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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES AND EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 1998
[ ] 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. 0-23450
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
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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. [ ] The following officers, directors, and
beneficial owners of 10% or more of the Company's Common Stock were delinquent
in filing an Annual Statement of Changes in Beneficial Ownership on Form 5:
Michael G. Todd, Herbert Russell, John W. DeHaven, and David R. Paes. The Form
5 was filed by the above officers, directors and beneficial owners in mid
December, 1998, approximately four weeks late.
State the issuer's revenues for its most recent fiscal year. $1,452,209.
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.
$528,982 based on the average of the bid and asked obtained from the National
Quotation Bureau, Inc. ("NQB") on June 1, 1999.
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 7,890,528 common stock shares,
as of June 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format YES [ ] NO [X]
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TABLE OF CONTENTS
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<S> <C>
FORWARD-LOOKING STATEMENTS............................... 4
- --------------------------
PART I
ITEM 1. DESCRIPTION OF BUSINESS...................... 4
ITEM 2. DESCRIPTION OF PROPERTY...................... 26
ITEM 3. LEGAL PROCEEDINGS............................ 43
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF
SECURITY HOLDERS............................. 43
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................... 44
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION............................ 45
ITEM 7. FINANCIAL STATEMENTS......................... 59
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 59
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a)OF THE EXCHANGE ACT............. 59
ITEM 10. EXECUTIVE COMPENSATION....................... 62
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................ 63
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................. 65
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............. 66
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking
statements. Such forward-looking statements are generally accompanied by words
such as "intends," "projects," "strategies," "believes," "anticipates," "plans,"
and similar terms that convey the uncertainty of future events or outcomes. The
forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in ITEM 6 of this
Report, the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION --Factors That May Affect Future Results and Market Price of Stock."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof and
are in all cases subject to the Company's ability to, (1)cure its current severe
liquidity problems caused by its current short-term debt obligations, and (2) to
raise sufficient capital to commence and continue meaningful operations. If the
Company cannot restructure, refinance or retire its current debt, the Company's
status as a viable going concern will remain in doubt. There can be no assurance
that the Company will be able to raise sufficient capital to cure its liquidity
problems and pursue the business objectives discussed herein. Capitol
Communities Corporation undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including without limitation those identified in the "Risk
Factors" section of the Company's Registration Statement filed with the
Securities and Exchange Commission (the "SEC") in September 1996 on Form 10-SB.
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT
Capitol Communities Corporation, a Nevada corporation (the "Company"), was
formed on August 21, 1995. It is the successor-by-merger to AWEC Resources,
Inc., a New York corporation (the "Predecessor Corporation"). Unless the context
otherwise requires, all references to the "Company" in this Report include the
Predecessor Corporation, and all references to the Company's business and
properties include the business and properties of Capitol Communities
Corporation and its wholly-owned subsidiaries discussed in more detail below.
The Predecessor Corporation was incorporated in the State of New York as
Century Cinema Corporation in November 1968. In 1969, the Predecessor
Corporation conducted its initial public offering of common stock, pursuant to a
Form S-2 registration statement filed with the SEC. From 1970 to 1971, the
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Predecessor Corporation filed annual reports under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). From 1972 until the Company's filing
of its Registration Statement on Form 10-SB on September 16, 1996, neither the
Predecessor Corporation nor its successor, Capitol Communities Corporation,
complied with the reporting requirements under the Exchange Act.
By 1983, current management of the Company believes that the Predecessor
Corporation had virtually no assets and was essentially dormant. In April 1984,
the Predecessor Corporation acquired the business of Diagnostic Medical
Equipment Corporation ("DMEC") (the "DMEC Acquisition"). In June 1983, the
Predecessor Corporation changed its name to Diagnostic Medical Equipment Corp.
After the DMEC Acquisition, the Predecessor Corporation was in the
pharmaceutical, medical equipment and surgical supplies business. In August
1987, the Predecessor Corporation filed a registration statement with the SEC on
Form S-18 for a proposed offering of securities. The registration statement
never became effective and was deemed abandoned by the SEC, as of August 1991.
The Company's management believes that, by December 1992, the Predecessor
Corporation had virtually no assets.
In February 1993, Charles L. Silengo Sr. and certain affiliates and related
persons (the "Silengo Group") sold all of the outstanding shares of Lion Coal
Co. ("Lion Coal") to the Predecessor Corporation in return for the issuance of
shares of common stock representing a majority interest in the Predecessor
Corporation. In August 1993, the Silengo Group sold most of its Predecessor
Corporation common stock to Joe Vick ("Vick"), thereby transferring control of
the Predecessor Corporation to Vick. The Predecessor Corporation transferred
its interest in Lion Coal to Charles L. Silengo, for nominal consideration, in
connection with the Silengo Group's sale of its Predecessor Corporation common
stock to Vick.
In October 1993, the Predecessor Corporation formed a wholly-owned
subsidiary, Resource Equity Corporation, a Texas corporation ("Resource
Equity"), to hold options on oil and gas properties purchased by the Predecessor
Corporation from PetroSource Energy Corporation ("PetroSource"), a company
controlled by Vick. The Predecessor Corporation issued shares of common stock
representing a controlling interest in the corporation to PetroSource as
consideration for the options. Although, at the time of the purchase, the board
of directors of the Predecessor Corporation valued the options at $1,395,356,
the amount of cash that PetroSource paid for the options, the options were later
discovered to be worthless. Resource Equity was subsequently dissolved on
February 13, 1996, by the State of Texas for failure to pay State franchise
taxes.
On November 29, 1993, the Predecessor Corporation filed a Form 10
registration statement with the SEC to register its common stock pursuant to
Section 12(g) of the Exchange Act. The Predecessor Corporation later withdrew
the registration statement, for reasons which are unknown to current management
of the Company.
On December 20, 1993, the Predecessor Corporation changed its name to AWEC
Resources, Inc. On February 11, 1994, the Predecessor Corporation formed
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a wholly-owned subsidiary, AWEC Development Corporation, an Arkansas
corporation, which later changed its name on January 29, 1996, to Capitol
Development of Arkansas Inc. (the "Operating Subsidiary").
In February 1994, PetroSource transferred the majority of its shares of
Predecessor Corporation common stock to Prescott Investments Limited
Partnership, a Nevada limited partnership ("Prescott LP"), and Charlie
Corporation, a Nevada corporation ("Charlie Corporation"), both of which were
then, and currently are, affiliates of Michael G. Todd, Herbert E. Russell and
John W. DeHaven. See ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. The shares were transferred as payment for public relations
services provided by Prescott LP and Charlie Corporation to the Predecessor
Corporation.
On February 15, 1994, the Operating Subsidiary purchased approximately
2,041 acres of land in Maumelle, Arkansas (the "Maumelle Property") from Century
Realty, Inc. ("Century") for an aggregate purchase price of $8,430,000. The
purchase price was comprised of $1,693,000 paid in cash at the closing of the
sale and a promissory note payable to Century in the original principal amount
of $6,737,000, secured by a first priority security interest in a portion of the
Maumelle Property. The cash paid at the closing was obtained from the proceeds
of Maumelle Property lot sales to third parties that occurred concurrently with
the Operating Subsidiary's acquisition of the Maumelle Property. Since
purchasing the Maumelle Property, the Operating Subsidiary has sold, as of
September 30, 1998, approximately 305 acres of the Maumelle Property, for
aggregate gross sales proceeds of $6,304,786.
The Maumelle Property was previously owned by Michael G. Todd and John W.
DeHaven, through a general partnership known as DeHaven, Todd & Company ("DTC"),
for approximately five years, from 1988 to 1993. In an uncontested foreclosure
action, DTC transferred the Maumelle Property to Century, successor to the
Resolution Trust Corporation (the "RTC"), which then was receiver for San
Jacinto Savings Association, the holder of a DTC promissory note secured by the
Maumelle Property. Century acquired rights to its claims on the Maumelle
Property from the RTC in February, 1993.
On February 17, 1994, the Predecessor Corporation filed another Form 10
registration statement with the SEC, but later withdrew it because of
significant comments from the SEC and the Predecessor Corporation's lack of
sufficient resources to satisfactorily respond to the SEC's comments.
In May 1994, the Predecessor Corporation formed a wholly-owned subsidiary,
AWEC Homes, Inc., an Arkansas corporation (the "Home Construction Subsidiary"),
for the purpose of building single family homes on lots owned by the Predecessor
Corporation. The Home Construction Subsidiary, which later changed its name to
Capitol Homes, Inc. on January 29, 1996, has had no construction operations.
In November 1994, Vick and PetroSource sold their remaining shares of the
Predecessor Corporation common stock to Charlie Corporation and Prescott LP in
consideration of strategic planning services.
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The Operating Subsidiary refinanced its $6,737,000 Century promissory note
in September 1995 by (a) borrowing $3,500,000 from Resure, Inc., an Illinois
Insurance Exchange member syndicate ("Resure"), to make a cash payment of
$2,500,000 to Century (the "Resure Loan I"), (b) issuing two promissory notes to
Century, in the amount of $1,400,000 (the "Century Note I") and $350,000 (the
"Century Note II"), respectively, to replace the original Century promissory
note, and (c) issuing 700,000 shares of Common Stock to Century. In
consideration of the cash payment, promissory notes, and stock, Century released
all of the real property securing the original promissory note and accepted
approximately 36 acres of Maumelle Property commercial lots as collateral to
secure the $1,400,000 Century Note I. The Resure Loan I was evidenced by a
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promissory note (the "Resure Note I") which is secured by approximately 1,045
acres of the Maumelle Property residential acreage. Effective September 30,
1997, the Company entered into a settlement agreement with Century (the "Century
Settlement Agreement) to cancel the Century Note I and Century Note II in
exchange for the delivery of a deed to 36 acres of the commercial Maumelle
Property and an additional 3.8 acres of commercial land in Maumelle, Arkansas
(the "Corner Tract") that the Company acquired on May 7, 1997. On April 17,
1998, the Operating Subsidiary exercised its option under the Century Settlement
to purchase the 36 acres of commercial property, the 3.8 acre Corner Tract, and
700,000 shares of the Company's voting common stock owned by Century, for a
total purchase price of $2,132,057. The Company holds the common stock as
Treasury Shares.
Concurrently with the Resure Loan I, Resure issued to the Operating
Subsidiary a subordinated surplus debenture in the original principal amount of
$3,500,000 (the "Resure Debenture"). As consideration for the Resure Debenture,
the Operating Subsidiary issued a $3,500,000 promissory note to Resure (the
"Resure Note II"), which was secured by approximately 410 acres of the 1,044
acres of residential property securing the Resure Loan I. In February 1997, an
Illinois court found that Resure was insolvent, ordered that Resure be
liquidated, and appointed the Illinois Director of Insurance, Mark Boozell, (the
"Resure Liquidator") to oversee the liquidation. In May 1997, Resure's
liquidator agreed to release 67 acres held as collateral in exchange for
$675,100 to be placed in a cash collateral account. Effective September 30,
1997, the Company entered into a settlement agreement with the Liquidator of
Resure (the "Resure Settlement Agreement") whereby the Liquidator modified the
Resure Note I to bring all past due payments current in return for acceleration
of the maturity date from July 1, 2000 to September 1, 1999 and released the
approximately 344 acres that secured the Resure Note II. The Liquidator also
agreed to cancel the Resure Note II in exchange for the Company's termination of
its right to the Resure Debenture. The Resure Debenture was acquired by the
Operating Subsidiary on September 1, 1995, as consideration for the $3,500,000
Resure Note II. The Operating Subsidiary was entitled to receive semi-annual
payments of principal and interest on the Resure Debenture, which generally
matched the amount and timing of the semi-annual payments due to Resure under
the Resure Note II. The Resure Settlement Agreement was approved by the Circuit
Court of Cook County, Illinois, Chancery Division, on October 24, 1997.
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Subsequent to the Company's fiscal year end, a foreclosure action was
instituted by the Resure Liquidator, against the Operating Subsidiary in the
Chancery Court of Pulaski County, Arkansas. Resure is seeking to foreclose on
approximately 701 acres of the Large Residential Tract of the Maumelle Property
securing the $3,500,000 Resure Note I and up to $2,000,000 in developer's fees.
The Resure Note I is currently in default. See ITEM 2, "DESCRIPTION OF
PROPERTY--Subsequent Events," ITEM 3, "LEGAL PROCEEDINGS," and ITEM 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - LIQUIDITY AND
CAPITAL RESOURCES -- Certain Recent Evens Relating to the Company's Indebtedness
and Liquidity Requirements."
In order to effectuate a change in domicile and name change approved by a
majority of the Predecessor Corporation shareholders, the Predecessor
Corporation merged, effective January 30, 1996, into Capitol Communities
Corporation, a Nevada corporation formed in August 1995 solely for the purpose
of the merger. Under the terms of the merger, each share of Predecessor
Corporation common stock was converted to a single share of Capitol Communities
Corporation common stock (the "Common Stock"), and Capitol Communities
Corporation succeeded to all of the assets, rights, obligations and liabilities
of the Predecessor Corporation.
On April 17, 1997, the Company formed Capitol Resorts, Inc., an Arkansas
corporation (the "Resort Subsidiary"), for the purpose of conducting the
Company's vacation ownership interest operations. See below "--Business of the
Company."
On July 30, 1997, the Company acquired Capitol Resorts of Florida, Inc.
(the "Florida Resorts Subsidiary"), a newly formed Florida Corporation pursuant
to an Agreement and Plan of Reorganization between MLT Management Corp.("MLT"),
a corporation not affiliated with the Company, the Company and the Florida
Resorts Subsidiary. Under the agreement MLT transferred its contract right to
purchase approximately 36 acres of land and improvements near Disney World in
Osceola County, Florida (the "Florida Bible College Property"). The Company
acquired all of the outstanding stock in the Florida Resorts Subsidiary in
exchange for the issuance of 100,000 shares of Company common stock to MLT. The
Florida Resorts Subsidiary then closed the purchase of the Florida Bible College
Property July 30, 1997, at a purchase price of $922,000 plus costs. On July 30,
1998, the Florida Bible College Property was transferred to Capitol SB
Development Corporation, a wholly-owned subsidiary of the Florida Resorts
Subsidiary. See below "--Business of the Company," ITEM 2, "DESCRIPTION OF
PROPERTY," and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF
OPERATION - LIQUIDITY AND CAPITAL RESOURCES -- Certain Recent Evens Relating to
the Company's Indebtedness and Liquidity Requirements."
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. See below "--Business of the Company," and ITEM 2, "DESCRIPTION OF
PROPERTY."
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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 two ground leases and improvements which
include 16 long term lease units ("LTL") in Pompano Beach, Florida (the "Oceans
Villas" Property), and approximately $294,000 in promissory notes (the "Ocean
Villas Paper") created from the prior sale of four LTL units. See below "--
RECENT BUSINESS DEVELOPMENT," ITEM 2, "DESCRIPTION OF PROPERTY -Subsequent
Events," and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
- - LIQUIDITY AND CAPITAL RESOURCES -- Certain Recent Evens Relating to the
Company's Indebtedness and Liquidity Requirements."
On April 21, 1998, the Resorts Subsidiary formed Capitol Club International
Inc.("Capitol Club"), a Florida corporation, for the purpose of the development
and sales of retail memberships. Capitol Club intends to become a full service
leisure travel and vacation provider, including membership sales, travel
reservation services, member fulfillment, discount vacation packages, and
wholesale inventory exchange. Capitol Club has yet to commence operations. See
below, "--Business of the Company."
On April 29, 1998, the Florida Resorts Subsidiary formed 396-R Corporation,
a Florida corporation, for the purposes of holding the Florida Bible College
Property. On July 30, 1998, 396-R Corporation changed its name to Capitol SB
Development Corporation ("Capitol SB"). See ITEM 2, "DESCRIPTION OF PROPERTY."
On April 30, 1998, the Resort Subsidiary acquired all of the membership
interests of Entry Resorts International, LLC, a New Hampshire limited liability
company ("ERI") and Entry Resorts Marketing, LLC, a New Hampshire limited
liability company ("EMI"), from unaffiliated third parties. ERI and EMI are
engaged in the development, marketing and sale of vacation packages and time
share products and services. See below "--BUSINESS OF THE COMPANY."
RECENT BUSINESS DEVELOPMENT
On July 29, 1998, the Company entered into a contract with an unaffiliated
third party purchaser to sell approximately 7.4 acres of the Maumelle Commercial
Property for a total purchase price of $300,000. The sale of the property
closed on January 5, 1999, with net proceeds to the Company of $273,726.24.
On May 3, 1999, Entry Resorts International LLC changed its name to Capitol
Resort Club, LLC ("CRC").
On May 3, 1999, the Resort Subsidiary dissolved Entry Resorts Marketing,
LLC, which had no assets or liabilities.
On August 21, 1998, the Resorts Subsidiary formed Capitol Resorts Exchange
Services, Inc. ("Exchange Services"), a Florida corporation, for the purpose of
providing timeshare exchange services for its vacation interval properties.
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Effective October 15, 1998, the Florida Resorts Subsidiary disposed of its
interest in the Ocean Villas Property by exchanging the outstanding and issued
shares of OPV for 32,305 shares of the Company's voting common stock owned by
MLT Management Corporation ("MLT Management"). The exchange agreement between
the Florida Resorts Subsidiary and unaffiliated third parties, MLT Management,
Ocean Palms Resort, Inc., and B&G Acceptance Corp., exchanges OPV's interest in
two ground leases plus improvements comprised of the 16 Ocean Villas LTL units,
the promissory notes arising from the sale of the units and the first and second
mortgages encumbering the ground leases for the 32,305 shares of the Company's
common stock held by MLT Management. See ITEM 2, "DESCRIPTION OF PROPERTY," and
"--Subsequent Events," and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN
OF OPERATION - LIQUIDITY AND CAPITAL RESOURCES -- Certain Recent Evens Relating
to the Company's Indebtedness and Liquidity Requirements."
On March 29, 1999, a Contribution Agreement was entered into between the
Operating Subsidiary and Trade Partners, Inc. ("Trade Partners"), an
unaffiliated third party, for the purpose of forming TradeArk Properties, LLC
("TradeArk Properties"), an Arkansas limited liability company which will
develop and sell real estate. On June 1, 1999, an amendment to the Contribution
Agreement was executed by the parties extending the closing date (the "Closing
Date") to no later than June 30, 1999. On June 14, 1999, the parties performed
all of the terms and obligations of the Contribution Agreement, including the
capitalization of TradeArk Properties.
Trade Partners, a Michigan corporation that acquires, holds and transfers
life insurance policies on persons with limited life expectancies, referred to
as viatical settlement contracts, contributed to TradeArk Properties viatical
settlement contracts that the parties determined had a discounted net present
value of $8,3000,000. The capital contribution provides Trade Partners with a
64.84% membership interest in TradeArk Properties.
The Operating Subsidiary contributed certain tracts of its Maumelle
Property, including 192 acres of single-family lots ("Pine Ridge Tract"); 19
acres of multi-family lots ("Rector Mountain Tract"); 40 acres of commercial
lots ("Tract D"); and 6 acres of commercial lots(Tract E"), (collectively known
as the "Contributed Maumelle Property"). TradeArk Properties assumed $3,800,000
in debt collateralized by the Contributed Maumelle Property. The fair market
value of the Contributed Maumelle Property was determined by the parties to be
$8,300,000, which after the assumed debt, represented a capital contribution by
the Company of $4,500,000 or a 35.16% membership interest in TradeArk
Properties.
Simultaneously on the Closing Date and pursuant to the terms of the
Contribution Agreement, TradeArk Properties secured a $4,000,000 loan from New
Era Life Insurance Company ("New Era"). The loan has a fixed interest rate of
13% per annum, and matures in 30 months from the date of the loan when all
accrued interest and principal is due. $3,156,581.92 of the New Era loan
proceeds were used to retire loans held by the Company and secured by part of
the Contributed Property. The New Era loan is secured by the Contributed
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Property and the viaticals settlement contracts. After legal fees and other
closing costs, the Company received from TradeArk Properties $930,713.18 of the
New Era loan proceeds. The Company intends to use the proceeds for operating
capital and expenses.
TradeArk Properties is managed by a manger selected by majority of the
membership interest in TradeArk Properties. (See ITEM 2, "DESCRIPTION OF
PROPERTY and ITEM 6, MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION -- CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S INDEBTEDNESS AND
LIQUIDITY REQUIREMENTS."
On March 31, 1999, a Plan and Agreement for Corporate Separation
("Separation Plan") was entered into between the Company and Charlie
Corporation, a related party. On June 14, 1999, the parties executed a First
Amendment to the Settlement Plan. Under the terms of the Separation Plan,
Charlie Corporation exchanged 2,839,689 shares of the Company's common stock for
all of the issued and outstanding capital stock of the Resort Subsidiary, and
the Florida Resorts Subsidiary, both of which are wholly-owned subsidiaries of
the Company. The exchange also included the Resort Subsidiary's solely-owned
interest in Capitol Club, Exchange Services, Capitol Resorts International and
Entry Resorts Marketing (dissolved May 3, 1999), and the Florida Resorts
Subsidiary's solely-owned interest in Capitol SB Development. Under the terms of
the Separation Plan, Charlie Corporation assumed the liabilities, including
$2,100,000 in related debt, for the Resort Subsidiary and Florida Resorts
Subsidiary, effective June 14, 1999.
With the exchange the Company disposed of its interest in approximately 36
acres of land and improvements near Disney World in Osceola County, Florida held
by Capitol SB Development, and the rights to a ground lease and improvements
referred to as the Ocean Palms Resort located in Pompano Beach, Florida. The
Ocean Palms Resort Property consists of a 53 long term leasehold unit complex,
pool, office areas, parking area and other amenities. The assignment of the
ground lease rights is held by the Florida Resorts Subsidiary.
The parties determined that the fair market value of the stock in the
Resorts Subsidiary and the Florida Resorts Subsidiary was $3,344,987 and the
fair market value of the Company's stock was $3,344,987. The Company is holding
the 2,839,689 shares as treasury shares.
Pursuant to the terms of the Separation Plan, Herbert E. Russell, a
director of the Company who is the grantor and trustee of an irrevocable trust
which owns 100% of the issued and outstanding shares of Charlie Corporation,
resigned as director of the Company on June 14, 1999.
Management anticipates the transaction will qualify as a tax-free corporate
separation and exchange for federal tax purposes. However, since neither party
has requested a ruling by the Commissioner of Internal Revenue, there can be no
assurance the transaction will be treated as a tax-free
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corporate separation and exchange. See ITEM 2, "DESCRIPTION OF PROPERTY," ITEM
6, MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- Certain Recent
Events Relating to the Company's Indebtedness and Liquidity Requirements," and
ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In addition, since the Company's fiscal year-end, it has sold a right of
way to the Maumelle Water Management of the City of Maumelle for a price of
$5,000. On June 30, 1999, the Company sold approximately 30 acres of single-
family lots to an unaffiliated third party for a total sales price of
$535,226.40. The Company had net proceeds of $146,218.31, after paying $364,000
on the First Arkansas Valley Bank line of credit, which secures a portion of the
single-family lots. See ITEM 2, "DESCRIPTION OF PROPERTY," ITEM 6, MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- Certain Recent Events Relating
to the Company's Indebtedness and Liquidity Requirements."
BUSINESS OF THE COMPANY
The following discussion of the "BUSINESS OF THE COMPANY," is qualified in
its entirely by events subsequent to the Company's fiscal year ended September
30, 1998. On June 14, 1999, the Company divested all interest in its VOI
properties. The Board of Directors (the "Board") determined that it was not in
the best interest of the Company to continue to operate its VOI properties in
Florida or to develop or acquire other VOI properties. The Board's decision
resulted from a determination to focus on its primary business of developing and
selling single-family property. See above, ITEM 1, "DESCRIPTION OF BUSINESS -
RECENT BUSINESS DEVELOPMENT," and ITEM 2, "DESCRIPTION OF PROPERTY."
GENERAL. The Company is in the business of developing and selling real
estate, primarily in the City of Maumelle, Arkansas, a 5,000 acre planned
community located on the Arkansas River, across from the western Little Rock
area and fifteen miles from downtown Little Rock, Arkansas. The Company also
intends to engage in vacation ownership operations consisting of the following:
(1) the acquisition, renovation, development and operation of vacation ownership
resorts, hotels and other vacation properties, (2) marketing and selling
vacation ownership interests ("VOIs") and LTLs interest in such properties
(collectively, "Vacation Intervals"), and (3) providing financing for the
purchase of Vacation Intervals at its properties. Although the Company has
acquired properties which it intends to develop as Vacation Intervals, no
significant operations have commenced.
The Company's real estate as of September 30, 1998, consisted of the
remaining unsold portion of the Maumelle Property consisting of approximately
1,767 acres, approximately 36 acres of the Florida Bible College land located in
Osceola, Florida, the Ocean Palms Resort Property consisting of the lease rights
to 120 feet of beachfront land and improvements, and the Ocean Villas Property,
consisting of two ground lease rights to a four lot parcel of land and
improvements. The Ocean Resort Property and the Ocean Villas Property are
located in Pompano Beach, Florida. During the fiscal year ended September 30,
1998, the Operating Subsidiary exercised its option under the Century Settlement
to purchase the 36 acres of commercial property and 3.8 acres of
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commercial property known as the corner tract ("Corner Tract"). During fiscal
year, the Company sold one lot of the Pine Ridge Maumelle real estate to the
Maumelle Water Management District for an aggregate sales price of $25,000.
During the fiscal year ended September 30, 1998,the Company's business has
consisted primarily acquiring VOI properties. Although management of the
Company during the last two fiscal years, decided to shift the Company's primary
focus from selling land to the construction and sale of single-family homes, and
the development, sale and operation of vacation ownership intervals, the Company
has not yet commenced material development, building or other operational
activities and will require substantial funding before it can do so. Moreover,
the Company is suffering severe liquidity problems which prevents the Company
from conducting any meaningful business activities. There can be no assurance
that the Company will be able to raise sufficient capital to cure its liquidity
problems and pursue the business objectives, strategies or transactions
discussed herein. See ITEM 3, "LEGAL PROCEEDINGS," ITEM 6, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," and ITEM 7, "FINANCIAL
STATEMENTS."
The Maumelle Property is managed by Maumelle Enterprises, Inc. ("Maumelle
Enterprises"), a real estate management firm that is affiliated with certain
officers, directors and controlling shareholders of the Company until March,
1997, and as of the date of this Report is still affiliated with certain
officers of the Company. The Company expects that Maumelle Enterprises will
continue in the foreseeable future to manage the Maumelle Property and any other
Maumelle-area real property the Company may acquire. In other geographic areas,
the Company expects to engage local unaffiliated brokers to sell or manage its
properties. See ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--
SERVICES PROVIDED BY AFFILIATED COMPANIES."
The Company managed and operated the vacation ownership properties in
Pompano Beach, Florida until it divested its interest in such properties,
subsequent to the Company's fiscal year-ended September 30, 1998.
PRINCIPAL PRODUCTS AND MARKETS.
RESIDENTIAL AND COMMERCIAL PROPERTIES. The Company plans to conduct its
single-family development and construction activities primarily in Arkansas,
through the Operating Subsidiary and/or the Home Construction Subsidiary. The
Company intends to develop residential lots and to construct single-family
homes, apartments, and commercial buildings on the land that it presently owns
in Maumelle or may acquire in Maumelle in the future. Management anticipates
that the Company will develop and sell residential lots and homes primarily with
joint venture partners. The developed properties will be sold to contractors,
private home purchasers and apartment or commercial building operators, as
appropriate. See ITEM 2, "DESCRIPTION OF PROPERTY--PROGRAM OF DEVELOPMENT."
The Company's initial focus in its home-building operations is to develop
single-family homes in the $125,000 to $200,000 price range on the approximately
3,800 unimproved single-family home lots it owns in Maumelle and
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on improved lots it intends to acquire from third parties in Maumelle. The
Company does not expect to operate, manage or lease any of the single-family
homes, apartment, or commercial properties it may develop.
The Company intends to sell vacant property from its real estate inventory
only as needed to meet liquidity requirements or if Company management
determines that a particular property is not appropriate for development by the
Company. During the fiscal year ended September 30, 1998, the Company has sold
one lot of its real property for an aggregate amount of $25,000. See ITEM 6
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION---LIQUIDITY AND
CAPITAL RESOURCES--Certain Recent Capital Raising Transactions." The Company
expects that any such land sold in the future likely will be land which has been
zoned for commercial or multi-family use, since the Company wishes to retain as
many single-family home lots, as it can for development and sale by the Company.
Company management expects that any such commercial or multi-family properties
sold will be purchased by other real estate developers, who may compete with the
Company in any development activity undertaken by the Company in Maumelle.
Based on current sales trends as evidenced by building permits issued,
recent improvement bond refinancing and renewed efforts of the Maumelle City
staff to attract industrial development, Management of the Company believes that
there is substantial unmet demand in the Maumelle area for single-family homes
in the $125,000 to $200,000 price range. There can be no assurance, however, as
to the existence of such demand or how long such demand will continue or that
the Company will be able to sell all of the homes it may build in Maumelle.
VACATION INTERVALS. The Company intends to sell Vacation Intervals in
vacation ownership properties owned or to be acquired by the Company. The
Company initially planed to complete the remodeling and sale of whole ownership
LTL interests in the 16 unit Ocean Palms Villas property in Pompano Beach, which
it recently acquired. Six of the 16 units were remodeled during the Company's
fiscal year ended September 30, 1998, with no units sold during this time
period. Subsequent to the Company's fiscal year end, on October 15, 1998, the
Florida Resorts Subsidiary entered into an agreement with unaffiliated third
parties MLT Management, Ocean Palms Resort, Inc., and B&G Acceptance Corp. to
exchange the OPV stock held by the Florida Resorts Subsidiary for 32,305 shares
of the Company's common stock held by MLT Management; thereby divesting the
Company of the Ocean Villas Property, including all liabilities thereof. See
above "-Recent Business Development." The Company also plans to construct a new
hotel on its Florida Bible College Property when it can obtain adequate
financing. The hotel which will be utilized to sell Vacation Intervals in the
price range of $10,000 to $12,000 per week, assuming it can obtain construction
financing. The Company manages and operates the vacation ownership properties
it acquired in Pompano Beach. The Company intends to manage and operate the
vacation ownership properties it acquires or develops in Florida and other
areas, including the Florida Bible College Property. The Company plans to
conduct its vacation ownership operations primarily through individual
subsidiaries to be owned by the Resort Subsidiary.
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Subsequent to the Company's fiscal year ended September 30, 1998, the
Company entered into a Separation Agreement with Charlie Corporation, an
affiliated party, to exchange 2,839,689 shares of the Company's common stock for
all of the outstanding and issued shares of the Resort Subsidiary and the
Florida Resorts Subsidiary; thereby divesting the Company of the Ocean Palms
Property and the Florida Bible Property, including all liabilities thereof. See
above "-Recent Business Development," ITEM 2, "DESCRIPTION OF PROPERTY--PROGRAM
OF DEVELOPMENT," ITEM 3, "LEGAL PROCEEDINGS," ITEM 6, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION - Certain Events Relating to the Company's
Indebtedness and Liquidity Requirements," and ITEM 12, "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."
Vois and LTLs. The purchase of a Vacation Interval typically entitles the
buyer to use a fully-furnished vacation residence, generally for a one-week
period each year, in perpetuity. Typically, the purchaser of a VOI acquires an
ownership interest in the vacation residence, which is often held as tenant in
common with other buyers of interests in the property generally a one-week
period each year in perpetuity. The purchaser of an LTL typically acquires a
long-term leasehold interest in the property, and therefore owns all 52 weeks of
a year for a specified number of years, typically 50 to 60 years.
The owners of VOI's typically manage the property through a non-profit
homeowners' association, which is governed by a Board consisting of
representatives of the developer and owners of Vacation Intervals at the resort.
The Board hires an agent, delegating many of the rights and responsibilities of
the homeowners' association to a management company, as described above,
including grounds landscaping, security, housekeeping and operating supplies,
garbage collection, utilities, insurance, laundry and repair and maintenance.
In the case of LTLs, the same functions are performed by the landlord or a
management company selected by the landlord.
Each Vacation Interval owner typically is required to pay the homeowners'
association or management company, a share of all costs of maintaining the
property. These charges can consist of an annual maintenance fee plus applicable
real estate taxes and special assessments, assessed on an as-needed basis. If
the owner does not pay such charges, the owner's use rights may be suspended and
the homeowners' association or the holder of the note and assignment of the
leasehold interest may foreclose on the owner's Vacation Interval.
The Vacation Ownership Industry and Market. The vacation ownership
industry has existed in the United States since the late 1960s and has during
the past few years become one of the fastest growing real estate and vacation
industries in the country, as reported by the American Resort Development
Association (the "ARDA"), a trade association for the vacation ownership
industry. According to the ARDA in a study for the year ended December 31,
1997,it is estimated that approximately 2.0 million United States families own
VOI units worldwide and that sales volume for 1997, in the United States was in
excess of $2.72 billion, a 25% sales increase over 1996, and in excess of $6.0
billion worldwide. The average VOI unit in the United States sells for
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$10,000 for a one week ownership interval, according to industry sources. LTL
interest typically sell in the range of $60,000 to $125,000 per unit, depending
upon the unit's location and size.
For many vacationers, particularly those with families, a lengthy stay at a
quality commercial lodging establishment can be very expensive, and the amount
of space required by a family (without renting multiple rooms) makes it
uneconomical for vacationers. Also, room rates and availability at such
establishments are subject to change periodically. In addition to providing
improved lifestyle benefits to owners, vacation ownership presents an economical
alternative to commercial lodging for vacationers.
The Company believes that, based on published industry data, the following
factors have contributed to the increased acceptance of the vacation ownership
concept among the general public and the substantial growth of the vacation
ownership industry over the past 15 years:
. Increased consumer confidence resulting from consumer protection regulation
of the vacation ownership industry and the entrance of brand name national
lodging companies to the industry;
. Increased flexibility of vacation ownership due to the growth of
international exchange organizations;
. Improvement in the quality of both the facilities themselves and the
management of available vacation ownership resorts;
. Increased consumer awareness of the value and benefits of vacation
ownership including the cost savings relative to other lodging alternatives; and
. Improved availability of financing for purchasers of Vacation Intervals.
The vacation ownership industry traditionally has been highly fragmented
and dominated by a large number of local and regional resort developers and
operators, each with small resort portfolios generally of differing quality. The
Company believes that one of the most significant factors contributing to the
current success of the vacation ownership industry is the entry into the market
of some of the world's major lodging, hospitality and entertainment companies.
Such major companies which now operate or are developing Vacation Interval
resorts include Marriott Ownership Resorts, The Walt Disney Company, Hilton
Hotels Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts, and Inter-
Continental Hotels and Resorts, as well as Primus Hotel Corporation and Westin
Hotels & Resorts.
The Company believes that national lodging and hospitality companies are
attracted to the vacation ownership concept because of the industry's rapid
historic growth rate and high profit margins. In addition, such companies
recognize that Vacation Intervals provide an attractive alternative to the
traditional hotel-based vacation and allow the hotel companies to leverage
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their brands into additional resort markets where demand exists for
accommodations beyond traditional hotels.
According to information compiled by the ARDA for the year ended December
31, 1997, the prime market for Vacation Intervals is the 40-55 year age range
who are reaching their the peak of their earning power and are rapidly gaining
more leisure time. The median age of a Vacation Interval buyer at the time of
purchase is 48. The median annual household income of current Vacation Interval
owners in the United States is approximately $63,000, with approximately 35% of
all Vacation Interval owners having annual household income greater than $75,000
and approximately 17% of such owners having annual household income greater than
$100,000. Despite the growth in the vacation ownership industry as of December
31, 1994, Vacation Interval ownership has achieved only an approximate 3.0%
market penetration among United States households with income above $35,000 per
year and 3.9% market penetration among United States households with income
above $50,000 per year.
According to the ARDA study, the three primary reasons cited by consumers
for purchasing a Vacation Interval are (i) the ability to exchange the Vacation
Interval for accommodations at other resorts through exchange networks (cited by
82% of Vacation Interval purchasers), (ii) the money savings over traditional
resort vacations (cited by 61% of purchasers) and (iii) the quality and appeal
of the resort at which they purchased a Vacation Interval (cited by 54% of
purchasers). According to the ARDA study, buyers have a high rate of repeat
purchases: approximately 41% of all Vacation Interval owners own more than one
interval representing approximately 65% of the industry inventory and
approximately 51% of all owners who bought their first Vacation Interval before
1985 have since purchased a second Vacation Interval. In addition, customer
satisfaction increases with length of ownership, age, income, multiple location
ownership and accessibility to Vacation Interval exchange networks.
The Company intends to take advantage of these demographic and other trends
if it is able to extend, replace, convert into long-term debt or retire its
current short-term debt obligations and obtain the necessary funds to commence
development. See "- - GROWTH STRATEGIES," below. Based on past industry
statistics, the Company expects the vacation ownership industry to continue to
grow as the baby-boom generation continues to enter the 40-55 year age bracket,
the age group which purchased the most Vacation Intervals in 1997.
MARKETING AND ADVERTISING.
The Company intends to develop a marketing and advertising plan, with
emphasis on the print media, to promote the sale of homes built by the Company
on the Maumelle Property. The Company also plans to build, decorate, furnish
and landscape model homes to facilitate sales on the Maumelle Property. The
Company intends to use community, regional and cooperative brokers to sell the
lots, homes or other properties it develops.
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The Company intends to employ a variety of marketing programs to generate
prospects for Vacation Interval sales efforts, which would include targeted
mailings, overnight mini-vacation packages at the vacation ownership resorts or
hotels the Company intends to develop, gift certificates, seminars and various
destination-specific local marketing efforts. Additionally, the Company intends
to offer incentive premiums to guests to encourage resort tours, in the form of
entertainment tickets, hotel stays, gift certificates or free meals. The
Company also intends to employ the traditional direct mail channels of
marketing, as well as telemarketing organizations and major travel agents to
promote the sale of Vacation Intervals. The Company expects to use an on-site
sales force at the vacation ownership resorts it intends to develop to market
its Vacation Interval product.
On April 30, 1998, the Resort Subsidiary acquired all of the membership
interests of CRC. CRC owns and operates a travel club with approximately 11,000
members. CRC will primarily concentrate on the development and sales of
wholesale travel club memberships and provide lodging fulfillment to all of its
members. Capitol Club, a wholly-owned subsidiary of the Florida Resorts
Subsidiary, will concentrate on the development and sales of retail memberships
and will become a full service leisure travel and vacation provider, including
membership sales, travel reservation services, member fulfillment, discount
vacation packages, and wholesale inventory exchange. Capitol Club has yet to
commence operations.
The Company intends to commence its Vacation Interval marketing activities
by selling VOI units on its Florida Bible College and selling discount vacation
packages, which would include stays at the hotel that the Company intends to
develop on the Florida Bible College Property near Disney World in Osceola,
Florida. See ITEM 2, "DESCRIPTION OF PROPERTY" and "PROGRAM OF DEVELOPMENT-
Development of Vacation Ownership Properties." The Company intends to employ
sales representatives at the hotel to sell Vacation Intervals to the hotel
guests.
GROWTH STRATEGIES.
The Company's primary business objective is to increase long-term total
returns to shareholders through appreciation in value of the Common Stock. The
Company intends to achieve this objective by implementing the long-term growth
strategies summarized below. The Company will not be able to implement any of
these strategies if it cannot overcome its present illiquidity and raise
substantial additional capital to commence material development operations, of
which there can be no assurance. See ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION."
DEVELOPMENT OF MAUMELLE PROPERTY AND VACATION OWNERSHIP OPERATIONS. The
------------------------------------------------------------------
Company initially intends to focus on the building and sale of single-family
homes in Maumelle, Arkansas, the construction and acquisition of vacation
ownership properties, and the sale and marketing of Vacation Interval interests
in such properties. The Company believes that such activities are the Company's
most significant growth opportunities.
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Development of Maumelle Property. The Company's growth strategy with
--------------------------------
respect to the Maumelle Property is to focus on the building and sale of single-
family lots and homes on improved lots it intends to acquire in Maumelle and on
the approximately 3,800 unimproved single-family home lots that are now part of
the Maumelle Property.
Of the approximately 5,300 single-family vacant sites in the City of
Maumelle, approximately 1,500 sites are not owned by the Company. The Company
plans to acquire some of these single-family sites, including some that are
owned by affiliates of the Company, if it can raise sufficient funds to do so.
Given the Company's ownership of a majority of available home sites in Maumelle,
and the fact that under Maumelle's current Master Land Use Plan little or no new
property can be added to the City of Maumelle without public hearings regarding
any proposed annexation of land by the City and the subsequent approval by the
City's Board of Directors, the Company believes it can achieve a dominant
position in the Maumelle market for single-family home sites. Management
expects that this dominance will enable the Company to implement an orderly
build-out program designed to maximize the selling prices of the homes it sells.
See ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--POSSIBLE
ACQUISITIONS OF LAND FROM AFFILIATES."
Vacation Interval Operations. The Company's growth strategy with respect
----------------------------
to its proposed vacation interval business is to capitalize on the increasing
popularity of Vacation Intervals by identifying and pursuing attractive
acquisition, conversion, development and marketing opportunities in the
industry.
The Company intends to acquire and/or develop vacation interval properties
in destinations where it discerns a strong demand. In evaluating whether to
acquire, convert or develop a vacation interval property in a particular
location, the Company expects to analyze relevant demographic, economic and
financial data. Specifically, the Company intends to consider the following
factors, among others, in determining the viability of a potential new vacation
interval resort or other property in a particular location: (i) supply/demand
ratio for the purchase of Vacation Intervals in the relevant market and for
Vacation Interval exchanges into the relevant market by other Vacation Interval
owners, (ii) the market's growth as a vacation destination, (iii) the ease of
converting a hotel or condominium property into a vacation interval resort from
a regulatory and construction point of view, (iv) the availability of additional
land at or nearby the property for potential future development and expansion,
(v) competitive accommodation alternatives in the market, (vi) uniqueness of
location, and (vii) barriers to entry that would tend to limit competition.
If the Company can overcome its present illiquidity and raise sufficient
development capital, the Company intends to focus its initial vacation interval
activities in Florida by (1) constructing a hotel on the Florida Bible College
Property near Disney World in Osceola, Florida, and marketing Vacation Intervals
to guests at the hotel, (2) constructing vacation interval units on the Bible
College Property, and (3) acquiring or constructing additional vacation interval
interest in other resort properties in Florida.
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See ITEM 2, "DESCRIPTION OF PROPERTY--CERTAIN PROPERTY RECENTLY ACQUIRED OR TO
BE ACQUIRED" and "--PROGRAM OF DEVELOPMENT." The ARDA estimates that Florida has
a higher concentration of Vacation Intervals than any other state in the United
States. See "--COMPETITION," below.
The Company believes that an important part of its growth strategy will be
to obtain approval to have any vacation interval properties it develops
participate in broad-based Vacation Interval exchange networks. In a 1995 study
sponsored by the Alliance for Timeshare Excellence and the ARDA, the exchange
opportunity was cited by purchasers of Vacation Intervals as one of the most
significant factors in determining whether to purchase a Vacation Interval.
Participation in an exchange network would allow the Company's vacation interval
customers to exchange in a particular year their occupancy right in the unit in
which they own a Vacation Interval for an occupancy right at the same time or a
different time in another participating resort, based upon availability and the
payment of a variable exchange fee. A member may exchange his Vacation Interval
for an occupancy right in another participating resort by listing his Vacation
Interval as available with the exchange organization and by requesting occupancy
at another participating resort, indicating the particular resort or geographic
area to which the member desires to travel, the size of the unit desired and the
period during which occupancy is desired.
Once the Company's first vacation interval property has been developed, the
Company intends to apply to have its property included in a broad-based Vacation
Interval exchange network. There can be no assurance, however that any future
vacation interval properties developed by the Company will be accepted on a
Vacation Interval exchange. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION--RESULTS OF OPERATION--Factors That May Affect Future
Results and Market Price of Stock."
Another important component of the Company's growth strategy in the
vacation interval industry will be the financing of Vacation Interval purchases.
The Company intends to offer financing to purchasers of Vacation Intervals. The
Company anticipates that this financing would be secured by an assignment of
interest or a first mortgage on the underlying Vacation Interval. The Company
intends to raise capital for its operation and/or debt servicing requirements by
selling the promissory notes generated by this activity or using the notes as
collated for future commercial loans.
GEOGRAPHIC MARKETS DIVERSIFICATION. The Company believes that geographic
----------------------------------
diversity in its real property and vacation interval development activities will
be a key factor in achieving long-term stability and growth. The Company intends
to work toward this diversity by considering real estate development and
vacation interval opportunities throughout the United States and by forming
joint ventures with local developers.
PRODUCT DIVERSIFICATION. Although, initially, the Company's primary focus
-----------------------
will be on the construction of single-family homes and vacation interval
properties, the Company intends to diversify its portfolio and income sources
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by developing for sale the commercial and multi-family properties it currently
owns or may acquire in the future.
STRATEGIC ACQUISITIONS. The Company intends to make strategic acquisitions
----------------------
of businesses in geographic areas outside of Arkansas and Florida, particularly
in the vacation interval and home construction industries.
COMPETITION.
The real estate development and vacation interval industries are highly
competitive. In Arkansas--the geographic area in which the Company initially
intends to commence its single-family home and commercial development--there are
numerous large national and regional firms with significantly greater experience
and financial resources than the Company currently possesses. Such firms will
likely compete with the Company in the acquisition of land for development, the
hiring of sub-contractors, experienced management personnel, construction
workers and other employees, and the sale of product. The Company also will
compete for residential sales with the resale market for existing homes, multi-
family home sales, including townhouses and condominiums, and with available
rental properties.
In the vacation interval industry, the Company will be subject to
significant competition from other vacation interval resort owners and
operators, many with extensive experience in the lodging, hospitality and
entertainment areas. Many of the world's most recognized lodging, hospitality
and entertainment companies have begun to develop and sell Vacation Intervals in
resort properties, including, among others, Marriott Ownership Resorts, The Walt
Disney Company, Hilton Hotels Corporation, Hyatt Corporation, Four Seasons
Hotels & Resorts, and Inter-Continental Hotels and Resorts. These entities
possess significantly greater development experience, financial, marketing,
personnel and other resources than those of the Company and may be able to grow
at a more rapid rate or more profitably as a result.
The Company currently has no material presence or reputation in Arkansas
and Florida or any other area in the real estate development or vacation
interval industries, and due to the substantial amount of short-term debt the
Company needs to extend, replace, convert into long-term debt or retire such
debt and also the lack of sufficient capital, it may not be able to commence
significant development activities. As a result, the Company may experience
difficulties in competing with established developers. Although the Company
intends to improve its ability to compete by entering into joint venture or
similar development agreements with established real estate and vacation
interval developers and raising additional capital, there can be no assurance of
the success of any such agreements or attempts to raise capital or the Company's
ability to overcome its present illiquidity.
RAW MATERIALS.
The main raw materials used in the construction of homes and vacation
interval units are concrete and lumber. In addition, the Company will use a
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variety of other construction material, including glass and sheetrock. For
commercial construction the primary materials are steel, concrete and glass. The
Company intends to use materials that are commercially available on competitive
terms from a variety of sources, but there can be no assurance that such
materials will be available on terms that are acceptable to the Company. Since
the Company has not commenced significant construction activities, it does not
yet have any principal suppliers.
GOVERNMENTAL REGULATIONS AND STATE GOVERNMENT APPROVAL OF VACATION INTERVAL
SALES.
The building industry is subject to extensive and complex regulations. The
Company, its subcontractors and any joint venture partners must comply with
various federal, state and local laws, ordinances, rules and regulations
regarding zoning, architectural design, construction, population, density,
availability and installation of utility services, such as water, electricity,
gas, and waste disposal, the preservation of the natural terrain, and other
related matters, which requires resources and expertise which, for the most
part, the Company currently lacks. The Company intends to obtain such resources
and expertise by raising additional capital, hiring appropriate sub-contractors,
and entering into consulting agreements and/or joint venture agreements with
experienced real estate developers and other appropriate parties.
The vacation interval operations of the Company will be subject to
extensive regulation by the federal government and the zoning and other laws in
the state, county and city jurisdictions where the Company's vacation interval
properties will be located and where Vacation Intervals will be marketed and
sold. At the federal level, the Company may be subject to, among others, the
following legislation: the Federal Trade Commission Act, which prohibits unfair
or deceptive acts, the Truth-in-Lending Act, Regulation Z, the Equal Opportunity
Credit Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the
Real Estate Standards Practices Act, the Telephone Consumer Protection Act, the
Telemarketing and Consumer Fraud and Abuse Prevention Act, the Fair Housing Act
and the Civil Rights Acts of 1964 and 1968. In addition, most states including
Florida have adopted laws and regulations regarding the sale of Vacation
Intervals, including laws that will require the Company to file with a state
authority for its approval a detailed offering statement describing the Company,
all material aspects of the project and the sale of the Vacation Intervals.
Most states grant the right to purchasers to cancel a contract of purchase at
any time within a period of time, usually ranging from three to fifteen days.
Other applicable state laws include licensing requirements for sellers of real
estate and travel sellers, and anti-fraud and telemarketing laws, price, gift,
and sweepstake laws, and labor laws.
The Company's Maumelle Property is subject to the City of Maumelle's Master
Land Use Plan. Under this Plan, approximately 1,241 acres of the approximately
1,325 acres of the Maumelle Property that was developable land as of September
30, 1998, was already zoned for single-family homes. The current zoning allows
the Company to apply for building permits for the
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approximately 3,800 single-family home sites located on this acreage. Although
much of the Company's property is currently zoned for single-family homes, none
of the developable land acreage is subdivided and the Company will be required
to incur significant additional cost to subdivide the property into individual
lots. The Company believes it can satisfy all anticipated governmental
requirements involved in the subdivision process, if it obtains adequate
additional funding and expertise.
The Company must seek building permits from the City of Maumelle Building
Inspector for each home it builds in Maumelle. The Company must apply for
building permits for each commercial property it develops in Maumelle from the
Maumelle City Planning Commission and the City's Board of Directors. Although
the Company believes it can satisfy all necessary requirements to obtain
building permits, at the present time, the Company is not seeking building
permits and does not intend to do so until it raises additional capital or
obtains construction funding.
The Company may be required to mitigate any environmental impact on its 446
acres of wetlands in Maumelle that may be caused by the Company's proposed
development activities in Maumelle. Although the Company is not currently aware
of any such mitigation requirements, the Company will be required to obtain
approval from the Army Corp of Engineers of any required mitigation efforts.
The Company may incur additional costs and delays in seeking such approvals and
performing such mitigation. See "--ENVIRONMENTAL LAWS," below.
Delays in obtaining governmental permits and approvals may increase
development costs to the Company. Zoning requirements and restrictions could
become more restrictive in the future, resulting in additional time and money
being spent to obtain approvals for development of the Company's properties.
The Company also may be subject to periodic delays or may be precluded from
developing projects due to building moratoriums or slow-growth or no-growth
initiatives that could be implemented in the future in the areas which it does
business. In addition, governmental authorities could change the zoning of all
or some of the Company's properties, or change vacation interval regulations,
which could result in a decrease in property values.
Under various state and federal laws governing housing and places of public
accommodation the Company is required to meet certain requirements related to
access and use by disabled persons. The Company is likely to incur substantial
costs complying with such laws, which may have a material adverse effect on the
Company. Additional legislation may impose further burdens or restrictions on
owners with respect to access by disabled persons. The ultimate amount of the
cost of compliance with such legislation is not currently ascertainable.
Limitations or restriction arising from such laws may make it difficult for the
Company to develop its vacation interval resort properties and may limit
application of the Company's growth strategy in certain instances or reduce
profit margins on the Company's operations.
The Company believes that, with adequate funding, it can comply with all
applicable laws regarding its real estate development and vacation interval
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operations. There can be no assurance, however, that the Company will be able to
comply with all such laws. The Company expects that the costs of complying with
governmental regulations will be very significant once it commences development
activities. There can be no assurance that the Company will be able to obtain
state approval to sell Vacation Intervals in all jurisdictions in which the
Company desires to sell such interests, or that the cost of complying will not
be so prohibitive as to make it unprofitable to commence vacation interval
operations. Any failure to comply with applicable laws or regulations could
have a material adverse effect on the Company.
ENVIRONMENTAL LAWS.
The Company is subject to various federal, state and local laws, ordinances
and regulations regarding environmental matters. Under these laws, a current or
previous owner or operator of real property may be required to investigate and
clean up hazardous or toxic substances or petroleum product releases at such
property, and may be held liable to a governmental entity or to third parties
for property damage and the costs of investigation, removal and decontamination
incurred by such parties in connection with contamination. The penalty is
imposed whether or not the owner or operator was aware of, or responsible for
the hazardous or toxic substances, and the liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation or responsibility.
The costs of investigation, removal or decontamination of such substances
could be substantial. If such substances are found on real property or there is
a failure to properly remove or decontaminate the area, the property could be
difficult to sell, rent, develop or use to secure debt financing. Persons who
arrange for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting form
environmental contamination emanating from a site. In connection with its
ownership and operation of real property, the Company potentially may be liable
for the foregoing costs.
Certain Federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACMs and may provide for third parties to seek
recovery from owners and operation of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of its
properties, the Company may be potentially liable for such costs.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no
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state or federal requirements regarding the monitoring for, presence of, or
exposure to, radon in indoor air, the EPA and the Surgeon General recommend
testing residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (Pci/L) (the "Recommended Action Level"). The
presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's properties may adversely affect the
Company's ability to develop its residential and commercial properties or sell
Vacation Intervals at such properties, as well as the market value of such
property.
Recently-enacted federal legislation will eventually require the Company to
disclose to potential purchasers of Vacation Intervals at any Company resorts
that were constructed prior to 1978 any known lead-paint hazards and will impose
treble damages for failure to so notify. If the Company decides to renovate and
of the existing buildings on the Florida Bible College Property, or any other
properties that it may acquire in the future, the Company will be subject to
this legislation if the buildings were constructed before 1978, as are the
existing buildings on the Florida Bible College Property.
Electric transmission lines are located in the vicinity of the Company's
properties. Electric transmission lines are one of many sources of electro-
magnetic fields ("EMFs") to which people may be exposed. Research into potential
health impacts associated with exposure to EMFs has produced inconclusive
results. Notwithstanding the lack of conclusive scientific evidence, some states
now regulate the strength of electric and magnetic fields emanating from
electric transmission lines, while others have required transmission facilities
to measure for levels of EMFs. In addition, the Company understands that
lawsuits have, on occasion, been filed (primarily against electric utilities)
alleging personal injuries resulting from exposure as well as fear of adverse
effects from transmission lines has been a factor considered in determining
property values in obtaining financing and in condemnation proceedings in
eminent domain brought by power companies seeking to construct transmission
lines. Therefore, there is a potential for the value of a property to be
adversely affected as a result of its proximity to a transmission line and for
the Company to be exposed to damage claims by person exposed to EMFs.
The Company has had a Phase I investigation conducted on the Maumelle
Property, excluding the approximately 446 acres of wetlands and 7.4 acres of
Commercial Property currently under contract, in December 1998. The
investigation found no evidence of soil or ground water contamination on the
studied property and recommended that a Phase II study was not warranted. This
Phase I assessment was carried out in accordance with accepted industry
practices and consisted of non-invasive investigations of environmental
conditions at the properties, including a preliminary investigation of the sites
and identification of publicly known conditions concerning properties in the
vicinity of the sites, physical site inspections, review of aerial photographs
and relevant governmental records where readily available, interviews of
knowledgeable parties, investigation for the presence of above ground and
underground storage tanks presently or formerly at the sites, a
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visual inspection of potential lead-based paint and suspect friable ACMs where
appropriate, a radon survey, and the preparation and issuance of a written
report. In 1986, an Environmental Protection Agency ("EPA") representative
stated in a letter to a previous owner of the Maumelle Property, that although
part of the Maumelle Property had been used by the United States government
during World War II as a munitions ordnance facility until 1950, the entire site
had been decontaminated by the U.S. government prior to its sale in 1961. In the
letter, the EPA characterized the property as not having any further
environmental concerns. The Company has had a Phase I investigation conducted on
the Florida Bible College Property in April, 1998, which found no evidence of
soil or ground water contamination on the studied property and recommended that
a Phase II study was not warranted. No environmental studies have been conducted
by the Company on the Ocean Palms Resort Property or the Ocean Villas Property.
The Company is not aware of any environmental liability with respect to any
of its real property that the Company believes would have a material adverse
effect on the Company's business, assets, or results of operations.
Nevertheless, there can be no assurance, that the Company's real property does
not contain hazardous or toxic substances, particularly on the property which
has not been subjected to a Phase I investigation, or that the Company will not
incur costs associated with the decontamination of any such substances or
liability arising from any such contamination. No assurance can be given that
the environmental studies conducted on the property reveal all environmental
liabilities or that no prior owner created any material environmental condition
not known to the Company.
The Company believes that compliance with applicable environmental laws and
regulations will have a material adverse effect on the Company, its financial
condition and its results of operations unless the Company can raise substantial
additional capital to fund its operations. The Company believes that its
properties are in compliance in all material respects with all federal, state
and local laws, ordinances and regulations regarding hazardous or toxic
substances. The Company has not been notified by any governmental authority or
any third party, and is not otherwise aware, of any material noncompliance,
liability or claim relating to hazardous or toxic substances or petroleum
products in connection with any of its present properties.
Number of Employees. As of the Company's fiscal year-ended September 30,
1998, the Company and its subsidiaries had 20 full-time employees, and 10 part-
time employees. As of the date of this Report the Company and its subsidiaries
have 10 full-time employees and seven part-time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
GENERAL
The Company's principal asset is the Maumelle Property, located in
Maumelle, Arkansas, title to which is held by the Operating Subsidiary. At the
Company's fiscal year-end, the Maumelle Property consisted of approximately
1,241 acres of single-family sites (which included approximately
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3,800 home sites), approximately 30 acres of multi-family sites, approximately
54 acres of commercial lots, and approximately 446 acres of miscellaneous
undevelopable property. The Maumelle Property is currently zoned under the City
of Maumelle Master Land Use Plan for various development uses, including single-
family residences, multi-family units, and commercial development. As of
September 30, 1998, the Company's single-family home sites in the City of
Maumelle represented approximately 70% of all available vacant land in Maumelle
zoned for single-family homes. Subsequent to the Company's fiscal year-end, the
Company contributed 197 acres of single-family lots, 46 acres of commercial
lots, and 19 acres of multi-family lots of the Maumelle Property to TradeArk
Properties. The Company received a 35.15% membership interest in TradeArk
Properties for the capital contribution of the Contributed Maumelle Property.
See above, ITEM 1, "DESCRIPTION OF THE BUSINESS - RECENT BUSINESS DEVELOPMENT."
The Maumelle Property can be divided into five categories: (1) the Large
Residential Tract, (2) the Pine Ridge Lots, (3) the Multi-Family Lots, (4) the
Commercial Lots, and (5) the Miscellaneous Tract and Property. Each category of
Maumelle Property will be discussed separately below after the following
overview of the City of Maumelle.
As of the fiscal year ended September 30, 1998, the Company's real
property in Florida consisted of approximately 36 acres of land and improvements
in Osceola, Florida; the lease rights to 120 feet of beachfront land and
improvements located in Pompano Beach, Florida; and two lease rights to a four
lot parcel of land and improvements located in Pompano Beach, discussed
separately below. Subsequent to the fiscal year end, the Company exchanged its
interest in the four lot parcel of land and improvements located in Pompano
Beach (the "Ocean Villas Property") for 32,305 shares of the Company's common
stock.
In June 1999, the Company exchanged its Florida VOI properties, which
consists of 36 acres of land and improvements located in Osceola, Florida (the
"Florida Bible College Property"), and the lease rights to 120 feet of
beachfront land and improvements located in Pompano Beach (the "Ocean Palms
Resort"), for 2,839,689 shares of the Company's common stock owned by Charlie
Corporation, a related party. See below, "-- Maumelle Property", and ITEM 12,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Except as otherwise noted, the Company believes that its real property
assets are in good condition and are suitable and adequate for the uses
indicated. Since there are no insurable improvements on the Company's properties
other than the Florida properties discussed below, the Company does not maintain
any insurance coverage on most of its real property assets. Prior to the
divestment of the Florida Bible College Property and the Ocean Palms Resort
Property in June, 1999, both were insured as follows: the Florida Bible College
Property was covered by an insurance policy covering bodily injury in the amount
of $1,000,000 per occurrence and in the aggregate $2,700,000. The Company no
longer maintains a property damage policy on the Florida Bible College Property
inasmuch as it has determined that the present buildings do not meet its needs
and intends to demolish them. The Ocean Palms
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Resort Property was covered by an insurance policy for property damage in the
amount of $2,700,000, commercial general liability policy of $2,000,000 and an
umbrella excess liability policy of $5,000,000. Prior to its sale on October 15,
1998, the Company maintained property insurance of $646,000 for fire and
$650,000 for flood damage on its Ocean Villas Property. The Ocean Villas
Property was also covered by a $2,000,000 commercial general liability policy
and an umbrella excess liability police of $10,000,000. Management believes the
properties were adequately insured.
MAUMELLE PROPERTY
The City of Maumelle. The City of Maumelle is a 5,000 acre planned
community located off Interstate 40 on the Arkansas River. Fifteen miles from
downtown Little Rock, the capital of Arkansas, Maumelle is patterned after other
"new town" communities such as Reston, Virginia, Irvine Ranch in Orange County,
California and Columbia, Maryland.
Under the Master Plan, Maumelle cannot add new property to the city for
residential development without public hearings regarding any proposed
annexation of land by the City and the subsequent approval by the City Board of
Directors. From Maumelle's inception in 1966 to 1996, approximately $120
million has been spent on infrastructure, including sewer and water capacity for
a city of up to 25,000 residents and a system of designated common areas,
including pathways, parks, lakes, a golf course and other recreational areas.
The City of Maumelle was incorporated as a city in 1985. It is governed by a
mayor and city council and has police, fire, and emergency services.
The population of Maumelle has grown at a faster rate than that of
neighboring Little Rock, Arkansas. From 1990 through 1996, Maumelle had a 18%
increase in its population; whereas Little Rock did not show any increase. The
community of Maumelle appears to be attracting more highly educated residents
than does Little Rock. The U.S. Department of Commerce and the Little Rock
Metropolitan Planning Commission ("Metroplan"), a government planning agency,
stated that in 1990, 92.6% of Maumelle residents had completed high school, with
38.8% having four or more years of college. During the same period, only 82% of
Little Rock residents had completed high school and 30.3% had four years or more
of college. Maumelle also exceeds the national average for high school and
college attendance. As of 1990, only 75.2% of U.S. citizens had completed high
school and 20.3% had four or more years of college.
Since 1979, Maumelle has attracted some major companies to its industrial
areas, including Molex, Target Distribution Center, Kinney Shoe Distribution
Center, Carrier (a manufacturing facility), Kimberly Clark (a manufacturing
facility), Ace Hardware Distribution Center, Family Dollar Distribution Center,
and Lamb Packaging and Iskco (both manufacturing facilities). The job growth
rate in the City of Maumelle has increased by 7.5% from 1990 to 1995; during the
same period Little Rock had a job growth rate increase of 14%.
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As of June 30, 1997, the average new home permit value in Maumelle was
$138,480 and the average new home price in Maumelle by 1998 was $156,825, and in
Little Rock was $188,812, according to a Metroplan report. The number of
building permits issued by Maumelle has increased 383.9% between 1990 and 1997,
according to Metroplan. During the same period, Little Rock experienced a
decline in building permit issuances of 1.39%. A total of 124 building permits
were issued in Maumelle in 1995, 220 in 1996, 240 in 1997, and 263 in 1998.
Large Residential Tract. As of the end of the 1998 fiscal year, the Large
Residential Tract was comprised of approximately 1,045 acres of undeveloped
residential. Under current zoning, the Company believes this land can be
subdivided into approximately 3,300 single-family lots. The Large Residential
Tract currently is zoned for residential development.
The Operating Subsidiary has fee title to the Large Residential Tract, all
of which is subject to a first-priority mortgage securing the $3,500,000 Resure
Loan I. Approximately 701 acres of the Large Residential Tract ("Residential
Parcel 1") is retained by the Liquidator as collateral on the Resure Note I,
which was modified pursuant to the terms of the Resure Settlement Agreement,
effective September 30, 1997.
Under the original terms of the Resure Note I, quarterly payments of
principal and interest in the amount of $101,591.16 commenced January 1, 1997,
until its maturity date on July 1, 2000. Prior to that date, interest only
payments were required on a quarterly basis. Under the Resure Settlement
Agreement the Company will continue to pay on the Resure Note I quarterly
installments of principal and interest in the amount of $101,591.16 until the
modified maturity date on September 1, 1999. The balance due at maturity,
assuming payment of all scheduled principal and interest payments and no pre-
payments, will be $3,305,842. The Resure Note I bears interest at a rate of 10%
per annum. As of the date of this Report, the Company has not paid the July 1,
or October 1, 1998 payments or the January 1, or April 1, 1999 payments to
Resure, for an aggregate past due amount of $406,364. The current principal
amount of the Resure Note I is $3,395,189, as of the Company's fiscal year end
and as of June 1, 1999. The Resure Note I may be prepaid at anytime by the
Company without incurring premiums or penalties. As additional consideration for
the Liquidator to enter into the Resure Settlement Agreement, the Company agreed
to pay a developer's fee of $2,000 (the "Developer's Fee") for each lot sold in
Residential Parcel 1, and approximately 344 acres of the Large Residential Tract
("Residential Parcel 2"). In the event that any portion of Residential Parcel 1
is sold prior to being subdivided into single-family lots, the Company will pay
$2,853 per acre, and $5,844.20 per acre if Residential Parcel 2 is sold prior to
being subdivided; however, such Developer's Fees shall not exceed $2,000,000.
The Developer's Fee is secured by a written amendment to the loan mortgage
securing the Resure Note I, and recorded against the Residential Parcel 1 of the
Large Residential Property.
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Subsequent to the Company's fiscal year-end, on April 19, 1999, the Resure
Liquidator instituted a foreclosure action against the Operating Subsidiary
seeking to foreclose on the 701 acres of the Large Residential Tract of the
Maumelle Property, which secures the Resure Note I and the Developer's Fees. On
May 28, 1999, the Operating Subsidiary filed an answer generally denying the
claims. The Company is currently negotiating with Resure to retire the
liability on a discounted basis and have the lawsuit dismissed. The Company
intends to pay off the liability from proceeds from the sale of some of its
Maumelle Property and/or by obtaining additional equity. There can be no
assurance, however, that the Company will prevail in the lawsuit or that
negotiations will be successful or even if they are that the Company will be
able to raise the funds required. See ITEM 3, "LEGAL PROCEEDINGS," and ITEM 6,
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION-LIQUIDITY AND CAPITAL
RESOURCES."
The remaining 344 acres of the Large Residential Property has no mortgages;
however, the property was used to secure a $1,750,000 line of credit at the Bank
of Atkins ("Bank of Atkins Loan I"). Interest is payable at a fixed rate of
9.5% per annum. The loan matured on May 27, 1998, but was extended on the same
terms to December 2, 1999, at which time all principal and interest is due and
payable. The line of credit was extended by First Arkansas Valley Bank, as a
result of a merger between the Bank of Atkins and First Arkansas Valley Bank
(hereinafter referred to as the "First Arkansas Line of Credit I"). As of the
Company's fiscal year-end, an aggregate of $1,750,000 was outstanding on the
First Arkansas Line of Credit Line I. Subsequent to the Company's fiscal year-
end on June 30, 1999, the Company sold approximately 30 acres of the Large
Residential Property for a sales price of $535,226.40. $364,000 of the proceeds
from the sale were used to pay down the First Arkansas Line of Credit Line I.
As of the date of this Report an aggregate of $1,386,000 was outstanding on the
credit line.
On February 12, 1998, the Company obtained a $150,000 loan from the Bank of
Atkins ("Bank of Atkins Loan II) also secured by the same 344 acres of the Large
Residential Tract as the $1,750,000 line of credit from First Arkansas Valley
Bank. Interest was payable at a fixed rate of 10% per annum. The loan matured
on May 27, 1998, at which time all principal and accrued interest was due and
payable. This loan was paid in full on April 15, 1998, from funds advanced
under the line of credit from the Union Planters Bank and secured by the Florida
Bible College Property. See below "--FLORIDA BIBLE COLLEGE PROPERTY," and ITEM
6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- LIQUIDITY AND
CAPITAL RESOURCES."
Pine Ridge Lots. The Pine Ridge Lots are comprised of approximately 197
acres, including 487 single-family lots which have a preliminary plat filed with
the City of Maumelle. The property is zoned for residential development. The
Operating Subsidiary has fee title to the Pine Ridge Lots. There are no
mortgages or liens for indebtedness or any other material encumbrances on the
property.
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Subsequent to the Company's fiscal year-end on June 14, 1999, the Operating
Subsidiary contributed the 197 acres of the Pine Ridge Lots to TradeArk
Properties, in which the Company holds a 35.16% membership interest. TradeArk
Properties anticipates commencing the development of finished residential lots
on the Pine Ridge Lots in September 1999, assuming it can raise sufficient
capital.
Commercial Lots. The Commercial Lots are approximately 54 acres of land
that has been zoned for commercial use. During the fiscal year ended September
30, 1998, the Operating Subsidiary exercised its option under the Century
Settlement to purchase 36 acres of commercial property and the 3.8 acre Corner
Tract for a total purchase price of $2,132,057. Approximately 39.8 acres of the
Commercial Lots are subject to a lien in favor of the First Arkansas Valley
Bank, as security for a $1,875,00 loan which was used to assist the Company in
purchasing the property ("First Arkansas Valley Bank Loan II"). The loan bears
interest at the rate of 10% per annum and matured on October 12, 1998. The loan
has been extended on the same terms to July 16, 1999, at which time all
principal and accrued interest is due and payable. An aggregate of $1,875,000
was outstanding as of the Company's fiscal year-end. Subsequent to the Company's
fiscal year-end, the First Arkansas Valley Bank Credit Line II was paid in full,
in the amount of $1,948,277.04, which represented all interest and principal due
on the loan, as of June 14, 1999. The First Arkansas Valley Bank Credit Line II
was paid from the proceeds of the New Era loan obtained by TradeArk Properties.
The New Era loan is secured by the Contributed Maumelle Property and viatical
settlement contracts.
On June 14, 1999, the Operating Subsidiary contributed 46 acres of the
Commercial Lots to TradeArk Properties, which the Company holds a 35.16%
membership interest. TradeArk Properties proposes to develop 40 acres of
Commercial Lots for sale commencing in fiscal year 1999. TradeArk Properties
intends to hold 6 acres for resale. The Company proposes to develop the
remaining 8 acres of Commercial Lots for sale, either through joint ventures or
through its Home Construction Subsidiary See ITEM 6, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES."
Thirty-six acres of the Commercial Lots are encumbered by a lien securing
payment of special improvement taxes assessed against the property to service a
$380,000 bond issuance by the City of Maumelle, Arkansas Multi-Purpose
Improvement District No. 2. The annual tax on the property is $92,430, payable
each October 10, and was timely paid by the Company.
Multi-Family Lots. The Multi-Family Lots are approximately 30 acres of
land that have been zoned for multi-family use. The Company may sell certain
portions of the Multi-Family Lots to meet liquidity requirements or if the
Company's Management determines that a particular property is not appropriate
for development by the Company. The Operating Subsidiary has fee title to these
lots, subject to the liens discussed below.
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Approximately 30 acres of the Multi-Family Lots are subject to a lien in
favor of the Bank of Little Rock, as security for a $400,000 line of credit
("Little Rock Credit Line I"), a $450,00 line of credit ("Little Rock Credit
Line II"), a $250,000 loan ("Little Rock Credit Line III"), and a $100,000 loan
("Little Rock Credit Line IV") provided by that Bank, of which an aggregate of
$1,199,524 was outstanding as of the Company's fiscal year end. As of the date
of this Report, the Little Rock Credit Lines II, III and IV have been paid in
full. An aggregate of $400,000 is due on the Little Rock Credit Line I, as of
the date of this Report. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and Other
Liquidity Requirements. The $400,000 line of credit and the $250,000 loan
credit bears interest of a fixed rate of 9.5% per annum. The $400,000 line of
credit requires monthly interest payments commencing May 10, 1998, until April
10, 1999, when a balloon payment consisting of the entire principal balance and
accrued interest under the line is due and payable. This line of credit has been
extended to April 10,2000 on the same terms and conditions. The $400,000 line of
credit is secured by approximately 11 acres of the Multi-Family Maumelle
Property. The $450,000 line of credit bears interest at 9.5% per annum, and
requires no monthly payments of interest or principal. The $450,000 line of
credit matured February 5, 1998, at which time the maturity date was extended to
November 5, 1999, or on demand, whichever is sooner. This line of credit is
secured by approximately 19 acres of the Multi-Family Maumelle Property. The
$250,000 loan is payable interest only until September 10, 1998, at which time
the maturity date was extended to September 10, 1999, or on demand, whichever is
sooner. The Little Rock Credit Line III requires five interest only payments
commencing October 10, 1998 and continuing to the maturity date, at which time
all principal and accrued interest is due and payable. This line of credit is
secured by the same 19 acres of Multi-Family Maumelle Property as the $450,000
line of credit. The $100,000 loan bears interest at 9.5% per annum, and is
payable interest only until February 10, 1999, or on demand, whichever is
sooner. The maturity date on the $100,000 line of credit was extended to August
7, 1999. The Little Rock Credit Line IV requires five interest only payments
commencing September 7, 1998 and continuing to the maturity date, at which time
all principal and accrued interest is due and payable. The line of credit is
secured by the same 19 acres of Multi-Family Maumelle Property as the $450,000
and $250,000 line of credit. See ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - - LIQUIDITY AND CAPITAL RESOURCES-Indebtedness and Other
Liquidity Requirements."
As of September 30, 1998, and as of the date of this Report, all ad valorem
taxes on the Multi-Family Lots are current.
Subsequent to the Company's fiscal year-end, the Operating Subsidiary
contributed 19 acres of the Multi-Family Lots to TradeArk Properties. TradeArk
Properties assumed the Little Rock Credit Lines II, III and IV, and on June 14,
1999, paid off these loans in full. TradeArk paid off the Little Rock Credit II
in the amount of $454,802.05, the Little Rock Credit III in the amount of
$250,325.34 and the Little Rock Credit IV in the amount of $100,208.22. The
payments on the Little Rock Credit Lines represented all
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interest and principal due on the loans and were paid from the proceeds of the
New Era loan, which is secured by the Contributed Maumelle Property and the
viatical settlement contracts. TradeArk Properties proposes to hold the 19 acres
of Multi-Family Lots for resale. See ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES."
Miscellaneous Tract and Property. The Miscellaneous Tract and Property
consists of approximately 446 acres of wetlands. The Operating Subsidiary has
fee title to the Miscellaneous Tract and Property, which are held free of any
encumbrances or liens. The Company has no current development plans for such
property. The wetlands property is located in the Arkansas River and,
therefore, is unsuitable for development.
Florida Bible College Property. The Florida Bible College Property located
in Osceola, Florida consists of 36 acres of land near Disney World. Fee title to
such property is held by the Capitol SD Subsidiary. See ITEM 1, "DESCRIPTION OF
BUSINESS." As of the Company's fiscal year end, the Company has not taken
depreciation on the property. Taxes on the property and improvements are
$53,573, due on March 31 of each year.
The Florida Bible College Property consists of buildings and other
improvements. The improvements include two vacant two-story hotel buildings,
totaling approximately 49,450 square feet. The buildings contain 95 rooms, as
well as a lobby area, offices, a cafeteria, a kitchen, and meeting space. The
improvements also include a swimming pool, landscaping, irrigation, an asphalt
paved parking area and concrete walks and curbs. The structures are not
occupied and Management has determined that the facilities are not adequate for
or suitable for the Company's intended use of the property. See "--PROGRAM OF
DEVELOPMENT," below.
Approximately 22 acres are zoned for commercial and industrial use. This
property includes an office/education building, an auditorium, an administrative
building, and five single-family residences. These improvements are in fair to
good condition. The buildings are not occupied.
The approximately 36 acres of the Florida Bible College Property has been
used to secure a $1,000,000 line of credit from Transflorida Bank, which was
acquired by Union Planters Bank in 1998 (hereinafter referred to as the "Union
Planters Bank Line of Credit"). The line of credit 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 Company is required to pay interest only
on a monthly basis until the loan matures on April 1, 1999, at which time the
entire principal and interest is due and payable. The maturity date on this
line of credit has been extended to July 1, 1999. The Company owed $996,281 on
the line of credit as of the fiscal year-end, and as June 1, 1999. As of May 31,
1999, the Company owed $21,986 in past due interest.
On June 14, 1999, subsequent to the Company's fiscal year-end, the Company
exchanged all of the issued and outstanding stock in the Florida
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Resorts Subsidiary and Resort Subsidiary, which owns the Florida VOI properties,
including the Florida Bible College Property, for 2,839,689 shares of the
Company's common stock owned by Charlie Corporation, a related party. The
Florida Resorts Subsidiary assumed all liabilities for the Florida Bible College
Property, including the $1,000,000 line of credit and all past due interest owed
to Union Planters Bank, and $53,573 in past due taxes. See ITEM 6," MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - - LIQUIDITY AND CAPITAL
RESOURCES-Indebtedness and Other Liquidity Requirements," and See ITEM 12,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Ocean Palms Resort Property. The Ocean Palms Resort Property, acquired on
December 9, 1997 from an unaffiliated third party, is comprised of the rights to
the Ground Lease and improvements referred to as the Ocean Palms Resort located
in Pompano Beach, Florida. The property consist of a 53 LTL unit complex, pool,
office areas, parking area and other amenities. The assignment of the Ground
Lease rights is held by the Florida Resorts Subsidiary. The Ground Lease is for
a period of 99 years, and will expire on March 1, 2064. The Ground Lease is
payable to Nancy H. Newell and Jane H. Tubbs, or their successors or assigns, at
a rate of $76,200, per year due on March 1. The Ground Lease is encumbered by a
mortgage in the amount of $1,158,000 held by various trusts and individuals (the
"Ocean Palms Mortgagee"), which the Florida Resorts Subsidiary assumed. The
Ocean Palms Mortgage is evidenced by a promissory note ("Ocean Palms Note") in
the amount of $1,158,000 and bears interest at a rate of 12.75% per annum. The
Ocean Palms Note is payable interest only in the amount of $12,303.75 each month
from January 1, 1998 to May 1, 1998. The note is payable thereafter in the
amount of $17,119.85, commencing May 1, 1998, until its maturity on April 1,
1999, when the note was due in full. The Company extended the maturity date on
the Ocean Palms Note to April 1, 2000 by paying an extension fee of $9,788.04 on
March 1, 1999. The balance due on the note is $1,106,212 as of September 30,
1998, and $1,055,810, as of June 1, 1999. The Company has the option of
extending the Ocean Palms Note for one additional year, by paying an option fee
of 1% of the then outstanding principal balance of the note on or before March 1
of each year. The Ocean Palms Note is collaterized by an assignment of the Ocean
Palms Resort Paper held by the Company and the conditional assignment of the
Ground Lease to the Ocean Palms Mortgagee. Under the terms of the assignment of
the paper, the Company is obligated to pay the Ocean Palms Mortgagee the monthly
proceeds from the Ocean Palms Paper up to the amount of the monthly mortgage
payment.
The 53 LTL units have been sold and are in good condition, as is the
common area improvements. The owners of the individual units are responsible for
the taxes, insurance and maintenance of their unit and a share of the common
area maintenance. These costs are assessed and collected monthly by the Company
as part of its management services. These management services also include the
management of the common area property and the rental of LTL units for owners
that choose to rent their units as hotel rooms. Management believes Ocean Palms
Resort is adequately insured.
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<PAGE>
Subsequent to the Company's fiscal year-end, the Company has repossessed 23
LTL units due to lack of payments by the leaseholders. As of June 14, 1999,
when the Company divested its interest in the Ocean Palms Resort Property, only
one unit has been resold. The unit was sold at a price exceeding the appraised
value of the LTL unit.
On June 14, 1999, the Company exchanged its stock in the Florida Resorts
Subsidiary and Resort Subsidiary, which owns the Florida VOI properties,
including Ocean Palms Resort Property, for 2,839,689 shares of the Company's
common stock owned by Charlie Corporation, a related party. The Florida Resorts
Subsidiary assumed all liabilities for the Ocean Palms Resort Property,
including the Ocean Palms Ground Leases and Mortgages, evidenced by the Ocean
Palms Note. See ITEM 6," MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION - - LIQUIDITY AND CAPITAL RESOURCES-Indebtedness and Other Liquidity
Requirements," and See ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
Ocean Villas. On December 9, 1997, the Florida Resorts Subsidiary
acquired all of the issued and outstanding stock of OPV, an unaffiliated third
party. With the stock acquisition, the Company acquired OPV's primarily asset,
two lease rights to a four lot parcel of land and improvements (the "Ground
Leases") located in Pompano Beach, Florida (the "Ocean Villas Property"). The
Company acquired the 16 LTL unit Ocean Villas, and approximately $294,000 in
promissory notes (the "Ocean Villas Paper") created 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 which encumbers the
Ground Leases.
The First Ground Lease, dated July 1964, requires payment in the amount of
$2,614.18 every six months, and is for a period of 99 years, of which 64 years
and 10 months remain as of September 30, 1998. The Second Ground Lease, dated
December 1969, requires payment in the amount of $2,848.55 every six months, and
is for a period of 99 years, of which 64 years and 10 months remained as of
September 30, 1998. The Florida Resorts Subsidiary disposed the First and
Second Ground Lease liability when it divested its stock ownership in OPV on
October 15, 1998.
The First and Second Ground Leases are encumbered by two mortgages. The
first mortgage leasehold, and promissory note evidencing the mortgage (the
"First Ocean Villas Note",),dated September 17, 1997 in the amount of $375,000,
payable to Onofrio Biviano. The First Ocean Villas Note bears interest at a
rate of 10.5% per annum with payments of interest and principal of $3,743.92 due
on the 17/th/ of each month until the note matures on September 17, 2001, when
any remaining outstanding balance is due. As of the Company's fiscal year end
the aggregate amount due on the first mortgage leasehold was $369,173.
The second mortgage leasehold and promissory note evidencing the mortgage
(the "Second Ocean Villas Note"), dated December 9, 1997 in the amount of
$150,000, payable to Domenick Greco, Trustee and Leonard Gross. The
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<PAGE>
First Ocean Villas Note bears interest at a rate of 12% per annum payable
interest only in the amount of $1,500 per month, commencing January 9, 1998
until the note's maturity on December 9, 1998, when the entire principal and
accrued interest is due.
The First and Second Ocean Villas Mortgage are secured by collateral
assignments to the mortgagees of any and all non-recourse installment notes
arising out of the sale of the Ocean Villas LTL units, until such mortgages are
paid in full. The Florida Resorts Subsidiary disposed of the First and Second
Villas Mortgages liability when it divested its stock ownership in OPV on
October 15, 1998.
Four of the 16 Ocean Villas units have been remodeled and sold to third
parties at an average price of $73,743 per unit, which resulted in the Ocean
Villas Paper, discussed above. The remaining 12 unsold units will require
approximately $50,000 in renovation. The Company during the fiscal year
renovated six LTL units and had the units for sale through an unaffiliated real
estate brokerage firm, although none were sold. Management believes the
property was adequately insured.
Taxes on the Ocean Villas complex are approximately $12,432 and are due on
December 31, 1998. Taxes were prorated and paid as of October 15, 1998, when
the Florida Resorts Subsidiary exchanged its interest in the Ocean Villas
Property for 32,305 shares of the Company's common stock. As part of the
exchange, OPV assumed all liabilities for the Ocean Villas Property. See ITEM
6," MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - - LIQUIDITY AND
CAPITAL RESOURCES-Indebtedness and Other Liquidity Requirements."
PROGRAM OF DEVELOPMENT.
The following discussion of "PROGRAM OF DEVELOPMENT," is qualified in
its entirely by events subsequent to the Company's fiscal year ended September
30, 1998. On June 14, 1999, the Company divested all interest in its VOI
properties. The Board determined that it was not in the best interest of the
Company to continue to operate the VOI properties in Florida or to develop or
acquire other VOI properties. The Board's decision resulted from a
determination to focus on the Company's primary business of developing and
selling single-family property and homes. To further this goal, the Board
decided to contribute approximately 257 acres of residential, multi-family and
commercial lots of the Maumelle Property to TradeArk Properties. The Company
received a 35.16% membership interest in TradeArk Properties for the Contributed
Maumelle Property. TradeArk Properties anticipates commencing land development
activities on a portion of the Contributed Maumelle Property in September 1999.
See above, ITEM 1, "DESCRIPTION OF BUSINESS - RECENT BUSINESS DEVELOPMENT," and
ITEM 2, "DESCRIPTION OF PROPERTY."
The Company, however, will not be able to implement any of the following
plans for developing its properties if it cannot overcome its present
illiquidity and raise substantial additional capital, of which there can be no
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<PAGE>
assurance. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
Development of Property in Maumelle. The Company intends to commence its
initial development and sale of residential lots by September, 1999, through its
membership interest in TradeArk Properties.
The Company intends to commence development activity on portions of the
property it now owns in Maumelle as soon as it can obtain the necessary funds to
do so. Management anticipates that the Company will begin the development and
sale of residential property on the Pine Ridge Lots, located in Maumelle. The
development and sale of the Pine Ridge Lots will be done through the Company's
membership interest in TradeArk Properties. TradeArk Properties intends to
start home site improvements on at least one Pine Ridge subdivision in September
1999, assuming it is able to obtain necessary capital for such development.
The Pine Ridge Lots are fully entitled with a preliminary subdivision plat
recorded with the City of Maumelle. The Pine Ridge Lots are comprised of 487
lots in four subdivisions, averaging approximately 120 lots each. The
improvement district in which the Pine Ridge Lots are located is already
partially improved, with a roughly graded roadway.
Because the Pine Ridge Lots were partially improved prior to the Company's
acquisition, the Company expects its cost to develop an improved lot will be
less in Pine Ridge than the other Maumelle Property. Management estimates that
construction costs for single-family homes built on the acquired lots and on the
Pine Ridge Lots will average approximately $50 to $53 per square foot. The
Company estimates that the aggregate cost of building and selling 487 homes on
the Pine Ridge Lots, inclusive of general and administrative expenses, sales and
marketing expenses, will be in the range of $75 to $85 per square foot.
The Company intends to build up to 3,300 moderately priced single-family
homes on the Large Residential Tract for sales prices in the range of $125,00 to
$200,000, assuming it can resolve the Resure lawsuit which is seeking to
foreclose on approximately 701 acres of the Large Residential Tract. The
Company estimates that the cost for building and selling these homes, inclusive
of general and administrative expenses, sales and marketing expenses, and
closing costs, will be in the range of $100,000 to $160,000 per home.
Because the Company lacks experience in the home construction industry and
has only limited experience in the vacation ownership industry, the Company
believes it may be difficult to obtain conventional credit sources sufficient to
finance the foregoing development activity. The Company, therefore, believes it
may be necessary to enter into joint ventures with well capitalized real estate
developers to pursue the Company's building program.
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There are no current plans for the improvement or development of the
Commercial Lots or the Miscellaneous Tracts and Properties. These properties
are being held for the purpose of future development or resale, depending upon
the Company's liquidity needs or if Management determines specific properties do
not meet its development strategies.
Development of Vacation Interval Properties. The Company intends to
conduct vacation interval operations initially in Florida, either on its own or
with joint venture partners. The Company commenced vacation ownership activities
by renovating and selling LTL units in the Ocean Villa Property located in
Pompano Beach, Florida. The Ocean Villa Property consists of 16 LTL units, of
which 12 units remained unsold as of the Company's fiscal year end and as
October 15, 1998. The Company managed the Ocean Villas until its sale on October
15, 1998 when the Company divested its interest in the Ocean Palms Property.
The Company continued to manage the Ocean Palms Resort LTL units, until it
divested its interest in the Ocean Palms Resort Property in June, 1999. Such
management services included the up-keep of the common areas and the rental of
the LTL units as hotel rooms for LTL owners that choose to rent their units.
The Company also intends to initially construct a hotel on its Florida
Bible College Property near Disney World, Florida. Although the property has
two vacant two-story hotel buildings on the property, totaling approximately
49,450 square feet, Management has determined that the buildings are not
suitable or adequate for their purposes and plan to demolish the buildings.
Assuming the Company is able to obtain the necessary capital through
construction and long-term debt financing for such development, of which there
can be no assurance, the Company intends to begin vacation ownership business
development activities by constructing a seven story 264 room hotel on the
Florida Bible College Property. The Company intends to use the hotel in the
Company's proposed Vacation Interval marketing operations. See "--DESCRIPTION
OF PROPERTY," above, and ITEM 1, "DESCRIPTION OF BUSINESS." The Company
intends to sell discount vacation tours to prospective Vacation Interval
purchasers, which would include a stay in the Company's hotel, and employ
marketing representatives to sell VOI units to the hotel guests. See ITEM 1,
"DESCRIPTION OF BUSINESS--BUSINESS OF THE COMPANY--MARKETING AND ADVERTISING."
Management estimates that the construction of the hotel, which will include a
vacation interval sales offices, on the Florida Bible College Property will cost
approximately $14,000,000 and will commence when the Company is able to obtain
the necessary financing. The Company initially intends to contract with an
unaffiliated management firm to manage the hotel.
After the construction of the hotel, the Company intends to develop a
health spa and approximately 150 Vacation Interval units on the property,
although such plans are in the preliminary stages. The timing and actual number
of rooms and Vacation Interval units built will depend on the demand for hotel
space and Vacation Intervals and the level of the Company's Vacation Interval
pre-sales.
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<PAGE>
The Company intends to finance the construction of the hotel building by
obtaining a construction and permanent loan secured by the property. The
property was appraised at $4,470,000 by an unaffiliated third party in December
1997. However, since the Company is currently using the Florida Bible College
Property to secure a $1,000,000 line of credit from Union Planters Bank, there
can be no assurance that the Company will be able to obtain the necessary long-
term financing or overcome its present illiquidity and raise sufficient capital
to commence meaningful operations.
Subsequent to the Company's fiscal year-end, the Company divested all
interest in the Florida Bible College Property in exchange for 2,839,689 shares
of the Company's common stock owned by Charlie Corporation, a related party.
See above, ITEM 1, "DESCRIPTION OF BUSINESS - RECENT BUSINESS DEVELOPMENT," ITEM
2, "DESCRIPTION OF PROPERTY," and ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
General. The following is a discussion of investment policies, financing
policies, conflict of interest policies, and policies with respect to certain
other activities of the Company. The policies with respect to these activities
have been determined by the Company's Board of Directors and may be amended or
revised from time to time at the discretion of the Board without a vote of the
shareholders of the Company, except that changes in certain policies with
respect to conflicts of interest must be approved by a majority of the
independent directors and otherwise be consistent with legal requirements.
Investment Policies.
Investments in Real Estate or Interests in Real Estate. The Company
------------------------------------------------------
generally conducted all of its investment activities through the Operating
Subsidiary and Resorts Subsidiary through the fiscal year-end. Subsequent to
the fiscal year-end, the Company divested its interest in the Resort
Subsidiaries. The Company intends to conduct all of its investment activities
for the foreseeable future through the Operating Subsidiary, except that any
construction activity will likely be conducted through the Home Construction
Subsidiary or through the Company's membership interest in TradeArk Properties,
or other joint venture partnerships.
The Company's investment objective is to increase long-term total returns
to shareholders through appreciation in the value of the Common Stock. The
Company's policy is to acquire or develop assets where the Company believes that
favorable investment opportunities exist based on market conditions at the time
of the investment.
The Company expects to pursue its investment objectives primarily through
the direct ownership of properties by the Operating Subsidiary and/or
subsidiaries, or through indirect property ownership opportunities, such as
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its interest in TradeArk Properties. The Company may pursue other indirect
property ownership opportunities, particularly if it is necessary or advisable
to do so in order to acquire the development resources, which the Company now
lacks. The Company intends to acquire or develop residential, and commercial
properties primarily in the Maumelle area, but may pursue the acquisition or
development of residential and commercial properties in other areas of the
United States.
Future development or investment activities will not be limited by the
governing documents of the Company or its subsidiaries to any geographic area,
product type or specified percentage of the Company's assets. It is the
Company's policy to acquire assets primarily for possible capital gain.
Securities of or Interests in Persons Primarily Engaged in Real Estate
----------------------------------------------------------------------
Activities and Other Issuers. The Company also may invest in securities of
- ----------------------------
other entities engaged in real estate activities or invest in securities of
other issuers, including investments by the Company for the purpose of
exercising control over such entities. No such investments will be made,
however, unless the Board of Directors determines the proposed investment would
not cause the Company to be an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act").
Should management recommend prospective acquisitions in the be the policy to
enumerate a correlation between the strategic objectives of the Company and the
prospective acquisition, or a plan to enhance shareholder value as measured by
future book value or earnings per share.
Investments in Mortgages. During the Company's fiscal year, the Company
------------------------
acquired $2,600,000 in promissory notes, secured by conditional assignments on
leases on various LTL units in the Ocean Palms Resort Property. The notes have
been collaterally assigned by the Company to the holder of the Ground Lease
mortgage, as security. The Company has no immediate plans to warehouse
mortgages. The Company has determined that it is in its best interests to engage
in such activities as a means of providing enhanced service to its Vacation
Interval buyers. The Company may also offer such services to its home buying
customers, and hold mortgages generated from the sale of its Maumelle Property
inventory.
Subsequent to the Company's fiscal year-end, the Company divested its
interest in the Ocean Palms Resort Property, including the Ocean Palms Notes.
Financing Policies. The organizational documents of the Company and its
subsidiaries impose no limits on the amount of indebtedness they may incur. The
Company will from time to time determine its borrowing policies in light of
then-current economic conditions, relative costs of debt and equity capital,
market value of the Company's real estate assets, growth and acquisition
opportunities, and other factors.
The Company intends to raise additional capital through equity offerings,
debt financing, or a combination thereof, although there can be no
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assurance that the Company will be able to raise such capital on favorable terms
or at all.
The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on the Company's
portfolio as a whole.
Conflicts of Interest Policies. The Board of Directors is subject to
certain provisions of Nevada law that are designed to eliminate or minimize
certain potential conflicts of interest. There can be no assurances, however,
that these policies always will be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made that
might fail to reflect fully the interest of all shareholders. See ITEM 12,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Under Nevada law, each director is subject to restrictions on the
misappropriation of corporate opportunities to himself or his affiliates of
which he becomes aware solely as a result of his service as a director. The
Company may transact business with one or more of its directors or officers or a
corporation, firm or association in which one or more of its directors or
officers are directors, officers or are financially interested, provided any of
the following requirements are satisfied:
(a) The interested directors or officers must disclose the common
directorship, office or financial interest to the board of directors,
have it noted in the minutes, and a majority of the disinterested
directors must approve or ratify the contract or transaction; or
(b) The interested directors or officers must disclose the common
directorship, office or financial interest to the shareholders, and
the shareholders must approve by a majority vote the contract or
transaction. The votes of the interested director or officer must be
counted in any such vote of the shareholders; or
(c) The common directorship or office or financial interest is not known
to the director and officer at the time the transaction is brought
before the board of directors and therefore is not disclosed; or
(d) The contract or transaction is fair as to the Company at the time it
is authorized or approved.
Certain Policies with Respect to Other Activities. The Company and its
subsidiaries have authority to offer their securities and to repurchase and
otherwise acquire their securities, and they are likely to engage in such
activities. In the future, the Company and its subsidiaries may make loans to
joint ventures in which they participate in order to meet working capital needs.
The Company and its subsidiaries have not engaged in trading, underwriting,
agency distribution, or sale of securities of other issuers and
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do not intend to do so. The Company and its subsidiaries intend to make
investments in a manner such that they will not be treated as an investment
company under the Investment Company Act.
Competitive Conditions. The Company's real property is subject to the
highly competitive conditions of the real estate development and vacation
ownership industries. In Arkansas--the geographic area in which the Company
initially intends to commence its single-family home and commercial development-
- -there are numerous large national and regional firms with significantly greater
experience and financial resources than the Company currently possesses. Such
firms will likely compete with the Company in the acquisition of land for
development, the hiring of sub-contractors, experienced management personnel,
construction workers and other employees, and the sale of product. The Company
also will compete for residential sales with the resale market for existing
homes, multi-family home sales, including townhouses and condominiums, and with
available rental properties.
In the vacation interval industry, especially in Florida, the area where
the Company intends to initially develop VOLs, the Company will be subject to
significant competition from other vacation ownership resort owners and
operators, many with extensive experience and market presence in the lodging,
hospitality and entertainment areas. Many of the world's most recognized
lodging, hospitality and entertainment companies have begun to develop and sell
Vacation Intervals in resort properties, including, among others, Marriott
Ownership Resorts, The Walt Disney Company, Hilton Hotels Corporation, Hyatt
Corporation, Four Seasons Hotels & Resorts, and Inter-Continental Hotels and
Resorts. These entities possess significantly greater development experience,
financial, marketing, personnel and other resources than those of the Company
and may be able to grow at a more rapid rate or more profitably as a result.
The Company currently has no material presence or reputation in Arkansas,
Florida, or any other area in the real estate or vacation interval development
industry 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.
The Company believes that its ownership of a substantial majority of the
available undeveloped single-family home properties in Maumelle will give the
Company an advantage in entering the single-family home construction market in
Maumelle, assuming it is able to obtain sufficient capital to commence
construction activities. Although the Company does not currently have
substantial vacation interval industry expertise, Management believes that such
expertise can be acquired if the Company obtains the necessary capital to
attract experienced personnel.
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ITEM 3. LEGAL PROCEEDINGS.
As of the Company's fiscal year-end, the approximately 197-acre Pine Ridge
Lots are no longer subject to a possible tax assessment by the Pine Ridge
Addition Residential Property Owners Multi-Purpose Improvement District No. 9
(the "Pine Ridge Improvement District") in the amount of $237,811. In a lawsuit
unrelated to the Company the Pine Ridge Improvement District claimed the
authority to levy taxes against the Company's Pine Ridge Lots to satisfy any
judgment.
On March 13, 1997, the Company, as intervenor in the foregoing lawsuit, was
granted a summary judgment that released the Pine Ridge Improvement District's
lien on the Pine Ridge Lots owned by the Company. An appeal of this judgment
was dismissed and the Chancery's Court decision affirmed by the Court of Appeals
on April 28, 1998.
On April 19, 1999, Nathaniel S. Shapo, Director of Insurance of the State
of Illinois, as Liquidator of Resure Inc., instituted a foreclosure action
against the Operating Subsidiary and the Bank of Little Rock, in the Chancery
Court of Pulaski County, Arkansas (the "Resure lawsuit"). The Resure Liquidator
is seeking to foreclose on approximately 701 acres of the Large Residential
Tract of the Maumelle Property securing the $3,500,000 Resure Note I, which is
currently in default. The action also seeks $2,000,000 in Development Fees the
Liquidator claims the Operating Subsidiary owes under the terms and conditions
of the September 30, 1997, Settlement Agreement, which is secured by the same
701 acres as the Resure Note I.
On May 28, 1999, the Operating Subsidiary filed an answer, generally
denying the claims. The Operating Subsidiary also has moved to have the Bank of
Little Rock dismissed from the action asserting that Resure erred in determining
that the bank has an interest in the approximately 701 acres of the Large
Residential Tract. There can be no assurance, however, that the Operating
Subsidiary will prevail in the action or that it will be able to negotiate a
favorable settlement with Resure prior to any foreclosure.
The Company is involved in a pending legal action arising out of the normal
course of its business. In the opinion of Management, the outcome of such legal
action will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of security holders, through the solicitation
of proxies or otherwise.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is listed for trading in the over-the-counter market on
the NASDAQ electronic bulletin board under the symbol "CPCY"; however, the
market for shares of the Common Stock is extremely limited. There can be no
assurance that the present limited market for the Company's common stock will
become more active or even be sustained. In addition, any future sale of the
Company's stock by any of the controlling shareholders may have a substantial
adverse impact on any such public market.
The high and low bid prices for shares of common stock of the Company for
each quarter within the last two fiscal years are as follows:
<TABLE>
<CAPTION>
BID
Quarter Ending High Low
- -------------- ---- ---
<S> <C> <C>
September 30, 1996 2.75 1.375
December 30, 1996 2 1.25
March 31, 1997 1.25 1.06
June 30, 1997 1.25 .81
September 30, 1997 .94 .75
December 30, 1997 .781 .437
March 31, 1998 2.875 .562
June 30, 1998 3.375 1.562
September 30, 1998 1.937 .625
</TABLE>
These bid prices were obtained from the National Quotation Bureau, Inc.
("NQB"), and reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not reflect actual transactions.
HOLDERS
The number of record holders of the Company's common stock was 832, as of
September 30, 1998, and 836, as of June 1, 1999.
DIVIDENDS
During the fiscal year ended September 30, 1998 and the fiscal year ended
September 30, 1997, the Company did not declare any cash dividends with
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respect to its Common Stock. The Company does not expect to declare dividends in
the foreseeable future. The future dividend policy of the Company cannot be
ascertained with any certainty, particularly since the Company has decided to
focus on its primary business of developing single-family lots and homes, and
has had no operational history in these areas of business. There are no material
restrictions limiting, or restrictions that are likely to limit, the Company's
ability to pay dividends on its Common Stock in the future, except that the
articles of incorporation of the Company permit the board of directors to
approve the issuance of preferred stock having such rights as may be designated
by the board without shareholder approval. Such rights may include preferences
with respect to dividends as well as prohibitions against the declaration of
dividends on Common Stock under certain circumstances.
The following issuances of unregistered securities occurred during the
fiscal year ended September 30, 1998:
(1) On October 20, 1997, the Company issued 20,000 shares of the Company's
voting Common Stock to Ann Alridge, an officer of the Operating Subsidiary, in
consideration of management services to the Company. The Company relied on
Section 4(2)of the Securities Act in agreeing to issue such securities.
(2) In December 1997, the Company issued 33,500 shares of its voting
Common Stock to an unaffiliated company as partial consideration for the
purchase of the Ocean Palms Resort Property, the Ocean Palms Resort Paper and
other rights. The Company relied on Section 4(2) and Rule 506 of the Securities
Act in agreeing to issue such securities.
(3) In April 1998, the Company issued 200,000 shares of its voting
Common Stock to unaffiliated third parties as partial consideration for the
acquisition of Entry Resorts International LLC, and Entry Resorts Marketing LLC;
and granted options for another 100,000 shares to vest over a five year period,
commencing April 30, 1999, and expiring on April 30, 2003. The options vest at
a rate of 20% per year, and are exercisable at $3.34 per share. The Company
relied on Section 4(2) and Rule 506 of the Securities Act in agreeing to issue
such securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing in Item 7 of this Report (the
"Financial Statements"). As noted in 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.
The discussion below is also qualified in its entirely by events subsequent
to the Company's fiscal year end. On June 14, 1999, the Company
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divested all interest in its VOI properties, in exchange for 2,839,689 shares of
the Company's common stock owned by a related party. The Board has determined
that it was not in the best interest of the Company to continue operating its
VOI properties in Florida or to develop or acquire other VOI properties. The
Board's decision resulted from a determination to focus on the Company's primary
business of developing and selling single-family property and homes. To further
this goal, the Board decided to contribute approximately 257 acres of single-
family, multi-family and commercial lots of the Maumelle Property to TradeArk
Properties. For the Contributed Maumelle Property, the Company received a 35.16%
membership interest in TradeArk Properties. Management anticipates that during
the next fiscal year, all residential development and sales will be done through
TradeArk Properties and other joint venture partners. See above, ITEM 1,
"DESCRIPTION OF BUSINESS - RECENT BUSINESS DEVELOPMENT," ITEM 2, "DESCRIPTION OF
PROPERTY," and ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The Company significantly changed the nature of its business activities
from land sales to real estate development and vacation interval operations
during the fiscal year ended September 30, 1997, and during the period covered
by the financial statements (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, 1998 to Year Ended September 30,
1997. For the year ended September 30, 1998, the Company experienced a loss of
$3,829,723 compared with a loss of $143,768 for the year ended September 30,
1997. The difference in performance resulted primarily from a reduction in
revenues from $4,139,299 in the year ended September 30 1997, to $1,329,307 in
the year ended September 30, 1998, a reduction of $2,809,992 or 67.88%. The cost
of sales for the year ended September 30, 1998, amounted to $447,270, resulting
in a gross profit of $882,037. Despite the decrease in revenues, gross profits
as a percentage of revenues did increase from 54.2% in the year ended September
30, 1997 to 66.35% in the year ended September 30 1998. However, during the year
ended September 30, 1998, operating expenses also increased to $3,960,130 from
$1,687,329 in the year ended September 30 1997, an increase of $2,272,801 or
134.70%.
Sales decreased by $2,809,992 for the year ended September 30, 1998, from
$4,139,299 for the year ended September 30, 1997, as a result of reduced land
sales in Maumelle from $4,121,177 in the year ended September 30 1997 to
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$25,000 in the year ended September 30 1998. This reduction in sales was
partially offset by revenues of $529,858 from CRC and revenues of $747,720 from
the Pompano Beach operations, which include Ocean Villas Property and Ocean
Palms Resort Property (the "Pompano Beach Operations"). Gross profits for the
year ended September 30, 1998 was $882,037. Gross profits for the year ended
September 30, 1997 was $2,243,474.
From the year ended September 30, 1997 to the year ended September 30,
1997, operating expenses increased from $1,687,329 to $3,960,130, an increase of
$2,272,801. Most of this increase in operating expenses resulted from the
vacation industry operations in Florida, from the Pompano Beach Operations and
EMI and ERI operations in New Hampshire. Operating expenses related to these
operations were $1,859,317 for the year ended September 30, 1998, compared to
$834 for the year ended September 30,1997. Other operating expenses increased
by $613,484, in the same period, from $1,687,329 in the year ended September 30,
1997 to $2,300,813. The increase was primarily attributable to increases in
amortization of loan costs, management expenses and the write off of property
options. Management expenses increased from $564,074 for the year ended
September 30, 1997, to $744,163 for the year ended September 30, 1998, an
increase of $215,898. Most of this increase was the result of an increase in
management expense fees due to Maumelle Enterprises, a related party, from
$163,993 for the year ended September 30, 1997, to $324,618 for the year ended
September 30, 1998. For fiscal year ended September 30, 1998, accrued management
fees due to Maumelle Enterprises decreased to $50,599, from $80,000 for fiscal
year ended September 30, 1997. Amortization of loan fees increased to $557,005
in the year ended September 30, 1998, from $291,271 in the year ended September
30, 1997, an increase of $265,733. Amortization of the Resure loans decreased
from $134,417 in the year ended September 30, 1997, to $38,592 in the year ended
September 30, 1998. The decrease of $95,825 resulted from the expensing of all
remaining loan costs and the payoff of the Resure Note II in the year ended
September 30, 1997. Amortization of fees on all other loans increased by
$361,558 over those for the year ended September 30, 1997. The Company also
realized an expense of $242,469 as a result of electing not to exercise its
option under a contract to acquire property in Little Rock, Arkansas. This
expenses resulted from the forfeiture of option deposits, as well as the write
off of sums expended for engineering and zoning changes. During the year ended
September 30, 1997, write off of deposits totaled only $27,603, a difference of
$214,866.
Interest income for the fiscal year ended September 30, 1998, increased by
$58,947, from $71,543 for the fiscal year ended September 30, 1997, to $130,490
in fiscal year ended September 30, 1998. This was primarily due to interest due
on the Promissory Notes acquired with the Pompano Beach operations.
The Company continues to accrue management fees to Maumelle Enterprises, a
related party. However actual expenses, including salaries to Maumelle
Enterprises, have been paid during fiscal year ended September 30, 1998. Mr.
Todd has accrued his salary of $20,000 per month from October 1, 1997 to
September 30, 1998. Maumelle Enterprises and Mr. Todd have represented to the
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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 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 1998, 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.
Two hundred and forty permits were issued by the City of Maumelle for the
construction of new single-family homes during the 1997 calendar year. During
1998, 263 permits have been issued for the construction of new homes. Although
there can be no assurance that such increase in activity will continue the
Company believes that the level of home development activity in Maumelle will
continue to increase in the future, as compared to 1996, for the following
reasons:
(2) 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, 1998, this development has approximately 433
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.
(3) In 1998, 322 new jobs have been created in the City of Maumelle as a
result of continuing industrial expansion. In the period 1990 through 1997, the
SMSA of the Little Rock/North Little Rock area, which includes Maumelle, has
shown a total increase of 145,700 new jobs; 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
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through September in Florida, and snow or rain from November through March in
Missouri.
Factors That May Affect Future Results and Market Price of Stock. The
factors identified below are believed to be important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward looking statement made by
or on behalf of the Company, whether in this section or elsewhere in this Report
or in any other written or verbal statement of the Company 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. The Company currently has $11,261,862 in short term debt
----------------
that will mature during fiscal year ended September 30, 1999, 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 overcome
its present illiquidity, 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 building a hotel on its Florida
Bible College during the fiscal year 1999, 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
second quarter of 1999. 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 overcome its present illiquidity and 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 and develop residential lots--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.
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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 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, 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 and residential lots,
----------------------------------
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
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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 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, 1998, 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. The balance owing on the
Resure Note I was $3,395,189 as of the Company's fiscal year end and
as of the date of this Report.
. $200,000 recourse note payable to Davister Corp. (the "Davister
Note"), matured January 9, 1996, unsecured; 9% interest payable at
maturity.
. $3,855,872 in non-secured short-term debt financed by private sources.
The promissory notes generally bear interest at a rate of
approximately 10.9% per annum and mature nine months from the date of
issuance of each note.
. $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 9.5% per annum. The Company is
required to pay interest only on a monthly basis until the credit line
matured on April 10, 1999, at which time the Little Rock Credit Line I
maturity date was extended to April 10, 2000, when all unpaid
principal balance plus and accrued interest is due and payable. The
balance owing on the Little Rock Credit.
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Line I as of the Company's fiscal year-end and as the date of this
Report was $399,524.
. $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 9.5% per annum and requires no
monthly payments of interest or principal. The Little Rock Credit Line
II matured February 5, 1998, at which time its maturity date was
extended to November 5, 1999, when all interest and principal is due
and payable, or on demand, whichever is sooner. The balance owing on
the Little Rock Credit Line II as of the Company's fiscal year-end was
$450,000. On June 14, 1999,the Little Rock Credit Line II was paid in
full in the amount of $454,802.05, which represented all interest and
principal due.
. $250,000 loan from the Bank of Little Rock (the "Little Rock Credit
Line III")is secured by the same 19 acres of Multi-Family Maumelle
Property as the Little Rock Credit Line II. The Little Rock Credit
Line III bears interest at a fixed rate of 9.5% per annum and matured
September 10, 1998, at which time the loan's maturity date was
extended to November 10, 1999, or on demand, whichever is sooner. The
Little Rock Credit Line III requires five interest only payments
commencing October 10, 1998 and continuing until maturity, at which
time all principal and accrued interest is due and payable. The
balance owing on the Little Rock Credit Line III as of the Company's
fiscal year-end was $250,000. On June 14, 1999,the Little Rock Credit
Line III was paid in full in the amount of $250,325.34, which
represented all interest and principal due.
. $100,000 loan from the Bank of Little Rock (the "Little Rock Credit
Line IV") is secured by the same 19 acres of Multi-Family Maumelle
Property as the $450,000 and $250,000 line of credit. The Little Rock
Credit Line IV bears interest at a fixed rate of 9.5% per annum and
matured on February 10, 1999, at which time the maturity date of the
loan was extended to August 7, 1999. The Little Rock Credit Line IV
requires five interest only payments commencing September 7, 1998, and
continuing to the date of maturity, at which time all principal and
accrued interest is due and payment, or on demand, which ever is
sooner. The balance owing on the Little Rock Credit Line IV as of the
Company's fiscal year-end was $100,000. On June 14, 1999,the Little
Rock Credit Line IV was paid in full in the amount of $100,208.22,
which represented all interest and principal due.
. $1,750,000 in a commercial revolving line of credit from the First
Arkansas Bank ("First Arkansas Line of Credit I"), secured by
approximately 344 acres of the Large Residential Tract of the Maumelle
Property. The line, which matured May 27, 1998, was
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extended to December 2, 1999. The line of credit bears interest at a
fixed rate of 9.5% per annum and upon maturity all principal and all
accrued interest is due. The balance owing on the First Arkansas Line
of Credit I, as of the Company's fiscal year-end was $1,750,000.
Subsequent to the Company's fiscal year-end on June 30, 1999, the
Company paid down this loan in the amount of $364,000. The payment was
made from the proceeds from the sale of approximately 30 acres of the
Large Residential Tract, a portion of which secures the First Arkansas
Line of Credit I. An aggregate of $1,386,000 is owed on this loan, as
of the date of this Report.
. $1,875,000 loan from First Arkansas Valley Bank ("First Arkansas
Valley Bank Loan II"), is secured by 39.5 acres of the commercial
Maumelle Property. The Operating Subsidiary pledged 700,000 shares of
the Company's common stock as additional collateral for the loan. The
First Arkansas Valley Bank Loan II bears interest at the rate of 10
percent per annum and matured on October 12, 1998. The loan's maturity
date was extended to July 16, 1999, at which time all principal, plus
accrued interest is due and payable. The balance owing on the First
Arkansas Valley Bank Loan II as of the Company's fiscal year-end was
$1,875,000. On June 14, 1999,the First Arkansas Valley Bank Loan II
was paid in full in the amount of $1,948,277.04, which represented all
interest and principal due.
. $1,000,000 line of credit from Union Planters Bank is 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 Union
Planters Bank Line of Credit 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 Company is required
to pay interest only on a monthly basis until the line of credit
matures on April 1, 1999, at which time the line of credit was
extended to July 1, 1999. Upon maturity, the entire principal balance
plus any accrued and unpaid interest is due and payable. The balance
owing on the Union Planter Bank Line of Credit as of the Company's
fiscal year end was $996,281. On June 14, 1999, the Company divested
its interest in the Florida Bible College Property and accordingly all
liability of the Union Planters Bank Line of Credit, including a an
interest payment in the amount of $21,989 that was due on May 31,
1999.
. $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,
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at which time it is the note is payable interest and principal each
month until it matures on April 1, 1999. The Company exercised it
right to extend the maturity date to April 1, 2000 for a fee of
$9,788.04. The note can be extended for 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 the Company's fiscal
year end the balance of the note was $1,106,212. On June 14, 1999, the
Company divested its interest in the Ocean Palms Resort Property and
all liability of the First Ocean Villas Note.
. $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. As of
the Company's fiscal year end, the amount owing on the First Ocean
Villas Note was $369,173. Subsequent to the Company's fiscal year-end,
the Company disposed of the First Ocean Villas Note liability when it
divested its stock ownership in OPV on October 15, 1998.
. $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 Company's fiscal year end, the amount owing on the
Second Ocean Villas Note was $150,000. Subsequent to the Company's
fiscal year end, the Company disposed of the Second Ocean Villas Note
liability when it divested its stock ownership in OPV on October 15,
1998.
In addition to the above indebtedness, under the terms of 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. As of the date of this Report, no
land has been sold and therefore no development fees have been paid to Resure.
Subsequent to the Company's fiscal year-end, Resure instituted a foreclosure
action against the Operating Subsidiary seeking to foreclose on the 701 acres of
the Large Residential Tract of the Maumelle Property. See ITEM 3, "LEGAL
PROCEEDINGS," and below, "-CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S
INDEBTEDNESS AND LIQUIDITY REQUIREMENTS."
CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S INDEBTEDNESS AND LIQUIDITY
REQUIREMENTS
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Since the end of the 1998 fiscal year, the Company has obtained
approximately $2,100,000 in additional non-secured short term from private
sources. The promissory notes generally bear interest at a general rate of 10.9%
per annum and mature nine months from the date of issuance.
The Company is current on all of the foregoing debt, except the Resure Note
I, and the Davister Note. As of the date of this Report, the Company has not
paid the July 1 and October 1, 1998 payments or the January 1 and April 1, 1999
payments to Resure for an aggregate past due of amount of $404,364. On April 19,
1999, a foreclosure action was instituted by the Resure Liquidator against the
Operating Subsidiary in the Chancery Court of Pulaski County, Arkansas. Resure
is seeking to foreclose on approximately 701 acres of the Large Residential
Tract of the Maumelle Property that secures the Resure Note I and Developer's
Fees. On May 28, 1999, the Operating Subsidiary filed an answer generally
denying the claims. The Company is currently negotiating with Resure to retire
the liability on a discounted basis and have the lawsuit dismissed. The Company
intends to pay off the Resure and Davister Note liabilities from proceeds from
the sale of some of the Maumelle Property and/or by obtaining additional equity.
There can be no assurance, however, that the Company will prevail in the
litigation or that negotiations with Resure will be successful or even if they
are that the Company will be able to raise the funds. See ITEM 3, "LEGAL
PROCEEDINGS." The liability of the Union Planters Bank line of credit, including
all past-due interest, and all past due taxes was assumed by Charlie Corporation
under the terms of the Separation Plan, discussed below.
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 1999, from debt financing or generated revenues. There can be no
assurance, however, that the Company will be able to raise the required capital
to retire the Davister Note.
On October 15, 1998, the Florida Resorts Subsidiary exchanged its interest
in the Ocean Villas Property for 32,305 shares of the Company's common stock,
owned by MLT Management. As part of the exchange, OPV assumed all liabilities
for the First Ocean Villas Property, including the Ocean Villas Note for
$375,000 and the Second Ocean Villas Note for $150,000.
On June 14, 1999, the Company exchanged its interest in the Florida Resorts
Subsidiary and the Resort Subsidiary for 2,839,689 shares of the Company's
common stock, owned by Charlie Corporation. With the exchange, Charlie
Corporation assumed all liabilities for the Ocean Palms Resort Property,
including the $1,158,000 Ocean Palms Resort Note, and the Florida Bible College
Property, including the $1,000,000 line of credit from Union Planters Bank, all
past due interest payments, and $53,573 in past due taxes.
On June 14, 1999, the Company contributed 192 acres of Contributed Maumelle
Property to TradeArk Properties for a 35.16% membership interest. TradeArk
Properties assumed the liabilities for loans secured by a portion of the
Contributed Maumelle Property including the First Arkansas Valley Bank
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Credit Line II, the Little Rock Credit I, Little Rock Credit II, Little Rock
Credit III and Little Rock Credit IV. These loans were paid in full, including
all interest and principal, on June 14, 1999, from the proceeds of the New Era
loan obtained by TradeArk Properties and secured by the Contributed Maumelle
Property and viatical settlement contracts.
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 $1,000,000. Unless the Company's debt, most of which is in default or
will mature within the next six months, can be refinanced, restructured, or
retired, the Company's status as a viable going business concern will remain in
doubt.
Certain Capital Raising Transactions. During the fiscal year ended 1998,
the Company obtained capital through the following transactions:
. The Company has sold one lot of the Maumelle residential property for
an aggregate amount of $25,000.
Subsequent to the Company's fiscal year end, the Company raised additional
capital for the purpose operating capital through the following transactions:
. The Company borrowed approximately $2,100,000 in non-secured short
term debt from private investors. The promissory notes generally bear
interest at a rate of 10.9% per annum and mature nine months from the
date of issuance of each note.
. On January 5, 1999, the Company sold approximately 7.4 acres of
Maumelle commercial property for $300,000 with net proceeds to the
Company of $274,726.24.
. The Company sold a right of way to the Maumelle Water Management in
Maumelle, Arkansas for $5,000.
. On June 30, 1999, the Company sold approximately 30 acres of single-
family lots of the Large Residential Tract of the Maumelle Property to
an unaffiliated third party for a sales price of $535,226.40. The
Company received net proceeds of $146,218.31 from the sale, after
reducing the First Arkansas Line of Credit I by $364,000.
Prospective Sources of Liquidity. Current operating cash flows will not be
sufficient to service the Company's existing debt or the Company's anticipated
operating cash needs. The Company currently has insufficient funds to retire its
short-term debt, most of which will mature within the next six months or is in
default. If the Company cannot refinance, restructure or retire this debt or
raise additional equity and/or capital, the Company's status as a viable going
business concern will remain in doubt.
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The Company is presently marketing portions of its Maumelle Property for
sale in order to generate sufficient funds to reduce its current short-term
debt. The Company is also exploring opportunities to develop and sell portions
of its Maumelle Property with joint venture partners.
With respect to prospective long-term liquidity, the Company intends to
generate the bulk of its cash from operations by developing and selling
residential lots in the City of Maumelle. 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 lots of the
approximately 3,500 single-family home sites it owns in Maumelle or with
TradeArk Properties and on the improved lots it intends to acquire in Maumelle
from the third parties, and (2)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 the need for operating capital by the
development of residential lots for sale and/or 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, 1998 to Year Ended September 30,
1997. At September 30, 1998, the Company had total assets of $17,297,072, a
increase of $7,062,780 or 69.01% from the Company's total assets as of the
fiscal year ended September 30, 1997.The Company had cash of $1,047,021 at
September 30, 1998, compared to a (negative) cash position on September 30,
1997, an increase of $819,859 or 360.91%. This improvement resulted from the
secured and non-secured short term debt financing. See "LIQUIDITY AND CAPITAL
RESOURCES" above.
Accounts receivable increased from $12,096 on September 30, 1997 to
$462,384 on September 30, 1998, an increase of $450,288. This increase was
primarily due to increases in receivables due to the Resort Subsidiaries of
$237,901 and $138,706 and $63,037 in accrued interest which were acquired in
fiscal 1998 and therefore had no comparable receivables in fiscal year-end 1997.
Loan origination fees increased from $155,350 as of September 30,1997, to
$405,638, as of September 30, 1998, an increase of $250,279. This was primarily
due to an increase in debt.
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 day, the Company also acquired the Ocean Villas Property, the assets
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of which included $243,970 in the Ocean Villas Promissory Notes. The collective
balance due on these notes amounted to $2,411,041, net of a discount of
$247,218. The Company also held $61,056 in promissory notes from unrelated third
parties. As of September 30, 1998, the collective net balance on these notes
amounted to $296,260 current and $1,667,828 long term, for a total of
$1,964,098.
The Company has no investments during the fiscal years ended September 30,
1997 and September 30,1998.
The carrying value of the Company's real estate holdings increased by
$3,111,021 during the year, from $9,468,637 in fiscal year ended September 30,
1997 to $12,579,658 in fiscal year ended September 30, 1998. The net increase
was a result of the acquisition of the Ocean Villas Property and the related
capitalized costs which resulted in an increase of $520,008; the acquisition of
approximately 40 acres of Commercial Property of the Maumelle Property for a
total increase of $1,927,604 in the Company's real estate holdings; and
additional expenditure on the Florida Bible College Property, in the amount of
$536,610, including capitalization of interest. Other factors were capitalized
costs of $50,793 added to the book value of the Maumelle Commercial and Multi-
Family Lots and a reduction of $242,469 related to the write off the Capital
Lakes Estates option. In addition, four units of the Ocean Palms Resort Property
were reacquired and added to the real estate holdings of the Company in the
amount of $223,995.
On April 30, 1998, the Company acquired CRI and $167,000 in vacation club
membership lists which are being amortized over a period between five and ten
years. The balance on the membership lists as of September 30, 1998 was
$185,584. There was no comparable assets in fiscal year ended 1997. Goodwill of
$95,499 was also recognized for the acquisition.
Total liabilities of the Company as of September 30, 1998, was $16,695,018
an increase of $10,627,193 from the September 30, 1997's total of $6,067,825.
The current liability for notes payable increased by $9,161,889 during the
fiscal year ended September 30, 1998, from $2,099,973 to $11,261,862. This
increase included the $2,882,734 of secured short term loans obtained during the
year. New short term lines of credit with an aggregate balance owing of
$6,227,493 were also obtained during the year. These short term loans were used
to acquire the Pompano Beach Properties and other expenses in December, 1997.
The Ocean Palms Villas Property was financed with the assumption of a first
leasehold mortgage with a balance of $369,173, as of September 30, 1998,
reflected primarily in the increase in long term liabilities and a second
leasehold montage of $150,000, as of September 30, 1998, reflected in the
increase in short term liabilities. These loans were both assumed by a third
party purchaser of the Ocean Villas Property subsequent to the Company's fiscal
year. The Ocean Palms Resort Property leasehold mortgage balance as of September
30, 1998 of $1,106,212. The maturity date of the Ocean Palms Resort leasehold
was extended to April 1, 2000 in consideration of an extension payment of
$9,788.04. The Company considers the leasehold as a current note payable.
Subsequent to the
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Company's fiscal year end, on June 14, 1999, the Company divested its interest
in the Ocean Palms Resort Property, including the leasehold mortgage.
The Company increased its short term debt from the Bank of Little Rock by
an additional $350,000 during fiscal year ended September 30, 1998. The funds
were used for general operating purposes. As of September 30, 1998, the Company
had borrowed $1,875,000 from the First Arkansas Valley Bank and approximately
$996,281 from Union Planters Bank. The funds were used primarily for the
purchase of 39.8 acres of Commercial Lots and 700,000 shares of the Company's
common stock from Century.
Accounts payable and accrued expenses increased by $1,180,987, from
$576,804 as of September 30, 1997, to $1,757,791, as of September 30, 1998. A
portion of the increase, or $352,500 was comprised of accrued officers'
salaries. The acquisition of CRC also increased accounts payable and accrued
expenses by $203,787. Accrued real estate taxes payable increased by $181,134
due to the acquisition of the Florida Bible College Property. Accrued interest
increased by $380,481 from $59,810 as of September 30, 1998, as a result of the
increase in total debt liabilities.
Shareholders' Equity decreased by $3,564,413 or 85.56% in the year. The
decrease is a result of a net operating loss income of $3,829,723 for the year
ended September 30, 1998, and the acquisition of 700,000 shares of the Company's
common stock under the terms of the Century option agreement, which was
partially offset by the issuance of $166,500 of the Company's common stock as
part of the acquisition cost of CRC and $95,900 from the exercise of options for
the purchase of the Company's common stock.
ITEM 7. FINANCIAL STATEMENTS.
The audited financial statements of the Company are included in this Annual
Report on Form 10-KSB at pages F1 to F15.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
The Company has not changed accountants during the last two fiscal years;
nor has the Company had any disagreements with the accountants on any matter of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedures.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
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DIRECTORS AND EXECUTIVE OFFICERS
Date of Expiration of
Name Age Position Election Director Term
- ---- --- -------- -------- -------------
Michael G. Todd 49 Chairman, 7/95 1999 or until
President, Successor
and Secretary elected
Herbert E. Russell 73(1) Director 3/94 Resigned
June 14,
1999
Robert R. Neyland 43 Director 4/94 1999 or until
successor
elected
Thomas Blake 63 Director 3/97 1999 or until
successor
elected
David R. Paes 44 Vice President, 7/95 N/A
Treasurer and
Assistant Secretary
Raymond Baptista 57 Vice President 10/97 N/A
Of Finance
(1) On June 14, 1999, Herbert E. Russell resigned as Director of the Company as
part of the terms of the Separation Plan. The majority of the board of
directors have not elected a successor, as of the date of this Report.
The following is a biographical summary of the experience of the directors
and executive officers of the Company:
MICHAEL G. TODD. Chairman of the Board, President and Chief Executive Officer,
and Secretary of the Company. Todd also is the sole Director and President of
the Operating Subsidiary and the Florida Resorts Subsidiary. Todd is a general
partner of DeHaven Todd & Co., a merchant banking partnership he co-founded in
1985 with John W. DeHaven. Todd has extensive experience in the banking
industry, having been the President and Chief Executive Officer of two Southern
California banks, Orange City Bank and Bay Cities National Bank.
HERBERT E. RUSSELL. Director. Russell is the President of Charlie Corporation, a
Nevada corporation, which is a controlling shareholder of the Company. Russell
is also President of Hermico Corporation, a company founded
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by Russell and engaged in the business of prospecting and producing precious
metal concentrates. Prior to forming Hermico, Russell owned and operated an oil
field trucking company and a cotton farm.
ROBERT R. NEYLAND. Director. Neyland also serves on the Board of Directors of
Home Capital Investment Corporation, a public company. Since 1993, Neyland has
been the Chief Financial Officer for Select Switch Systems, Inc., a privately-
held Texas company. He was also a partner in Living Suite, a weekly and monthly
residential rental company, from 1990 to 1996.
DAVID R. PAES. Vice President, Treasurer, and Assistant Secretary. Paes is
Executive Vice President and a controlling shareholder of Maumelle Enterprises,
a real estate management company that currently provides management and
administrative service to the Company. See ITEM 12, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--SERVICES PROVIDED BY AFFILIATED COMPANIES." He has been
involved in real estate development as a chief financial officer of two real
estate land companies since 1977, and is a certified public accountant.
THOMAS BLAKE. Director. Blake is the Director, Business/ Finance, of Glenwood L.
Garvey Associates, an urban planning and consulting firm. As Special Advisor to
Self-Cleaning Environments USA, Inc., a manufacturer of environmentally friendly
waste disposal units, Blake provides consulting services regarding business
planning, financing, and marketing. His the founder and former principal of
Thomas C. Blake Consulting, an advisory service firm, and was Chief Executive
Officer of Interstate Group Administrators, Inc., a benefit services company. He
is a director of West Coast Savings & Loan and formerly was a director of
various other financial institutions.
RAYMOND C. BAPTISTA. Vice President - Finance. Baptista has 25 years experience
in banking and finance, both nationally and internationally. He has also been
actively involved in real estate acquisitions and development and was president
and CEO of a national real estate management company.
SIGNIFICANT EMPLOYEES
The Company's sole significant full-time employee is Michael G. Todd, its
Chairman, President, Chief Executive Officer, and Secretary.
FAMILY RELATIONSHIPS
There are no family relationships between any directors or executive
officers of the Company, either by blood or by marriage.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, no director, person nominated to become a
director, executive officer, promoter or control person of the Company:
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(1) was a general partner or executive officer of any business against
which any bankruptcy petition was filed, either at the time of the bankruptcy or
two years prior to that time;
During 1998, Select Switch Systems, Inc., a company in which Robert R.
Neyland serves as an executive officer, filed for bankruptcy.
(2) was convicted in a criminal proceeding or named subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or
(4) was found by a court of competent jurisdiction (in a civil action), the
SEC or the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been reversed,
suspended or vacated.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation that was paid in 1998 fiscal year to the Company's executive
officers.
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the periods indicated:
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Name & Year Salary Bonus Other Res- Securi- LTIP All
Prin- or ($) ($) Annual tric- ties Pay- Other
cipal Period Compen- ted Under- outs Compen-
Position Ended sation Stock Lying sation
Options
Michael 9/30/98 $240,000/(1)/ 0 0 0 0 0
Todd,
Chairman/
President
David 9/30/98 0 0 0 0 0 0 0
Paes/(2)/
</TABLE>
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<PAGE>
(1) Michael G. Todd has been employed as President of the Company since
November 1994. Todd received no salary from the Company for the period November
1994 through September 30, 1997. Effective September 30, 1997, Todd canceled the
deferred salary in the amount of $480,000 owed to him by the Company for the
above mentioned period. Todd has deferred his salary for the period October 1,
1997 through September 30, 1998, in the amount of $240,000. Todd has received no
other compensation.
(2) David Paes has been Vice-President of the Company since July 1995, and
devotes approximately 75% of his time to its operations. Paes has received no
salary from the Company from July 1995 through September 30, 1998. Paes did
receive 50,000 shares of the Company's common stock in compensation for
management services rendered to the Company on July 29, 1997.
The Company does not have any qualified or non-qualified stock or option
plans for its employees.
The Company has a five-year written agreement with Todd to perform the
duties of President. Under the agreement, which became effective on October 1,
1995, Todd is to be compensated at a rate of $20,000 per month. The agreement
expires on September 30, 2000. The Company is not party to any other employment
agreements.
DIRECTOR COMPENSATION
Outside directors are compensated for their services in the amount of $500
per month. Outside directors Neyland, Russell, and Blake have agreed to defer
such compensation until the Treasurer of the Company determines that sufficient
funds are available to make such payments. Such compensation has been deferred
since April 1994, and continues to be deferred. For the fiscal year ended
September 30, 1998, the Company had a deferred liability in the amount of
$18,000 for outside directors' compensation.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of shares of Common
Stock as of September 30, 1998, for (i) each person who is known by the Company
to be the beneficial owner of more than a 5% interest in the Company, (ii)
directors of the Company, (iii) the sole "named executive officer" of the
Company, as defined in Item 402(a)(2) of SEC Regulation S-B, and (iv) the
directors and named executive officer of the Company as a group. Unless
otherwise indicated in the footnotes, all such interests are owned directly, and
the indicated person or entity has sole voting and investment power. Addresses
are provided only for 5% or greater owners.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Name and
Title of Class address of Amount and Percent of
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beneficial nature of bene- class
owner(1) ficial owner
Common Stock Michael G. Todd(2) 2,856,589 shares 40.90%
Common Stock John W. DeHaven(3)(4) 2,879,689 shares 41.23%
Common Stock Herbert E. Russell(3) 2,839,689 shares 40.66%
Common Stock Robert R. Neyland 0 shares 0%
Common Stock Thomas Blake 0 shares 0%
Common Stock Directors and Executive
Officers as a Group 5,696,278 shares 81.56%
(1) Unless otherwise indicated, the address of the beneficial owner is 25550
Hawthorne Boulevard, Suite 207, Torrance, California 90505.
(2) All of these shares are owned by Prescott Investments, L.P. or Granite
Industries LLC. Michael G. Todd is the sole managing member of Granite
Industries LLC, which is the managing general partner of Prescott LP. Todd
is the sole "named executive officer" of the Company, as defined in Item
402(a)(2) of SEC Regulation S-B. See ITEM 9, "DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS."
(3) All of these shares are owned by Charlie Corporation, of which Herbert E.
Russell, as grantor and trustee of an irrevocable trust, owns 100% of the
outstanding stock. John W. DeHaven is the sole income beneficiary of the
trust, but Russell has sole investment and voting power over the trust. The
trust terminates on the death of John W. DeHaven. Subsequent to the
Company's fiscal year-end, the Company exchanged its interest in the Resort
Subsidiary and the Florida Resorts Subsidiary for the 2,839,689 shares of
the Company's common stock owned by Charlie Corporation. On June 14, 1999,
Russell resigned as director of the Company, pursuant to the terms of the
Separation Plan. See ITEM 9, "DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS."
(4) John W. DeHaven disclaims beneficial ownership of the shares owned by
Charlie Corporation. 40,000 of the shares are owned by Mile High Limited
Partnership ("Mile High LP") of which John W. DeHaven is the general
partner. Subsequent to the Company's fiscal year-end, the Company exchanged
its interest in the Resort Subsidiary and the Florida Resorts Subsidiary
for the 2,839,689 shares of the Company's common stock owned by Charlie
Corporation.
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<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERVICES PROVIDED BY AFFILIATED COMPANIES
The Company has paid fees or expects to pay fees to certain affiliated
companies for various types of services, and will continue to do so in the
future. These arrangements are summarized below.
Maumelle Enterprises, Inc. Agreement. The Company has an oral agreement
with Maumelle Enterprises, Inc. to provide management and administrative
services for the Maumelle Property. Currently, Maumelle Enterprises manages the
Company's inventory of property, oversees any sale of property, and manages
administrative matters such as ensuring payment of taxes, mortgages and other
expenditures incurred in management of the property. Maumelle Enterprises also
represents the Company at local and state hearings that may affect the Company's
property. Until March 1997, Maumelle Enterprises was owned primarily by officers
and directors of the Company. It has no clients other than the Company and
DeHaven Todd Limited Partnership, an Arkansas limited partnership ("DTLP"),
which is owned almost entirely by Michael G. Todd and John W. DeHaven. In March
1997, Michael G. Todd and John W. DeHaven agreed to cancel all of their shares
of Maumelle Enterprises common stock, which aggregately represented twenty
percent (20%) of the shares in Maumelle Enterprises, as partial consideration
for Maumelle Enterprises' agreement to sell approximately 3.8 acres of
commercial property, known as the Corner Tract, in the City of Maumelle to the
Company. After giving effect to the cancellation of the shares owned by Mr. Todd
and Mr. DeHaven, David Paes and Mary Peyton each owns 50% of the outstanding
shares of Maumelle Enterprises, as of the date of this Report. Mary Peyton, the
President of the Resort Subsidiary, receives a salary of $39,600 per annum as an
officer of Maumelle Enterprises.
Under the oral management and administrative services agreement, payment to
Maumelle Enterprises for management services depends upon the actual services
rendered in a given month and the current liquidity of the Company. If funds are
not available, Maumelle Enterprises has agreed to defer payment of its
management fees. For the fiscal year ended September 30, 1998, the Company paid
Maumelle Enterprises $274,019 in expenses, and accrued unpaid management fees of
$50,599. The increase in payments are a result of an increase in salaries
necessitated by the acquisition of Florida vacation interval properties that
required management services.
The Company intends to formalize its management agreement with Maumelle
Enterprises in writing. The duration, terms and conditions of the contract have
not yet been determined and will be subject to approval by the independent
directors of the Company.
Subleasing of Office Space. The Company is currently subleasing its
principal office space in Torrance, California from DTC, a California
partnership. The partnership, owned equally by Michael G. Todd and John W.
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DeHaven charges the Company $1,900 per month. The Company paid DTC the total of
$21,600 in rental payments for the fiscal year ended September 30, 1998.
The majority of the disinterested board of directors on October 1, 1995,
voted to approve the oral agreement between the Company and DTC for the
subleasing of office space from DTC to the Company.
The Company plans to continue to sublease its office space from DTC
on a month to month basis.
ACQUISITIONS OF LAND FROM AFFILIATES
Land Acquisition. The Company intends to purchase 121 improved single-
family lots from DTLP. John W. DeHaven, who is the sole general partner of DTLP,
owns 75% of DTLP, while Michael G. Todd owns 20% as a limited partner. In
addition to the 121 single-family lots, DTLP owns approximately 6 acres of
commercial property and approximately 135 single-family lots in the City of
Maumelle.
The Company expects to purchase any lots it acquires from DTLP at fair
market value, to be determined at the time of purchase. Such fair market value
will be established by an unaffiliated certified appraiser. Any future
transactions between the Company and its officers, directors and affiliates will
be approved by a majority of the Company's outside directors or will be
consistent with policies approved by such outside directors.
ACQUISITION OF STOCK FROM AFFILIATES
Subsequent to the Company's fiscal year-end, the Company agreed to exchange
all of the issued and outstanding stock it holds in the Resort Subsidiary and
the Florida Resorts Subsidiary for the acquisition of 2,839,689 shares of common
stock from by Charlie Corporation, formalized in a Separation Plan between the
Company and Charlie Corporation, dated March 31, 1999, and amended on June 14,
1999. With the acquisition of the Resort Subsidiary and the Florida Resorts
Subsidiary, Charlie Corporation assumed the assets and liabilities of the Ocean
Palms Resort Property, the Florida Bible College Property, Capitol Club,
Exchange Club, CRC and Entry Resorts Marketing, which was dissolved in May,
1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
CAPITOL COMMUNITIES CORPORATION, INCLUDING PREDECESSOR CORPORATION AND
SUBSIDIARIES.
Report of Independent Auditors ................................. F-1
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Balance Sheet as of September 30, 1998.......................... F-2
Statements of Operations for the Years Ended
September 30, 1998 and 1997..................................... F-4
Statements of Changes in Shareholders' Equity
September 30, 1998.............................................. F-5
Statements of Cash Flows for the Years Ended
September 30, 1998 and 1997..................................... F-6
Notes to Financial Statements................................... F-7
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EXHIBITS
The following Exhibits are filed as part of this Report. (Exhibits numbers
correspond to the exhibits required by Item 601 of Regulation S-B for an annual
report on Form 10-KSB,
2.1.1 Articles of Merger, filed with State of Nevada, dated November 29, 1995,
merging AWEC Resources into Capitol Communities Corporation.*
2.1.2 Agreement of Merger, filed with State of Nevada, dated November 15, 1995,
between AWEC Resources, Inc., and Capitol Communities Corporation.*
2.2 Certificate of Merger, filed with State of New York, dated January 5,
1996, merging AWEC Resources, Inc., into Capitol Communities
Corporation.*
3.1.1 Articles of Incorporation of Capitol Communities Corporation, dated
August 18, 1995.*
3.1.2 Certificate of Amendment of Articles of Incorporation of Capitol
Communities Corporation, dated February 6, 1996.*
3.2 Bylaws of Capitol Communities Corporation, dated August 22, 1995.*
10.1 Contribution Agreement, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.2 Subordinated Surplus Debenture, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.3 Non-Recourse Promissory Note, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.4 Non-Recourse Mortgage, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*
10.5 Security Agreement, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*
10.6 Environmental Indemnity Agreement, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.7 Loan Agreement, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*
10.8 Promissory Note, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*
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10.9 Mortgage, dated September 11, 1995 between AWEC Development Corporation
and Resure, Inc.*
10.10 Environmental Indemnity Agreement, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.11 Agreement for Refinance of Secured Note, dated September 11, 1995 between
Century Realty, Inc., AWEC Resources, Inc., and AWEC Development
Corporation.*
10.12 Promissory Note, dated September 11, 1995, between AWEC Development
Corporation and Century Realty, Inc. in the amount of $1,400,000.*
10.13 Mortgage, dated September 11, 1995, between AWEC Development Corporation
and Century Realty, Inc. in the amount of $350,000.*
10.14 Promissory Note, dated September 11, 1995, between AWEC Development
Corporation and Century Realty, Inc.*
10.15 Guaranty, dated September 11, 1995, between AWEC Development Corporation
and Century Realty, Inc.*
10.16 Stock Option Agreement, dated September 11, 1995, between Century Realty,
Inc., and AWEC Development Corporation.*
10.17 Release Deed, dated September 9, 1995, between Century Realty, Inc., and
AWEC Development Corporation.*
10.18 Employment Agreement, dated July 14, 1995 between the Company and Michael
G. Todd.*
10.19 Olsen Consultant Agreement, dated October 7, 1996 between the Company
and Jens Olsen.**
10.20 Purchase Agreement, dated October 24, 1995, between John L. Burnett,
Trustee for Wood Health Joint Venture and the Company***
10.21 Asset Purchase Agreement, effective February 21, 1997, between Capitol
Communities Corporation and SunBay Inc. for the purchase of the SunBay
Resort.****
10.22 Real state Contract, effective February 28, 1997, between Capitol
Communities Corporation and Steve Hockersmith as agent for an
unidentified buyer for the sale of 67.51 acres of land in Maumelle,
Arkansas.****
10.23 Asset Purchase Agreement, effective June 16, 1997, between Capitol
Communities Corporation and PVP Development Company, L.L.C. an Arkansas
limited liability company, for the purchase of approximately 20.71 acres
of land in Branson, Missouri.*****
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10.24 Asset Purchase Agreement, effective June 16, 1997, between Capitol
Communities Corporation and Palace View Ventures, L.L.C., a Missouri
limited liability company, and Palace View, Inc.,a Missouri corporation
for the purchase of approximately 1 acres of land with 2 finished
pads.*****
10.25 Agreement and plan of reorganization dated July 30, 1997 to acquire
shares of Capital Resorts of Florida, Inc. and Florida Bible
College.*****
10.26 Century Realty, Inc. Settlement and Release Agreement signed October 20,
1997, effective September 30, 1997.******
10.27 Debt Settlement and Release dated effective September 30, 1997.******
10.28 Agreement, dated December 9, 1997, between Capitol Resorts of Florida,
Inc. and Ocean Palms Development Corporation and Ocean Palms Resort,
Inc.*******
10.29 Ground Lease, dated February 10, 1996, between Lighthouse Point
Construction Corp. and Nancy H. Newell and Jane H. Tubbs.*******
10.30 Assignment of Ground Lease and Tenant Leases, dated December 9, 1997,
between Capitol Resorts of Florida Inc., and Ocean Palms Development
Corporation.*******
10.31 Assignment of Leashold Improvements, dated December 9, 1997, between
Capitol Resorts of Florida Inc., and Ocean Palms Development
Corporation.*******
10.32 Mortgage and Note Modification and Assumption Agreement, dated December
9, 1997, between Capitol Resorts of Florida Inc., and the Trustee of the
M.B. Co., Inc. Pension Plan, the Trustee of the Domenick Greco Revocable
Trust, Stanley Elkman, the Trustee of the Arthur A. Kober Co., Inc.,
Employees Profit Sharing Fund, and Morton J. Berman ("Ocean Palms Resort
Mortgagee").*******
10.33 Collateral Assignment and Pledge of Agreements and Conditional
Assignments of Lease and Purchase Money Promissory Note, dated December
9, 1997, between Capitol Resorts of Florida Inc., and jointed by Ocean
Palms Development Corporation and assigned to the Ocean Palms Resort
Mortgagee.*******
10.34 Assignment of Agreements and Conditional Assignments of Lease and
Purchase Money Promissory Notes, dated December 9, 1997, between Capitol
Resorts of Florida Inc., and Ocean Palms Development Corporation and
Ocean Palms Resort, Inc.*******
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10.35 Purchase Money Leasehold Mortgage and Security Agreement, dated February
2, 1992, between Lucaya Beach Hotel Corporation and Del-Aire Management
Co., Inc.*******
10.36 Mortgage and Note Modification Agreement, dated January 22, 1997, between
the Ocean Palms Resort Mortgagee and Ocean Palms Cooperative Association,
Inc.*******
10.37 Contribution Agreement, dated March 29, 1999, between Capitol Development
of Arkansas, Inc., and Trade Partners, Inc.********
10.38 Amendment to Contribution Agreement, dated June 1, 1999.********
10.39 Plan And Agreement For Corporation Separation, dated March 31, 1999,
between Capitol Communities Corporation and Charlie Corporation.********
10.40 First Amendment To Plan And Agreement For Corporation Separation, dated
June 14, 1999.********
11. Statement of Computation of Per Share Earnings.
23. Consent of Joel S. Baum P.A.
27. Financial Data Schedule
See Financial Statements at F-1 To F-15.
* Exhibit(s) incorporated by reference from the Registration on Form 10-
SB of the Company, Registration No.915636 filed on September 16, 1996.
** Exhibit incorporated by reference from Form 8-K, Commission File No.
915636 filed on October 18, 1996.
*** Exhibit(s) incorporated by reference from the December 31, 1996
Quarterly Report on Form 10-QSB filed on February 19, 1997.
****Exhibit(s) incorporated by reference from the March 31, 1997
Quarterly Report on Form 10-QSB filed on May 19, 1997.
*****Exhibit(s) incorporated by reference from the June 30, 1997
Quarterly Report on Form 10-QSB filed on August 13, 1997.
******Exhibit(s) incorporated by reference from the Form 8-K, Commission
File No. 915636 filed on November 5, 1997.
*******Exhibit(s) incorporated by reference from the Company's Annual
Report on Form 10-KSB filed with the Commission on December 29, 1997.
71
<PAGE>
********Exhibits incorporated by reference from the Form 8-K, Commission
File No. 0-23450 filed on June 28, 1999.
(b) REPORTS ON FORM 8 K
The following reports on Form 8-K were filed by the Company during the
fiscal quarter ended September 30,1998.
During the last quarter of the Company's fiscal year ended September 30,
1998, the Company filed a Current Report on Form 8-K dated July 1, 1998,
reporting the acquisition of the Ocean Palms Resort Property.
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
Date: July 6, 1999 By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief
Executive Officer
72
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC.
AND SUBSIDIARIES
AUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report 1
Financial Statements
Consolidated Balance Sheet 2-3
Consolidated Statements of Operations 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-14
</TABLE>
<PAGE>
BAUM & COMPANY, P.A.
Certified Public Accountants
1515 University Drive - Suite 209
Coral Springs, Florida 33071
(954) 752-1712
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Stockholders
of Capitol Communities Corporation, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Capitol
Communities Corporation, Inc. and Subsidiaries as of September 30, 1998 and the
related statements of income and accumulated deficit, stockholders equity and
cash flows for the years ended September 30, 1998, and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Communities
Corporation, Inc. and Subsidiaries as of September 30, 1998 and the results of
its operations and its cash flows for the years ended September 30, 1998 and
1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 of the
financial statements, the Company has incurred losses from operations has a
significant negative working capital ratio, and has substantial non-productive
assets, which raise substantial doubt about its ability to continue as a going
concern. The company is also $.4 million in default on a $3.4 million mortgage
(Note 4). The financial statements do not include any adjustment that might
result from the outcome of this these uncertainties.
Coral Springs, Florida
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1998
ASSETS
------
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents $ 1,047,021
Accounts receivable 462,384
Notes receivable - current 296,260
Inventory 26,575
Prepaid expenses 255,400
-----------
Total Current Assets 2,087,640
Plant property and equipment:
Furniture and equipment (net of accumulated depreciation of $18,867) 104,055
Non Current Assets:
Land and real estate holdings (Note 9) 12,579,658
Vacation club memberships (Note 9) 185,584
Deferred taxes 69,425
Organization costs (net of accumulated amortization $605) 14,109
Other assets 78,043
Loan origination costs (net of accumulated amortization of $432,921) 405,638
Notes receivable non current (Note 9) 1,667,838
Intangible assets (net of accumulated amortization of $417) 9,583
Goodwill (Note 9) 95,499
-----------
Total Other Assets 15,105,377
-----------
Total Assets $17,297,072
===========
</TABLE>
See Accompanying Auditor's Report and Notes
-2-
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1998
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
<TABLE>
<S> <C>
Current Liabilities:
Notes payable (Note 7) $ 11,261,862
Accounts payable & accrued expenses 1,757,791
------------
Total Current Liabilities 13,019,653
Non Current Liabilities:
Notes payable (Notes 4 and 7) 3,675,365
------------
Total Liabilities 16,695,018
Stockholders Equity:
Preferred stock - $.01 par value, none issued - 0 -
Common stock - $.01 par value, 40,000,000 shares authorized,
7,624,500 shares outstanding 76,245
Additional Paid in Capital 7,203,531
Treasury stock (700,000 shares) (386,258)
Accumulated deficit (6,291,464)
------------
Total Stockholders' Equity 602,054
------------
Total Liabilities & Stockholders' Equity $ 17,297,072
============
</TABLE>
See Accompanying Auditor's Report and Notes
-3-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net sales and revenue $ 1,329,307 $ 4,139,299
Cost of sales 447,270 1,895,825
------------ -----------
Gross profit 882,037 2,243,474
-----------
Operating costs and expenses; selling,
general and administrative 3,960,130 1,687,329
------------ -----------
Income (loss) before interest income (expense) (3,078,093) 556,145
Interest income 130,490 71,543
Interest (expense) (882,120) (826,881)
------------ -----------
Net income (loss) before income taxes (3,829,723) (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)
------------ -----------
Net income taxes - 0 - 55,425
------------ -----------
Net income (loss) $ (3,829,723) $ (143,768)
============ ===========
Income (loss) Per common share $ (.53) $ (.02)
Weighted Average Common Shares Outstanding 7,249,494 7,171,014
</TABLE>
See Accompanying Auditor's Report and Notes
-4-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
September 30, 1998
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Treasury Accumulated
# Shares Amount Capital Stock Deficit
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
September 30, 1996 7,000,000 $ 70,000 $ 4,701,108 - 0 - $ (2,317,973)
Additional paid in capital
attributed to forgiveness of debt - 0 - - 0 - 240,000 - 0 - - 0 -
Additional Stock Issued 312,000 3,120 1,613,980 - 0 - - 0 -
Net Income (Loss) - 0 - - 0 - - 0 - - 0 - (143,768)
------------ ------------ ------------ ------------ ------------
September 30, 1997 7,312,000 73,120 6,555,088 - 0 - (2,461,741)
Stock issued for services 25,000 250 18,508 - 0 - - 0 -
Stock issued for acquisitions (Note 9) 233,500 2,335 501,165 - 0 - - 0 -
Stock returned (19,000) (190) - 0 - - 0 - - 0 -
Treasury Stock 700,000 shares (Note 9) - 0 - - 0 - - 0 - (386,259) - 0 -
Stock options exercised 73,000 730 128,770 - 0 - - 0 -
Net Income (Loss) - 0 - - 0 - - 0 - - 0 - (3,829,723)
------------ ------------ ------------ ------------ ------------
September 30, 1998 7,624,500 $ 76,245 $ 7,203,531 $ (386,259) $ (6,291,464)
============ ============ ============ ============ ============
</TABLE>
See Accompanying Auditor's Report and Notes
-5-
<PAGE>
CAPITAL COMMUNITIES CORPORATION, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30, 1998 and 1997
<TABLE>
<CAPTION>
Sept 30, 1998 Sept 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(3,829,723) $ (143,768)
ADJUSTMENTS to reconcile net income to net cash used for
operating activities:
Depreciation 16,455 2,412
Amortization 509,893 155,344
Forgiveness of accrued compensation credited to additional paid-in capital - 0 - 240,000
Common stock issued for services 18,758 - 0 -
(Increase) decrease in accounts and other receivables (388,210) 51,101
(Increase) decrease in prepaid assets 36,267 (195,781)
(Increase) decrease in deposits 109,361 (62,550)
(Increase) decrease in inventory (426) - 0 -
(Increase) decrease in real estate holdings (2,597,555) (312,280)
(Increase) decrease in other assets (78,071) - 0 -
Increase (decrease) in accounts payable and accruals 866,230 (784,793)
(Increase) in deferred tax asset - 0 - (69,425)
Increase (Decrease) in deferred taxes payable (14,000) 14,000
----------- -----------
Net cash provided (used) in operating activities (5,351,021) (1,105,740)
Cash flows from investing activities:
Acquisition of fixed assets (31,340) (38,672)
Decrease in investments - 0 - 3,500,000
Cash (used) for acquisitions (1,004,992) - 0 -
Collections on notes receivable 321,911 - 0 -
----------- -----------
Net cash provided (used) in investing activities (714,421) 3,461,328
Cash flows from financing activities:
Increase in debt 9,560,070 1,850,308
Reduction in notes payable (1,682,864) (5,310,821)
(Increase) in loan origination fees (760,172) (99,102)
Acquisition of treasury stock (386,258) - 0 -
Cash obtained in acquisitions 25,025 - 0 -
Issuance of common stock 129,500 1,617,100
Net cash provided (used) in financing activities 6,885,301 (1,942,515)
NET INCREASE IN CASH AND CASH EQUIVALENTS 819,859 413,073
CASH AND CASH EQUIVALENTS-BEGINNING OF YEAR 227,162 (185,911)
CASH AND CASH EQUIVALENTS-END OF YEAR $ 1,047,021 $ 227,162
=========== ===========
</TABLE>
See Accompanying Auditor's Report and Notes
-6-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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.
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. 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. The Company is currently in the
business of developing and selling real estate properties, vacation
packages, time share products and services.
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.
-7-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
-------------------------------------------
D. Income Taxes
------------
In February 1992, the Financial Accounting Standards Board issued
Statement on Financial Accounting standards 109 of "Accounting for
Income Taxes." Under Statement 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. The Company has net operating losses (NOL's) of approximately
$5,444,000 expiring in the years 2005 through 2009.
Deferred tax benefit (34% statutory rate) $ 1,302,000
Valuation allowance 1,302,000
-----------
Net Benefit $ - 0 -
===========
Due to the uncertainty of utilizing the NOL and recognizing the
deferred tax benefit, an offsetting valuation allowance has been
provided.
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,
1998 the company had approximately $1 million on deposit at one bank
resulting in a concentration of credit risk from uninsured bank
balances.
-8-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
-------------------------------------------
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, 1998 and 1997
were 7,249,494 and 7,171,012, respectively.
NOTE 2 - GOING CONCERN CONSIDERATIONS
----------------------------
The company has incurred significant losses from operations for the
current year, has a substantial accumulated deficit, has non
productive assets and is highly illiquid. Management has begun
implementation of plans to make the company more viable. The ultimate
outcome of these plans can not be determined.
Phase 1 is to obtain a 35% equity in a new real estate development
Limited partnership, by contributing land, in Maumelle Arkansas valued
at $8.3 million, as well as have the partnership pay off $3.8 million
of debt assigned to the land. The other partner is to contribute $8.3
million of financial assets.
Phase 2 of the plan is for the company to transfer to Charlie
Corporation, a major shareholder of the company, the Capitol Resorts
Inc. and Resorts of Florida, Inc., activities for all of Charlie
Corporations 2.8 million shares (37%) of company stock in the company.
Transferred items would include land in Kissimmee Florida, notes
receivable on units in the Ocean Palm Resort and offsetting $2.1
million of debt.
Phase 3 involves sale and development of the remaining real estate in
Maumelle Arkansas.
Subsequent to September 30, 1998, the company has been able to extend
the maturity date of most of its notes and mortgages (Note 7).
Payments are in default by $412,700 on a $3.4 million mortgage (Note
4). No claim for payment has been made for a $200,000 note due January
6, 1996.
NOTE 3 - AGREEMENTS
----------
Currently the Company has an informal agreement with Maumelle
Enterprise, Inc. (Maumelle), a business owned by an officer of the
company, to provide management, sales and administrative services for
the Company. Under this informal agreement, payment to Maumelle
Enterprises for such services depends upon the actual services
rendered in a given month and the current liquidity of the Company. If
funds are not available, Maumelle Enterprises has agreed to defer
-9-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 3 - AGREEMENTS (Continued)
----------------------
payment of its management fees. During the fiscal year ended September
30, 1998, the Company paid Maumelle Enterprises a total of $130,616
for expenses accrued from prior years and $143,403 for expenses due
for 1998. As of September 30, 1998, a balance of $50,599 in management
fees remained accrued and unpaid for fiscal 1998.
NOTE 4 MORTGAGE IN DEFAULT
-------------------
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. Effective September 30, 1997, the
Company entered into a modification of the promissory note with
Resure, Inc., with the maturity date modified to September 1, 1999.
Payments are due in the amount of $101,591 including principal and
interest at 10% per annum, payable quarterly.
As of September 30, 1998, the principal balance due was $3,395,189,
and the company was in arrears on its $101,591 payment required
(arrearages through May 1999 are approximately $412,700). The receiver
for the Resure, Inc. liquidation has filed notice with the court that
it will pursue legal remedies under the mortgage. The mortgage is
secured by 701.3 acres of land in Maumelle Arkansas, with a cost basis
of $3.473 million.
Management is in discussion with the Resure, Inc. receiver to make
settlement arrangements and does not think that any settlement would
have a detrimental effect on the company.
NOTE 5 LEASE AGREEMENT
---------------
The Company is subleasing office space from Dehaven & Todd Co., in
which a principle stockholder and officer of the company is a partner.
The monthly lease payment began on October 1, 1995 and is $1,900 per
month. The lease expired September 30, 1998 and has been continued on
a month by month basis. Other leased facilities are on a month by
month basis.
NOTE 6 EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
The Company has a five-year written agreement with an individual to
perform the duties of President. Under the agreement, which became
effective on October 1, 1995, he is to
-10-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 6 EXECUTIVE EMPLOYMENT AGREEMENT (Continued)
------------------------------------------
be compensated at a rate of $20,000. per month. The agreement expires
on September 30, 2000. The Company is not a party to any other
employment agreements.
NOTE 7 NOTES PAYABLE
-------------
Notes payable consist of the following:
<TABLE>
<CAPTION>
September 30, 1998
------------------
<S> <C>
Note Payable - Bank
-------------------
Secured by land; 9.5% per annum;
revised maturity April 10, 2000 $ 399,524
Note Payable - Bank
-------------------
Secured by land; 9.5% per annum;
revised maturity November 5, 1999 450,000
Note Payable - Bank
-------------------
Secured by land; 10% per annum;
revised maturity September 10, 1999 250,000
Note Payable - Bank
-------------------
Secured by land; 9.99% per annum;
revised maturity August 7, 1999 100,000
Note Payable - Bank
-------------------
Secured by land; 9.5% per annum;
revised maturity December 2, 1999 1,750,000
Note Payable - Bank
-------------------
Secured by land; 9.5% per annum;
revised maturity July 16, 1999 1,875,000
Note Payable - Corporation
--------------------------
Unsecured; 9% per annum;
matured January 6, 1996 200,000
</TABLE>
-11-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 7 NOTES PAYABLE (Continued)
-------------------------
<TABLE>
<S> <C>
Note Payable - Bank
-------------------
Secured by land; prime + 1% per annum;
revised maturity July 1, 1999 996,281
Note Payable - Individuals
--------------------------
Secured by second mortgage on property;
12% per annum; matures December 9, 1998 150,000
(Divested October 1999, - Note 11)
Mortgage
--------
Secured by first mortgage and Notes Receivable; 1,106,212
12.75% per annum;
revised maturity April 1, 2000
Notes Payable - Various
-----------------------
Unsecured; interest from 10% to 12%;
maturities not in excess of nine months 3,884,018
Note Payable - Mortgage (Note 4)
--------------------------------
Secured by land; 10% per annum;
due September 1, 1999;
quarterly payments of $101,591 3,395,189
Notes Payable - 1/st/ Leasehold Mortgage
----------------------------------------
Secured by property first mortgage; 10.5% per annum;
monthly payments of $3,744;
matures September 17, 2001 369,173
(Divested October 1999, Note 11)
Note Payable - Corporation
--------------------------
Secured by truck; 7.9% per annum;
monthly payments of $605;
matures July 3, 2000 11,830
-----------
Total Notes Payable 14,937,227
Less: Current Portion (as of Sept 30, 1998) 11,261,862
-----------
Non Current Portion (as of Sept 30, 1998) $ 3,675,365
===========
</TABLE>
-12-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 7 NOTES PAYABLE (Continued)
-------------------------
The company has obtained extensions on most of the notes and mortgages
payable, or has paid off the notes when due, (after Sept 30, 1998).
The categorization between current and non current was based on the
original maturity date.
NOTE 8 RELATED PARTY TRANSACTIONS
--------------------------
Dehaven Todd L.P. (a partnership of beneficial stockholders of the
company) had advanced within the year approximately $300,000 of funds
for use by the company. As of September 30, 1998, $106,000 had not
been reimbursed to this partnership.
NOTE 9 ACQUISITIONS
------------
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 total purchase price was
$2,237,059, and the cost allocated to the treasury stock was $389,259.
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.
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
-13-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 9 ACQUISITIONS (Continued)
------------------------
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. This facility was
sold in October 1998. (See Note 11).
On April 30, 1998, the company acquired Entry Resorts International
LLC, a company engaged in the development, marketing and sales of
vacation packages and memberships for 200,000 shares of common stock
and $30,000 in cash. Goodwill of $95,499 has been recognized for this
acquisition.
NOTE 10 EQUITY TRANSACTIONS
-------------------
The company issued 33,500 shares of common stock as part of the
acquisition of Ocean Palms Resorts in December 1997.
The company issued 25,000 shares of common stock, at a valuation of
$18,508 for various services provided.
In April and October 1998, consultants to the company exercised
options to purchase 73,000 shares of company stock for $129,500.
19,000 shares of the company stock had been returned.
700,000 shares of Treasury stock, at an allocated cost of $386,259 was
acquired under the Century Settlement agreement (See Note 9).
The company issued 200,000 shares of common stock in April 1998 as
part of the Entry Resorts International acquisition (See Note 9).
NOTE 11 SUBSEQUENT EVENTS
-----------------
On October 15, 1998, the ownership of Ocean Palms Villas was sold for
the return of 32,305 shares of company stock, and the assumption of
the balance of $519,173 in outstanding mortgages. A loss provision of
$69,000 was provided in fiscal year ending September 30, 1998 in
recognition of this transaction.
On March 29, 1999, a Contribution Agreement was entered into between
the company's subsidiary and Trade Partners, Inc., for the purpose of
forming TradeArk Properties, LLC, a Michigan limited liability company
to develop and sell real estate.
-14-
<PAGE>
CAPITOL COMMUNITIES CORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
Trade Partners contributed viatical settlement contracts that the
parties determined had a discounted net present value of $8,300,000.
The capital contribution provides Trade Partners with a 64.84%
membership interest in TradeArk Properties. The company contributed
certain tracts of real property. The capital contribution provides the
company with a 35.16% membership interest in TradeArk Properties.
On March 31, 1999, a Plan and Agreement for Corporate Separation was
entered into between the company and Charlie Corporation, a related
party. On June 14, 1999, the parties executed a First Amendment to the
Plan and Agreement for Corporate Separation. Under the terms of the
agreement Charlie Corporation exchanged 2,839,689 shares of the
company's common stock for all of the issued and outstanding capital
stock in the company's subsidiaries, Capitol Resorts, Inc. and Capitol
Resorts of Florida, Inc. and their subsidiaries.
-15-
<PAGE>
EXHIBIT 11
CAPITOL COMMUNITIES CORPORATION
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Twelve Months Ended
September 30,
1998 1997
---- ----
<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
April 17, 9997 (38,000)
April 25, 1997 (19,000)
May 7, 1997 (19,000)
October 7, 1997 38,000
October 20, 1997 20,000
October 28, 1997 (19,000)
December 31, 1997 33,500
April 2, 1998 35,000
April 17, 1998 (700,000)
April 30, 1998 200,000
September 30, 1998 5,000
----------- ----------
Total Outstanding 6,924,500 7,112,000
Weighted average number of 7,249,494 7,171,014
shares outstanding
Shares deemed outstanding from
assumed exercise of stock options - -
----------- ----------
Total 7,249,494 7,171,014
=========== ==========
Earnings (loss) applicable to
common shares $(3,829,723) $ (143,768)
=========== ==========
Earnings (loss) per share of
common stock $ (0.528) $ (0.020)
=========== ==========
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to the use of our firm's audited financial statements by
reference in the Registration Statement Form S-8 of Capitol Communities
Corporation (the "Company"). Such audited financial statements have been
incorporated by reference from the Company's Annual Report filed on Form 10K-SB
for the fiscal year ended September 30, 1998.
July 2, 1998
/s/ Joel S. Baum
Joel S. Baum, P.A., CPA
Coral Springs, Florida
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,047,021
<SECURITIES> 0
<RECEIVABLES> 758,644
<ALLOWANCES> 0
<INVENTORY> 26,575
<CURRENT-ASSETS> 2,087,640
<PP&E> 12,683,713
<DEPRECIATION> 18,867
<TOTAL-ASSETS> 17,297,072
<CURRENT-LIABILITIES> 13,019,653
<BONDS> 0
0
0
<COMMON> 76,245
<OTHER-SE> 525,809
<TOTAL-LIABILITY-AND-EQUITY> 17,297,072
<SALES> 1,329,307
<TOTAL-REVENUES> 1,459,797
<CGS> 447,270
<TOTAL-COSTS> 447,270
<OTHER-EXPENSES> 3,960,130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 882,120
<INCOME-PRETAX> (3,829,723)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,829,723)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
