<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended June 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
(Exact name of Small Business Issuer as specified in its charter)
Nevada 88-0361144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25550 Hawthorne Boulevard
Suite 207
Torrance, CA 90505
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 375-2266
Check whether the issuer (1) filed all reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act during the past 12 months (or for
such period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
[ ] YES [X] NO
The Company's quarterly reports for the periods ended December 31, 1998,
and March 31, 1999, on Form 10-QSB were filed late. The following officers,
directors, and beneficial owners of 10% or more of the Company's Common Stock
were delinquent in filing an Annual Statement of Changes in Beneficial Ownership
on Form 5: Michael G. Todd, Herbert Russell, John W. DeHaven, and David R. Paes.
The Form 5 was filed by the above officers, directors and beneficial owners in
mid December, 1998, approximately four weeks late.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock ($.01 Par Value) 4,090,361
(Title of Class) Shares Outstanding as of August 15,1999
Transitional Small Business Disclosure Format: [ ] YES [X] NO
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CAPITOL COMMUNITIES CORPORATION
Form 10-QSB
QUARTER ENDED June 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(Unaudited)................................................... 3
Consolidated Balance Sheet
June 30, 1999................................................. 3
Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 1999 and 1998.............. 4
Consolidated Statement of Operations
For the Nine Months ended June 30, 1999 and 1998.............. 5
Consolidated Statement of Operations
For the Three Months Ended June 30, 1999 and 1998............. 6
Consolidated Statement of stockholders's Equity
For the Nine months ended June 30, 1999....................... 7
Notes to Consolidated Financial Statements June 30, 1999........... 8
Item 2. Management's Discussion And Analysis of Plan of Operation..... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 19
Item 3. Defaults Upon Senior Securities............................... 19
Item 5. Other Information............................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................. 20
Signatures................................................................ 20
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
--------------------------------
Capitol Communities Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 1999 and September 30, 1998
UNAUDITED
<TABLE>
<CAPTION>
June 30, 1999 September 30,1998
-------------- ------------------
<S> <C> <C>
Current Assets
Cash in Bank $ 1,160,668 $ 1,047,021
Accounts Receivable 354,237 462,384
Notes receivable -Current - 296,260
Prepaid Assets 50,887 255,400
Inventory 26,575
----------- -----------
Total Current Assets 1,565,792 2,087,640
Plant, Property and Equipment
Furniture and Equipment, 25,715 104,055
net of depreciation
Other Assets
Land and Real Estate Holdings 5,505,640 12,579,658
Investment in Trade Ark Properties 4,626,208
Vacation Club Members 185,584
Deferred Taxes 69,425 69,425
Organization Costs 14,109
Other Assets 78,043
Loan origination costs, 658,857 405,638
net of amortization
Notes Receivable - non-current 204,000 1,667,638
Intangible Assets 9,583
Goodwill 95,499
----------- -----------
Total Other Assets 11,064,130 15,105,377
Total Assets $12,655,637 $17,297,072
=========== ===========
Current Liabilities
Notes Payable $11,871,288 $11,261,862
Accounts Payable & 1,226,488 1,744,983
Deferred Taxes Payable 14,000 14,000
----------- -----------
Total Current Liabilities 13,111,776 13,020,845
Non-Current Liabilities
Notes Payable 2,350 3,675,365
----------- -----------
Total Liabilities 13,114,126 16,696,210
Shareholders' Equity
Preferred Stock - -
Common Stock 76,300 76,245
Additional Paid in Capital 12,095,075 7,202,339
Treasury Stock (4,830,176) (386,258)
Accumulated Deficit (7,799,688) (6,291,464)
Total Shareholders' Equity (458,489) 600,862
----------- -----------
Total Liabilities and
Shareholders' Equity $12,655,637 $17,297,072
=========== ===========
</TABLE>
3
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Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 1999 and 1998
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(2,778,755) $(2,272,527)
Amortization 1,018,090 337,507
Depreciation 5,790 9,705
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables (203,578) (218,084)
(Increase) Decrease in Deposits 2,144
(Increase) Decrease in Other Assets 58,626 (210,555)
(Increase) Decrease in Real Estate Holdings 86,736 (3,070,596)
(Increase) Decrease in Accrued Interest
Receivable (29,249)
(Increase) Decrease in Pre-Paid Assets (349) (71,524)
(Increase) Decrease in Inventory (35,107)
(Increase) Decrease in Accrued Expenses (128,495) 436,608
Increase (Decrease) in Deferred Taxes Payable (14,000)
Increase (Decrease) in Accrued Interest
Payable 186,594
Other
----------- -----------
Net Cash Used for Operations (1,941,935) (4,949,084)
Cash Flows from Investing Activities:
Acquisition of Notes Receivable (240,000) (2,490,137)
Collection of Notes Receivable 36,000 132,341
Acquisition of Furniture and Fixtures (93,951)
Increase (decrease) in loan fees (1,176,580) (660,218)
----------- -----------
Net cash used in Investing Activities: (1,380,580) (3,111,965)
Cash Flows from Financing Activities
Increase in Notes Payable 7,136,966 10,135,884
Payment of Notes Payable (7,552,409) (1,769,363)
Cash From Trade Ark Investment 3,673,792
Re-acquisition of Common Stock (21,679) (386,259)
Issuance of Common Stock 240,437 631,495
----------- -----------
Net Cash used in Financing Activities 3,477,107 8,611,757
Net Increase (Decrease) in Cash 154,592 550,708
Beginning Cash 1,006,076 227,162
----------- -----------
Ending Cash $ 1,160,668 $ 770,870
=========== ===========
</TABLE>
4
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Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Nine Months Ended June 30, 1999 and 1998
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Sales $840,226 $25,000
Hotel Revenue - -
Miscellaneous Income 11,550
Cost of Sales 152,360 -
----------- -----------
Gross Profit $687,866 $36,550
Operating Expenses:
General & Administrative
Expenses 1,992,000 1,408,936
----------- -----------
Net Income (Loss) Before
Interest Income (1,304,134) (1,372,386)
Interest Income 26,893 2,859
Interest Expense (1,088,489) (445,351)
----------- -----------
Net Income (Loss) from continuing operations ($2,365,730) ($1,814,878)
----------- -----------
Net Income (Loss) from discontinued operations ($413,025) (457,649)
----------- -----------
Net Income (Loss) from operations ($2,778,755) ($2,272,527)
----------- -----------
Net Income (Loss) per share $( 0.412) $(0.315)
=========== ===========
Weighted average shares outstanding: 6,738,929 7,205,559
=========== ===========
Dividends per Share 0 0
----------- -----------
</TABLE>
5
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Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended June 30, 1999 and 1998
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Sales $535,226 $0
Hotel Revenue - -
Miscellaneous Income -
Cost of Sales 141,938 -
--------- -----------
Gross Profit $ 393,288 $ -
Operating Expenses:
General & Administrative
Expenses 718,100 631,310
--------- -----------
Net Income (Loss) Before
Interest Income (324,812) (631,310)
Interest Income 6,641 -
Interest Expense (385,616) (200,382)
--------- -----------
Net Income (Loss) from continuing operations ($703,787) ($831,692)
--------- -----------
Net Income (Loss) from discontinued operations ($193,124) ($313,658)
--------- -----------
Net Income (Loss) from operations ($896,911) ($1,145,350)
--------- -----------
Net Income (Loss) per share $( 0.140) $(0.166)
========= ===========
Weighted average shares outstanding: 6,406,781 6,885,951
========= ===========
Dividends per Share 0 0
--------- -----------
</TABLE>
6
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Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity
For the Nine Months Ended June 30, 1999
(Thousands of Dollars, except per share amount)
UNAUDITED
<TABLE>
<CAPTION>
Common Stock
$0.01 Par Value Additional
----------------- Paid-In Treasury Retained
Shares Amount Capital Stock Earnings Total
------ ------ ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at 9/30/98 7,624,500 $ 76 $7,202 ($386) ($6,291) $601
Additional Stock Issued(Net) 104,522 $ 1 $ 274 $275
Stock Canceled (98,972) ($1) ($34) ($35)
Trade Ark Investment $4,653 $4,653
Resorts Spin Off (2,839689) ($4,444) $858 ($3,586)
Net (loss) for the nine
months ended 6/30/99 ($2,366) ($2,366)
Balance at 6/30/99 4,790,361 $76 $12,095 ($4,830) ($7,799) ($458)
</TABLE>
7
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CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1999
-------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
Background
----------
The consolidated balance sheet at June 30, 1999 and the related
statements of operations and cash flows for the nine month period
ended June 30, 1999, include the accounts of Capitol Communities
Corporation and its wholly owned subsidiaries and are unaudited.
All inter-company accounts and transactions have been eliminated in
consolidation.
These unaudited interim consolidated financial statements should be
read in conjunction with the September 30, 1998 fiscal year end
financial statements and related notes. The unaudited interim
financial statements reflect all adjustments which are, in the
opinion of management, necessary for a fair statement of results
for the interim periods presented and all such adjustments are of a
normal recurring nature. Interim results are not necessarily
indicative of results for a full year.
The Company was originally incorporated in the State of New York on
November 8, 1968 under the name of Century Cinema Corporation. In
1983, the Company merged with a privately owned company, Diagnostic
Medical Equipment Corp., and as a result changed its name to that
of the acquired company. By 1990, the Company was an inactive
publicly held corporation. In 1993, the Company changed its name to
AWEC Resources, Inc., and commenced operations. On February 11,
1994, the Company formed a wholly-owned subsidiary, AWEC
Development Corp., an Arkansas corporation, which later changed its
name to Capitol Development of Arkansas Inc., on January 29, 1996.
The Company was formed to develop and sell real estate properties.
In May 1994, the Company formed a wholly-owned subsidiary, AWEC
Homes, Inc., an Arkansas corporation for the purpose of building
single-family homes. The subsidiary's name was changed to Capitol
Homes, Inc., on January 29, 1996.
In order to effectuate a change in domicile and name change,
approved by a majority of the Predecessor Corporation shareholders,
the Predecessor Corporation merged, effective January 30, 1996,
into Capitol Communities Corporation, a Nevada corporation formed
in August 1995, solely for the purpose of the merger.
Revenue Recognition
-------------------
The full accrual method is used to determine the recognition of
revenue. In order
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to recognize revenue and profit under the full accrual method the
following criteria must be met. The profit from the sale must be
determinable, that is, the collectibility of the sales price is
reasonably assured, or any portion which may not be collectible can be
reasonably estimated. In addition, the earnings process must be
complete, with no significant activities required of the seller after
the sale in order to earn the profit from the sale.
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1999
-------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
--------------------------------------------------------------------
Earnings/Loss Per Share
-----------------------
Primary earnings per common share are computed by dividing the net
income (loss) by the weighted average number of shares of common stock
and common stock equivalents outstanding during the year. The number
of shares used for the nine months ended June 30, 1999 was 6,738,929
and for the nine months ended June 30, 1998 was 7,205,559.
NOTE 2 - CAPITAL TRANSACTIONS
--------------------
In May 1993, the Company executed a 15 to 1 reverse stock split.
In September 1993, the Company issued an additional 4,282,126 shares
of common stock to existing stockholders.
In October 1993, the Company issued to Petro Source 6,079,000 shares
of common stock to acquire royalty interests in oil and gas properties
owned by Petro Source Energy Corp.
In July 1995, the Company executed a 5 to 1 reverse stock spilt.
In July 1995, the Company issued an additional 4,772,996 shares of
common stock to existing stockholders.
In October 1996, an individual pursuant to a consulting agreement,
exercised an option to purchase 38,000 shares of common stock.
In November 1996, an individual pursuant to a consulting agreement,
exercised an option to purchase 150,000 shares of common stock.
In April 1997, two shareholders returned a total of 57,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company.
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In May 1977, one shareholder returned a total of 19,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company
On July 29,1997, the Company issued 50,000 shares of common stock to
David Paes, an officer of the Company , in consideration of management
services to the Company.
On July 29,1997, the Company issued 50,000 shares of common stock to
Mary Peyton, an officer of the Capitol Homes, Inc., a wholly owned
subsidiary of the Company, in consideration of management services
to the Company.
On July 30,1997, the Company issued 100,000 shares of common stock to
an unaffiliated company for the purchase of all of the stock of
Capitol Resorts of Florida, Inc.,under an Agreement and Plan of
Reorganization, dated July 30, 1997.
On October 20, 1997, the Company issued 20,000 shares of common stock
to Ann Aldridge, an officer of Capitol Development of Arkansas, Inc.,
a wholly owned subsidiary of the Company, in consideration of
management services to the Company.
In October 1997. One shareholder returned a total of 19,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company.
In October 1997, a consultant to the Company exercised an option to
purchase 38,000 shares of common stock, pursuant to a consulting
agreement.
In December 1997, the Company issued 33,500 shares of common stock to
an unaffiliated company, as well as approximately $868,000 in cash and
the assumption of a $1,158,000 mortgage for the purchase of the Ocean
Palms Resort Property, the Ocean Palms Resort Paper and other rights.
In April 1998, a consultant to the Company exercised an option to
purchase 35,000 shares of common stock, pursuant to a consulting
agreement.
In April 1998, the Company issued 200,000 shares of common stock to
unaffiliated third parties pursuant to the acquisition of ERI and EMI,
and granted options for another 100,000 shares to vest over a five
year period, commencing April 30, 1999 and expiring on April 30, 2003.
The options vest at a rate of 20% per year and are exercisable at
$3.34 per share.
On April 17, 1998, Capitol Development of Arkansas, Inc., the
Company's Operating Subsidiary exercised its option under a Settlement
Agreement with Century Realty to repurchase 700,000 shares of the
Company's voting common
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stock. Such shares are now held as treasury shares.
In September 1998, the Company issued 5,000 shares to an unaffiliated
third party in consideration of services to the Company.
In October 1998, the Company issued 60,000 shares of common stock to
an unaffiliated third party pursuant to a Consulting Agreement dated
October 1, 1998.
Effective October 15, 1998, the Company disposed of its interest in
the Ocean Palms Villas property in exchange for 32,305 shares of the
Company's common stock. The shares were subsequently canceled by the
Company.
On October 15, 1998, the Company issued 10,000 shares each to William
Priakos and Eldon Hobbs, officers of Capitol Club International, Inc.
a wholly owned subsidiary of the Company in consideration of
management services to the Company.
On February 18, 1999, pursuant to the terms of a Settlement Agreement
and Mutual Release between the Company and its subsidiaries and
Michael D. Munro, an employee of a subsidiary of the Company, a total
of 66,667 shares of common stock of the Company was returned by Munroe
and subsequently canceled by the Company.
On March 29, 1999, a Contribution Agreement was entered into between
the company's subsidiary and Trade Partners, Inc., for the purpose of
forming TradeArk Properties, LLC, a Michigan limited liability company
to develop and sell real estate. The transaction was completed
effective June 14, 1999.
Trade Partners contributed viatical settlement contracts that the
parties determined had a discounted net present value of $8,300,000.
The capital contribution provides Trade Partners with a 64.84%
membership interest in TradeArk Properties. The company contributed
certain tracts of real property. The capital contribution provides the
company with a 35.16% membership interest in TradeArk Properties.
On March 31, 1999, a Plan and Agreement for Corporate Separation was
entered into between the company and Charlie Corporation, a related
party. On June 14, 1999, the parties executed a First Amendment to
the Plan and Agreement for Corporate Separation. Under the terms of
the agreement Charlie Corporation exchanged 2,839,689 shares of the
company's common stock for all of the issued and outstanding capital
stock in the company's subsidiaries, Capitol Resorts, Inc. and Capitol
Resorts of Florida, Inc. and their subsidiaries. The Company is
holding the stock as Treasury Shares.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward-Looking Statements
- --------------------------
Certain matters discussed in this Form 10-QSB are forward-looking
statements within the meaning of the Private Litigation Reform Act of 1995 and
as such may involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of the Company
to be different from any future results, performance or achievements expressed
or implied by such forward-looking statements. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Company's filings
with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
The the following discussion should be read in conjunction with the
unaudited financial statements appearing in Item 1, of this Part 1 ("the
Financial Statements"), and the information provided later in Item 2, of this
Report. As noted below in this Report, the Company needs to convert into long-
term debt, or replace or retire its current long term obligations and raise
additional capital to overcome its present illiquidity and commence significant
operations.
The discussion below is also qualified in its entirety by events occuring
in the thrid quarter ended June 30, 1999, as dicussed below. On June 14, 1999,
the Company divested all interests in its vacation ownership interval ("VOI")
properties, in exchange for 2,839,689 shares of the Company's common stock owned
by a related party. The Board has determined that it was not in the best
interest of the Company to continue operating its VOI properties in Florida or
to develop or acquire other VOI properties. The Board's decision resulted from a
determination to focus on the Company's primary business of developing and
selling single- family property and homes. To further this goal, the Board
decided to contribute approximately 257 acres of single-family, multi-family and
commercial lots of the Maumelle Property to TradeArk Properties LLC ("TradeArk
Properties"). For the contributed Maumelle Property, the Company received a
35.16% membership interest in TradeArk Properties. Management anticipates that
during this fiscal year, all residential development and sales will be done
through TradeArk Properties and other joint venture partners.
The Company significantly changed the nature of its business activities
from land sales to real estate development and vacation interval operations
during the fiscal years ended September 30, 1997 and 1998, although no
meaningful development operations have commenced. As a result, the Company's
management does not believe the historical financial information presented in
the Financial Statements is indicative of likely future results of operations.
The Company believes that its ability to generate revenues in the future from
real estate development will depend
12
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in large part on its ability to extend, replace, convert into long term debt or
retire its current short term debt and raise additional capital.
Financial Condition
- -------------------
There continues to be substantial doubt about the Company's ability to
continue as a going concern, due to its current illiquidity and uncured defaults
in some of its secured debt. As discussed below, the Company obtained $2,613,370
in unsecured short-term debt financing from private sources (collectively the
"Bridge Loans"), during the nine month period ended June 30, 1999, reflected in
$1,160,668 in cash on hand. There can be no assurance, however, that the Company
will be able to raise the additional capital required to cure the defaulted loan
and satisfy its long-term liquidity requirements. See "LIQUIDITY AND CAPITAL
RESOURCES," below.
Change in Financial Condition Since the End of the Last Fiscal Year.
--------------------------------------------------------------------
At June 30, 1999, the Company had total assets of $12,655,637 a decrease of
$4,641,435, or 26.83% over the Company's total assets as of the Company's fiscal
year end of September 30, 1998. The Company had cash of $1,160,668 at June 30,
1999, compared to a cash position of $1,047,021 at September 30, 1998, a
decrease of $113,647.
Prepaid assets decreased from $255,400 on September 30, 1998, by $204,513
to $50,887 on June 30, 1999.
The carrying value of the Company's real estate holdings increased by
$7,074,018 during the nine months from $12,579,658 to $5,505,640. The major
decreases resulted from the disposition of Capitol Resorts, Inc., and Capitol
Resorts of Florida, Inc. (the "Resorts Subsidiaries"), and the contribution of
certain portions of real property (the "Contributed Maumelle ") with a book
value of $3,113,556 at September 30, 1998. Of these holdings, the disposition of
the Company's interest in OPV Development, Inc. ("OPV") in October, 1998,
resulted in a decrease of $520,008. The Contributed Maumelle Property
contributed to Trade Ark Properties had a book value of $3,581,355 at September
30, 1998. The sale of a 7-acre commercial tract in Maumelle, Arkansas resulted
in a decrease of $10,422 in book value. The sale of a 30 acre residential site
in Maumelle resulted in a decrease of $141,938 in book value. See "LIQUIDITY AND
CAPITAL RESOURCES," below.
Total liabilities of the Company at June 30, 1999, decreased to
$13,114,126, a decrease of $3,582,084 over the September 30, 1998 total of
$16,696,210. The current liability for notes payable increased by $609,426
during the nine months from $11,261,862 to $11,871,288. This resulted primarily
from the reclassification of the Resure, Inc. ("Resure"), mortgage payable from
long term to short term debt. In addition, the Company increased its unsecured
short term notes payable from $3,855,872 at September 30, 1998 by $2,613,370 to
$6,469,242 at June 30, 1999.
Accounts payable and accrued expenses decreased by $ 518,495. At September
30,1998,
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the liability for accounts payable and accrued expenses totaled $1,744,983. At
June 30, 1999, the balance was $1,226,488. Accrued interest payable increased by
$170,011 from $440,291 at September 30, 1998 to $610,302 at June 30, 1999.
Accrued real estate and special taxes payable decreased from the September 30,
1998 balance of $181,134 to a balance of $12,811, a decrease of $168,323, at
June 30, 1999, primarily due to taxes being paid during the period.
Shareholders' Equity decreased by $1,059,351. The decrease results from
the combination of the loss from the continuing operations of $2,365,730 for
the nine month period ending June 30, 1999, the issuance of 60,000 new shares of
the Company's common stock at $4.00 per share, as payment of a financial
consulting contract, the issuance of 20,000 new shares at $1.125 per share as
payment for services rendered by employees of the Resort Subsidiaries, the
cancellation of 32,305 shares at $1.062 per share received from the disposition
of OPV, and the cancellation of 66,667 shares at par, pursuant to the terms of a
Settlement Agreement and Mutual Release between the Company and a former
employee and the issuance of 24,522 shares at $0.50 per share as payment of
consulting fees. The transaction establishing the Trade Ark Properties provided
$4,653,021 in additional paid in capital. The spin-off of the Resorts
Subsidiaries resulted in the acquisition of 2,839,689 shares of Treasury Stock
at a value of $4,443,917 and the removal of a negative Retained Earnings of
$857,506 from the Consolidated Statements, resulting in a net decrease of
$3,586,411.
Results of Operations
- ---------------------
Comparison of Nine Months Ended June 30, 1999 to the Nine Months Ended June 30,
- --------------------------------------------------------------------------------
1998 For the nine months ended June 30, 1999, the Company experienced a net
- ----
loss of $2,778,755 compared with a loss of $2,272,527 for the nine months ended
June 30, 1998. While sales from continuing operations improved by $815,226 from
$25,000 to $840,226, general and administrative expenses increased by $583,064,
from $1,408,936 to $1,992,000, and interest expense increased by $643,138 from
$445,351 to $1,088,489, resulting in the increased net loss. (See discussion
below).
Sales increased by $815,226 to $840,226 for the nine months ended June 30,
1999, from $25,000 for the nine months ended June 30, 1998. During the nine
months ended June 30, 1998, the Company sold one parcel of undeveloped land for
$25,000. During the nine months ended June 30, 1999, revenues of $5,000 resulted
from the sale of a right-of way to the Maumelle Water Management in Maumelle,
Arkansas, revenues from the sale of 7.4 acres of commercial property for
$300,000 and revenues of $535,226 from the sale of a 29 acre tract zoned for
residential use.
General and administrative expenses increased to $1,992,000 for the nine
months ended June 30, 1999 from $1,408,936 for the nine months ended June 30,
1998. Management expenses totaled $266,467 for the nine months ended June 30,
1999, a decrease of $17,426 from the $240,893 expense for the nine months ended
June 30, 1998. Consulting fees of $312,470 for the nine months ended June 30,
1998, decreased by $115,209 to $197,261 for the nine months ended June 30, 1999.
The major reason for the increase in general and administrative expense was
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amortization expense, which increased by $694,639 from $323,451 at June 30, 1998
to $1,018,090 for the nine months ended June 30, 1999. This resulted from the
costs associated with the acquisition of the short term unsecured Bridge Loans.
Interest income increased from $2,859 for the nine months ended June 30,
1998 to $26,893 for the nine month period ended June 30, 1999.
Interest expense increased by $643,138 from $445,351 for the nine months
ended June 30, 1998 to $1,088,489 for the nine months ended June 30, 1999. The
increase resulted from the increase in debt by the Company, even though a
substantial amount of the debt was advanced to the now discontinued Florida
operations.
The loss from discountinued operations from the VOI Florida properties of
$457,649 for the nine months ended June 30, 1998 decreased to a loss of $413,025
for the nine months ended June 30, 1999. During the period ending June 30, 1998,
these operations had sales totaling $691,139, cost of sales of $167,630 and
operating expenses, including interest expense of $738,344. During the nine
months ended June 30, 1999, the sales totaled $1,019,042, cost of sales were
$258,618 and operating expenses, including interest expense were $1,142,222.
Comparison of The Three Months Ended June 30, 1999 to the Three Months Ended
- ----------------------------------------------------------------------------
June 30,1998. For the three months ended June 30, 1999, the Company
- ------------
experienced a net loss of $896,911 compared with a loss of $1,145,350 for the
three months ended June 30, 1998. While sales from continuing operations
improved by $535,226, general and administrative expenses increased by $86,790
from $631,310 to $718,100, and interest expense increased by $185,234 from
$200,382 to $385,616, resulting in the decrease in net loss.
Sales increased by $535,226 for the three months ended June 30, 1999 from
$0 for the three months ended June 30, 1998. During the period ended June 30,
1999, the Company sold a parcel of 29 acres of residential property for
$535,226.
General and administrative expenses increased to $718,100 for the three
months ended June 30, 1999 from $631,310 in the three months ended June 30,
1998. Management fees for the period ended June 30, 1999 amounted to $63,386,
a decrease of $5,938 from the $84,651 expense for the three months ended June
30, 1998. Consulting fees of $204,187 for the three months ended June 30, 1998
decreased by $136,140 to $68,047 for the three months ended June 30, 1999. The
major cause for the increase in general and administrative expenses was
amortization expense which increased by $245,093 from $147,060 for the three
months ended June 30, 1998 to $392,153 for the three months ended June 30, 1999.
This resulted from the acquisition costs associated with the short term
unsecured Bridge Loans.
Interest income increased from $0 for the three month period ended June 30,
1998, to $6,641 for the three month period ended June 30, 1999.
Interest expense increased by $185,234 from $200,382 for the three months
ended June
15
<PAGE>
30, 1998 to $385,616 for the three months ended June 30, 1999. The increase
resulted from the increase in debt by the Company, even though a substantial
amount of the proceeds from that debt was advanced to the now discontinued
Florida VOI operations.
The loss from discontinued operations of $313,658 for the three months
ended June 30, 1998 decreased to a loss of $193,124 for the three months ended
June 30, 1999. During the three months ending June 30, 1998 these operations had
sales totaling $387,842, cost of sales $147,094 and operating expenses,
including interest expense of $676,822. During the three months ended June 30,
1999, the sales totaled $327,903, cost of sales were $90,908 and operating
expenses, including interest expense, were $403,878.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents amount to $1,160,668 or 9.17% of total assets at
June 30, 1999, as compared with $1,047,021 at September 30,1998. The Company's
liquidity position at June 30, 1999, is not adequate to meet the Company's
liquidity requirements. As of June 30, 1999, the Company owed $507,955 in past
due payments to Resure and had $3,701,006 in short-term debt due within the next
six months. As of the date of this Report, the Company has approximately
$3,600,000 in defaulted debt and $3,788,107 in short-term debt due within the
next six months. The Company's status as a going concern remains in doubt.
As of June 30, 1999, the Company has borrowed $6,469,242 from private
sources, (the "Bridge Loans"). The majority of the promissory notes evidencing
the Bridge Loans, (the "Bridge Notes") bear interest at a rate of 10.9% per
annum and mature nine months from the date of each Note. The Bridge Loans are
unsecured, however the Company has provided a guarantee bond to the Bridge Note
holders at a cost to the Company of approximately 5% of the gross proceeds
received from the Bridge Loans. The Company has also paid the investment
banking firm that assisted the Company in obtaining the Bridge Loans a fee equal
to 15% of Bridge Loans gross proceeds received.
The Bridge Notes mature primarily in the late third and fourth quarter of
1999 and in the first quarter of 2000 . In the next fiscal year, the Company
intends to replace the notes with long term debt or equity capital. Management
intends to negotiate with the present note holders to reinvest the Bridge Notes
for an additional nine month period. If some or all of the note holders choose
not to reinvest, the Company will have to replace the maturing notes with debt
or equity capital. There can be no assurance, however, that the Company will
be able to obtain the funds necessary to pay the matured Bridge Notes.
Effective October 15, 1998, Capitol Resorts of Florida Inc. (the "Florida
Resorts Subsidiary") disposed of its interest in the Ocean Villas Property by
exchanging the issued and outstanding shares of OPV for 32,305 shares of the
Company's voting common stock owned by MLT Management Corporation ("MLT
Management"). The exchange agreement between the Florida Resort Subsidiary and
unaffiliated third parties, MLT Management, Ocean Palms Resort, Inc., and B&G
Acceptance Corp., exchanges OPV's interest in two ground leases plus
16
<PAGE>
improvements comprised of the 16 Ocean Villas LTL units, promissory notes
arising from the sale of the units, and first and second mortgages encumbering
the ground leases for the 32,305 shares of the Company's common stock held by
MLT Management. The transaction eliminated approximately $519,173 in Company
debt.
On March 29, 1999, a Contribution Agreement was entered into between
Capitol Development of Arkansas, Inc. (the "Operating Subsidiary"), and Trade
Partners, Inc. ("Trade Partners"), an unaffiliated third party, for the purpose
of forming TradeArk Properties, LLC ("TradeArk Properties"), an Arkansas limited
liability company which will develop and sell real estate. On June 1, 1999, an
amendment to the Contribution Agreement was executed by the parties extending
the closing date (the "Closing Date") to no later than June 30, 1999. On June
14, 1999, the parties performed all of the terms and obligations of the
Contribution Agreement, including the capitalization of TradeArk Properties.
Trade Partners, a Michigan corporation that acquires, holds and transfers
life insurance policies on persons with limited life expectancies, referred to
as viatical settlement contracts, contributed to TradeArk Properties viatical
settlement contracts that the parties determined had a discounted net present
value of $8,3000,000. The capital contribution provides Trade Partners with a
64.84% membership interest in TradeArk Properties.
The Operating Subsidiary contributed certain tracts of its Maumelle
Property, including 192 acres of single-family lots ("Pine Ridge Tract"); 19
acres of multi-family lots ("Rector Mountain Tract"); 40 acres of commercial
lots ("Tract D"); and 6 acres of commercial lots(Tract E"), (collectively known
as the "Contributed Maumelle Property"). TradeArk Properties assumed $3,800,000
in debt collateralized by the Contributed Maumelle Property. The fair market
value of the Contributed Maumelle Property was determined by the parties to be
$8,300,000, which after the assumed debt, represented a capital contribution by
the Company of $4,500,000 or a 35.16% membership interest in TradeArk
Properties. The transaction eliminated approximately $2,675,000 in Company debt.
Simultaneously on the Closing Date and pursuant to the terms of the
Contribution Agreement, TradeArk Properties secured a $4,000,000 loan from New
Era Life Insurance Company ("New Era"). The loan has a fixed interest rate of
13% per annum, and matures in 30 months from the date of the loan when all
accrued interest and principal is due. $3,156,581.92 of the New Era loan
proceeds were used to retire loans held by the Company and secured by part of
the Contributed Property. The New Era loan is secured by the Contributed
Property and the viaticals settlement contracts. After legal fees and other
closing costs, the Company received from TradeArk Properties $930,713.18 of the
New Era loan proceeds. The Company intends to use the proceeds for operating
capital and expenses.
On March 31, 1999, a Plan and Agreement for Corporate Separation
("Separation Plan") was entered into between the Company and Charlie
Corporation, a related party. On June 14, 1999, the parties executed a First
Amendment to the Settlement Plan. Under the terms of the Separation Plan,
Charlie Corporation exchanged 2,839,689 shares of the Company's common
17
<PAGE>
stock for all of the issued and outstanding capital stock of the Resort
Subsidiary, and the Florida Resorts Subsidiary, both of which are wholly-owned
subsidiaries of the Company. The exchange also included the Resort Subsidiary's
solely-owned interest in Capitol Club, Exchange Services, Capitol Resorts
International and Entry Resorts Marketing (dissolved May 3, 1999), and the
Florida Resorts Subsidiary's solely-owned interest in Capitol SB Development.
Under the terms of the Separation Plan, Charlie Corporation assumed the
liabilities, including $2,100,000 in related debt, for the Resort Subsidiary and
Florida Resorts Subsidiary, effective June 14, 1999.
With the exchange the Company disposed of its interest in approximately 36
acres of land and improvements near Disney World in Osceola County, Florida held
by Capitol SB Development, and the rights to a ground lease and improvements
referred to as the Ocean Palms Resort located in Pompano Beach, Florida. The
Ocean Palms Resort Property consists of a 53 long term leasehold unit complex,
pool, office areas, parking area and other amenities. The assignment of the
ground lease rights is held by the Florida Resorts Subsidiary.
The parties determined that the fair market value of the stock in the
Resorts Subsidiary and the Florida Resorts Subsidiary was $3,586,411 and the
fair market value of the Company's stock was $3,586,411. The Company is holding
the 2,839,689 shares as treasury shares.
The Company is current on its debt, except for a $3,500,000 recourse note
owed to Resure Inc. (the "Resure Note I"), which matures September 1, 1999, and
a $200,000 recourse note payable to Davister Corp. (the "Davister Note"), which
matured January 9, 1996. As of the date of this Report, the Company has not paid
the July 1 and October 1, 1998 payments or the January 1, April 1, and July 1,
1999 payments to Resure for an aggregate past due of amount of $507,955. On
April 19, 1999, a foreclosure action was instituted by the Resure Liquidator
against the Operating Subsidiary in the Chancery Court of Pulaski County,
Arkansas. Resure is seeking to foreclose on approximately 701 acres of the
Large Residential Tract of the Maumelle Property that secures the Resure Note I
and Developer's Fees. On May 28, 1999, the Operating Subsidiary filed an answer
generally denying the claims. The Company is currently negotiating with Resure
to retire the liability on a discounted basis and have the lawsuit dismissed.
The Company intends to pay off the Resure and Davister Note liabilities from
proceeds from the sale of some of the Maumelle Property and/or by obtaining
additional equity. There can be no assurance, however, that the Company will
prevail in the litigation or that negotiations with Resure will be successful or
even if they are that the Company will be able to raise the required funds. See
Part II, ITEM 1, "LEGAL PROCEEDINGS."
Although the Davister Note has matured, the lender has not demanded payment
or instituted collection proceedings. The Company intends to retire this debt
in fiscal year 1999, from debt financing or generated revenues. There can be no
assurance, however, that the Company will be able to raise the required capital
to retire the Davister Note.
The Company intends to raise operating capital by selling debt and/or
equity securities to the public or in private transactions and by the sale of
certain portions of the Maumelle Property.
18
<PAGE>
There can be no assurance, however, that the Company will be able to raise
sufficient funds to cure its defaulted debt obligations and retire its short-
term debt, most of which will mature within the next six months. If the Company
cannot refinance, restructure or retire this debt or raise additional equity
and/or capital, the Company's status as a viable going business concern will
remain in doubt.
In respect to prospective long-term liquidity, the Company intends to
generate the bulk of its cash from operations by developing and selling
residential lots, initially on the Maumelle Property and by selling additional
equity. This assumes that the Company can obtain the necessary financial
resources to overcome its present illiquidity.
On June 30, 1999, the Company sold approximately 30 acres of single-family lots
of the Maumelle Property to an unaffiliated third party for a sales price of
$535,226. The Company received net proceeds of $146,218 from the sale, after
reducing a First Arkansas Bank $1,750,000 commercial revolving line of credit by
$364,000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 19, 1999, Nathaniel S. Shapo, Director of Insurance of the State
of Illinois, as Liquidator of Resure Inc., instituted a foreclosure action
against the Operating Subsidiary and the Bank of Little Rock, in the Chancery
Court of Pulaski County, Arkansas (the "Resure lawsuit"). The Resure Liquidator
is seeking to foreclose on approximately 701 acres of the Large Residential
Tract of the Maumelle Property securing the $3,500,000 Resure Note I, which is
currently in default. The action also seeks $2,000,000 in Development Fees the
Liquidator claims the Operating Subsidiary owes under the terms and conditions
of the September 30, 1997, Settlement Agreement, which is secured by the same
701 acres as the Resure Note I.
On May 28, 1999, the Operating Subsidiary filed an answer, generally
denying the claims. The Operating Subsidiary also has moved to have the Bank of
Little Rock dismissed from the action asserting that Resure erred in determining
that the bank has an interest in the approximately 701 acres of the Large
Residential Tract. There can be no assurance, however, that the Operating
Subsidiary will prevail in the action or that it will be able to negotiate a
favorable settlement with Resure prior to any foreclosure.
Item 3. DEFAULTS UPON SENIOR SECURITIES
The Company incorporates by reference the information regarding defaults of
certain debt obligations from Part I, ITEM 2 "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF PLAN OF OPERATION - Liquidity and Capital Resources," and Part II,
ITEM 1, LEGAL PROCEEDINGS."
19
<PAGE>
Item 5. OTHER INFORMATION.
The Company incorporates by reference the information in Part I, ITEM 2,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and
Capital Resources."
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBITS
11 Statement re: computation of per share earnings
27 Financial Data Schedule
b) REPORTS ON FORM 8-K
The Company filed a 8K with the Securities and Exchange Commission on June
28, 1999.
SIGNATURES
August 24, 1999 CAPITOL COMMUNITIES CORPORATION
By: /s/ Michael G. Todd
Michael G. Todd
President and Chief Executive Officer
Date: August 24, 1999 By: /s/ David Paes
David Paes
Treasurer and Vice President
20
<PAGE>
EXHIBIT 11
CAPITOL COMMUNITIES CORPORATION
Computation of Earnings Per Share
Nine Months Ended
June 30,
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Shares Outstanding Beginning 6,924,500 7,312,000
Of Period
Shares Issued During Period
October 7, 1997 38,000
October 20, 1997 20,000
October 28, 1997 (19,000)
December 31, 1997 33,500
April 2, 1998 35,000
April 17, 1998 (700,000)
April 30, 1998 50,000
October 1, 1998 60,000
October 15, 1998 (32,305)
December 15, 1998 20,000
February 23, 1999 (66,667)
June 14, 1999 (2,839,689)
June 28, 1999 24,522
----------- -----------
Total Outstanding 4,090,361 6,769,500
Weighted average number of 6,738,929 7,205,559
shares outstanding
Shares deemed outstanding from
assumed exercise of stock options - -
----------- -----------
Total 6,738,929 7,205,559
=========== ===========
Earnings (loss) applicable to $(2,778,755) $(2,272,527)
common shares =========== ===========
Earnings (loss) per share of $(0.412) $ (0.315)
common stock =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> $1,160,668
<SECURITIES> 0
<RECEIVABLES> 354,237
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,565,792
<PP&E> 10,157,563
<DEPRECIATION> 16,051
<TOTAL-ASSETS> 12,655,637
<CURRENT-LIABILITIES> 13,111,776
<BONDS> 0
0
0
<COMMON> 76,300
<OTHER-SE> (534,789)
<TOTAL-LIABILITY-AND-EQUITY> 12,655,637
<SALES> 840,226
<TOTAL-REVENUES> 867,119
<CGS> 152,360
<TOTAL-COSTS> 152,360
<OTHER-EXPENSES> 1,992,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,088,489
<INCOME-PRETAX> (2,365,730)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (413,025)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,778,755)
<EPS-BASIC> (0.412)
<EPS-DILUTED> (0.412)
</TABLE>
