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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, 1999
[ ] 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 late by the above
officers, directors and beneficial owners.
State the issuer's revenues for its most recent fiscal year. $9,194,281.
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.
$298,352.75 based on the average of the bid and asked obtained from the National
Quotation Bureau, Inc. ("NQB") on December 1, 1999.
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 4,090,000 common stock shares,
as of December 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format YES [ ] NO [X]
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TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS ......................................... 4
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PART I
ITEM 1. DESCRIPTION OF BUSINESS ................................ 4
ITEM 2. DESCRIPTION OF PROPERTY................................. 19
ITEM 3. LEGAL PROCEEDINGS....................................... 34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 34
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................... 35
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION....................................... 36
ITEM 7. FINANCIAL STATEMENTS.................................... 48
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................. 48
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a)OF THE EXCHANGE ACT........................ 48
ITEM 10. EXECUTIVE COMPENSATION.................................. 50
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................... 52
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................................ 53
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................ 55
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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 meaningful operations. If the Company
cannot restructure, 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
Predecessor Corporation filed annual reports under the Securities Exchange Act
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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 a
wholly-owned subsidiary, AWEC Development Corporation, an Arkansas
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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 affiliates of Michael G. Todd. The shares were transferred as payment for
public relations services provided by Prescott LP and Charlie Corporation to the
Predecessor Corporation. Herbert E. Russell and John W. DeHaven as trustee and
beneficiary of Charlie Corporation, respectively, were affiliates of Michael G.
Todd until June 14, 1999, when Charlie Corporation exchanged its interest in the
Company for certain of the Company's assets. See discussion below, ITEM 2,
"DESCRIPTION OF PROPERTY," and ITEM 11, "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
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, 1999, approximately 600 acres of the Maumelle Property, for
aggregate gross sales proceeds of $15,440,012 (including the contribution
discussed below). In June, 1999, the Company contributed 258 acres of the
Maumelle Property to TradeArk Properties, LLC ("TradeArk Properties")for a
35.16% interest. See discussion below, and ITEM 2, DESCRIPTION OF PROPERTY- -
TradeArk Properties," and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION - - Certain Capital Raising Transactions."
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
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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.
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
promissory note (the "Resure Note I") which is secured by approximately 701
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 701 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 343 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
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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.
The Resure Note I is currently in default and 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 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. As of the date of this Report, the foreclosure action is
pending. See ITEM 2, "DESCRIPTION OF PROPERTY," ITEM 3, "LEGAL PROCEEDINGS," and
ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - LIQUIDITY
AND CAPITAL RESOURCES"
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. The Resort Subsidiary was
divested by the Company on June 14, 1999, as part of a Plan and Agreement for
Corporation Separation between the Company and Charlie Corporation. See
discussion below.
On July 30, 1997, the Company acquired Capitol Resorts of Florida, Inc.
(the "Florida Resorts Subsidiary"), a 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 ("Capitol SB"), a wholly-owned subsidiary of the Florida
Resorts Subsidiary. Capitol SB was formed on April 29, 1998, by the Florida
Resorts Subsidiary as 396-R Corporation, for the purpose of
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holding the Florida Bible College Property. On July 30, 1998, 396-R Corporation
changed its name to Capitol SB Development Corporation. The Florida Resorts
Subsidiary, including all properties held by the Florida Resorts Subsidiary was
divested by the Company on June 14, 1999, as part of a Plan and Agreement for
Corporation Separation between the Company and Charlie Corporation. See
discussion below, ITEM 2, "DESCRIPTION OF PROPERTY," and ITEM 6, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - LIQUIDITY AND CAPITAL RESOURCES."
On December 9, 1997, the Florida Resorts Subsidiary acquired the lease
rights to 120 feet of beachfront land and improvements located in Pompano Beach,
Florida (the "Ocean Palms Resort Property") from Ocean Palms Resort, Inc.
("OPRI"), and Ocean Palms Development Corporation ("OPDC"), unaffiliated third
parties. The Company exchanged its interest in the Ocean Palms Property on June
14, 1999, as part of a divestment of the Florida Resorts Subsidiary by the
Company and Charlie Corporation. See discussion below, ITEM 2, "DESCRIPTION OF
PROPERTY," and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF
OPERATION - LIQUIDITY AND CAPITAL RESOURCES."
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. 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., exchanged 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. The shares are being held as Treasury
Shares. See ITEM 2, "DESCRIPTION OF PROPERTY -Subsequent Events," and ITEM 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - LIQUIDITY AND
CAPITAL RESOURCES."
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. The Capitol Club subsidiary was divested on June
14, 1999, as part of a Plan and Agreement for Corporation Separation between the
Company and Charlie Corporation. As of the date of divestment, Capitol Club had
not commenced operations.
On April 30, 1998, the Resort Subsidiary acquired all of the membership
interests of Entry Resorts International, LLC, a New Hampshire limited
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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. 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. CRC was divested on June 14, 1999, as part of a Plan and Agreement
for Corporation Separation between the Company and Charlie Corporation. See
discussion below.
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.
Exchange Services was divested on June 14, 1999, as part of a Plan and Agreement
for Corporation Separation between the Company and Charlie Corporation. See
discussion below.
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 for a 64.84% membership interest in TradeArk Properties.
The Operating Subsidiary contributed )258 acres 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") for a membership interest of 35.16%. The
transaction was treated as a capital contribution in the quarterly report filed
on Form 10QSB for the period ended June 30, 1999 and filed with the SEC on
August 26, 1999. At fiscal year end, the Company's accountants determined the
transaction should be treated as a sale under the Statement of Financial
Accounting Standards Number 66, "Accounting for Sales of Real Estate." Since
the agreement for the transaction was designated as a Contribution Agreement,
for the purposes on this Report only, the TradeArk Properties agreement will be
defined as a "Contribution." See ITEM 2, "DESCRIPTION OF PROPERTY," and ITEM 6,
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --RESULTS OF
OPERATIONS --Comparison of Year Ended September 30, 1999 to Year Ended
September 30, 1998," "--LIQUIDITY AND CAPITAL RESOURCES," and "--Certain
Capital Raising Transactions."
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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
CRC, 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 Ocean Palms Resort located in Pompano Beach,
Florida. See ITEM 2, "DESCRIPTION OF PROPERTY," ITEM 6, MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --LIQUIDITY AND CAPITAL
RESOURCES," and ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
BUSINESS OF THE COMPANY
The following discussion of the "BUSINESS OF THE COMPANY," is qualified in
its entirely by events that occurred during the Company's fiscal year ended
September 30, 1999. On June 14, 1999, the Company divested all interest in its
vacation interval properties. The Board of Directors (the "Board") determined
that it was not in the best interest of the Company to continue to operate its
vacation ownership interests ("VOIs") and long term leaseholds ("LTLs")
(collectively, "Vacation Intervals")in Florida or to develop or acquire other
Vacation Interval properties. The Board made this decision based on higher than
expected operating costs from the Florida Vacation Interval properties and lower
than expected revenues. The Board's decision also resulted from a determination
to focus on its primary business of developing and selling property from the
Company's Maumelle Property inventory in order to utilize core assets to
restructure the Company's short-term debt into equity and/or long-term debt.
See above, ITEM 1, "DESCRIPTION OF BUSINESS," and ITEM 2, "DESCRIPTION OF
PROPERTY."
GENERAL. During fiscal year ended September 30, 1999, the Company shifted
its focus to the development and sale of its property 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. As stated above, the Board determined during the fiscal year to
divest the Company's interest in its Vacation Interval properties predicated on
higher than anticipated losses from the Vacation Interval operations.
The Company's real estate as of September 30, 1999, consisted of the
remaining unsold portion of the Maumelle Property consisting of approximately
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1,472 acres and the Company's 35.16% interest in TradeArk Properties. See
above, ITEM 1, "DESCRIPTION OF BUSINESS-Business Development," ITEM 2,
"DESCRIPTION OF PROPERTY," and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION --Certain Capital Raising Transactions."
During fiscal year, the Company sold the following property: (i) 7.4 acres
of the Commercial Maumelle Property to an unaffiliated third party, for a price
of $300,000 with proceeds to the Company of $273,726.24; (ii) a right of way on
the Maumelle Property to the Maumelle Water Management of the City of Maumelle
for a price of $5,000; (iii) approximately 30 acres of single-family lots to an
unaffiliated third party for a sales price of $535,226.40; and (iv) the sale of
258 acres of Maumelle Property to TradeArk Properties, for a 35.16% interest in
TradeArk Properties, cash of $930,713.18 and divestment of debt assumed by
TradeArk Properties.
During the fiscal year ended September 30, 1999,the Company's business has
consisted primarily of selling land from its Maumelle Property inventory and
operating its Vacation Interval properties in Florida, until June, 1999, when
the Company divested all interest in the Vacation Interval properties. The Board
decided to shift the Company's primary focus from Vacation Interval operations
and the construction and sales of single-family homes due to lack of capital and
its inability to overcome severe illiquity caused by its current short-term
debt. The Company's current liquidity problems prevents the Company from
conducting any meaningful business activities other than selling assets from the
remaining Maumelle Property. Although management anticipates utilizing a portion
of the Maumelle Property to raise equity and/ or restructure its current short-
term debt into long-term debt, there can be no assurance that the Company will
be able to raise sufficient capital or restructure its short-term debt 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 of the Company. The Company expects that Maumelle Enterprises will
continue in the foreseeable future to manage the Maumelle Property. In other
geographic areas, the Company expects to engage local unaffiliated brokers to
sell or manage any property it may acquire.
The Company managed and operated the Vacation Interval properties in
Pompano Beach, Florida until it divested its interest in such properties in June
1999.
PRINCIPAL PRODUCTS AND MARKETS.
MAUMELLE PROPERTIES. The Company plans to develop and sell land from its
inventory of residential, and multi-family lots of the Maumelle Property.
Management anticipates that the undeveloped lots will be sold to contractors,
and apartment building operators, as appropriate.
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The Company will 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 and to construct
single-family homes, and apartments on the land that it presently owns in
Maumelle. Management anticipates that the Company will develop and sell single-
family homes with joint venture partners. See ITEM 2, "DESCRIPTION OF
PROPERTY--PROGRAM OF DEVELOPMENT."
The Company's initial focus is selling land from its Maumelle Property
inventory to reduce the Company's current short-term debt or if Company
management determines that a particular property is not appropriate for
development by the Company. Management anticipates that if commences home-
building operations with a joint venture partner it will develop single-family
homes in the $125,000 to $200,000 price range on a portion of the approximately
3,000 unimproved single-family home lots it owns in Maumelle. The Company does
not expect to operate, manage or lease any of the single-family homes, and
apartment properties it may develop.
During the fiscal year ended September 30, 1999, the Company has sold 295.4
acres, plus a right of way, of its real property for an aggregate amount of
$1,744,665.82. See ITEM 6 "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION--LIQUIDITY AND CAPITAL RESOURCES." Management expects that any
Maumelle Property sold probably will be purchased by other real estate
developers, who may compete with the Company or its joint partners 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 lots.
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 any or
all of its inventory of residential Maumelle Property. See "--GROWTH
STRATEGIES," below.
VACATION INTERVALS. As discussed above, the Company shifted its focus
during fiscal year ended September 30, 1999 from developing, selling and
operating Vacation Intervals into the development and sale of its Maumelle
Property inventory. During the fiscal year, the Company divested all of its
interest in its Vacation Interval properties. 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. On June 14, 1999,
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 See above, ITEM 1 "DESCRIPTION OF
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BUSINESS-Business Development," ITEM 2, "DESCRIPTION OF PROPERTY--PROGRAM OF
DEVELOPMENT," 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."
MARKETING AND ADVERTISING.
The Company intends to develop a marketing and advertising plan, with
emphasis on the print media, to promote the sale of its Maumelle Property
inventory and any single-family homes it constructs through TradeArk Properties
or other joint venture partners. The Company also plans to list such property
with local real estate brokers.
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. The Company initially intends to focus
--------------------------------
on the sale of single-family lots in Maumelle, Arkansas. The Company believes
that the sale of portions of its Maumelle Property inventory will help the
Company to restructure its current short-term debt and permit the Company to
commence in activities which would offer the Company significant growth
opportunities. These opportunities may include, but are not limited to,
participating in joint partnerships in the home building industry for the
construction and sale of single-family homes, primarily in Maumelle, Arkansas.
Development of Maumelle Property. The Company's growth strategy with respect
--------------------------------
to the Maumelle Property is to focus on sale of single-family and multi-family
lots. The Company may, through joint venture partners, develop and build homes
on the single-family lots it currently owns in Maumelle, Arkansas.
Of the approximately 5,300 single-family vacant sites in the City of
Maumelle, approximately 1,500 sites are not owned by the Company or TradeArk
Properties. Given the Company's ownership of a majority of available home sites
in Maumelle, directly or through TradeArk Properties, 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 the development and sale of single-family home sites and in
the sale of single-family homes.
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RESTRUCTURING DEBT. The Company believes that restructuring its current
------------------
short-term debt will be a key factor in achieving long-term stability and
growth. Currently, management is trying to implement a strategy to utilize the
Company's assets to restructure its short-term debt into equity and/or long-term
debt, and raise additional capital by liquidating portions of its Maumelle
Property inventory. Once a debt restructuring program is implemented, the
Company intends to seek geographic and product diversification throughout the
United States and form joint ventures with partners in the home construction
industry. There can be no assurances, however, that the Company will be able to
successfully restructure its debt, which may limit application of the Company's
growth strategy.
PRODUCT DIVERSIFICATION. Although the Company's primary focus will be on
-----------------------
the sale of portions of its Maumelle Property inventory, the Company intends to
diversify its portfolio and income sources by developing and building single-
family homes with joint venture partners, including TradeArk Properties.
COMPETITION.
The real estate development industry is highly competitive. In Arkansas
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 development and sale of land
for development. TradeArk Properties and any other joint ventures the Company
may form will also have significant competition in the home construction
industry from larger more experienced developers who will compete with the
Company in the acquisition of land, 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.
The Company currently has no material presence or reputation in Arkansas or
any other area in the real estate development industry. Due to the Company's
substantial amount of short-term debt and lack of capital, it may have to sell
portions of its Maumelle Property at less than market value. As a result, there
may be reduced profit margins on the Company's operations which may make it more
difficult for the Company to compete with other land developers or to raise
additional capital and/or equity. Although the Company intends to improve its
ability to compete by selling portions of its Maumelle Property inventor,
entering into joint venture or similar development agreements with established
real estate developers, raising additional capital and restructuring its current
short-term debt, 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.
GOVERNMENTAL REGULATIONS.
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The development industry is subject to extensive and complex regulations.
In the sale of its Maumelle Property, the Company, or 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 Company's Maumelle Property is subject to the City of Maumelle's Master
Land Use Plan. Under this Plan, approximately 1,472 acres of the approximately
1,015 acres of the Maumelle Property that was developable land as of September
30, 1999, was already zoned for single-family homes. The current zoning allows
the Company to develop and offer for sale approximately 3,000 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.
If the Company forms a joint ventures to construct homes, it 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 multi-
family 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 can obtain an appropriate joint venture partner, restructure its
debt and raise additional capital.
The Company may be required to mitigate any environmental impact on its 446
acres of wetlands in Maumelle that may be caused by the Company's proposed
development activities in Maumelle. Although the Company is not currently aware
of any such mitigation requirements, the Company will be required to obtain
approval from the Army Corp of Engineers of any required mitigation efforts.
The Company may incur additional costs and delays in seeking such approvals and
performing such mitigation. See "--ENVIRONMENTAL LAWS," below.
Delays in obtaining governmental permits and approvals may increase
development costs to the Company. Zoning requirements and restrictions could
become more restrictive in the future, 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-
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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, which could result in a decrease in
property values.
The Company believes that, with adequate funding, it can comply with all
applicable laws regarding its real estate development 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 in regard to the sale of its Maumelle Property. However, any
failure to comply with applicable laws or regulations or the enactment of new
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.
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In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to, radon in indoor air, the EPA and the Surgeon General recommend testing
residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (Pci/L) (the "Recommended Action Level"). The
presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's properties may adversely affect the
Company's ability to develop its residential and multi-family properties, as
well as the market value of such 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 that was sold during the fiscal year. 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 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
18
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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, prior to the divestment of the properties.
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 may 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,
1999, the Company and its subsidiaries had one full-time employees, and no 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
1,015 acres of single-family sites (which included approximately 3,000 home
sites), approximately 11 acres of multi-family sites, 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 and multi-family units. As
of September 30, 1999, 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, including the single-family lots owned by
TradeArk Properties.
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The Maumelle Property can be divided into five categories: (1) the Large
Residential Tract, (2) the Pine Ridge Tract; (3) the Multi-Family Lots, and (4)
the Miscellaneous Tract and Property and (5) Commercial Lots. The Commercial
Lots owned by the Company were sold during the fiscal year. Each category of
Maumelle Property will be discussed separately below after the following
overview of the City of Maumelle.
In June, 1999, the Company contributed certain tracts of its Maumelle
Property for a 35.16% membership interest in TradeArk Properties. See ITEM 1,
"DESCRIPTION OF BUSINESS - Business Development," and discussion below, "--
MAUMELLE PROPERTY-- TradeArk Property," and ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION -- Certain Capital Raising Transactions."
During fiscal year, 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. See ITEM 1,
"DESCRIPTION OF BUSINESS - Business Development," and below, "-- Maumelle
Property."
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 ITEM 1, "DESCRIPTION OF BUSINESS - Business
Development," see discussion 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. Although there are no insurable improvements on the Company's
properties other than the Florida properties discussed below, the Company does
not maintain a general liability insurance coverage on 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
Ocean Palms 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
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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%.
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 1999 fiscal year, the Large
Residential Tract was comprised of approximately 1,015 acres of undeveloped
residential. Under current zoning, the Company believes this land can be
subdivided into approximately 3,000 single-family lots. The Large Residential
Tract currently is zoned for residential development.
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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. As of the end of the Company's fiscal year it is
in default under the terms of the Resure Note I and is subject to a foreclosure
action. See, discussion below.
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. Under the terms of the Resure Note I it 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 approximately 701 acres of the Large Residential Tract ("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.
As of the Company's fiscal year-end, the Company is in default on the
Resure Note I. The Company has not paid to Resure the July 1, or October 1, 1998
payments or the January 1, April 1, and July 1, 1999 payments. All principal and
interest on the Resure Note I became due and payable on September 1, 1999. The
aggregate amount due on the Resure Note I, as of September 30, 1999 is
$3,903,790 and $3,961,462 as of the date of this Report. Predicated on the
Company's failure to paid quarterly payments to Resure since July, 1998, the
Resure Liquidator instituted a foreclosure action on April 19, 1999 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 and have the lawsuit dismissed. The Company intends to
pay off the liability from proceeds from the sale of some of its Maumelle
Property or by obtaining long-term debt or 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
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PROCEEDINGS," and ITEM 6, MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION-LIQUIDITY AND CAPITAL RESOURCES."
The remaining 314 acres of the Large Residential Property has no mortgages;
however, the property is used to secure a $1,750,000 line of credit from First
Arkansas Valley Bank ("First Arkansas Line of Credit 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.
On June 30, 1999, the Company sold approximately 30 acres of the Large
Residential Property for a sales price of $535,226.40. Three hundred and sixty-
four thousand of the proceeds from the sale were used to pay down the First
Arkansas Line of Credit I, for the release of the 30 acres that secured a
portion of the loan. As of September 30, 1999, an aggregate of $1,435,010 was
outstanding on the credit line. As of the date of the this Report, the First
Arkansas Line of Credit I is in default and the Company owes an aggregate of
$1,457,966.
The Company intends to sell certain portions of the remaining 1,015 acres
of Large Residential Track to meet liquidity requirements.
Pine Ridge Lots. As of the Company's fiscal year-end, it does not directly
own any of the Pine Ridge Lots.
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. 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. TradeArk Properties anticipates commencing the development of
finished residential lots on the Pine Ridge Lots in the second quarter of fiscal
year 2000, assuming it can raise sufficient capital. See ITEM 1, "DESCRIPTION OF
BUSINESS - Business Development," and ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES," and " --
Certain Capital Raising Transactions."
Commercial Lots. As of the Company's fiscal year-ended September 30, 1999,
the Company did not directly own any Commercial Lots. During the fiscal year,
the Company contributed 46 acres of Commercial Lots of the Maumelle Property to
TradeArk Properties, and sold 7.4 acres to unaffiliated third party for
$273,726.24. Prior to the contribution to TradeArk, approximately 39.8 acres
of the Commercial Lots were 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 bore interest at the rate of 10% per annum and matured on October 12, 1998.
The loan had been extended on the same terms to July 16, 1999, at which time
all principal and accrued interest was due and payable. Pursuant to the terms of
the Contribution Agreement, the First Arkansas Valley
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Bank Credit Line II was paid in full on June 14, 1999, in the amount of
$1,948,277.04. 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. ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- -- Certain Capital Raising Transactions."
TradeArk Properties proposes to develop 40 acres of Commercial Lots for
sale commencing in the second quarter of fiscal year 2000. TradeArk Properties
intends to hold 6 acres for resale. See ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES."
Multi-Family Lots. As of the Company's fiscal year-ended September 30,
1999, there are approximately 11 acres of Multi-Family Lots zoned for multi-
family use. During the fiscal year, the Company contributed 19 acres of the
Multi-Family Lots of the Maumelle Property to TradeArk Properties. The Operating
Subsidiary has fee title to these lots, subject to the liens discussed below.
Prior to the contribution to TradeArk, approximately 30 acres of the Multi-
Family Lots were subject to a lien in favor of the Bank of Little Rock, as
security for 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. Approximately, 11 acres of the Multi-Family
Lots are currently 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") and a
$250,000 line of credit ("Little Rock Credit Line V"). As of the Company's
fiscal year-end, the Little Rock Credit Lines II, III and IV have been paid in
full. An aggregate of $401,604 is due on the Little Rock Credit Line I, and
$251,301 on the Little Rock Credit Line IV, as of the Company's fiscal year-end.
Subsequent to the Company's fiscal year end, the Little Rock Credit Line V was
paid in full. 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 bore interest at 9.5% per annum, and required
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. This line of credit was secured by approximately 19 acres of
the Multi-Family Maumelle Property. As part of the Contribution Agreement, on
June 14, 1999, TradeArk Properties paid off the Little Rock Credit II in the
amount of $454,802.05,
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The $250,000 loan was payable interest only until September 10, 1998, at
which time the maturity date was extended to September 10, 1999. The Little Rock
Credit Line III required 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 was secured by the same 19
acres of Multi-Family Maumelle Property as the $450,000 line of credit. As part
of the Contribution Agreement, on June 14, 1999, TradeArk Properties paid off
the Little Rock Credit III in the amount of $250,325.34.
The $100,000 loan bore interest at 9.5% per annum, and was payable interest
only until February 10, 1999. The maturity date on the $100,000 line of credit
was extended to August 7, 1999. The Little Rock Credit Line IV required five
interest only payments commencing September 7, 1998 and continuing to the
maturity date, at which time all principal and accrued interest was due and
payable. The line of credit was secured by the same 19 acres of Multi-Family
Maumelle Property as the $450,000 and $250,000 line of credit. As part of the
Contribution Agreement, on June 14, 1999, TradeArk Properties paid off the
Little Rock Credit IV in the amount of $100,208.22.
The $250,000 Little Rock Credit Line V bears interest at a fixed rate of
9.5% per annum. The $250,000 line of credit requires seven monthly interest
payments commencing August 10, 1999, until March 10, 2000, when a balloon
payment consisting of the entire principal balance and accrued interest is due
and payable. The $250,000 line of credit is secured by the remaining 11 acres
owned by the Company after contributing 19 acres to TradeArk Properties.
The Little Rock Credit Lines II, III, and IV 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." See ITEM 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- LIQUIDITY AND
CAPITAL RESOURCES-Indebtedness and Other Liquidity Requirements."
Subsequent to the Company's fiscal year, the Company paid off the Little
Rock Credit Line V in the amount of $252,082. The Little Rock Credit Line V was
paid from monies received from the Florida Resort Subsidiary as repayment of the
loan and other expenses advanced by the Company to the Florida Resort
Subsidiary.
As of September 30, 1999, and as of the date of this Report, all ad valorem
taxes on the remaining 11 acres of Multi-Family Lots owned by the Company are
current.
The Company may sell certain portions of the remaining 11 acres of 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.
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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."
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.
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, the Company exchanged all of the issued and outstanding
stock in the Florida 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.
As of the date of divestment, the Company had not taken depreciation on the
property. 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."
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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 was $1,055,810, as of June 14, 1999,
when the Company divested the Ocean Palms Property. The Company had 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 was 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 believed Ocean Palms
Resort was adequately insured during the time the property was held by the
Company.
During fiscal year ended September 30, 1999, the Company 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, no units
had been resold.
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
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<PAGE>
the Ocean Palms Note. The Florida Resort Subsidiary assumed all liability for
any outstanding taxes due on the Ocean Palms Resort Property. 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.
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 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.
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<PAGE>
During the fiscal year until divestment, no Ocean Villas units were sold,
although 16 units were offered for sale to third parties at an average price of
$73,743 per unit.
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."
TradeArk Properties. On June 14, 1999, the Operating Subsidiary
contributed )258 acres 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") for a 35.16% membership interest in TradeArk Properties. TradeArk
Properties assumed $3,800,000 in debt collateralized by the Contributed Maumelle
Property.
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. The New Era loan is
secured by 258 acres of the Contributed Property and by viaticals settlement
contracts with a discounted net present value of $8,300,000 contributed by Trade
Partners for a 64.84% interest in TradeArk Properties. After legal fees and
other closing costs, the Company received from TradeArk Properties $930,713.18
from the New Era loan proceeds.
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
- -- LIQUIDITY AND CAPITAL RESOURCES," and "-- Certain Capital Raising
Transactions."
PROGRAM OF DEVELOPMENT.
During the Company's fiscal year ended September 30, 1999, the Company
divested all interest in its Vacation Interval properties. The Board determined
that it was not in the best interest of the Company to continue to operate the
Vacation Interval properties in Florida or to develop or acquire other Vacation
Interval 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 258 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
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<PAGE>
Contributed Maumelle Property. TradeArk Properties anticipates commencing land
development activities on a portion of the Contributed Maumelle Property in the
second quarter of fiscal year 2000. See above, ITEM 1, "DESCRIPTION OF BUSINESS-
RECENT BUSINESS DEVELOPMENT," and ITEM 2, "DESCRIPTION OF PROPERTY," and ITEM 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION -- Certain Capital
Raising Transactions."
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
assurance. See ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
Development of Property in Maumelle. The Company intends to develop and offer
for sale portions of its residential lots inventory, as well as portions of the
Multi-Family Lots during fiscal year-ended 2000.
Management anticipates that the Company will begin the development and sale
of residential property on the Large Residential Track located in Maumelle, and
the development and sale of the Pine Ridge Lots, through its membership interest
in TradeArk Properties.
The Company intends to build up to 3,000 moderately priced single-family homes
on the Large Residential Tract for sales prices in the range of $125,00 to
$200,000, assuming it can resolve the Resure lawsuit which is seeking to
foreclose on approximately 701 acres of the Large Residential Tract and obtain a
suitable joint venture partner. 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, the
Company believes it may be difficult to obtain conventional credit sources
sufficient to finance the foregoing development activity or to find suitable
joint venture partners that will be able to obtain such financing to pursue the
Company's building program.
There are no current plans for the improvement or development of 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 TradeArk Properties. TradeArk Properties intends to start
home site improvements on at least one Pine Ridge subdivision in the second
quarter of fiscal year 2000, 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
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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, TradeArk Properties expects its cost to develop an improved lot
will be less in Pine Ridge than on the Company's 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. TradeArk Properties 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.
TradeArk proposes to develop 40 acres of Commercial Lots for sale
commencing in fiscal year 2000, and hold the remaining 6 acres for resale. It is
holding the 19 acres of Multi-Family Lots for resale. See discussion above,
"--Development of the Maumelle Property."
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 its membership interest in TradeArk Properties. The Company
intends to conduct all of its investment activities for the foreseeable future
through the Operating Subsidiary, or through membership interest in other
entities 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 its
interest in TradeArk Properties. The Company may pursue other indirect
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<PAGE>
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 develop residential, and multi-family properties
primarily in the Maumelle area, but may pursue the acquisition or development of
residential and multi-family 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
------------------------
has divested its interest in approximately $2,600,000 in promissory notes
acquired through its interest in the Ocean Palms Resort Property. The Company
has no immediate plans to acquire or warehouse mortgages. The Company may,
however, may offer and hold mortgages generated from the sale of its Maumelle
Property inventory.
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 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
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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 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 sales. In
Arkansas--the geographic area in which the Company holds its real property
inventory and offers such inventory for development and sale--there are numerous
large national and regional firms with significantly greater
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<PAGE>
experience and financial resources than the Company currently possesses. Such
firms will likely compete with the Company in the marketing and sale of land for
development, Additionally, if the Company forms joint partnership for the
construction of homes, it will compete with such firms for the acquisition of
land, 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.
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 selling single-family lots or if it enters the single-
family home construction market in Maumelle, assuming it is able to obtain
sufficient capital to commence construction activities.
The Company currently has no material presence or reputation in Arkansas or
any other area in the real estate development industry and does not have
sufficient capital to commence significant development activities, other than
the liquidation of its existing Maumelle Property inventory. For this and other
reasons discussed herein, the Company may experience difficulties in competing
with established developers.
ITEM 3. 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. 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.
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No matters were submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is listed for trading in the over-the-counter market on
the NASDAQ electronic bulletin board under the symbol "CPCY"; however, the
market for shares of the Common Stock is extremely limited. There can be no
assurance that the present limited market for the Company's common stock will
become more active or even be sustained. In addition, any future sale of the
Company's stock by any of the controlling shareholders may have a substantial
adverse impact on any such public market.
The high and low bid prices for shares of common stock of the Company for
each quarter within the last two fiscal years are as follows:
<TABLE>
<CAPTION>
BID
Quarter Ending High Low
- -------------- ---- ---
<S> <C> <C>
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
December 30, 1998 1.375 .781
March 31, 1999 1.00 .375
June 30, 1999 .50 .437
September 30, 1999 .532 .437
</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 836, as of
September 30, 1999.
35
<PAGE>
DIVIDENDS
During the fiscal year ended September 30, 1999 and the fiscal year ended
September 30, 1998, the Company did not declare any cash dividends with respect
to its Common Stock. The Company does not expect to declare dividends in the
foreseeable future. The future dividend policy of the Company cannot be
ascertained with any certainty, particularly since the Company has decided to
focus on its primary business of developing and selling single-family lots.
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, 1999:
(1) In December, 1998, the Company issued 10,000 shares of the Company's
voting Common Stock to Bill Priakos, an officer of the Resort 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 1998, the Company issued 10,000 shares of its voting
Common Stock to Eldon Hobbs, an officer of the Resort 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.
(3) In July, the Company issued 24,522 shares to Wilbur Schwartz, a
consultant to the Company, as payment for services rendered. The Company relied
on Section 4(2) of the Securities Act in agreeing to issue such securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing in Item 7 of this Report (the
"Financial Statements"). As noted below and elsewhere in this Report, 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.
During the period covered by the financial statements, the Company
significantly changed the nature of its business activities from real estate
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<PAGE>
development and vacation interval operations to land sales from its existing
Maumelle Property inventory (as discussed in more detail herein).
In June, 1999, the Company divested all interest in its vacation interval
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 the vacation interval properties
in Florida or to develop or acquire other vacation interval properties. The
Board's decision was based on poorer than expected performance by its Florida
operations which generated higher than expected operating costs and lower than
expected revenues. The Board's decision also resulted from a determination to
focus on its primary business of developing and selling property from the
Company's Maumelle Property inventory in order to utilize core assets to
restructure the Company's short-term debt into equity and/or long-term debt.
To further this goal, the Board decided to contribute approximately 258
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, that any residential development
and sales will be done through TradeArk Properties and other joint venture
partners. See above, ITEM 1, "DESCRIPTION OF BUSINESS," ITEM 2, "DESCRIPTION OF
PROPERTY," and discussion below, "-- Certain Capital Raising Transactions."
As a result of this significant changes, 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 activities will depend in large part on its ability to restructure
its current short-term debt into long-term debt and raise sufficient capital to
commence meaningful development operations, and the Company's ability to enter
into joint venture partnerships with developers that have greater development
expertise than the Company now possesses.
RESULTS OF OPERATIONS
Comparison of Year Ended September 30, 1999 to Year Ended September 30,
1998. For the year ended September 30, 1999, the Company experienced a loss of
$1,022,694 compared with a loss of $3,829,732 for the year ended September 30,
1998. The difference in performance resulted primarily from an increase in
revenues from $41,768 in the year ended September 30 1998, to $9,146,365 in the
year ended September 30, 1999, an increase of $9,104,619. The cost of sales for
the year ended September 30, 1999, amounted to $3,799,340, resulting in a gross
profit of $3,769,713. Despite the increase in revenues, gross profits as a
percentage of revenues were reduced from 100% in the year ended September 30,
1998 to 41.22% in the year ended September 30 1999, The sale in the year ended
September 30, 1998, involved a small tract of land that did not have an
allocated acquisition cost. Additionally, the gross profit for the
37
<PAGE>
year ended September 30, 1999, was affected by the non-recognition of $1,577,312
of land sales profit. During the year ended September 30, 1999, operating
expenses also increased to $2,787,761 from $2,300,813 in the year ended
September 30 1998, an increase of $486,948 or 21.16%.
Sales increased by $9,104,619 for the year ended September 30, 1999, from
$41,746 for the year ended September 30, 1998, as a result of land sales in
Maumelle from $25,000 in the year ended September 30 1998 to $9,146,365 in the
year ended September 30 1999. Gross profit for the year ended September 30,
1998 was $41,746. Gross profit for the year ended September 30, 1999 was
$3,769,713.
The Company, in its quarterly report filed on Form 10QSB for the period
ended June 30, 1999 and filed with the SEC on August 26, 1999, accounted for the
TradeArk Properties transaction as a capital contribution. At fiscal year end,
the Company's accountants determined the transaction should be treated as a sale
under the Statement of Financial Accounting Standards Number 66, "Accounting for
Sales of Real Estate." Under Statement 66, a sale to a buyer in which the
seller, in this case the Company, owns or acquires an equity interest in the
buyer, the seller only recognizes profit of proportionate to the outside
interest in the buyer; in this case the 64.84% interest owned by Trade Partners.
This resulted in the Company not recognizing profit of $1,577,312 on this
transaction. Accordingly, the Company's carrying value of the investment in
TradeArk Properties was reduced from its stated value of $4,500,000 by the
amount of this unrecognized land sales profit, by recognizing the sales and an
additional $3,646,980 in costs of sales. The result, after considering the
unrecognized profit, was an improvement in the Company's net loss before taxes
of approximately $3,000,000. Previously, the difference between the carrying
value of the land contributed and the value used for the contribution was
classified as additional paid in capital and the value of the investment in
TradeArk Properties was carried at its value of $4,500,000. After restating the
transaction as a sale, the unrecognized profit reduced the carrying value of the
transaction and after taking into consideration the change between additional
paid in capital and retained earnings, the stockholders equity was also reduced
by the unrecognized profit. If TradeArk Properties sells the assets it holds,
the Company will recognize a proportionate share of the unrecognized profit.
From the year ended September 30, 1998 to the year ended September 30,
1999, operating expenses increased from $2,300,813 to $2,787,761, an increase of
$486,948 or 21.16%. The increase was primarily attributable to increases in
amortization of loan costs. Management expenses decreased from $337,499 for the
year ended September 30, 1998, to $269,649 for the year ended September 30,
1999, a decrease of $67,853. This decrease was the result of an decrease in
management expense fees due to Maumelle Enterprises, a related party, from
$324,618 for the year ended September 30, 1998, to $269,649 for the year ended
September 30, 1999. For fiscal year ended September 30, 1999, accrued management
fees due to Maumelle Enterprises decreased to $33,463, from $50,599 for fiscal
year ended September 30, 1998. See ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS-Maumelle Enterprises Inc., Agreement."
38
<PAGE>
Amortization of loan fees increased to $1,441,873 in the year ended September
30, 1999, from $550,241 in the year ended September 30, 1998, an increase of
$891,632.
Interest income for the fiscal year ended September 30, 1999, increased by
$40,369, from $7,547 for the fiscal year ended September 30, 1998, to $47,916 in
fiscal year ended September 30, 1999. Interest expenses increased by $713,084
during the year ended September 30, 1998, to $1,416,898 during the year ended
September 30, 1999.
The loss from discontinued operations of $865,119 for the year ended
September 30, 1998 decreased to a loss of $413,025 for the year ended September
30, 1999. During the year ended September 30, 1998 these operations had sales
totaling $1,410,463 with costs of sales of $447,270 and operating expenses,
including interest expenses, of $1,828,353. During the year ended September 30,
1999, these operations had total sales of $1,019,042 with costs of sales of
$258,618 and operating expenses, including interest expenses, of $1,142,222.
The Company continues to accrue management fees, to the extent possible, to
Maumelle Enterprises, a related party. However actual expenses, accrued
management fees, overhead and salaries, have been paid to Maumelle Enterprises
during fiscal year ended September 30, 1999. During fiscal year, Mr. Todd was
paid $259,073, which is deferred and current compensation for the period October
1, 1997 through September 30, 1999. The $259,073 were advances taken by Mr.
Todd and against deferred salary. As of the fiscal year, Mr. Todd has accrued
salary in the amount of $220,927. Mr. Todd will continue to accrue one-half or
$10,000 of his $20,000 per month salary. Maumelle Enterprises and Mr. Todd have
represented to the Company that it is their intention to allow the Company to
accrue a portion of their 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 restructure or
retire its short-term debt into long-term debt and/or equity, and commence
significant development operations through TradeArk Properties or other joint
venture partners. The Company, through its interest in TradeArk Properties
intends to take advantage of an apparent increase in building activity in the
City of Maumelle in 1999, which is 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 sixty-three permits were issued by the City of Maumelle for
the construction of new single-family homes during the 1998 calendar year. From
January through November 1999, 291 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, for the following
reasons:
39
<PAGE>
(1) 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, 1999, this development has approximately 367
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.
(2) In 1998, 220 new jobs have been created in the City of Maumelle as a
result of continuing industrial expansion. In the period 1990 through 1998, the
SMSA of the Little Rock/North Little Rock area, which includes Maumelle, has
shown a total increase of 1.8% in 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 has to liquidate its property for less than fair market value to
obtain the necessary capital to retire or restructure its existing short-term
debt. See "LIQUIDITY AND CAPITAL RESOURCES," below.
Even if the Company can overcome its present illiquidity and restructure it
current short-term debt into equity or long-term debt and raise sufficient
capital to commence meaningful operations, there is no assurance the Company
will be able to attract joint venture partners with home-building expertise.
Joint venture partners, such as TradeArk Properties may experience some seasonal
variance in the flow of income from these home-building 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.
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 $12,488,025 in short term debt
----------------
that will mature during fiscal year ended September 30, 2000. Of the $12,488,025
in short-term debt, approximately $5,125,513 is currently in default. This
illiquity may prevent the Company from realizing or consummating any of its
business plans, objectives, strategies, or transactions, unless its can
restructure its short-term debt into equity or long-term debt and/or raise
capital. Except for the short-term debt, the Company has minimal operating
income and its primary source of funds to meet
40
<PAGE>
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. In addition, if the Company has to
liquidate portions of its Maumelle Property in the fiscal year ended September
30, 2000 to satisfy maturing short-term debt, it may be at less than fair market
value.
The improvement of single-family lots and any subsequent home building and
construction is capital-intensive and generally involve a high degree of
leveraging and up-front expenses to improve it, and begin development. The
Company intends to sell unimproved and improved lots from its Maumelle Property
inventory. It also intends to commence home building operations through its
membership interest in TradeArk during the second quarter of fiscal year 2000.
TradeArk intends to obtain a construction loan collaterized by the property,
which is currently is encumbered by a $4,000,000 loan. There can be no
assurance, however, that the Company will be able to obtain such loans. In
addition, the Company will need to enter into joint ventures or other agreements
with well-funded development partners to implement its growth strategies in the
home building 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 industry is highly competitive. In
-----------
Arkansas--the geographic area in which the Company initially intends to sell
residential lots and other property from its Maumelle Property inventory and to
build homes through its interest in TradeArk Properties--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 sale of land and for the sale of single-family
homes, the acquisition of land for development, the hiring of sub-contractors,
experienced management personnel, construction workers and other employees. 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 or
any other area in the real estate sales and 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.
Lack of Experience. The Company has no operational experience in the real
------------------
estate development industry other than in the sale of property. 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.
41
<PAGE>
Interest Rates; Mortgage Financing. Demand for residential lots and homes,
----------------------------------
as well as for multi-family and 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. Any adverse changes in the
availability of Federal Housing Administration or Veterans Administration
mortgage financing may also adversely impact the Company's housing sales.
Many Factors Beyond The Company's Control. The nature of the real estate
-----------------------------------------
development industry 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 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.
LIQUIDITY AND CAPITAL RESOURCES
Indebtedness and Other Liquidity Requirements. The principal amount of the
Company's total debt at September 30, 1999, 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, matured 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 Resure Note I is currently
in default and a foreclosure action has been instituted against the
Company. The balance owing on the Resure Note I was $3,903,790 as of
the Company's fiscal year end and $3,961,462, 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.
. $6,835,544 in non-secured short-term debt financed by private sources.
The promissory notes generally bear interest at a rate ranging from
10.9% to 14% per annum, with a weighted average as of the Company's
year end of 11.03% per annum, and mature nine months from the date of
issuance of each note. As of the date of this Report, the Company is
in default on $330,323.87 plus interest in the amount of $5,766.11.
. $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
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<PAGE>
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 in the amount of
$3,120 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 Line I as
of the Company's fiscal year-end and as the date of this Report is
$399,524.
. $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 bank released approximately 30 acres of the secured
property in conjunction with its sale and subsequent payment of
$364,000, of which $350,000 applied to principal and $14,000 to
accrued interest paid to First Arkansas Bank on the loan. The line,
which matured May 27, 1998, was 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 $1,435,010. As of the date of this Report, the
line of credit is in default and the Company owes an aggregate of
$1,457,966.
. $250,000 in a commercial revolving line of credit from the Bank of
Little Rock (the "Little Rock Credit Line V"), secured by 11 acres of
the multi-family Maumelle Property. The Little Rock Credit Line V
bears interest at a fixed rate of 9.5% per annum. The $250,000 line of
credit requires seven monthly interest payments in the amount of
$2,082, commencing August 10, 1999, until March 10, 2000, when a
balloon payment consisting of the entire principal balance and accrued
interest is due and payable.
In addition to the above indebtedness, under the terms of the Resure
Settlement Agreement, the Company is also 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.
CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S INDEBTEDNESS AND LIQUIDITY
REQUIREMENTS
43
<PAGE>
In October, 1999, the Little Rock Credit Line V was paid in full in the
amount of $252,082. The credit line was paid from the repayment of a loan owed
by the Florida Resort Subsidiary to the Company, which also included $69,000 in
expenses that was advanced to by the Florida Resort Subsidiary.
The Company is current on all of the foregoing debt, except for the
following: Resure Note I, the First Arkansas Valley Bank Line of Credit I, a
portion of the short-term notes, 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, April 1, July 1 and October 1, 1999 payments to Resure for an
aggregate past due of amount of $3,903,789. 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 and
have the lawsuit dismissed.
The First Arkansas Valley Bank Line of Credit I matured on December 2,
1999, at which time the Company owed an aggregate of $1,457,966 in principal and
interest. The Company is currently in default on the line of credit and is
currently negotiating to either extend or retire the debt. In addition, the
Company is in default on a portion of its short term notes. At the date of this
Report, the Company owed an aggregate of $336,089.98 in principal and interest
on the notes.
Although the Davister Note has matured, the lender has not demanded payment
or instituted collection proceedings.
The Company intends to pay off the Resure, Davister Note, short term notes,
and First Arkansas Valley Bank Line of Credit I liabilities from proceeds from
the sale of some of the Maumelle Property, obtaining long-term debt and/or
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."
In addition to the foregoing debt and other liquidity requirements, the
Company will, within six months after the date of this Report, require general
working capital to cover overhead and administrative expenses in the amount of
at least $500,000. Unless the Company's debt, most of which is in default or
will mature within the next six months, can be 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 1999,
the Company obtained capital through the following transactions:
44
<PAGE>
. The Company has sold 7.4 acres of the Commercial Maumelle Property to
an unaffiliated third party, for a price of $300,000 with net proceeds
to the Company of $273,726.24;
. a right of way on the Maumelle Property to the Maumelle Water
Management of the City of Maumelle for a price of $5,000; and
. approximately 30 acres of single-family lots 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.
. The Company received $930,713.18 from the TradeArk Properties
transaction, which for accounting purposes was characterized as a sale
of certain portions of the Maumelle Property inventory to TradeArk
Properties. In addition to the cash, the Company received a 35.16%
membership interest in TradeArk Properties and reduced its short-term
debt by $2,753,613. See above, "-- RESULTS OF OPERATIONS-- Comparison
of Year Ended September 30, 1999 to Year Ended September 30, 1998."
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 $893,191 in non-secured short term
debt from private investors. The promissory notes generally bear
interest ranging from at a rate of 10.9% per annum to 14% per annum
and mature nine months from the date of issuance of each note.
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 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.
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
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the next two years are (1) the development and sale of single-family lots of the
approximately 3,000 single-family home sites it owns in Maumelle; (2) the
development and sale of single-family homes in Maumelle, Arkansas by TradeArk
Properties; and (3)the liquidation of property which Management considers
unsuitable for the Company's purposes or as required. See ITEM 1, "DESCRIPTION
OF BUSINESS--BUSINESS OF THE COMPANY--GROWTH STRATEGIES."
The Company intends to raise operating capital by selling debt and/or
equity securities to the public or in private transactions. There can be no
assurance, however, that such public or private offerings will be successful.
The Company also 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, 1999 to Year Ended September 30,
1998. At September 30, 1999, the Company had total assets of $10,421,311, a
decrease of $6,875,761 or 39.75% from the Company's total assets as of the
fiscal year ended September 30, 1998. The Company had cash of $864,381 at
September 30, 1999, compared to $1,047,021 on September 30, 1998, a decrease of
$182,640 or 17.44%. This decrease was a result of operating losses for the
fiscal year ended September 30, 1999. See "LIQUIDITY AND CAPITAL RESOURCES"
above.
Accounts receivable decreased from $462,384 on September 30, 1998 to
$51,554 on September 30, 1999, an decrease of $410,830. This decrease was
primarily due to the divestment of the Resort Subsidiaries.
Loan origination fees increased from $405,638 as of September 30,1998, to
$544,656, as of September 30, 1999, an increase of $149,018. This was primarily
due to an increase in debt.
On June 14, 1999, the Company divested its interest in several Ocean Palms
Resort Promissory Notes resulting in a decrease in assets and notes receivable.
During the fiscal year, the Company also divested its interest Ocean Villas
Property, the assets of which included $243,970 in the Ocean Villas Promissory
Notes which resulted in a decrease of assets. The Company also held $61,056 in
promissory notes from unrelated third parties, which was divested with the Ocean
Villas Property resulting in a decrease in accounts receivable.
During the fiscal year, the Company contributed 258 acres of the Maumelle
Property for an investment interest of 35.16% in TradeArk Properties. For
accounting purposes, the contribution was booked as a sale. The Company had no
investments during the fiscal year ended September 30, 1998.
The carrying value of the Company's real estate holdings decreased by
$7,027,281 during the year, from $12,579,658 in fiscal year ended September
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30, 1998 to $5,552,377 in fiscal year ended September 30, 1999. The net decrease
was a result of the divestment of the Florida Resorts Subsidiary and the Resorts
Subsidiary, which included the Ocean Palm Property and the Florida Bible College
Property, and the divestment of the Ocean Villas Property which resulted in a
decrease of $3,347,549; and sale of certain portions of the Maumelle Property to
TradeArk Properties for a carrying value of $3,799,340. Other factors included
additions during the year ended September 30, 1999 to carrying costs of various
Maumelle Properties totaling $119,608.
The decrease was also the result of the divestment of CRI, including
$185,584 in vacation club membership lists, and goodwill of $95,499.
Total liabilities of the Company as of September 30, 1999, was $13,713,577
a decrease of $2,981,441 from the September 30, 1998's total of $16,695,018. The
current liability for notes payable increased by $1,226,163 during the fiscal
year ended September 30, 1999, from $11,261,862 to $12,488,025. The increase was
primarily the result of the Resure Note I of $3,395,189 being changed to current
notes payable. The divestment of the Resorts Subsidiaries provided a reduction
of notes payable of $2,621,665.
This increase also included the $2,979,673 of secured short term loans
obtained during the year. These short term loans were used to service existing
debt, as well expenses from the Florida Vacation Interval operations, until such
properties were divested. Long term debt decreased by $3,675,365 in fiscal year
ended September 30, 1999, a decrease of $3,675,365 or 100% over the fiscal year
ended September 30, 1998, reflected primarily from the recognition of the Resure
Note I as a current note payable and the divestment of the Ocean Villa Notes.
The Company decreased its short term debt from the Bank of Little Rock by
$600,000 during fiscal year ended September 30, 1999. The short-term debt was
paid by TradeArk Properties as part of the Contribution Agreement in which the
Company contributed a portion of the Maumelle Property to TradeArk Properties.
As of September 30, 1999, the Company had paid $364,000 on the $1,875,000 line
of credit from the First Arkansas Valley Bank. The $364,000 came from the sale
of approximately 30 acres of the Maumelle Property. The Company decreased its
liability of $996,281 from Union Planters Bank when it divested its interest in
the Florida Bible College.
Accounts payable and accrued expenses decreased by $532,239, from
$1,757,791 as of September 30, 1998, to $1,225,552, as of September 30, 1999.
The divestment of the Resorts Subsidiaries resulted in $586,083 of the decrease.
Accrued real estate taxes payable decreased by $171,158 due to payments of
accrued tax due in the fiscal year, the divestment of the Vacation Interval
Properties and the contribution of the Contributed Maumelle Property to TradeArk
Properties. Accrued interest increased by $301,287 from $440,291 as of September
30, 1998, to $741,578, as of September 30, 1999, as a result of the increase in
short-term notes and the non-payment of interest on the Resure Note I.
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Shareholders' Equity decreased by $3,292,266 or 647% during the fiscal
year. The decrease is a result of a net operating loss of $1,022,694 for the
year ended September 30, 1999, and the acquisition of 2,839,689 shares of the
Company's stock. The 2,839,689 shares are being held as treasury shares.
ITEM 7. FINANCIAL STATEMENTS.
The audited financial statements of the Company are included
in this Annual Report on Form 10-KSB at pages F-1 to F-8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 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.
DIRECTORS AND EXECUTIVE OFFICERS
Date of Expiration of
Name Age Position Election Director Term
- ---- --- -------- -------- --------------
Michael G. Todd 50 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 44 Director 4/94 1999 or until
successor
elected
Thomas Blake 66 Director 3/97 1999 or until
successor
elected
David R. Paes 45 Vice President, 7/95 N/A
Treasurer and
48
<PAGE>
Assistant
Secretary
Raymond Baptista 58 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 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 is Preisent and co-founder of Applerock
Funding Corporation, which was organized in 1998 to originate and acquire loans
secured by first liens on manufactured housing lots. He is also a director of
Collins Financial Service, Inc., a private debt collection company, director of
FiData Inc., an internet technology company, and a director and officer of Iron
Harbor Development Group, LLC, a real estate development company.
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
49
<PAGE>
founder and former principal of Thomas C. Blake Consulting, an advisory service
firm, and was Chief Executive Officer of Interstate Group Administrators, Inc.,
a benefit services company. He is a director of West Coast Savings & Loan and
formerly was a director of various other financial institutions.
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:
(1) was a general partner or executive officer of any business against
which any bankruptcy petition was filed, either at the time of the bankruptcy or
two years prior to that time;
(2) was convicted in a criminal proceeding or named subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or
(4) was found by a court of competent jurisdiction (in a civil action),
the SEC or the Commodity Futures Trading Commission to have violated a federal
or state securities or commodities law, and the judgment has not been reversed,
suspended or vacated.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
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<PAGE>
The following table sets forth certain information with respect to the
compensation that was paid in 1999 fiscal year to the Company's executive
officers.
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the periods indicated:
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name & Year Salary Bonus Other Res- Securi- LTIP All
Prin- or ($) ($) Annual tric- ties Pay- Other
cipal Period Compen- ted Under- outs Compen-
Position Ended sation Stock Lying sation
Options
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael 9/30/99 $240,000/(1)/ 0 0 0 0 0 0
Todd,
Chairman/
President
David 9/30/99 0 0 0 0 0 0 0
Paes/(2)/
</TABLE>
(1) Michael G. Todd has been employed as President of the Company since
November 1994. During fiscal year, Mr. Todd was paid $259,073, which is deferred
and current compensation for the period October 1, 1997, through September 30,
1999. As of the fiscal year, Mr. Todd has accrued salary in the amount of
$220,927. Mr. Todd will continue to accrue one-half or $10,000 of his $20,000
per month salary.
(2) David Paes has been Vice-President of the Company since July 1995, and
devotes approximately 40% of his time to its operations. Paes has received no
salary from the Company from July 1995 through September 30, 1999.
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
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<PAGE>
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, 1999, the Company had a deferred liability in the amount of
$12,000. Upon resignation, Mr. Russell forgave his accrued director's fees in
the amount of $27,000, which represented fees accrued from April, 1994 through
June, 1999, 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, 1999, 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
<TABLE>
<CAPTION>
Name and
address of Amount and
beneficial nature of bene- Percent of
Title of Class owner(1) ficial owner class
<S> <C> <C> <C>
Common Stock Michael G. Todd(2) 2,896,589 shares 70.82%
Common Stock John W. DeHaven(3)(4) 0 shares 0%
Common Stock Herbert E. Russell(3) 0 shares 0%
Common Stock Robert R. Neyland 0 shares 0%
Common Stock Thomas Blake 0 shares 0%
Common Stock Directors and Executive
Officers as a Group 2,896,589 shares 70.82%
</TABLE>
(1) Unless otherwise indicated, the address of the beneficial owner is 25550
Hawthorne Boulevard, Suite 207, Torrance, California 90505.
(2) All of these shares are owned by Prescott Investments, L.P. 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. Mr. Todd also has a beneficial
52
<PAGE>
interest in 40,000 shares previously owned by Nine Mile Limited
Partnership. See below, "Note 4," and ITEM 9, "DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS."
(3) All of these shares were owned by Charlie Corporation, of which Herbert
E. Russell, as grantor and trustee of an irrevocable trust, owned 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. During the
Company's fiscal year-end 1999, 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 disclaimed beneficial ownership of the shares owned by
Charlie Corporation. 40,000 of the shares were owned by Nine Mile Limited
Partnership ("Nine Mile") of which John W. DeHaven is the general
partner. During the Company's fiscal year-end 1999, 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. Mr. DeHaven also sold during the fiscal year the 40,000
shares held by Nine Mile LP to an entity in which Mr. Todd has a
beneficial interest.
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
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<PAGE>
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 Home Construction Subsidiary,
receives a salary of $66,000 per annum as an officer of Maumelle Enterprises.
David Paes, an officer of the Company, receives a salary of $84,000 per annum as
an of 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 to the extent possible. For the fiscal year ended September 30,
1999, the Company paid Maumelle Enterprises $269,649 in expenses, which
effective after June 14, 1999, included overhead expenses, paid accrued and
previously unpaid management fees of $50,599 and payment of $33,463 which is
considered an overpayment. The Company will be credited the $33,463 against
future management fees and/or by the assumption by Maumelle Enterprises of
liabilities owed by the Company. Due to the divestment of the Resort
subsidiaries, management expenses have decreased.
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.
DeHaven charges the Company $2,144 per month. The Company paid DTC the total of
$23,776 in rental payments for the fiscal year ended September 30, 1999.
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.
ACQUISITION OF STOCK FROM AFFILIATES
During the Company's fiscal year-ended September 30, 1999, 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
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<PAGE>
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) Reports on Form 8k
none
(b) FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
CAPITOL COMMUNITIES CORPORATION, INCLUDING PREDECESSOR CORPORATION AND
SUBSIDIARIES.
Report of Independent Auditors....................................... F-2
Balance Sheet as of September 30, 1999............................... F-4
Statements of Operations for the Years Ended
September 30, 1999 and 1998.......................................... F-5
Statements of Changes in Shareholders' Equity
September 30, 1999................................................... F-6
Statements of Cash Flows for the Years Ended
September 30, 1999 and 1998.......................................... F-7
Notes to Financial Statements........................................ F-8
55
<PAGE>
EXHIBITS
The following Exhibits are filed as part of this Report. (Exhibits numbers
correspond to the exhibits required by Item 601 of Regulation S-B for an annual
report on Form 10-KSB,
2.1.1 Articles of Merger, filed with State of Nevada, dated November 29, 1995,
merging AWEC Resources into Capitol Communities Corporation.*
2.1.2 Agreement of Merger, filed with State of Nevada, dated November 15,
1995, between AWEC Resources, Inc., and Capitol Communities
Corporation.*
2.2 Certificate of Merger, filed with State of New York, dated January 5,
1996, merging AWEC Resources, Inc., into Capitol Communities
Corporation.*
3.1.1 Articles of Incorporation of Capitol Communities Corporation, dated
August 18, 1995.*
3.1.2 Certificate of Amendment of Articles of Incorporation of Capitol
Communities Corporation, dated February 6, 1996.*
3.2 Bylaws of Capitol Communities Corporation, dated August 22, 1995.*
10.1 Contribution Agreement, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.2 Subordinated Surplus Debenture, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.3 Non-Recourse Promissory Note, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.4 Non-Recourse Mortgage, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*
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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<PAGE>
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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<PAGE>
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.
59
<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 30,1999.
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
there unto duly authorized.
CAPITOL COMMUNITIES CORPORATION
Date: December 27, 1999 By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief
Executive Officer
60
<PAGE>
CAPITOL COMMUNITIES CORPORATION
FINANCIAL STATEMENTS
Report of Independent Auditors....................................... F-2
Balance Sheet as of September 30, 1999............................... F-4
Statements of Operations for the Years Ended
September 30, 1999 and 1998.......................................... F-5
Statements of Changes in Shareholders' Equity
September 30, 1999................................................... F-6
Statements of Cash Flows for the Years Ended
September 30, 1999 and 1998.......................................... F-7
Notes to Financial Statements........................................ F-8
F-1
<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 balance sheets of Capitol Communities
Corporation, Inc. and Subsidiaries as of September 30, 1999 and the related
statements of income and accumulated deficit, stockholders equity and cash flows
for the years ended September 30, 1999 and 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capitol Communities
Corporation, Inc. and Subsidiaries as of September 30, 1999 and the results of
its operations and its cash flows for the years ended September 30, 1999 and
1998 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
F-2
<PAGE>
substantial non-productive assets, which raise substantial doubt about its
ability to continue as a going concern. The Company is in default on
approximately $5.3 million in mortgages and notes (Notes 4 and 7). The financial
statements do not include any adjustment that might result from the outcome of
these uncertainties.
Coral Springs, Florida
December 21, 1999
F-3
<PAGE>
Capitol Communities Corporation
Balance Sheet as of September 30, 1999
<TABLE>
<CAPTION>
September 30,
1999
<S> <C>
Current Assets
Cash in Bank $ 864,381
Accounts Receivable 51,554
Notes Receivable- current 383,000
Prepaid Assets 3,085
-------------
Total Current Assets 1,302,020
Plant property and equipment
Furniture and Equipment, net of accumulated depreciation of $17,982 23,784
Other Assets
Land and Real Estate Holdings (Notes 9 and 11) 5,552,377
Investment in Trade Ark Properties (Notes 9 and 13) 2,844,474
Loan origination costs, net of amortization of $1,173,902 554,656
Notes Receivable- non current 144,000
-------------
Total Other Assets 9,095,507
Total Assets $ 10,421,311
=============
Current Liabilities
Notes Payable (Notes 4 and 7) $ 12,488,025
Accounts Payable & Accrued Expenses 1,225,552
-------------
Total Current Liabilities 13,713,577
Non Current Liabilities
Notes Payable -
Total Liabilities 13,713,577
Shareholders' Equity
Preferred stock-$.01 par value, none issued -
Common Stock-$.01 par value, 40,000,000 shares authorized 76,300
7,630,050 shares outstanding
Additional Paid in Capital 7,470,913
Treasury Stock (4,795,852)
Accumulated Deficit (6,043,627)
-------------
Total Shareholders' Equity (3,292,266)
Total Liabilities and
Shareholders' Equity $ 10,421,311
=============
</TABLE>
F-4
<PAGE>
Capitol Communities Corporation
Consolidated Statements of Operations
For the Fiscal Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revenues:
Sales $ 9,146,365 $ 41,746
Unrecognized Land Sale Profit (Note 9) 1,577,312
Cost of Sales 3,799,340 -
----------- -----------
Gross Profit 3,769,713 41,746
Operating Expenses:
General & Administrative
Expenses 2,787,761 2,300,813
----------- -----------
Net Income (Loss) Before
Other Income/Expense 981,952 (2,259,067)
Operations of Unconsolidated Investments (78,214) -
Interest Income 47,916 7,547
Interest Expense (1,416,898) (713,084)
----------- -----------
Net Income (Loss) from continuing operations $ (465,244) $(2,964,604)
Net Income (Loss) from discontinued operations (413,025) (865,119)
Provision for Income Taxes (Notes 1 and 12)
Current 75,000 -
Change in valuation allowance 69,425 -
----------- -----------
Net Income (Loss) $(1,022,694) $(3,829,723)
Net Income (Loss) per share $ (0.168) $ (0.528)
Weighted average shares outstanding: 6,100,537 7,249,494
</TABLE>
F-5
<PAGE>
Capitol Communities Corporation
Schedule of Owners Equity
For the Year Ended September 30, 1999
<TABLE>
<CAPTION>
Common Additional Treasury Retained
Shares Stock Paid in Capital Stock Earnings
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at 9/30/98 7,624,500 $ 76,245 $ 7,203,531 $ (386,258) $ (6,291,464)
Additional Stock
Issued 104,522 1,045 273,716
Director's Fees forgiven 27,000
Stock Cancelled (98,972) (990) (33,334)
Resorts Spin Off (Note 11) (4,409,593) 857,506
Net Income (Loss) for year
from Continuing Operations (609,669)
Balance at 9/30/99 7,630,050 $ 76,300 $ 7,470,913 $ (4,795,851) $ (6,043,627)
</TABLE>
F-6
<PAGE>
Capitol Communities Corporation
Statements of Cash Flows
For the Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (1,022,694) $(3,829,723)
Amortization 1,474,518 509,893
Depreciation 21,281 16,455
Unrecognized Land Sale Profit 1,577,312
Common Stock Issued for Services 34,761 18,758
Forgiven Salaries and fees added to Paid in Capital 4,500
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables 410,830 (388,210)
(Increase) Decrease in Inventory 26,575 (426)
(Increase) Decrease in Deposits - 109,361
(Increase) Decrease in Other Assets 382,818 (78,071)
(Increase) Decrease in Real Estate Holdings 7,027,281 (2,597,555)
(Increase) Decrease in Investments (2,844,474)
(Increase) Decrease in PrePaid Assets 252,315 36,267
Increase (Decrease) in Accrued Expenses (532,239) 866,230
(Increase) Decrease in Deferred Tax Asset 69,425
Increase (Decrease) in Deferred Taxes Payable (14,000)
------------ -----------
Net Cash Used for Operations 6,882,209 (5,351,021)
Cash Flows from Investing Activities:
Cash used for Acquisitions (1,004,992)
Collections of Notes Receivable 1,437,098 321,911
Disposal of Furniture and Fixtures 102,211
Acquisition of Furniture and Fixtures (16,945) (31,340)
------------ -----------
Net Cash Provided (Used) in Financing Activities 1,522,364 (714,421)
Cash Flows from Financing Activities:
Increase in Notes Payable 9,173,291 9,560,070
Payment of Notes Payable (11,625,212) (1,682,864)
(Increase) Loan Origination Fees (1,704,681) (760,172)
Cash obtained in acquisitions 25,025
Cash used in Divestments (21,018)
Acquisition of Treasury Stock (4,409,593) (386,258)
Issuance of Common Stock 129,500
------------ -----------
Net Cash Provided (Used) in Investing Activities (8,587,213) 6,885,301
Net Increase (Decrease) in Cash (182,640) 819,859
Beginning Cash 1,047,021 227,162
------------ -----------
Ending Cash $ 864,381 $ 1,047,021
============ ===========
</TABLE>
F-7
<PAGE>
See Accompanying Auditors Report and Notes
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, both of which were then and currently are affiliates of Michael
Todd, Herbert Russell and John DeHaven, the beneficial owners of the Company.
These shares were transferred in consideration for public relations services
provided by Prescott Limited Partnership and Charlie Corporation to Petro
Source. Such services were deemed by Petro Source to be integral and
indispensable to the concurrent acquisition of approximately 2,041 acres of land
in Maumelle, Arkansas by the Company's Operating Subsidiary. The Company was not
a party to the transfer of shares. The Company did not issue any new shares
pursuant to the acquisition of the land. Accordingly, the transfer of shares did
not affect the capitalization of the Company, and was non-dilutive to all other
shareholders.
In order to effectuate a change in domicile and name change approved by a
majority of the Predecessor Corporation shareholders, the Predecessor
Corporation merged, effective January 30, 1996, into Capitol Communities
Corporation, a Nevada corporation formed in August 1995 solely for the purpose
of the merger. The Company is currently in the business of developing and
selling real estate properties.
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.
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 $4,500,000 expiring in the years 2006 through 2009.
<TABLE>
<S> <C>
Deferred tax benefit (34% statutory rate) $1,530,000
Valuation allowance 1,530,000
Net Benefit ----------
$ 0
----------
</TABLE>
Due to the uncertainty of utilizing the NOL and recognizing the deferred tax
benefit, an offsetting valuation allowance has been provided.
F-8
<PAGE>
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, 1999 the company had
approximately $800,000 on deposit in one bank resulting in a concentration of
credit risk from uninsured bank balances.
H. Earnings/Loss Per Share
Primary earnings per common share are computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. The number of shares used for the
fiscal years ended September 30, 1999 and 1998 were 6,100,537 and 7,249,494,
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. The Company is currently in default on a $3.4 million mortgage
and a $1.4 million mortgage as well as $332,324 of short term unsecured
debt(Note 4). No claim for payment has been made for a $200,000 note due January
6, 1996. Management has begun implementation of plans to make the company more
viable. The ultimate outcome of these plans can not be determined.
Phase I 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. This
phase of the plan was completed in June 1999. (See Note 9)
Phase 2 of the plan is for the company to transfer to Charlie Corporation, a
major shareholder of the company, the capitol Resorts 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. This phase
of the plan was completed simultaneously with phase 1 in June 1999. (See Note
11)
Phase 3 involves sale and development of the remaining real estate in Maumelle,
Arkansas.
NOTE 3 - AGREEMENTS
Currently the Company has an informal agreement with Maumelle, Enterprise, Inc.
(Maumelle). A business
F-9
<PAGE>
owned by an officer of the company, to provide management, sales and
administrative services for the Company Under this informal agreement payment to
Maumelle for such services depends upon the actual services rendered in a given
month and the current liquidity of the Company.
During the fiscal year ended September 30, 1999, the Company paid Maumelle a
total of $50,599 for fees accrued from prior years and $269,646 for fees due for
1999. As of September 30, 1999, a balance of $33,463 of expenses were overpaid.
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 reset to
October 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, 1999, the principal balance due was $3,395,189, and the
company was in arrears on its $101,591 payment since July 1, 1998. The Company
did not pay the Mortgage on its maturity date. Accrued interest through
September 30, 1999 is approximately $508,600. The receiver for the Resure, Inc.
liquidation has filed suit against the Company seeking judgment in the sum of
$5.5 million for amounts due under the promissory note and a developers fee as
per a settlement agreement dated September 30, 1997. The mortgage is secured by
701.3 acres of land in Maumelle, Arkansas, with cost basis of $3.473 million.
Management has been in discussion with the Resure, Inc. receiver to make
settlement arrangements and has reached an agreement. Management is now
attempting to arrange financing to pay the balance due under the agreement.
Under the agreement a payment of the principal and accrued interest due under
the promissory note, approximately $3.99 million would satisfy the mortgage and
developers fee.
On November 26, 1997 the Company entered into a promissory note with Bank of
Atkins, now First Arkansas Valley Bank, for $1,750,000 bearing interest at 10%
per annum, payable May 27, 1998. The note was subsequently extended to November
27, 1998 and to May 27, 1999 and to December 2, 1999. The Company failed to make
the interest payment due on December 2 in order to request another loan
extension. The note is secured by a mortgage on approximately 315 acres of land
in Maumelle with a cost basis of $1.766 million.
Additionally, the Company is currently in default on $330,324 of unsecured short
term notes which matured in November and December 1999 and an unsecured note for
$200,000 which was due January 6, 1996.
NOTE 5 - LEASE AGREEMENT
The Company is subleasing office space from DeHaven, Todd & Co., in which a
principal stockholder and officer of the company is a partner. The monthly lease
payment began on October 1, 1995 and is $2,150 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 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
F-10
<PAGE>
Notes payable consist of the following:
<TABLE>
<S> <C>
Note Payable - Bank of Little Rock
Secured Line of Credit, 9.50% per annum;
secured by 11 acres Maumelle, AR
maturing April 10, 2000 $ 399,524
Note Payable - Bank of Little Rock
Secured Note, 9.50% per annum;
secured by 11 acres Maumelle, AR
maturing March 10, 2000; retired October 12, 1999 250,000
Note Payable - First Arkansas Valley Bank
Secured Note, 9.50% per annum;
secured by 332 acres residential land Maumelle, AR
maturing December 2, 1999; currently in default,
(See Note 4) 1,400,000
Note Payable - Davister
Unsecured Note, 9% per annum;
matured January 6, 1996 (See Note 4) 200,000
Notes Payable - Various
Unsecured notes, interest from 10.90% to 14.00%
with maturities not in excess of nine months of which
certain notes totaling $330,324 are currently in default,
(See Note 4) 6,835,544
Note Payable - Resure Mortgage
Secured 10% per annum due October 1, 1999
secured by 701 acres residential land Maumelle, AR
payable with quarterly payments beginning
1/1/98 for $101,591; mortgage is delinquent (See Note 4)
3,395,189
Note Payable - GMAC
Secured 7.9% per annum maturing July 3, 2000
secured by 1997 Chevrolet Pickup Truck
payable at $605 per month 5,270
Total Current Maturities 12,480,257
----------
Total Non-Current Maturities -
Total Notes Payable 12,480,257
===========
</TABLE>
The company has not obtained extensions on many of the notes and mortgages
payable that have become due and is in default. The categorization between
current and non current was based on the original maturity date.
NOTE 8 - RELATED PARTY TRANSACTIONS
F-11
<PAGE>
DeHaven Todd L.P. (a partnership of beneficial stockholders of the company)
had advanced within the prior year approximately $300,000 of funds for use by
the company. As of September 30, 1999, $31,000 had not been reimbursed to this
partnership.
The Company entered into a Plan and Agreement for Corporate Separation with
Charlie Corporation on March 31, 1999. Charlie Corporation was a related party
and major stockholder of the Company at the time. (See Note 11)
NOTE 9 - INVESTMENT
On March 29, 1999, a Contribution Agreement was entered into between
Capitol Communities Corporation's subsidiary, Capitol Development of
Arkansas, Inc. (the "Company") and Trade Partners, Inc. ("Trade Partners"),
a unaffiliated third party, for the purpose of forming TradeArk Properties,
LLC ("TradeArk Properties"), a Michigan limited liability company to
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 Closing Date, 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 $8,300,000. The capital contribution provides Trade
Partners with a 64.84% membership interest in TradeArk Properties.
The Company contributed certain tracts of real property its owns in
Maumelle, Arkansas (the "Maumelle Property"), including 192 acres of
single-family lots; 19 acres of multi-family lots; 40 acres of commercial
lots; and 6 acres of commercial lots, (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 when all accrued interest
and principal is due. The New Era loan is secured by the Contributed
Property and viaticals.
After legal fees, loan retirements and other closing costs, the Company
received $930,713 from the New Era loan proceeds from TradeArk Properties.
While this transaction is referred to as a capital contribution, the
Company has determined that the proper treatment is to consider it a sale
under Statement of Financial Accounting Standards No. 66 "Accounting for
Sales of Real Estate". Under statement 66 a sale to a buyer in which the
seller, in this case the Company, owns or acquires an equity interest in
the buyer, the seller only recognizes profit proportionate to the outside
interests in the buyer. In this case the 64.84% interest owned by Trade
Partners. This resulted in the Company not recognizing profit of $1,577,312
on this transaction. The Company's carrying value of the investment in
TradeArk was reduced from its stated value of $4,500,000 by the amount of
this unrecognized land sales profit.
F-12
<PAGE>
NOTE 10 - EQUITY TRANSACTIONS
The company issued 44,522 shares of common stock, at a valuation of $34,761
for various services provided.
In October 1999, consultants to the company exercised options to purchase
60,000 shares of company stock for $240,000. The payment for the stock is
applied monthly against the amount due under the consulting agreement.
98,972 shares of the company stock had been returned.
2,839,689 shares of Treasury stock, at an allocated cost of $4,409,593 was
acquired under the Plan and Agreement for Corporate Separation (See Note 11).
NOTE 11 - CORPORATE SEPARATION
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 Plan and Agreement for Corporate Separation. Under
the terms of the Separation 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. (the "Resort Subsidiary"), and Capitol Resorts of Florida, Inc., (the
"Florida Resorts Subsidiary"). The exchange also included the Resort
Subsidiary's solely-owned interest in Capitol Club, Exchange Services,
Capitol Resorts International and Entry Resorts Marketing, and the Florida
Resorts Subsidiary's solely-owned interest in Capitol SB Development. Under
the terms of the Separation Agreement, 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 consist 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 Company is holding the 2,839,689 shares as treasury shares.
NOTE 12 - INCOME TAXES
As stated in Note 1, the Company does not recognize a deferred tax asset.
During the year ended September 30, 1999 and primarily as a result of the
TradeArk transaction (See Note 9), the Company did realize ad benefit from its
unrecorded deferred tax benefit. For tax purposes all the profit from the
TradeArk transaction is recognized. This resulted in taxable income before
application of Net Operating Loss "NOL" carryforwards of approximately $900,000.
The utilization NOL resulted in an unrecorded tax benefit of approximately
$300,000. The Company also incurred a liability for state income tax of
approximately $75,000 and eliminated a deferred tax benefit from a prior period
in the amount of $69,425.
NOTE 13 - UNCONSOLIDATED SUBSIDIARIES
The Company holds a 35.16% interest in TradeArk Properties, LLC. (See note
9) The investment
F-13
<PAGE>
in TradeArk is accounted for under the equity method. The Company reports its
proportionate share of the investments operating income or loss and increasing
or decreasing the carrying value of the investment accordingly. In the case of
TradeARk, the company also decreased its carrying value by the amount of the
unrecognized land sales profit in accordance with SFAS 66 (See Note 9). This
difference between the carrying value of the investment and the underlying
equity in the investment will be accounted for as the assets of TradeArk are
sold or otherwise disposed.
At September 30, 1999, TradeArk holds Real Estate valued at $8,300,000,
viatical contracts valued at $8,300,000 and other assets of $183,422. TradeArk
liabilities include a mortgage of $4,000,000 and other liabilities of $206,000.
Members Equity is $12,577,422. Operating loss from inception through September
30, 1999 was $222,578.
F-14
<PAGE>
EXHIBIT 11
CAPITOL COMMUNITIES CORPORATION
Computation of Earnings Per Share
Twelve Months Ended
September 30,
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Shares Outstanding Beginning
Of Period 6,924,500 7,312,000
Shares Issued During Period
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
October 1, 1998 60,000
December 15, 1998 (32,305)
December 15, 1998 (20,000)
February 23, 1999 (66,667)
June 14, 1999 (2,839,689)
June 30, 1999 24,522
----------- -----------
Total Outstanding 4,090,361 6,924,500
Weighted average number of 6,100,537 7,249,494
shares outstanding
Shares deemed outstanding from
assumed exercise of stock options - -
----------- -----------
Total 6,100,537 7,249,494
=========== ===========
Earnings (loss) applicable to
common shares $(1,022,694) $(3,829,723)
=========== ===========
Earnings (loss) per share of
common stock $ (0.168) $ (0.528)
</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, 1999.
December 22, 1999
/s/ Joel S. Baum
Joel S. Baum, P.A., CPA
Coral Springs, Florida
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 864,381
<SECURITIES> 0
<RECEIVABLES> 434,554
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,302,020
<PP&E> 5,576,161
<DEPRECIATION> 21,281
<TOTAL-ASSETS> 10,421,311
<CURRENT-LIABILITIES> 13,713,577
<BONDS> 0
0
0
<COMMON> 76,300
<OTHER-SE> (3,368,566)
<TOTAL-LIABILITY-AND-EQUITY> 10,421,311
<SALES> 9,146,365
<TOTAL-REVENUES> 9,194,281
<CGS> 3,799,340
<TOTAL-COSTS> 3,799,340
<OTHER-EXPENSES> 2,787,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,416,898
<INCOME-PRETAX> (881,269)
<INCOME-TAX> 144,425
<INCOME-CONTINUING> (465,244)
<DISCONTINUED> (413,025)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,022,694)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
