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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 March 31, 2000
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission File No. 0-23450
CAPITOL COMMUNITIES CORPORATION
(Exact name of Small Business Issuer as specified in its charter)
Nevada 88-0361144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25550 Hawthorne Boulevard
Suite 207
Torrance, CA 90505
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 375-2266
Check whether the issuer (1) filed all reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act during the past 12 months (or for
such period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
[X] YES [_] NO
The 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.
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) 4,230,361
(Title of Class) Shares Outstanding as of March 31, 2000
Transitional Small Business Disclosure Format: [_] YES [X] NO
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CAPITOL COMMUNITIES CORPORATION
Form 10-QSB
QUARTER ENDED March 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
(Unaudited).............................................................................. 3
Consolidated Balance Sheet
March 31, 2000...................................................................... 4
Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 2000 and 1999.................................... 5
Consolidated Statement of Operations
For the Six Months ended March 31, 2000 and 1999.................................... 6
Consolidated Statement of Stockholders' Equity
For the Six Months ended March 31, 2000............................................. 7
Notes to Consolidated Financial Statements March 31, 2000................................ 8
Item 2. Management's Discussion And Analysis of Plan of Operation................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 16
Item 3. Defaults Upon Senior Securities.......................................................... 17
Item 6. Exhibits and Reports on Form 8-K......................................................... 17
Signatures......................................................................................... 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
--------------------------------
3
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Capitol Communities Corporation
Balance Sheet
as of March 31, 2000 and September 30,1999
UNAUDITED
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
<S> <C> <C>
Current Assets
Cash in Bank $ 44,319 $ 864,381
Accounts Receivable 56,960 51,554
Notes Receivable- current 48,000 383,000
Prepaid Assets 3,390 3,085
--------------- --------------
Total Current Assets 152,669 1,302,020
Plant property and equipment
Furniture and Equipment
net of accumulated depreciation of $21,644 and $17,982 20,122 23,784
Other Assets
Land and Real Estate Holdings 5,552,802 5,552,377
Investment in Trade Ark Properties 2,736,779 2,844,474
Loan origination costs net of
amortization of $1,619,197 and $1,173,902 177,145 554,656
Notes Receivable- non current 120,000 144,000
--------------- --------------
Total Other Assets 8,586,726 9,095,507
Total Assets $ 8,759,517 $ 10,421,311
=============== ==============
Current Liabilities
Notes Payable 12,155,142 12,488,025
Accounts Payable & Accrued Expenses 1,582,860 1,225,552
--------------- --------------
Total Current Liabilities 13,738,002 13,713,577
Non Current Liabilities
Notes Payable - -
Total Liabilities 13,738,002 13,713,577
Shareholders' Equity
Preferred stock-$.01 par value, none issued - -
Common Stock-$.01 par value, 40,000,000 shares authorize
7,770,050 shares outstanding 77,700 76,300
Additional Paid in Capital 7,469,513 7,470,913
Treasury Stock (4,795,852) (4,795,852)
Accumulated Deficit (7,729,846) (6,043,627)
--------------- --------------
Total Shareholders' Equity (4,978,485) (3,292,266)
Total Liabilities and
Shareholders' Equity $ 8,759,517 $ 10,421,311
=============== ==============
</TABLE>
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Capitol Communities Corporation
STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
UNAUDITED
2000 1999
----- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (1,686,219) $ (1,881,844)
Amortization 581,080 646,613
Depreciation 3,662 12,371
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables (5,406) 49,311
(Increase) Decrease in Other Assets 12,520
(Increase) Decrease in Real Estate Holdings (425) 197,471
(Increase) Decrease in Investments 107,695
(Increase) Decrease in PrePaid Assets (305) 60,877
(Increase) Decrease in Inventory (8,473)
Increase (Decrease) in Accrued Expenses 357,308 (106,279)
Other 20
----------- -------------
Net Cash Used for Operations (642,590) (1,017,433)
Cash Flows from Financing Activities:
Acquisition of Notes Receivable (240,000)
Collections of Notes Receivable 359,000 32,430
Acquisition of Furniture and Fixtures (40,186)
Increase (decrease) in loan fees (203,589) (803,810)
----------- -------------
Net Cash Provided (Used) in Financing Activities 155,411 (1,051,566)
Cash Flows from Investing Activities:
Increase in Notes Payable 232,053 3,342,054
Payment of Notes Payable (564,936) (2,163,667)
Cancellation of Common Stock (667)
Issuance of Common Stock - 228,176
----------- -------------
Net Cash Provided (Used) in Investing Activities (332,883) 1,405,896
Net Increase (Decrease) in Cash (820,062) (663,103)
Beginning Cash 864,381 1,047,021
----------- -------------
Ending Cash $ 44,319 $ 383,918
=========== =============
</TABLE>
5
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Capitol Communities Corporation
Consolidated Statements of Operations
For the Three months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
UNAUDITED
2000 1999
<S> <C> <C>
Revenues:
Sales $ 0 $ 305,000
Hotel Revenue - -
Miscellaneous Income 525 -
Cost of Sales - 10,422
----------- -----------
Gross Profit 525 294,578
Operating Expenses:
General & Administrative
Expenses 989,878 1,273,900
----------- -----------
Net Income (Loss) Before
Interest Income/Expense (989,353) (979,322)
Operations of Unconsolidated Investments (107,695)
Interest Income 11,932 20,252
Interest Expense (601,103) (702,873)
----------- -----------
Net Income (Loss) from continuing operations ($1,686,219) ($1,661,943)
Net Income (Loss) from discontinued operations $ 0 ($219,901)
Net Income (Loss) ($1,686,219) ($1,881,844)
=========== ===========
Net Income (Loss) per share (0.411) (0.271)
=========== ===========
Weighted average shares outstanding: 4,098,558 6,952,989
=========== ===========
</TABLE>
6
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Capitol Communities Corporation
Schedule of Owners Equity
For the Six Months Ended March 31, 2000
Unaudited
<TABLE>
<CAPTION>
Common Additional Treasury Retained
Shares Stock Paid in Capital Stock Earnings
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at 9/30/99 7,630,050 $76,300 7,470,913 $(4,795,851) $(6,043,627)
Additional Stock
Issued 140,000 1,400 (1,400)
Director's Fees forgiven
Stock Cancelled
Net Income (Loss) for
Six Months Ended 3/31/00 (1,686,219)
Balance at 3/31/00 7,770,050 $77,700 $7,469,513 $(4,795,851) $(7,729,846)
</TABLE>
7
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CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
March 31, 2000
--------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
Background
----------
The consolidated balance sheet at March 31, 2000 and the related
statements of operations and cash flows for the six month period
ended March 31, 2000, 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, 1999 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,
8
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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 to recognize revenue and profit under the full accrual method the
following criteria must be met. The profit from the sale must be
determinable, that is, the collectibility of the sales price is reasonably
assured, or any portion which may not be collectible can be reasonably
estimated. In addition, the earnings process must be complete, with no
significant activities required of the seller after the sale in order to
earn the profit from the sale.
Earnings/Loss Per Share
-----------------------
Primary earnings per common share are computed by dividing the net income
(loss) by the weighted average number of shares of common stock and common
stock equivalents outstanding during the year. The number of shares used
for the six months ended March 31, 2000 was 4,098,558 and for the six
months ended March 31, 1999 was 6,952,989. The number of shares used for
the three months ended March 31, 2000 was 4,128,823 and for the three
months ended March 31, 1999 was 6,945,528.
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 with the Company's current liabilities exceeding its
total assets by $4.98 million. As of March 31, the Company is in default
on a $3.4 million mortgage as well as $2,479,523 of short term unsecured
debt. No claim for payment has been made for a $200,000 note due January 6,
1996. A foreclosure suit has been filed on the $3.4 million mortgage.
Management has begun implementation of plans to make the company more
viable. The ultimate outcome of these plans cannot be determined. The
ability of the Company to continue as a going concern is dependent upon a
successful outcome of these plans. The accompanying Financial Statements do
not include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
Since March 31, the Company is delinquent on an additional $1,029,612 of
short term unsecured debt and two additional mortgages totaling $600,000
bringing the total of defaulted and delinquent debt to $7.7 million as of
May 9, 2000.
NOTE 3 -SUBSEQUENT EVENTS
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On March 29, the Company entered into an agreement to sell approximately 33
acres of residential land in Maumelle, Arkansas for a price of $25,000 per
acre. The Company anticipates to close on the contract during the third
quarter of the fiscal year ended September 30, 2000.
On May 8, the Company's wholly owned subsidiary, Capitol Development of
Arkansas, Inc. entered into agreements with MACANUSA, Inc. to sell
approximately 1000 acres of residential land, which consists of the bulk of
its real estate in Maumelle, Arkansas. The effect of the transactions will
provide cash, a secured note and an exchange of real estate for an interest
in real estate in Houston, Texas. The cash will provide for payment of
current, delinquent and defaulted mortgages totaling $5.6 million. The
secured note will provide a source of payment for the short term unsecured
debt. This debt will not be brought current, but will be moved from an
unsecured position to a secured position and paid as the secured note is
paid. This transaction is expected to close in May, 2000. The exchange
transaction will give the Company an interest in Real property in Houston,
Texas. This will provide a source of cash flow to the Company. The buyer,
MACANUSA, Inc. will have an option to repurchase this interest. The
exchange transaction is expected to close in July, 2000. The Company has
valued the transactions at $20,000,000. The Company retains the rights to
the proceeds of the previous 33 acre sale.
There is no assurance that all or any of the above mentioned transactions
will actually close.
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. 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 this ITEM 2 "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
10
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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.
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.
Management does not believe the historical financial information presented
in the Financial Statements is indicative of likely future results of
operations, due to the fact that the Company significantly changed the nature of
its business activities from real estate development
and vacation interval operations to land sales from its existing real estate
inventory located in Maumelle, Arkansas (the "Maumelle Property"). (See
"Liquidity and Capital Resources --Subsequent Events").
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 short-term debt, as discussed in more detail below.
Subsequent to the quarter ended March 31, 2000, the Company entered into an
agreement to sell the bulk of its assets to MACANUSA, Inc. ("MACANUSA"), a
developer of residential and commercial properties. If the Company is able to
successfully complete the MACANUSA transactions, it will allow the Company to
retire the majority of its debt. (See "LIQUIDITY AND CAPITAL RESOURCES," and
"Liquidity and Capital Resources --Subsequent Events," below).
Change in Financial Condition Since the End of Last Fiscal Year. At March
----------------------------------------------------------------
31, 2000 the Company had total assets of $8,759,517, a decrease of $1,661,794 or
15.95% of the Company's total assets as of the Company's fiscal year end of
September 30, 1999. The decline in total assets resulted from several causes.
A note receivable of $335,000 was collected during the first quarter. The
Company has discontinued borrowing using the short term unsecured debt. This
debt had substantial origination costs. By discontinuing new debt, the existing
origination costs continue to be amortized, but new origination costs are not
incurred. As a result the loan origination costs net of amortization have
declined $377,511 since September 30, 1999. The Company had cash of $44,319 at
March 31, 2000 compared to $864,381 at September 30, 1999, a decrease of
$864,381. The decline in cash occurred because cash on hand was used to pay
operating expenses and retire debt without new funds coming in from new debt or
from sales.
11
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The current portion of Notes Receivable decreased from $383,000 on
September 30, 1999 by $335,000 to $48,000 March 31, 2000.
The carrying value of the Company's real estate holdings remained almost
unchanged during the six months, increasing from $5,552,377 to $5,552,802. The
Company's investment in Trade Ark, decreased from $2,844,474 to $2,736,779
reflecting the Company's portion of the net loss of Trade Ark which is accounted
for by the equity method.
Total liabilities of the Company at March 31, 2000 were $13,738,002, an
increase of $24,425 from the September 30, 1999 total of $13,713,577. The
current liability for notes payable decreased by $332,883 during the three
months, from $12,488,025 to $12,155,142. The Company decreased its unsecured
short term notes payable from $6,835,544 at September 30, 1999 by $226,836 to
$6,608,708 at March 31, 2000.
Accounts payable and accrued expenses increased by $357,308. At September
30, 1999 the liability for accounts payable and accrued expenses totaled
$1,225,552. At March 31, 2000 the balance was $1,582,860. Accrued Interest
Payable increased by $259,992 from $741,578 at September 30, 1999 to $1,001,570
at March 31, 2000. Accrued real estate taxes payable increased from the
September 30, 1999 balance of $9,976 to a balance of $16,626, an increase of
$6,650, at March 31, 2000.
Shareholders' Equity decreased by $1,686,219. The decrease results
entirely from the operating loss of $1,686,219 for the six month period ending
March 31, 2000.
Results of Operations
- ---------------------
Comparison of the Six Months Ended March 31, 2000 to the Six Months Ended
-------------------------------------------------------------------------
March 31, 1999. For the six months ended March 31, 2000 the Company experienced
- ---------------
net loss of $1,686,219 compared with a loss of $1,881,884 for the six months
ended March 31, 1999. While sales from continuing operations decreased by
$305,000 from $305,000 to $0, general and administrative expenses decreased by
$284,022, from $1,273,900 to $989,878, and interest expense decreased by
$101,770, from $702,873 to $601,103 essentially offsetting the decrease in sales
and resulting in an increase in net loss from continuing operations of $24,276.
The six months ended March 31, 1999 had a loss from discontinued operations of
$219,901. There were no discontinued operation results for the six months
ended March 31, 2000 which caused the net loss to decrease by $195,625 from the
loss of $1,881,884.
Sales decreased by $305,000 to $0 for the six months ended March 31, 2000
from $305,000 for the six months ended March 31, 1999. During the six months
ended March 31, 2000 there were no sales. During the six months ended March 31,
1999, a sale of $5,000 resulted from the proceeds from the sale of a right of
way in Maumelle and a sale of $300,000 from the sale of a 7 acre tract
originally zoned for commercial use.
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General and administrative expenses decreased to $989,878 for the six
months ended March 31, 2000 from $1,273,900 for the six months ended March 31,
1999. Management fees totaled $72,359 for the six months ended March 31, 2000,
a decrease of $97,722 from the $170,081 expense for the six months ended March
31, 1999. Consulting fees of $129,214 for the six months ended March 31, 1999
decreased by $34,337 to $94,877 for the six months ended March 31, 2000. Another
cause of the decrease in general and administrative expense was Amortization
expense which decreased by $44,857 from $625,937 at March 31, 1999 to $581,080
for the six months ended March 31, 2000. This resulted from the costs
associated with the short term unsecured Bridge Loans beginning to decline.
Interest income decreased from $20,252 for the six months ended March 31,
1999 to $11,932 for the six month period ended March 31, 2000.
Interest expense decreased by $101,770 from $702,873 for the six months
ended March 31, 1999 to $601,103 for the six months ended March 31, 2000. The
decrease resulted from the decrease in debt by the Company and by its Arkansas
subsidiary.
The operating loss for unconsolidated subsidiaries accounted for under the
Equity method totaled $107,695 for the six months ended March 31, 2000. There
was no similar activity during the six months ended March 31, 1999. The Trade
Ark investment comprised all of the Company's investment in unconsolidated
subsidiaries.
The loss from discontinued operations of $219,901 for the six months ended
March 31, 1999 decreased to $0 for the six months ended March 31, 2000. The
disposal of the discontinued operations was completed in June 1999. During the
six months ended March 31, 1999 the sales totaled $691,139, cost of sales were
$167,630 and operating expenses, including interest expense, were $738,344.
Comparison of the Three Months Ended March 31, 2000 to the Three Months Ended
- -----------------------------------------------------------------------------
March 31, 1999 For the three months ended March 31, 2000 the Company experienced
- --------------
net loss of $812,009 compared with a loss of $848,535 for the three months ended
March 31, 1999. While sales from continuing operations decreased by $300,000
from $300,000 to $0, general and administrative expenses decreased by $185,371,
from $646,692 to $461,321, and interest expense decreased by $49,075, from
$350,034 to $300,959 offsetting much of the decrease in sales and resulting in
an increase in net loss from continuing operations of $114,701. The three
months ended March 31, 1999 had a loss from discontinued operations of $151,227.
There were no discontinued operation results for the six months ended March 31,
2000 which caused the net loss to decrease by $36,526 from $848,535 for the
three months ended March 31, 1999 to $812,009 for the three months ended March
31, 2000.
Sales decreased by $300,000 to $0 for the three months ended March 31, 2000
from $300,000 for the three months ended March 31, 1999. During the three
months ended March 31, 2000 there were no sales. During the three months ended
March 31, 1999, there was a sale by the Maumelle, Arkansas subsidiary of
$300,000 from the sale of a 7 acre tract originally zoned for commercial use.
13
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General and administrative expenses decreased to $461,231 for the three
months ended March 31, 2000 from $646,692 for the three months ended March 31,
1999. Management expenses totaled $36,180 for the three months ended March 31,
2000, a decrease of $44,571 from the $80,751 expense for the three months ended
March 31, 1999. Consulting fees of $55,686 for the three months ended March 31,
1999 decreased by $7,637 to $48,049 for the three months ended March 31, 2000.
Another cause of the decrease in general and administrative expense was
Amortization expense which decreased by $58,740 from $322,207 for the three
months ended March 31, 1999 to $263,467 for the three months ended March 31,
2000. This resulted from the costs associated with the short term unsecured
Bridge Loans beginning to decline.
Interest income decreased from $9,840 for the three months ended March 31,
1999 to $4,746 for the three month period ended March 31, 2000.
Interest expense decreased by $49,075 from $350,034 for the three months
ended March 31, 1999 to $300,959 for the three months ended March 31, 2000. The
decrease resulted from the decrease in debt by the Company and by its Arkansas
subsidiary.
The operating loss for unconsolidated subsidiaries accounted for under the
Equity method totaled $55,000 for the three months ended March 31, 2000. There
was no similar activity during the three months ended March 31, 1999. The Trade
Ark investment comprised all of the Company's investment in unconsolidated
subsidiaries.
The loss from discontinued operations of $151,227 for the three months
ended March 31, 1999 decreased to $0 for the three months ended March 31, 2000.
The disposal of the discontinued operations was completed in June 1999. During
the three months ended March 31, 1999 the sales totaled $289,800, cost of sales
were $91,678 and operating expenses, including interest expense, were $378,945.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents amount to $44,319 or 0.51% of total assets at
March 31,2000, as compared with $864,381 at September 30, 1999. The Company's
liquidity position at March 31, 2000, is not adequate to meet the Company's
liquidity requirements. As of March 31, 2000, the Company has approximately
$6,079,523 in defaulted debt, and $5,046,230 in short-term debt due within the
next six months. The Company's status as a going concern remains in doubt.
As of March 31, 2000, the Company has borrowed $6,608,708 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.
During the quarter ended March 31, 2000, the Company has not issued any new
Bridge Loan
14
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Notes. Subsequent to the quarter ended March 31, 2000, the Company has not
renewed any maturing Bridge Loans. The Company does not intend to renew or seek
any additional bridge loan funding and intends to commence retiring the current
Bridge Notes with funds received from the MACANUSA transactions. (See "Liquidity
and Capital Resources --Subsequent Events"). There can be no assurances,
however, that the Company will be able to obtain the funds necessary to pay the
matured Bridge Notes.
The Company is current on its debt, except the recourse note owed to Resure
Inc. (the "Resure Note I"), which matured October 1, 1999 (discussed below), a
$200,000 recourse note payable to Davister Corp. (the "Davister Note"), which
matured January 9, 1996, and on $2,479,523 of the Bridge Notes. Although the
Davister Note has matured, the lender has not demanded payment or instituted
collection proceedings.
As of March 31, 2000, the Company is in default in the amount of $3,987,353
to Resure. 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 and Developer's Fees. On May 28, 1999, the Operating Subsidiary filed an
answer generally denying the claims. On March 15, 2000, the Company entered
into a new settlement agreement ("Settlement Agreement II") with the Resure
Liquidator. Under the terms of the Settlement Agreement II, the Company will
pay Resure $3,987,353.95 in principal and interest in satisfaction of all
pending claims by Resure against the Company and release the 701 acres of the
Large Residential Tract of the Maumelle Property that secures the Resure Note
and Developer's Fees. The Company intends to retire the debt from a portion of
the proceeds from the sale of majority of the Maumelle Property. (See "--
Subsequent Events," below). There can be no assurance, however, that the
Company will be able to successfully raise the funds required to meet the terms
of the agreement or prevail in the litigation if the Settlement Agreement II
expires. See Part II, ITEM 1, "LEGAL PROCEEDINGS."
On March 29, 2000 entered into an agreement to sell approximately 33 acres
of residential land of the Maumelle Property for $825,000. The Company intends
to use a portion of the proceeds to retire the $399,524 line of credit from the
Bank of Little Rock.
The Company intends to retire its matured debt and current debt by the
consummation of the MACANUSA transactions, which consists of the sale of
substantially all of the Maumelle Property. There can be no assurance,
however, that the Company will be able to raise sufficient funds to cure its
defaulted debt obligations and retire its short-term debt, most of which will
mature within the next six months. If the Company cannot complete the MACANUSA
transactions to 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.
Subsequent Events.
-----------------
Subsequent to March 31, 2000, the Company defaulted on an additional
$1,029,612 in Bridge Notes that matured, and on the Bank of Little Rock line of
credit secured by 11 multi-family acres
15
<PAGE>
of the Maumelle Property, due on April 10, 2000, in the amount of $399,524 and
the Bank of Little Rock line of credit, secured by the same 11 multi-family
acres, due on April 12, 2000 in the amount of $200,913.
On May 8, 2000, the Company's wholly owned subsidiary, Capitol Development
of Arkansas, Inc. (the "Operating Subsidiary") and MACANUSA entered into
agreements for the sale of 1,000 acres of the Maumelle Property. The sale
consists of the majority of the Company's assets and the transactions are valued
by the Company at $20,000,000. Under the terms of the agreement, MACANUSA will
pay $6,000,000 in cash and $6,500,000 in a note issued to the Company and
secured by a senior montage on 701 acres of the Maumelle Property. In a
separate transaction, the Company will exchange an interest in one of MACANUSA's
projects located in Houston, Texas in exchange for a portion of the Maumelle
Property. The Company has valued the exchange at $7,500,000. Under the
agreement, MACANUSA has the option to repurchase the exchange property for a
note in the amount of $7,500,000 which would mature no later than June 30, 2006.
The agreement calls for two closings, which the Company anticipates will
occur in May and in July. The Company will sell approximately 570 acres of
single-family residential lots of the Maumelle Property and 11 acres of multi-
family lots of the Maumelle Property for $6,000,000 in cash at the first
closing, and a secured note for $6,500,000. The Company intends to use a
portion of the cash proceeds from the sale to settle the pending foreclosure
action brought by the Liquidator of Resure, Inc., and retiring the $3,500,000
recourse note that secures 701 acres of single-family lots of the Maumelle
Property. The Company also intends to retire a line of credit from the Bank of
Little Rock in the amount of $200,913, which secures 11 acres of multi-family
lots of the Maumelle Property, and retire a commercial revolving line of credit
from the First Arkansas Valley Bank in the amount of $1,345,000, which secures
approximately 300 acres of single-family lots of the Maumelle Property.
The Company anticipates using the note and secured montage it receives from
MACANUSA to secure payment to retire the Bridge Notes.
At the second closing, the Company will exchange the remaining
approximately 416 acres of single-family lots of the Maumelle Property to
MACANUSA in exchange for an interest in one of MACANUSA's projects located in
the Houston, Texas area. Management anticipates that the exchange property will
provide the Company with cash flow for its operations.
With the sale of Capitol's land holdings in Maumelle, Arkansas, the Company
will no longer be in the business of developing and selling residential land and
lots. Upon closing the sale, the Board of Directors will oversee the search for
an acquisition of or merger into an operating business of such a nature as to be
consistent with the skills of the Company's management and to have sufficient
prospects as to warrant the allocation of the Company's remaining resources.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
16
<PAGE>
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 (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, 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 ("Settlement Agreement I"), which is secured by the
same 701 acres as the Resure Note.
On May 28, 1999, the Operating Subsidiary filed an answer, generally
denying the claims. Resure has agreed to an extension of the March 21, 2000
trial date pending the closing of a settlement agreement entered into between
the Company and the Liquidator of Resure ("Settlement Agreement II") on March
15, 2000. Under the terms of the Settlement Agreement II, the Company will pay
$3,987,353.95 in principal and interest to Resure to satisfy all claims against
the Company by Resure, including the claims for monies under the Resure Note and
Developer's Fees. On March 24, 2000, a Chancery Court judge approved the
Settlement Agreement II, and entered an order in the Chancery Court of Pulaski
County, Arkansas. Although the Settlement Agreement II designates that the
closing will be within 30 calendar days from the date the Order was entered in
the Chancery Court, Resure has not indicated that it will not abide by the
agreement, nor is there any provision in the agreement for termination for non-
compliance.
There can be no assurance, however, that the Company will be able to
successfully raise the funds required to meet the terms of the Settlement
Agreement II or prevail in the litigation if the Settlement Agreement II
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."
ITEM 5. OTHER INFORMATION.
The Company incorporates by reference the information in Part I, ITEM 2,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and
Capital Resources."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBITS
The following Exhibits are filed as part of this Report.
17
<PAGE>
11 Statement re: computation of per share earnings
27 Financial Data Schedule
b) REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITOL COMMUNITIES CORPORATION
Date: May 12, 2000 By: /s/ Michael G. Todd
-----------------------------------------
Michael G. Todd, Chairman,
President and Chief Executive Officer
Date: May 12, 2000 By: /s/ David Paes
-----------------------------------------
David Paes
Treasurer and Vice President
18
<PAGE>
EXHIBIT 11
Capitol Communities Corporation
Computation of Earnings Per Share
UNAUDITED
Six Months Ended
March 31,
2000 1999
------------- ------------
Shares Outstanding Beginning of Period 4,090,361 6,924,500
Shares Issued During Period:
October 1, 1998 60,000
October 15, 1998 (32,305)
December 15, 1998 20,000
February 23, 1999 (66,667)
March 6, 2000 140,000
------------- -------------
Total Outstanding 4,230,361 6,905,528
Weighted average number of shares outs 4,098,558 6,952,989
Shares deemed outstanding from assumed
exercise of stock options - -
------------- -------------
Total 4,098,558 6,952,989
============= =============
Earnings (loss) applicable to common
shares $(1,686,219) $(1,881,844)
============= =============
Earnings (loss) per share of common
stock $ (0.411) $ (0.271)
============= =============
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 2000 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 44,319
<SECURITIES> 0
<RECEIVABLES> 224,960
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 152,669
<PP&E> 5,572,924
<DEPRECIATION> 21,644
<TOTAL-ASSETS> 8,759,517
<CURRENT-LIABILITIES> 13,738,002
<BONDS> 0
0
0
<COMMON> 77,700
<OTHER-SE> (5,056,185)
<TOTAL-LIABILITY-AND-EQUITY> 8,759,517
<SALES> 0
<TOTAL-REVENUES> 12,457
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 989,878
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 601,103
<INCOME-PRETAX> (1,686,219)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,686,219)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,686,219)
<EPS-BASIC> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
