<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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
(Exact name of Small Business Issuer as specified in its charter)
Nevada 88-0361144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25550 Hawthorne Boulevard
Suite 207
Torrance, CA 90505
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 375-2266
Check whether the issuer (1) filed all reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act during the past 12 months (or for
such period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
The Company's quarterly reports for the periods ended December 31, 1998,
and March 31, 1999, on Form 10-QSB were filed late. 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 number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock ($.01 Par Value) 4,090,361
(Title of Class) Shares Outstanding as of July 20,1999
Transitional Small Business Disclosure Format: [ ] YES [X] NO
1
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CAPITOL COMMUNITIES CORPORATION
Form 10-QSB
QUARTER ENDED December 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(Unaudited)......................................................3
Consolidated Balance Sheet
December 31, 1998................................................3
Consolidated Statement of Cash Flows
For the Three Months Ended December 31, 1998 and 1997 ...........4
Consolidated Statement of Operations
For the Three Months ended December 31, 1998 and 1997............5
Consolidated Statement of Stockholders' Equity
For the Three Months ended December 31, 1998.....................6
Notes to Consolidated Financial Statements December 31, 1998..........7
Item 2. Management's Discussion And Analysis of Plan of Operation.......12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................18
Item 3. Defaults Upon Senior Securities.................................18
Item 6. Exhibits and Reports on Form 8-K................................19
Signatures................................................................19
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
--------------------------------
Capitol Communities Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and September 30, 1998
UNAUDITED
<TABLE>
<CAPTION>
December 31, 1998 September 30,1998
------------------ ------------------
<S> <C> <C>
Current Assets
Cash in Bank $ 869,189 $ 1,047,021
Accounts Receivable 425,488 462,384
Notes receivable -Current 299,905 296,260
Prepaid Assets 234,189 255,400
Inventory 35,048 26,575
----------- -----------
Total Current Assets 1,863,619 2,087,640
Plant, Property and Equipment
Furniture and Equipment, 133,198 104,055
net of depreciation
Other Assets
Land and Real Estate Holdings 12,307,175 12,579,658
Vacation Club Members 170,733 185,584
Deferred Taxes 68,425 69,425
Organization Costs 13,746 14,109
Other Assets 65,541 78,043
Loan origination costs, 595,051 405,638
net of amortization
Notes Receivable - non-current 1,883,763 1,667,638
Intangible Assets 9,458 9,583
Goodwill 95,499 95,499
----------- -----------
Total Other Assets 15,210,391 15,105,377
Total Assets $17,207,408 $17,297,072
=========== ===========
Current Liabilities
Notes Payable $15,829,801 $11,261,862
Accounts Payable & 825,878 1,744,983
Deferred Taxes Payable 14,000 14,000
----------- -----------
Total Current Liabilities 17,406,536 13,020,845
Non-Current Liabilities
Notes Payable 6,143 3,675,.365
----------- -----------
Total Liabilities 17,411,679 16,696,210
Shareholders' Equity
Preferred Stock - -
Common Stock 76,722 76,245
Additional Paid in Capital 7,430,038 7,202,339
Treasury Stock (386,258) (386,258)
Accumulated Deficit (7,324,773) (6,291,464)
Total Shareholders' Equity (204,271) 600,862
----------- -----------
Total Liabilities and
Shareholders' Equity $17,207,408 $17,297,072
=========== ===========
</TABLE>
3
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Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 1998 and 1997
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(1,033,309) $ (515,102)
Amortization 322,265 78,914
Depreciation 5,980 1,836
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables 36,896 (5,988)
(Increase) Decrease in Real Estate Holdings 272,483 (695,628)
(Increase) Decrease in Deposits (98,235)
(Increase) Decrease in Accrued Interest
Receivable (29,249)
(Increase) Decrease in Pre-Paid Assets 21,211 (58,074)
(Increase) Decrease in Inventory (8,473)
(Increase) Decrease in Accrued Expenses (183,248) (8,041)
Increase (Decrease) in Deferred Revenue 22,254
Increase (Decrease) in Accrued Interest
Payable 112,907
Other 12,502 (5,714)
----------- -----------
Net Cash Used for Operations (553,693) (1,200,120)
Cash Flows from Investing Activities:
Acquisition of Notes Receivable (240,000) (2,490,137)
Collection of Notes Receivable 20,430
Acquisition of Furniture and Fixtures (35,123) (39,951)
Increase (decrease) in loan fees (496,339) (94,601)
----------- -----------
Net cash used in Investing Activities: (751,032) (2,624,689)
Cash Flows from Financing Activities
Increase in Notes Payable 1,851,169 3,579,288
Payment of Notes Payable (952,452)
Issuance of Common Stock 228,176 368,250
----------- -----------
Net Cash used in Financing Activities 1,126,893 3,947,538
Net Increase (Decrease) in Cash (177,832) 122,729
Beginning Cash 1,047,021 227,162
----------- -----------
Ending Cash $ 869,189 $ 349,891
=========== ===========
</TABLE>
4
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Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended December 31, 1998 and 1997
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Revenues:
Sales $ 5,000 $ 25,000
Hotel Revenue
Miscellaneous Income 2,500
Cost of Sales ___________ __________
Gross Profit $ 5,000 $ 27,500
Operating Expenses:
General & Administrative
Expenses 627,208 427,770
---------- ----------
Net Income (Loss) Before
Interest Income (622,208) (400,270)
Interest Income 10,412 1,737
Interest Expense (352,839) (105,093)
----------- ----------
Net Income (Loss) from continuing operations $ (964,635) $ (503,626)
Net Income (Loss) from discontinued operations (68,674) (11,476)
Net Income (Loss) from all operations $(1,033,309) (515,102)
=========== ==========
Net Income (Loss) per share $( 0.148) $(0.070)
=========== ==========
Weighted average shares outstanding: 6,960,288 7,349,543
=========== ==========
Dividends per Share 0 0
----------- ----------
</TABLE>
5
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Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity
For the Three Months Ended December 31, 1998
(Thousands of Dollars, except per share amount)
UNAUDITED
<TABLE>
<CAPTION>
Common Stock
$0.01 Par Value Additional
--------------- Paid-In Treasury Retained
Shares Amount Capital Stock Earnings Total
------ ------ ------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at 9/30/98 7,624,500 $76 $7,202 ($386) ($6,291) $601
Additional Stock Issued 47,695 $ 1 $ 228 $229
Net (loss) for the three
months ended 12/31/98 ($1,033) ($1,033)
Balance at 12/31/98 7,672,195 $77 $7,430 ($386) ($7,324) ($204)
</TABLE>
6
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CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 1998
-----------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
Background
----------
The consolidated balance sheet at December 31, 1998 and the related
statements of operations and cash flows for the three month period
ended December 31, 1998, include the accounts of Capitol Communities
Corporation and its wholly owned subsidiaries and are unaudited. All
inter-company accounts and transactions have been eliminated in
consolidation.
These unaudited interim consolidated financial statements should be
read in conjunction with the September 30, 1998 fiscal year end
financial statements and related notes. The unaudited interim
financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the
interim periods presented and all such adjustments are of a normal
recurring nature. Interim results are not necessarily indicative of
results for a full year.
The Company was originally incorporated in the State of New York on
November 8, 1968 under the name of Century Cinema Corporation. In
1983, the Company merged with a privately owned company, Diagnostic
Medical Equipment Corp., and as a result changed its name to that of
the acquired company. By 1990, the Company was an inactive publicly
held corporation. In 1993, the Company changed its name to AWEC
Resources, Inc., and commenced operations. On February 11, 1994, the
Company formed a wholly-owned subsidiary, AWEC Development Corp., an
Arkansas corporation, which later changed its name to Capitol
Development of Arkansas Inc., on January 29, 1996. The Company was
formed to develop and sell real estate properties. In May 1994, the
Company formed a wholly-owned subsidiary, AWEC Homes, Inc., an
Arkansas corporation for the purpose of building single-family homes.
The subsidiary's name was changed to Capitol Homes, Inc., on January
29, 1996.
In order to effectuate a change in domicile and name change, approved
by a
7
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CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 1998
-----------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
(Continued)
-----------
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.
Revenue Recognition
-------------------
The full accrual method is used to determine the recognition of
revenue. In order to recognize revenue and profit under the full
accrual method the following criteria must be met. The profit from the
sale must be determinable, that is, the collectibility of the sales
price is reasonably assured, or any portion which may not be
collectible can be reasonably estimated. In addition, the earnings
process must be complete, with no significant activities required of
the seller after the sale in order to earn the profit from the sale.
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 three months ended December 31, 1998 was
6,960,288 and for the three months ended December 31, 1997 was
7,349,543.
NOTE 2 - CAPITAL TRANSACTIONS
--------------------
In May 1993, the Company executed a 15 to 1 reverse stock split.
In September 1993, the Company issued an additional 4,282,126 shares
of common stock to existing stockholders.
In October 1993, the Company issued to Petro Source 6,079,000 shares
of common stock to acquire royalty interests in oil and gas properties
owned by Petro Source Energy Corp.
In July 1995, the Company executed a 5 to 1 reverse stock spilt.
In July 1995, the Company issued an additional 4,772,996 shares of
common stock to existing stockholders.
8
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In October 1996, an individual pursuant to a consulting agreement,
exercised an option to purchase 38,000 shares of common stock.
In November 1996, an individual pursuant to a consulting agreement,
exercised an option to purchase 150,000 shares of common stock.
In April 1997, two shareholders returned a total of 57,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company.
In May 1977, one shareholder returned a total of 19,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company
On July 29,1997, the Company issued 50,000 shares of common stock to
David Paes, an officer of the Company , in consideration of management
services to the Company.
On July 29,1997, the Company issued 50,000 shares of common stock to
Mary Peyton, an officer of the Capitol Homes, Inc., a wholly owned
subsidiary of the Company, in consideration of management services
to the Company.
On July 30,1997, the Company issued 100,000 shares of common stock to
an unaffiliated company for the purchase of all of the stock of
Capitol Resorts of Florida, Inc.,under an Agreement and Plan of
Reorganization, dated July 30, 1997.
On October 20, 1997, the Company issued 20,000 shares of common stock
to Ann Aldridge, an officer of Capitol Development of Arkansas, Inc.,
a wholly owned subsidiary of the Company, in consideration of
management services to the Company.
In October 1997. One shareholder returned a total of 19,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company.
In October 1997, a consultant to the Company exercised an option to
purchase 38,000 shares of common stock, pursuant to a consulting
agreement.
In December 1997, the Company issued 33,500 shares of common stock to
an unaffiliated company, as well as approximately $868,000 in cash and
the assumption of a $1,158,000 mortgage for the purchase of the Ocean
Palms Resort Property, the Ocean Palms Resort Paper and other rights.
In April 1998, a consultant to the Company exercised an option to
purchase 35,000 shares of common stock, pursuant to a consulting
agreement.
9
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In April 1998, the Company issued 200,000 shares of common stock to
unaffiliated third parties pursuant to the acquisition of ERI and EMI,
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.
On April 17, 1998, Capitol Development of Arkansas, Inc., the
Company's Operating Subsidiary exercised its option under a Settlement
Agreement with Century Realty to repurchase 700,000 shares of the
Company's voting common stock. Such shares are now held as treasury
shares.
In September 1998, the Company issued 5,000 shares to an unaffiliated
third party in consideration of services to the Company.
In October 1998, the Company issued 60,000 shares of common stock to
an unaffiliated third party pursuant to a Consulting Agreement dated
October 1, 1998.
Effective October 15, 1998, the Company disposed of its interest in
the Ocean Palms Villas property in exchange for 32,305 shares of the
Company's common stock. The shares were subsequently canceled by the
Company.
On October 15, 1998, the Company issued 10,000 shares each to William
Priakos and Eldon Hobbs, officers of Capitol Club International, Inc.
a wholly owned subsidiary of the Company in consideration of
management services to the Company.
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
NOTE 3 - SUBSEQUENT EVENTS
-----------------
On February 18, 1999, pursuant to the terms of a Settlement Agreement
and Mutual Release between the Company and its subsidiaries and
Michael D. Munro, an employee of a subsidiary of the Company, a total
of 66,667 shares of common stock of the Company was returned by Munroe
and subsequently canceled by the Company.
On March 29, 1999, a Contribution Agreement was entered into between
the company's subsidiary and Trade Partners, Inc., for the purpose of
forming
10
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TradeArk Properties, LLC, a Michigan limited liability company to
develop and sell real estate.
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. The Company is
holding the stock as Treasury Shares.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward-Looking Statements
- --------------------------
Certain matters discussed in this Form 10-QSB are forward-looking
statements within the meaning of the Private Litigation Reform Act of 1995 and
as such may involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of the Company
to be different from any future results, performance or achievements expressed
or implied by such forward-looking statements. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Company's filings
with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
The the following discussion should be read in conjunction with the
unaudited financial statements appearing in Item 1, of this Part 1 ("the
Financial Statements"), and the information provided later in Item 2, of this
Report. As noted below in this Report, the Company needs to convert into long-
term debt, or replace or retire its current long term obligations and raise
additional capital to overcome its present illiquidity and commence significant
operations.
The discussion below is also qualified in its entirety by events subsequent
to December 31, 1998. On June 14, 1999, the Company divested all interests in
its vacation ownership interval ("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 LLC ("TradeArk Properties"). For the contributed
Maumelle Property, the Company received a 35.16% membership interest in TradeArk
Properties. Management anticipates that during this fiscal year, all residential
development and sales will be done through TradeArk Properties and other joint
venture partners.
The Company significantly changed the nature of its business activities
from land sales to real estate development and vacation interval operations
during the fiscal years ended September
12
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30, 1997 and 1998, 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 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 additional capital.
Financial Condition
- -------------------
There continues to be substantial doubt about the Company's ability to
continue as a going concern, due to its current illiquidity and uncured defaults
in some of its secured debt As discussed in more detail below, the Company
obtained $1,395,423 in unsecured short-term debt financing from private sources,
( collectively the "Bridge Loans"), during the three month period ended
December 31, 1998, reflected in $869,189 in cash on hand. There can be no
assurance, however, that additional financing can be obtained, or that the
Company will be able to raise the additional capital needed to satisfy long-term
liquidity requirements.(See "LIQUIDITY AND CAPITAL RESOURCES," below).
Change in Financial Condition Since the End of the Last Fiscal Year. At
--------------------------------------------------------------------
December 31, 1998, the Company had total assets of $17,207,408, a decrease of
$89,664, or 0.52% over the Company's total assets as of the Company's fiscal
year end of September 30, 1998. The Company had cash of $869,189 at December
31, 1998 compared to a cash position of $1,047,021 at September 30, 199, a
decrease of $177,832.
Prepaid assets decreased from $255,400 on September 30, 1998, by $21,211 to
$234,189 on December 31, 1998.
The carrying value of the Company's real estate holdings declined by
$272,483 during the three months from $12,579,658 to $12,307,175. One major
component of this decrease was the disposition of the Company's interest in OPV
Development, Inc. ("OPV"), which resulted in a decrease of $520,008. Additional
expenditures were spent on the Company's property in Orlando, Florida, including
capitalization of interest of $50,183, totaled $227,159.
Total liabilities of the Company at December 31, 1998, had increased to
$17,411,679, an increase of $715,469 over the September 30, 1998 total of
$16,696,210. The current liability for notes payable increased by $4,567,939
during the three month period from September 30, 1998, from $11,261,862 to
$15,829,801. This resulted primarily from the reclassification of the Resure
Inc. ("Resure"), mortgage payable from long term to short term debt. In
addition, the Company increased its unsecured short term notes payable by
$1,395,423.
Accounts payable and accrued expenses decreased by $ 183,248. At September
30,1998 the liability for accounts payable and accrued expenses totaled
$1,744,983. At December 31, 1998, the balance was $1,561,735. Accrued interest
payable increased by $25,893, from
13
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$440,291 at September 30, 1998 to $466,130 at December 31, 1998. Accrued real
estate and special taxes payable decreased from the September 30, 1998 balance
of $181,134 to a balance of $86,653 at December 31, 1998, a decrease of $94,481,
due to taxes being paid during the quarter.
Shareholders' Equity decreased by $805,133. The decrease results
primarily from an operating loss of $1,033,309 for the three month period ending
December 31, 1998, the issuance of 60,000 new shares of the Company's common
stock at $4.00 per share, as payment of a financial consulting contract, the
issuance of 20,000 new shares at $1.125 per share as payment of services
rendered by employees of the Resort subsidiaries and the cancellation of 32,305
shares at $1.062 per share received from the disposition of OPV.
Results of Operations
- ---------------------
Comparison of Three Months Ended December 31,m 1998 to the Three Months Ended
- ------------------------------------------------------------------------------
December 31, 1996. For the three months ended December 31, 1998, the Company
- ------------------
experienced a net loss of $1,033,309 compared with a loss of $515,102 for the
three months ended December 31, 1997. While sales and gross profit from
continuing operations were negligible during both periods, general and
administrative expenses increased by $199,438, from $427,770 to $627,208, and
interest expense increased by $247,746, from $105,093 to $352,839, resulting in
the increase in net losses. (See discussion below).
Sales decreased by $20,000 to $5,000 for the three months ended December
31, 1998, from $25,000 for the three months ended December 31, 1997. During the
three months ended December 31, 1997, the Company sold one lot of undeveloped
land for $25,000. During the three months ended December 31, 1998, the Company
sold a right of way to the Maumelle Water Management in Maumelle, Arkansas for
$5,000.
General and administrative expenses increased by $199,438, to $627,208 for
the three months ended December 31, 1998, from $427,770 for the three months
ended December 31, 1997. The major reason for the increase was amortization
expense, which increased by $224,816 from $78,914 at December 31, 1997 to
$303,730 for the three months ended December 31, 1998. This resulted from the
costs associated with the acquisition of the short term unsecured loans.
Management expenses totaled $89,330 for the three months ended December 31,
1998, an increase of $19,777 from the corresponding expense of $69,553 for the
three months ended December 31, 1997. Consulting fees of $99,669 for the three
months ended December 31, 1997 decreased by $26,141 to $73,528 for the three
months ended December 31, 1998.
Interest income increased to $10,412 for the three months ended December
31, 1998 from $1,737 for the three months ended December 31, 1997.
Interest expense increased by $247,746 from 105,093 for the three months
ended December 31, 1997 to $352,839 for the three months ended December 31,
1998. The increase
14
<PAGE>
resulted from the increase in debt by the Company due to advancement of
operating capital to the Florida VOI properties.
The loss from discontinued operations from the VOI Florida properties of
$11,476 for the three months ended December 31, 1997 increased to a loss of
$68,674 for the three months ended December 31, 1998. During the period ending
December 31, 1997, these operations had sales totaling $276,784, cost of sales
of $148,942 and operating expenses, including interest expense of $161,919.
During the same period in 1998, sales totaled $401,339, cost of sales were
$75,952 and operating expenses, including interest expense were $359,399.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents amount to $869,189 or 5.05% of total assets at
December 31,1998, as compared with $1,047,021 at September 30, 1998. The
Company's liquidity position at December 31, 1998, is not adequate to meet the
Company's liquidity requirements. As of December 31, 1998, the Company owed
$203,183 in past due payments to Resure and had $2,858,419 in short-term debt
due within the next six months. As of the date of this Report, the Company has
approximately $3,600,000 in defaulted debt, and $3,524,456 in short-term debt
due within the next six months. The Company's status as a going concern remains
in doubt.
As of December 31, 1998, the Company has borrowed $5,251,295 from private
sources, (the "Bridge Loans"). The majority of the promissory notes evidencing
the Bridge Loans, (the "Bridge Notes") bear interest at a rate of 10.9% per
annum and mature nine months from the date of each Note. The Bridge Loans are
unsecured, however the Company has provided a guarantee bond to the Bridge Note
holders at a cost to the Company of approximately 5% of the gross proceeds
received from the Bridge Loans. The Company has also paid the investment
banking firm that assisted the Company in obtaining the Bridge Loans a fee equal
to 15% of Bridge Loans gross proceeds received.
The Bridge Notes mature in late third and fourth quarters 1999. In the next
fiscal year, the Company intends to replace the notes with long term debt or
equity capital. In the interim, Management intends to negotiate with the
present note holders to reinvest the Bridge Notes for an additional nine month
period. If some or all of the note holders choose not to reinvest, the
Company will have to replace the maturing notes with debt or equity capital.
There can be no assurances, however, that the Company will be able to obtain
the funds necessary to pay the matured Bridge Notes.
Effective October 15, 1998, Capitol Resorts of Florida, Inc. (the "Florida
Resorts Subsidiary") disposed of its interest in the Ocean Villas Property by
exchanging the issued and outstanding 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 Resort 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
15
<PAGE>
improvements comprised of the 16 Ocean Villas LTL units, promissory notes
arising from the sale of the units and first and second mortgages encumbering
the ground leases for the 32,305 shares of the Company's common stock held by
MLT Management. The transaction eliminated approximately $519,173 in Company
debt.
On March 29, 1999, a Contribution Agreement was entered into between
Capitol Development of Arkansas, Inc. (the Company's "Operating Subsidiary") and
Trade Partners, Inc. ("Trade Partners"), an unaffiliated third party, for the
purpose of forming 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. The transaction eliminated approximately $2,675,000 in Company debt.
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
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.
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
16
<PAGE>
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 Capitol
Resorts, Inc. (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.
The Company is current on its debt, except a $3,500,000 recourse note owed
to Resure Inc. (the "Resure Note I"), which matures September 1, 1999, and a
$200,000 recourse note payable to Davister Corp. (the "Davister Note"), which
matured January 9, 1996. As of the date of this Report, the Company has not paid
the July 1 and October 1, 1998 payments or the January 1, April 1, and July 1,
1999 payments to Resure for an aggregate past due of amount of $507,955. 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 required funds. See
Part II, ITEM 1, "LEGAL PROCEEDINGS."
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.
17
<PAGE>
The Company intends to raise operating capital by selling debt and/or
equity securities to the public or in private transactions and by the sale of
certain portions of the Maumelle Property. There can be no assurance, however,
that the Company will be able to raise sufficient funds to cure its defaulted
debt obligations and retire its short-term debt, most of which will mature
within the next six months. 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.
In respect to prospective long-term liquidity, the Company intends to
generate the bulk of its cash from operations by developing and selling
residential lots, initially on the Maumelle Property and by selling additional
equity. This assumes that the Company can obtain the necessary financial
resources to overcome its present illiquidity.
Subsequent to the period ended December 31, 1998, on June 30, 1999, the
Company sold approximately 30 acres of single-family lots of the Maumelle
Property to an unaffiliated third party for a sales price of $535,226. The
Company received net proceeds of $146,218 from the sale, after reducing a First
Arkansas Bank $1,750,000 commercial revolving line of credit by $364,000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
Item 3. DEFAULTS UPON SENIOR SECURITIES
18
<PAGE>
The Company incorporates by reference the information regarding defaults of
certain debt obligations from Part I, ITEM 2 "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF PLAN OF OPERATION - Liquidity and Capital Resources," and Part II,
ITEM 1, LEGAL PROCEEDINGS."
Item 5. OTHER INFORMATION.
The Company incorporates by reference the information in Part I, ITEM 2,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and
Capital Resources."
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBITS
The following Exhibits are filed as part of this Report.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
b) REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITOL COMMUNITIES CORPORATION
Date: July 28, 1999 By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief Executive Officer
Date: July 28, 1999 By: /s/ David Paes
David Paes
Treasurer and Vice President
<PAGE>
EXHIBIT 11
CAPITOL COMMUNITIES CORPORATION
Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
Shares Outstanding Beginning 6,924,500 7,312,000
Of Period
Shares Issued During Period
October 7, 1997 38,000
October 20, 1997 20,000
October 28, 1997 (19,000)
December 31, 1997 33,500
October 1, 1998 60,000
October 15, 1998 (32,305)
December 15, 1998 20,000
----------- ----------
Total Outstanding 6,972,195 7,384,500
Weighted average number of 6,960,288 7,349,543
shares outstanding
Shares deemed outstanding from
assumed exercise of stock options - -
----------- ----------
Total 6,960,288 7,349,543
===========
Earnings (loss) applicable to $(1,033,309) $ (515,102)
common shares =========== ==========
Earnings (loss) per share of $ (0.148) $ (0.070)
common stock =========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 869,189
<SECURITIES> 0
<RECEIVABLES> 425,488
<ALLOWANCES> 0
<INVENTORY> 35,048
<CURRENT-ASSETS> 1,863,619
<PP&E> 12,440,373
<DEPRECIATION> 20,703
<TOTAL-ASSETS> 17,207,408
<CURRENT-LIABILITIES> 17,406,536
<BONDS> 0
0
0
<COMMON> 76,722
<OTHER-SE> (280,993)
<TOTAL-LIABILITY-AND-EQUITY> 17,207,408
<SALES> 5,000
<TOTAL-REVENUES> 15,412
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 627,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 352,839
<INCOME-PRETAX> (964,635)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (68,674)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,033,309)
<EPS-BASIC> (0.148)
<EPS-DILUTED> (0.148)
</TABLE>
