareholders' Equity $13,721,745 $10,164,867
=========== ===========
</TABLE>
3
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Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 1997 and 1996
UNAUDITED
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (515,102) $ (229,174)
Amortization 78,914 14,308
Depreciation 1,836
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables (5,988) (23,947)
(Increase) Decrease in Deposits (98,235)
(Increase) Decrease in Other Assets (5,714)
(Increase) Decrease in Real Estate Holdings (695,628) 204,973
(Increase) Decrease in Accrued Interest
Receivable (29,249) (61,753)
(Increase) Decrease in Pre-Paid Assets (58,074) (296,071)
Increase (Decrease) in Accrued Expenses (8,041) (110,574)
Increase (Decrease) in Deferred Revenue 22,254
Increase (Decrease) in Accrued Interest
Payable 112,907 285,131
----------- -----------
Net Cash Used for Operations (1,200,120) (217,107)
Cash Flows from Investing Activities:
Acquisition of Notes Receivable (2,490,137) 0
Acquisition of Furniture and Fixtures (39,951) 0
Increase (Decrease) in loan fees (94,601)
----------- -----------
(2,624,689)
Cash Flows from Financing Activities:
Increase in Notes Payable 3,579,288 99,727
Issuance of Common Stock 368,250 376,000
----------- -----------
Net Cash used in Financing Activities 3,947,538 475,727
Net Increase (Decrease) in Cash 122,729 258,620
Beginning Cash 227,162 (185,911)
----------- -----------
Ending Cash $ 349,891 $ 72,709
=========== ===========
</TABLE>
4
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Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended December 31, 1997 and 1996
UNAUDITED
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Sales $ 247,980 $ 218,574
Hotel Revenue 53,804
Miscellaneous Income 2,723
Cost of Sales 148,942 43,701
---------- ----------
Gross Profit $ 155,565 174,873
Operating Expenses:
General & Administrative
Expenses 588,604 268,831
---------- ----------
Net Income (Loss) Before
Interest Income (433,039) (93,958)
Interest Income 24,115 61,753
Interest Expense (106,178) (196,969)
Net Income (Loss) $ (515,102) $ (229,174)
========== ==========
Net Income (Loss) per share $ (0.070) $ (0.032)
========== ==========
Weighted average shares outstanding: 7,349,543 7,155,000
========== ==========
Dividends per Share 0 0
- -
</TABLE>
5
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 1997
-----------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
Background
----------
The consolidated balance sheet at December 31, 1997 and the related
statements of operations and cash flows for the three month period
ended December 31, 1997, include the accounts of Capitol Communities
Corporation and its wholly owned subsidiaries and are unaudited. All
inter-company accounts and transactions have been eliminated in
consolidation.
These unaudited interim consolidated financial statements should be
read in conjunction with the September 30, 1997, fiscal year end
financial statements and related notes. The unaudited interim
financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the
interim periods presented and all such adjustments are of a normal
recurring nature. Interim results are not necessarily indicative of
results for a full year.
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 Inc., on January 29, 1996. The Company was
formed to develop and sell real estate properties. In May 1994, the
Company formed a wholly-owned subsidiary, AWEC Homes, Inc., an
Arkansas corporation for the purpose of building single-family homes.
The subsidiary's name was changed to Capitol Homes, Inc., on January
29, 1996.
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.
On 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 Interval operation. See
"Management's Discussion
6
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and Analysis or Plan of Operation."
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 the Company and MLT Management Corp. ("MLT"), a corporation
not affiliated with the Company. See "Management's Discussion and
Analysis or Plan of Operation."
On December 9, 1997, the Florida Resorts Subsidiary acquired the lease
rights to 120 feet of beachfront land and improvements located in
Pompano Beach, Florida (the "Ocean Palms Resort Property") from Ocean
Palms Resort, Inc. ("OPRI"), and Ocean Palms Development Corporation
("OPDC") unaffiliated third parties. The Company also acquired the
interest of the owners in certain other assets of OPRI and OPDC. See
"Management's Discussion and Analysis or Plan of Operation."
On December 9, 1997, the Florida Resorts Subsidiary acquired all of
the issued and outstanding stock of OPV Development, Inc. ("OPV"), an
unaffiliated third party, whose primary asset is the Ocean Villas
property ("Ocean Villas"), located in Pompano Beach, Florida. See
"Management's Discussion and Analysis or Plan of Operation."
Revenue Recognition
-------------------
The full accrual method is used to determine the recognition of
revenue. In order to recognize revenue and profit under the full
accrual method the following criteria must be met. The profit from the
sale must be determinable, that is, the collectibility of the sales
price is reasonably assured, or any portion which may not be
collectible can be reasonably estimated. In addition, the earnings
process must be complete, with no significant activities required of
the seller after the sale in order to earn the profit from the sale.
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
-------------------------------------------------
POLICIES (Continued)
--------------------
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 year ended September 30, 1997, was
7,171,014 and for the three months ended December 31, 1997, was
7,349,543
7
<PAGE>
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 1997
-----------------
NOTE 2 - CAPITAL TRANSACTIONS
--------------------
In May 1993, the Company executed a 15 to 1 reverse stock split.
In September 1993, the Company issued an additional 4,282,126 shares
of common stock to existing stockholders.
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.
In July 1995, the Company executed a 5 to 1 reverse stock spilt.
In July 1995, the Company issued an additional 4,772,996 shares of
common stock to existing stockholders.
In October 1996, an individual pursuant to a consulting agreement,
exercised an option to purchase 38,000 shares of common stock.
In November 1996, an individual pursuant to a consulting agreement,
exercised an option to purchase 150,000 shares of common stock.
In April 1997, two shareholders returned a total of 57,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company.
In May 1977, one shareholder returned a total of 19,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company.
On July 30,1997, the Company issued 100,000 shares of common stock to
an unaffiliated company for the purchase of all of the stock of
Capitol Resorts of Florida, Inc., under an Agreement and Plan of
Reorganization, dated July 30, 1997.
On July 29, 1997, the Company issued 50,000 shares of common stock to
David Paes, an officer of the Company, in consideration of management
services to the Company.
On July 29, 1997, the Company issued 50,000 shares of common stock to
Mary Peyton, an officer of Capitol Homes, Inc., a wholly-owned
subsidiary of the Company, in consideration of management services to
the Company.
On October 20, 1997, the Company issued 20,000 shares of common stock
to Ann
8
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Alridge, an officer of Capitol Development of Arkansas, Inc., a
wholly-owned subsidiary of the Company, in consideration of management
services to the Company.
In October 1997, one shareholder returned a total of 19,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company.
In October 1997, an individual pursuant to a consulting agreement,
exercised an option to purchase 38,000 shares of common stock.
In December 1997, the Company issued 33,500 shares of common stock to
an unaffiliated company, together with $868,000 in cash and the
assumption of a $1,158,000 mortgage for the purchase of the Ocean
Palms Resort Property, the Ocean Palms Resort Paper and other rights.
See "Management's Discussion and Analysis or Plan of Operation."
9
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
---------------------------------------------------------
During the last fiscal year, the Company significantly changed the nature
of its business activities from land sales to real estate development and
vacation interval operations. Although the Company has not yet commenced any
material development or building activity, its primary focus is the development
and sale of residential single-family homes on the more than 1,700 acres it
currently owns in the City of Maumelle, Arkansas ("the Maumelle Property"), a
5,000 acre master planned community located fifteen miles from downtown Little
Rock. In addition, the Company has expanded its focus to include the
acquisition, renovation, development, sale and financing of vacation ownership
interval interests ("VOIs") and vacation long-term leasehold interests ("LTLs")
of resort, hotel and vacation properties. In its efforts to diversify its
development focus, the Company has purchased approximately 36.3 acres of land
and improvements in Osceola County, Florida, for development as a hotel and a
VOI property. In December 1997, the Company also purchased 16 LTL Units (the
"Ocean Villas" property), as a result of the acquisition of the stock of OPV
Development, Inc. ("OPV"), an unaffiliated third party. In December 1997, the
Company also purchased the lease rights to 120 feet of beachfront land and
improvements in Pompano Beach, Florida ( the "Ocean Palms Resort"). The Ocean
Palms Resort improvement includes a 53 LTL unit complex, all of which have been
sold, with the Company acquiring the promissory notes generated from the sale
(the "Ocean Palms Resort Promissory Notes"), as well as other assets. See
"LIQUIDITY AND CAPITAL RESOURCES." 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 restructure, retire or
replace its current short-term debt into long-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. The following
discussion should be read in conjunction with the financial statements and the
notes thereto appearing in Item 1 of this Part I (the "Financial Statements").
Financial Condition
- -------------------
During the fiscal year ended September 30, 1997, and during the three month
period ended December 31, 1997, the Company continued to focus on expanding its
position in the vacation interval and resort industries by acquiring strategic
assets in these industries. In the three month period ended December 31, 1997,
the Company acquired $2,490,137 in the Ocean Palms Resort Promissory Notes
generated from the sale of LTL units in the Ocean Palms Resort and the sale of
LTL units in the Ocean Villas (the "Ocean Villas Promissory Notes"). The
acquisition of the Ocean Villas units increased the Company's real estates by
$482,159. These acquisitions were primarily accomplished by utilizing cash and
short term loans and lines of credit available to the Company. The Company
intends to restructure and to replace the major of the short-term debt utilized
to purchase these properties with more conventional long term financing. See
"LIQUIDITY AND CAPITAL RESOURCES." The Company believes that results of
operations will improve in the future if the Company is able to raise sufficient
additional capital to replace or retire its short term debt, or convert such
debt in to long term debt where appropriate. Such restructuring will enable the
Company to commence significant development activities in
10
<PAGE>
Maumelle and expand its acquisition and sale of vacation interval interests.
There can be no assurance, however, that the Company will be able to
restructure or retire its short-term debt on favorable terms to the Company or
at all.
Change in Financial Condition Since the End of the Last Fiscal Year. At
--------------------------------------------------------------------
December 31, 1997, the Company had total assets of $13,721,745 an increase of
$3,556,878, or 35.0% over the Company's total assets as of the Company's fiscal
year end of September 30, 1997. The Company had cash of $349,891 at December
31, 1997, compared to $227,162 at September 30, 1997, an improvement of
$122,729. This improvement resulted from short-term loans from private sources
(the "Bridge Loans") discussed below. See "LIQUIDITY AND CAPITAL RESOURCES."
Prepaid assets increased from $202,674 on September 30, 1997, to $260,748
on December 31, 1997, an increase by $58,074. This increase was primarily a
result of the acquisition of the Ocean Palms Resort and Ocean Villas properties,
both of which are located in Pompano Beach Florida (collectively the "Pompano
Beach Properties"). The Ocean Palms Resort had prepaid insurance and a prepaid
ground lease totaling $58,796, as of December 31, 1997, while Ocean Villas had
prepaid insurance and a prepaid ground lease totaling $18,882, as of December
31, 1997. A financial consulting contract for the 12 month period ending
September 30, 1998, also increased prepaid assets by $25,125 in the three month
period ended December 31, 1997.
On December 9, 1997, the Company acquired an interest in several Ocean
Palms Resort Promissory Notes resulting from the sale of long term leasehold
Ocean Palms Resort units, together with certain other assets and rights. On the
same date, the Company also acquired the Ocean Villas property, the assets of
which included $243,970 in the Ocean Villas Promissory Notes. See "LIQUIDITY
AND CAPITAL RESOURCES." The collective balance due on these notes amounted to
$2,490,137, net of a discount of $255,852, as of December 31, 1997. There was
also accrued interest owing on the notes of $29,249, as of that date. There
were no related assets as of September 30, 1997.
Deposits increased from $62,679 as of September 31, 1997, to $160,914 as of
December 31, 1997, an increase of $98,235. This was primarily due to option
payment deposits of $70,000 made to Century Realty, Inc. ("Century") to
repurchase 36 acres of commercial property located in Maumelle, Arkansas and
deposits to various mortgage banking firms.
The carrying value of the Company's real estate holdings increased by
$695,628 during the three months ended December 31, 1997, from $9,468,637 to
$10,164,265. One major factor of this increase was the acquisition of Ocean
Villas, discussed above, which resulted in an increase of $482,159. Additional
expenditures on the Florida Bible College Property, in Osceola County, Florida,
including capitalization of interest in the amount of $51,298, accounted for the
balance of the increase.
Total liabilities of the Company at December 31, 1997, had increased to
$9,760,233, an
11
<PAGE>
increase of $3,706,408 over the September 30, 1997 total of $6,053,825. The
liability for accrued interest increased to $172,717 at December 31, 1997, from
$59,810 at September 30,1997. This increase of $112,907 reflects the interest on
the borrowing used to acquire Ocean Palms Resorts and Ocean Villas properties,
as well as the effect of interest due to Resure, Inc. ("Resure") for one
quarter. As of September 30, 1997, the payment due on October 1, 1997, had been
paid. The January 1, 1998, payment, while made on time, had not been paid as of
December 31, 1997. This timing difference resulted in an increase of $86,374 in
accrued interest payable over the September 30, 1997 total. The current
liability for notes payable increased by $3,216,598 during the three months,
from $2,099,973, as of September 30, 1997, to $5,316,571, as of December 31,
1997. This resulted primarily from using $1,617,424 of the Company's short-term
lines of credit to acquire the Pompano Beach Properties and other assets in
December 1997. The Ocean Palms Resort leasehold mortgage was assumed, with a
balance of $1,133,014, as of December 31, 1997, and has a renewal or extension
date of April 1, 1998. While the Company expects to renew or replace that
mortgage, the entire balance is considered a current note payable. Further, as
of December 31, 1997, the Company had borrowed $1,260,261 in Bridge Loans from
private sources. This represented an increase of $282,556 in the three month
period. See "LIQUIDITY AND CAPITAL RESOURCES."
Accounts payable and accrued expenses decreased by $ 8,041. At September
30,1997, the liability for accounts payable and accrued expenses totaled
$516,994. At December 31, 1997, the balance was $508,953. Accrued real estate
taxes payable increased by$14,962, which represents the difference between new
accruals of $17,045 and taxes paid, for a total of $3,083.
Shareholders' Equity decreased by $149,530 or 3.64%. The decrease results
primarily from the combination of the operating loss of $515,102 for the three
month period ending December 31, 1997, which was partially offset by the
issuance of $335,000 of the Company stock as part of the acquisition cost of the
Ocean Palms Resort and $33,250 from the exercise of options for the purchase of
stock.
Results of Operations
- ---------------------
Comparison of Three Months Ended December 31, 1997 to the Three Months Ended
- ----------------------------------------------------------------------------
December 31, 1996. For the three months ended December 31, 1997, the Company
- ------------------
experienced a net loss of $515,102 compared with a loss of $229,174 for the
three months ended December 31, 1996. The increase primarily is attributed to an
increase in General and Administrative Expenses.
Sales increased by $29,406 to $247,980 for the three months ended December
31, 1997, from $218,574 for the three months ended December 31, 1996. During the
three months ended December 31, 1997, the sale of the Ocean Villas LTL units,
totaled $222,980. Capitol Development of Arkansas, Inc. (the "Operating
Subsidiary"), sold one parcel of undeveloped land for $25,000. The Company also
received $53,804 in hotel management revenue from the newly acquired Pompano
Beach Properties. During the three months ended December 31, 1996, sales
totaled $218,574, primarily from the sale of a commercial property tract in
Maumelle for $110,000 and timber royalties of $90,452. The gross profit for the
three months ended December
12
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31, 1997 was $155,565, as compared with $174,873 for the three months ended
December 31, 1996. The higher gross profit in 1996 reflects the lower cost basis
in the land and timber sold in the period relative to the sales price.
General and administrative expenses increased by $319,773, from $268,831
for the three months ended December 31, 1996, to $588,604 for the three months
ended December 31, 1997. This increase is a result of the increase in
operational activities. Insurance costs increased by $10,505 in the three months
ended December 31, 1997, over the same period in 1996 as a result of the
acquisition of the Florida Bible College and the Pompano Beach Properties.
Management Fees to Maumelle Enterprises, which were waived for the three months
ended December 31, 1996, increased to $69,553 in the corresponding period in
1997. Employee compensation for the Pompano Beach Properties amounted to $26,263
for the period ended December 31, 1997, with no equivalent expense in the
comparable 1996 period. Amortization expenses increased by $64,606 for the three
months ended December 31, 1997, over the same period in 1996, primarily as a
result of costs associated with the Bridge Loans. In addition to the operating
expenses, an expense of $55,000 was recognized in the period ended December 31,
1997, when it was determined that deposits paid on two projects in Florida that
the Company had been negotiating to acquire, were not recoverable. There was no
comparable expense in 1996.
Interest income decreased from $61,753 for the three month period ended
December 31, 1996, to $24,115 for the three month period ended December 31,
1997. Interest income in 1996 represented interest due on the Resure Debenture,
which the Company no longer owns effective September 30, 1997. Interest income
for the three month period ended December 31, 1997, represented one month of
interest receiviables due to the Company from the Ocean Palms Resort Promissory
Notes and Ocean Villas Promissory Notes.
Interest expense decreased by $90,791 from $196,969 for the three months
ended December 31, 1996, to $106,178 for the three months ended December 31,
1997. The decrease resulted from the fact that despite the overall increase in
debt, the majority of the new debt, primarily the borrowings for the acquisition
of the Ocean Palms Resort and Ocean Villas properties, occurred in the last
month of the quarter. In addition to the $95,955 expensed for the three month
period ended December 31, 1997, interest of $61,568 was capitalized as part of
the improvement costs of the projects in Orlando, Florida and the Pompano Beach
Properties.
The Company does not foresee any significant elements of income or loss
that would not arise from its ordinary course of business, except for the losses
that would likely arise if the Company is unable to extend, replace or retire
its short term debt as it matures.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents amount to $349,891 or 2.54% of total assets at
December 31, 1997, as compared with $227,162 or 2.23% at September 30, 1997.
The Company's liquidity
13
<PAGE>
position at December 31, 1997, is not adequate to meet the Company's liquidity
requirements, which include approximately $5,300,000 in short term debt.
The Company has, as of December 31, 1997, borrowed $1,260,261 in Bridge
Loans from private sources with net proceeds to the Company of approximately
$997,677. The majority 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 each note. Although the Bridge Loans are unsecured,
the Company has provided a guarantee bond to the Bridge Note holders at a cost
to the Company of $91,837 or 7.3%. The Company has also paid the investment
banking firms that assisted the Company in obtaining the Bridge Loans a fee of
$170,747 or 13.6% of the Bridge Loans. The Bridge Notes mature in the third and
the fourth quarters of 1998. The Company may try to obtain an additional
$500,000 in short-term debt financing from private investors during the first
quarter of 1998, for general corporate purposes. There can be no assurance,
however, that the Company will be able to obtain debt financing on favorable
terms or at all.
Since the end of the Company's fiscal year ended September 30, 1997, it has
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 February 12, 1998,
the outstanding balance of the revolving line of credit was $1,750,000. The
funds were used to complete the acquisition of the Pompano Beach Properties, to
pay off certain accounts payable, and for working capital.
On February 12, 1998, the Company obtained a loan in the amount of $150,000
from the Bank of Atkins at a fixed rate of interest of 10.00%, maturing on May
27, 1998, at which time the principal and all accrued interest is due. This loan
is also secured by the 344 acres of the Large Residential Tract of the Maumelle
Property, as is the revolving line of credit discussed above. The funds are to
be used for general operating purposes.
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 interest only on a monthly
basis, and maturing on May 10, 1998. The line is secured by approximately a
10.799 acre multi-family parcel 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. The current maturity date is May 5, 1998. This line is secured by
approximately a 19 acre multi-family parcel of the Company's Maumelle Property.
As of February 12, 1998, the Company has drawn a total of $845,524 against the
lines. The proceeds were used to complete the purchase of approximately 35 acres
of land and improvements in Osceola County, Florida, known as the Florida Bible
College (See below).
14
<PAGE>
On December 9, 1997, Capitol Resorts of Florida, Inc. ("the Florida
Resorts Subsidiary") acquired the lease rights to Ocean Palms Resort, which
consist of 120 feet of beachfront land and improvements located in Pompano
Beach, Florida, from Ocean Palms Resort, Inc. ("OPRI"), and Ocean Palms
Development Corporation ("OPDC") unaffiliated third parties. The ground lease
rights to the Ocean Palms Resort property is for a period of 99 years, of which
66 years and 3 months remain (the "Ocean Palms Ground Lease"). The improvements
include a 53 LTL unit complex, and other common area facilities. The Company
also acquired the interest in several long term tenant leases, approximately
$2,500,000 in the Ocean Palms Resort Promissory Notes arising out of the sale of
the Ocean Palms Resort LTL units, and the right to manage and operate the on-
going rental of the LTL units as hotel rooms on behalf of the LTL owners. As of
December 31, 1997, the outstanding book value of the Ocean Palms Resort
Promissory Notes amounted to $2,246,167, net a of discount of $255,852. The
Ocean Palms Resort Promissory Notes are pledged, as additional collateral, to
certain debt on the property assumed by the Company, and discussed below.
The Company acquired the Ocean Palms Resort property, the Ocean Palms
Resort 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 (the "Ocean Palms Resort
Note").
On December 9, 1997, the Florida Resorts Subsidiary acquired all of the
issued and outstanding of OPV, an unaffiliated third party. With the stock
acquisition, the Company acquired OPV's primary asset, Ocean Villas, which
consists of two lease rights to a four lot parcel of land and improvements (the
"Ground Leases") located in Pompano Beach, Florida . The First Ground Lease is
for a period of 99 years, of which 65 years and 5 months remain. The Second
Ground Lease is for a period of 93 years and 3 months, of which 65 years and 5
months remain. The Company acquired the 16 LTL unit Ocean Villas, and
approximately $244,000 in the Ocean Villas Promissory Notes, which arose from
the prior sale of 4 LTL units, for approximately $107,000 in cash, and the
assumption of a first mortgage of $375,000 and a second mortgage of $150,000
encumbering the Ground Leases (the "First and Second Ocean Villas Notes"). As
of December 31, 1997, the outstanding book value of the Ocean Villas Promissory
Notes amounted to $243,970. The Ocean Villas Promissory Notes are pledged to
the First and Second Ocean Villas Notes as additional collateral, as discussed
below.
Due to the acquisition of the Ocean Palms Resort property and the Ocean
Villas property, the Company's debt 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 Promissory Note 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, 1998. The
note can be extended by two additional years upon the payment of a
15
<PAGE>
1% extension fee of the then outstanding principal balance of the note on
or before March 1, 1998.
$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.
As of the date of this Report, the Company is current on the quarterly
payments of $101,591 of principal and interest due to Resure on the $3,500,000
amended recourse note (the "Resure Note I"), which matures September 1, 1999,
and bears interest at 10% per annum. The Resure Note I is secured by the
approximately 701-acre Large Residential Tract in Maumelle, Arkansas. As of
February 1, 1998, the principal balance on the Resure Note I is $3,411,493. The
next quarterly payment to Resure is due on April 1, 1998.
As of December 31,1997, the Company was obligated for a $200,000 unsecured
recourse note payable to Davister Corp. (the "Davister Note") which matured
January 9, 1996. Although the Davister Note has matured, the lender has not
demanded payment or instituted collection proceedings. The Company intends to
retire this debt in fiscal year 1998, from debt financing or generated revenues.
The Company is currently negotiating with two mortgage banking firms to
arrange long-term 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 also 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 commence 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
$18,000,000, 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. The Florida
16
<PAGE>
Bible College property was appraised by a third party MAI appraiser on
December 5, 1997, at a value of $4,570,000. The property is presently
unencumbered.
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.
In respect to prospective long-term liquidity, the Company intends to
generate the bulk of its cash from operations by building and selling homes
initially on the Maumelle Property, and from the acquisition, development and
subsequent operation of resort and vacation properties and the development and
sale of VOI units and LTL units. This assumes that the Company can obtain the
necessary financial resources to restructure or retire its present short-term
debt and raise sufficient capital to commence development operations and begin
substantial building operations and/or successfully negotiate the acquisition
and sale of leisure properties. There can be no assurances, however, that the
Company will be able to restructure or retire its short-term debt or obtain the
necessary capital, on favorable terms to the Company or at all, to commence
meaningful operations. Even if the Company is able to obtain the necessary
capital required to commence meaningful operations, there can be no assurance
the Company will be able to negotiate acceptable terms for the acquisition and
development of additional properties.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION.
The Company incorporates by reference the information in Part I, Item 2,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Liquidity and
Capital Resources."
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBITS
The following Exhibits are filed as part of this Report.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
b) REPORTS ON FORM 8-K
None
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITOL COMMUNITIES CORPORATION
Date: February 18, 1998 By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief Executive Officer
Date: February 18, 1998 By: /s/ David Paes
David Paes
Treasurer and Vice President
18
<PAGE>
EXHIBIT 11
CAPITOL COMMUNITIES CORPORATION
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Shares Outstanding Beginning 7,312,000 7,000,000
Of Period
Shares Issued During Period
October 7, 1996 38,000
November 12, 1996 150,000
October 7, 1997 38,000
October 20, 1997 20,000
October 28, 1997 (19,000)
December 31, 1997 33,500
---------- ----------
Total Outstanding 7,384,500 7,188,000
Weighted average number of
shares outstanding 7,349,543 7,115,000
Shares deemed outstanding from
assumed exercise of stock options - -
---------- ----------
Total 7,349,543 7,115,000
========== ==========
Earnings (loss) applicable to
common shares $ (515,102) $ (229,174)
========== ==========
Earnings (loss) per share of
common stock $(0.070) $ (0.032)
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 348,891
<SECURITIES> 0
<RECEIVABLES> 18,084
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 657,972
<PP&E> 10,164,265
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,721,745
<CURRENT-LIABILITIES> 5,998,241
<BONDS> 0
0
0
<COMMON> 7,385
<OTHER-SE> 3,954,127
<TOTAL-LIABILITY-AND-EQUITY> 13,721,745
<SALES> 247,980
<TOTAL-REVENUES> 328,622
<CGS> 148,942
<TOTAL-COSTS> 148,942
<OTHER-EXPENSES> 588,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106,178
<INCOME-PRETAX> (515,102)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (515,102)
<EPS-PRIMARY> (0.070)
<EPS-DILUTED> (0.070)
</TABLE>
