<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, 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.
[_] YES [X] 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 August 2, 2000
Transitional Small Business Disclosure Format: [_] YES [X] NO
<PAGE>
CAPITOL COMMUNITIES CORPORATION
Form 10-QSB
QUARTER ENDED June 30, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).............................. 3
Consolidated Balance Sheet June 30, 2000............................ 3
Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 2000 and 1999............... 4
Consolidated Statement of Operations
For the Nine Months ended June 30, 2000 and 1999............... 5
Consolidated Statement of Operations
For the Three Months ended June 30, 2000 and 1999.............. 6
Consolidated Statement of Stockholders' Equity
For the Nine Months ended June 30, 2000........................ 7
Notes to Consolidated Financial Statements June 30, 2000............ 8
Item 2. Management's Discussion And Analysis of Plan of Operation...... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 17
Item 3. Defaults Upon Senior Securities................................ 18
Item 6. Exhibits and Reports on Form 8-K............................... 18
Signatures............................................................... 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
--------------------------------
Capitol Communities Corporation
Balance Sheet
as of June 30, 2000 and September 30,1999
UNAUDITED
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
<S> <C> <C>
Current Assets
Cash in Bank $ 14,731 $ 864,381
Accounts Receivable 60,920 51,554
Notes Receivable- current 48,000 383,000
Prepaid Assets 2,119 3,085
--------------- ---------------
Total Current Assets 125,770 1,302,020
Plant property and equipment
Furniture and Equipment
net of accumulated depreciation of $23,474 and $17,982 18,292 23,784
Other Assets
Land and Real Estate Holdings 5,542,126 5,552,377
Investment in Trade Ark Properties 2,697,165 2,844,474
Loan origination costs
net of amortization of $1,723,597 and $1,173,902 72,745 554,656
Notes Receivable- non current 108,000 144,000
--------------- ---------------
Total Other Assets 8,420,036 9,095,507
Total Assets $ 8,564,098 $ 10,421,311
=============== ===============
Current Liabilities
Notes Payable 12,032,726 12,488,025
Accounts Payable & Accrued Expenses 2,025,609 1,225,552
--------------- ---------------
Total Current Liabilities 14,058,335 13,713,577
Non Current Liabilities
Notes Payable - -
Total Liabilities 14,058,335 13,713,577
Shareholders' Equity
Preferred stock-$.01 par value, none issued - -
Common Stock-$.01 par value, 40,000,000 shares authorized 77,700 76,300
7,770,050 shares outstanding
Additional Paid in Capital 7,469,513 7,470,913
Treasury Stock (4,795,852) (4,795,852)
Accumulated Deficit (8,245,598) (6,043,627)
--------------- ---------------
Total Shareholders' Equity (5,494,237) (3,292,266)
Total Liabilities and Shareholders' Equity $ 8,564,098 $ 10,421,311
=============== ===============
</TABLE>
3
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Capitol Communities Corporation
Statements of Cash Flows
For the Nine Months Ended June 30, 2000 and 1999
UNAUDITED
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (2,201,971) $ (2,778,755)
Amortization 685,622 1,018,090
Depreciation 5,492 5,790
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables (9,366) (203,578)
(Increase) Decrease in Other Assets 58,626
(Increase) Decrease in Real Estate Holdings 10,251 86,736
(Increase) Decrease in Investments 147,309
(Increase) Decrease in PrePaid Assets 966 (349)
Increase (Decrease) in Accrued Expenses 800,057 (128,495)
Other
------------ -------------
Net Cash Used for Operations (561,640) (1,941,935)
Cash Flows from Financing Activities:
Acquisition of Notes Receivable (240,000)
Collections of Notes Receivable 371,000 36,000
Acquisition of Furniture and Fixtures
Loan Origination Fees (203,711) (1,176,580)
------------ -------------
Net Cash Provided (Used) in Financing Activities 167,289 (1,380,580)
Cash Flows from Investing Activities:
Increase in Notes Payable 232,054 7,136,966
Payment of Notes Payable (687,353) (7,552,409)
Cash from Trade Ark Investment 3,673,792
Reacquisition of Common Stock (21,679)
Issuance of Common Stock 240,437
------------ -------------
Net Cash Provided (Used) in Investing Activities (455,299) 3,477,107
Net Increase (Decrease) in Cash (849,650) 154,592
Beginning Cash 864,381 1,006,076
------------ -------------
Ending Cash $ 14,731 $ 1,160,668
============ =============
</TABLE>
4
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Capitol Communities Corporation
Consolidated Statements of Operations
For the Nine months Ended June 30, 2000 and 1999
UNAUDITED
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Revenues:
Sales $36,000 $840,226
Hotel Revenue - -
Miscellaneous Income 3,706 -
Cost of Sales 7,758 152,360
---------------- ----------------
Gross Profit 31,948 687,866
Operating Expenses:
General & Administrative
Expenses 1,273,641 1,992,000
---------------- ----------------
Net Income (Loss) Before
Interest Income/Expense (1,241,693) (1,304,134)
Operations of Unconsolidated Investments (147,309)
Interest Income 19,250 26,893
Interest Expense (832,219) (1,088,489)
---------------- ----------------
Net Income (Loss) from continuing operations ($2,201,971) ($2,365,730)
Net Income (Loss) from discontinued operations ($413,025)
Net Income (Loss) ($2,201,971) ($2,778,755)
================ ================
Net Income (Loss) per share (0.531) (0.412)
================ ================
Weighted average shares outstanding: 4,149,631 6,738,929
================ ================
</TABLE>
-UNAUDITED-
-PREPARED INTERNALLY-
5
<PAGE>
Capitol Communities Corporation
Consolidated Statements of Operations
For the Three months Ended June 30, 2000 and 1999
UNAUDITED
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Revenues:
Sales $36,000 $535,226
Hotel Revenue - -
Miscellaneous Income 3,181 -
Cost of Sales 7,758 141,938
---------------- ----------------
Gross Profit 31,423 393,288
Operating Expenses:
General & Administrative
Expenses 283,763 718,100
---------------- ----------------
Net Income (Loss) Before
Interest Income (252,340) (324,812)
Operations of Unconsolidated Investments (39,614)
Interest Income 7,318 6,641
Interest Expense (231,116) (385,616)
---------------- ----------------
Net Income (Loss) from continuing operations ($515,752) ($703,787)
Net Income (Loss) from discontinued operations ($193,124)
Net Income (Loss) ($515,752) ($896,911)
================ ================
Net Income (Loss) per share (0.122) (0.140)
================ ================
Weighted average shares outstanding: 4,230,361 6,406,781
================ ================
</TABLE>
-UNAUDITED-
-PREPARED INTERNALLY-
6
<PAGE>
Capitol Communities Corporation
Schedule of Owners Equity
For the Nine Months Ended June 30, 2000
Unaudited
<TABLE>
<CAPTION>
Common Additional Treasury Retained Total
Shares Stock Paid in Capital Stock Earnings Equity
------------------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at 9/30/99 7,630,050 $ 76,300 $ 7,470,913 $ (4,795,851) $ (6,043,627) $ (3,292,265)
Additional Stock
Issued 140,000 1,400 (1,400)
Director's Fees forgiven
Stock Cancelled
Net Income (Loss) for
Nine Months Ended 6/30/00 (2,201,971)
Balance at 6/30/00 7,770,050 $ 77,700 $ 7,469,513 $ (4,795,851) $ (8,245,598) $ (5,494,236)
</TABLE>
7
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CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 2000
-------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Background
----------
The consolidated balance sheet at June 30, 2000 and the related statements
of operations and cash flows for the six-month period ended June 30, 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.
8
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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 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 nine months ended June 2000 was 4,149,631 and for the nine months
ended June 30, 1999 was 6,738,929. The number of shares used for the three
months ended June 30, 2000 was 4,230,361 and for the three months ended
June 30, 1999 was 6,406,781.
NOTE 2 - GOING CONCERN CONSIDERATIONS
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 $5.49 million. As of June 30, the Company is in default on
a $3.4 million mortgage as well as $4,332,693 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.
On July 21, 2000, the Company's wholly owned subsidiary, Capitol
Development of Arkansas. Inc., filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy
Court for the Eastern District of Arkansas, Little Rock Division. Refer to
NOTE 3 -SUBSEQUENT EVENTS
9
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As of August 4, the Company is delinquent on an additional $758,920 of
short term unsecured debt and an additional mortgage totaling $400,000
bringing the total of defaulted and delinquent debt to $9.1 million, as of
August 4, 2000.
NOTE 3 - SUBSEQUENT EVENTS
On March 29, the Company entered into an agreement to sell approximately
32.16 acres of residential land in Maumelle, Arkansas for a price of
$25,000 per acre. The sale was originally expected to close by May 31,
2000, but was completed on July 20, with a sales price of $707,250 ($22,000
per acre). The terms of the sale were $250,000 cash at closing and a 90-day
wrap mortgage for the balance of $457,520. Payment of the wrap will result
in a $300,000 payment to First Arkansas Valley Bank, as a release price.
The bank extended its July 14, 2000 maturity date to October 14, 2000, for
the payment of approximately $67,000 interest and a principal reduction of
$50,000 from proceeds of the cash portion of sales proceeds.
On May 8, 2000, the Company's wholly owned subsidiary, Capitol Development
of Arkansas, Inc. entered into agreements with MACANUSA, Inc. to sell
approximately 1,000 acres of residential land in Maumelle, Arkansas, which
represents the majority of the Company's assets. On July 16, the Company
announced that this sale was delayed and the Company is currently seeking a
new buyer. The cash proceeds of this sale were to have paid the Settlement
Agreement with the holder of the $3.4 million mortgage. Subsequent to the
announcement, the mortgage holder was unwilling to delay or postpone a
foreclosure hearing scheduled for July 24, 2000 on approximately 700 acres
of residential land securing the mortgage.
As stated in NOTE 2 -GOING CONCERN CONSIDERATIONS, on July 21, 2000, the
Company's wholly owned subsidiary, Capitol Development of Arkansas. Inc.,
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of
Arkansas, Little Rock Division.
10
<PAGE>
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 which has resulted in the Company's wholly-owned subsidiary,
Capitol Development of Arkansas, Inc. (the "Operating Subsidiary") filing for
Chapter 11 with the United States Bankruptcy Court, Eastern District of Arkansas
on July 21, 2000, 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.
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"); provided it can overcome its
present illiquidity. (See "Liquidity and Capital Resources").
11
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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, which has resulted in the Company's
wholly-owned subsidiary, Capitol Development of Arkansas, Inc., (the "Operating
Subsidiary") filing a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Court for the Eastern District of Arkansas, Little Rock
Division, on July 21, 2000. The Operating Company holds the majority of the
Company's assets, including approximately 1,000 acres of the Maumelle Property.
(See discussion below, "--Liquidity and Capital Resources," and PART II, ITEM 1,
"LEGAL PROCEEDINGS."
Subsequent to the quarter ended June 30, 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. On July 16, the Company
announced that this sale was delayed, and the Company is presently seeking
another buyer. If the Company is able to successfully complete the MACANUSA
transactions, it will allow the Company to retire the majority of its debt.
However, there can be no assurance that the Company will be able to complete the
contemplated transaction with MACANUSA or in the alternative find another buyer.
(See "--Liquidity and Capital Resources--Subsequent Events," below).
Change in Financial Condition Since the End of Last Fiscal Year. At June
---------------------------------------------------------------
30, 2000, the Company had total assets of $8,564,098, a decrease of $1,857,213
or 17.82% 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 $481,911 since September 30, 1999. The Company had cash of $14,731 at
June 30, 2000 compared to $864,381 at September 30, 1999, a decrease of
$849,650. The decline in cash occurred because cash on hand was used to pay
operating expenses and retire debt without the acquisition of new funds from
debt or from sales.
The current portion of Notes Receivable decreased from $383,000 on
September 30, 1999 by $335,000 to $48,000 as of June 30, 2000.
The carrying value of the Company's real estate holdings remained almost
unchanged during the nine months, increasing from $5,552,377 to $5,542,126. The
Company's investment in Trade Ark, decreased from $2,844,474 to $2,697,165
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 June 30, 2000 were $14,058,335, an
increase of $344.758 from the September 30, 1999 total of $13,713,577. The
current liability for notes payable decreased by $455,299 during the nine
months, from $12,488,025 to $12,032,726. The Company decreased its unsecured
short term notes payable from $6,835,544 at September 30, 1999 by $347,099 to
12
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$6,488,445 at June 30, 2000.
Accounts payable and accrued expenses increased by $800,057. At September
30, 1999, the liability for accounts payable and accrued expenses totaled
$1,225,552. At June 30, 2000, the balance was $2,025.609. Accrued Interest
Payable increased by $479,322 from $741,578 at September 30, 1999 to $1,220,900
at June 30, 2000. Accrued real estate taxes payable increased from the September
30, 1999 balance of $9,976 to a balance of $19,155, an increase of $9,179, at
June 30, 2000.
Shareholders' Equity decreased by $2,201,971. The decrease resulted from
the operating loss of $2,201,971 for the nine month period ending June 30, 2000.
Results of Operations
---------------------
Comparison of the Nine Months Ended June 30, 2000 to the Nine Months Ended
--------------------------------------------------------------------------
June 30, 1999. For the nine months ended June 2000, the Company experienced net
-------------
loss of $2,201,971 compared with a loss of $2,778,755 for the nine months ended
June 30, 1999. While sales from continuing operations decreased by $804,226 from
$840,226 to $36,000, general and administrative expenses decreased by $718,359,
from $1,992,000 to $1,273,641, and interest expense decreased by $256,270, from
$1,088,489 to $832,219 resulting in the decrease in net losses despite lower
sales.
Sales decreased by $804,226 to $36,000 for the nine months ended June 30,
2000 from $840,226 for the nine months ended June 30, 1999. During the nine
months ended June 30, 2000, there were sales of $36,000. During the nine months
ended June 30, 2000, the project in Maumelle sold two developed lots for
$36,000. During the nine months ended June 30, 1999, the Company sold a
right-ow-way of the Maumelle Property for sale proceeds of $5,000 and a 7-acre
tract of the Maumelle Property, originally zoned for commercial use, for sale
proceeds of $300,000.
General and administrative expenses decreased to $1,273,641 for the nine
months ended June 30, 2000 from $1,992,000 for the nine months ended June 30,
1999. Management expenses totaled $108,538 for the nine months ended June 30,
2000, a decrease of $12,929 from the $233,467 expense for the nine months ended
June 30, 1999. Consulting fees of $134,877 for the nine months ended June 30,
1999 decreased by $62,384 to $197,271 for the nine months ended June 30, 2000.
The major cause of the decrease in general and administrative expense was
amortization expense which decreased by $332,468 from $1,018,090 at June 30,
1999 to $685,622 for the nine months ended June 30, 2000. This resulted from the
costs associated with the short term unsecured loans (the "Bridge Loans") as the
Company discontinued borrowing new Bridge Loans or renewing existing Bridge
Loans.
Interest income decreased from $26,893 for the nine months ended June 30,
1999 to $19,250 for the nine-month period ended June 30, 2000.
Interest expense decreased by $256,270 from $1,088,489 for the nine months
ended June 30, 1999 to $832,219 for the nine months ended June 30, 2000. The
decrease resulted from the decrease in debt by the Company and by its Arkansas
subsidiary.
13
<PAGE>
The operating loss for unconsolidated subsidiaries accounted for under the
Equity method totaled $147,309 for the nine months ended June 30, 2000. There
was no similar activity during the nine months ended June 30, 1999. The Trade
Ark investment comprised all of the Company's investment in unconsolidated
subsidiaries.
The loss from discontinued operations of $413,025 for the nine months ended
June 30, 1999 decreased to $0 for the nine months ended June 30, 2000, since the
disposal of the discontinued operations was completed in June 1999.
Comparison of the Three Months Ended June 30, 2000 to the Three Months Ended
----------------------------------------------------------------------------
June 30, 1999. For the three months ended June 30, 2000 the Company experienced
--------------
net loss of $515,752 compared with a loss of $896,911 for the three months ended
June 30, 1999. While sales from continuing operations decreased by $499,226 from
$535,226 to $36,000, general and administrative expenses decreased by $434,337,
from $718,100 to $283,763, and interest expense decreased by $154,500, from
$385,616 to $231,116 offsetting much of the decrease in sales and resulting in
an increase in net loss from continuing operations of $188,035.
Sales decreased by $499,226 to $36,000 for the three months ended June 30,
2000 from $525,226 for the three months ended June 30, 1999. During the three
months ended June 30, 2000, two developed lots were sold for total sale proceeds
of $36,000 and net proceeds of $34,969. During the three months ended June 30,
1999, there was a sale by the Maumelle, Arkansas subsidiary of $535,226 from the
sale of a 29-acre tract zoned for residential use.
General and administrative expenses decreased to $283,763 for the three
months ended June 30, 2000 from $718,100 for the three months ended June 30,
1999. Management expenses totaled $36,179 for the three months ended June 30,
2000, a decrease of $48,472 from the $84,651 expense for the three months ended
June 30, 1999. Consulting fees of $40,000 for the three months ended June 30,
2000 decreased by $28,047 to $68,047 for the three months ended June 30, 1999.
Amortization expense which decreased by $287,611 to $104,542 for the three
months ended June 30, 2000 from $392,153 for the three months ended June 30,
1999. This resulted from the costs associated with the short term unsecured
Bridge Loans, as the Company discontinued borrowing new Bridge Loans or renewing
existing Bridge Loans.
Interest income increased from $6,641 for the three months ended June 30,
1999 to $7,318 for the three month period ended June 30, 2000.
Interest expense decreased by $154,500 from $385,616 for the three months
ended June 30, 1999 to $231,116 for the three months ended June 30, 2000. The
decrease resulted from the decrease in debt by the Company.
The operating loss for unconsolidated subsidiaries accounted for under the
Equity method totaled $39,614 for the three months ended June 30, 2000. There
was no similar activity during the three months ended June 30, 1999. The Trade
Ark investment comprised all of the Company's investment in unconsolidated
subsidiaries.
14
<PAGE>
The loss from discontinued operations of $193,124 for the three months
ended June 30, 1999 decreased to $0 for the three months ended June 30, 2000,
since the disposal of the discontinued operations was completed in June 1999.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents amount to $14,730 or 0.17% of total assets at
June 30, 2000, as compared with $864,381 at September 30, 1999. The Company's
liquidity position at June 30, 2000, is not adequate to meet the Company's
liquidity requirements. As of June 30, 2000, the Company has approximately
$7,927,882 in defaulted debt, and $4,104,844 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, 2000, the Company has borrowed $6,488,445 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 June 30, 2000, the Company has not issued any new
Bridge Loan Notes. Subsequent to the quarter ended June 30, 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;
provided it can complete the MACANUSA transaction which consists of selling
approximately 1,000 acres of the Maumelle Property or in the alternative find
another buyer for the property. There can be no assurances, however, that the
Company will be able to sell the 1,000 acres, which represents the majority of
the Company's assets, to obtain the funds necessary to pay the matured Bridge
Notes. (See "Liquidity and Capital Resources --Subsequent Events").
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 $4,332,693 of the Bridge Notes. Although the
Davister Note has matured, the lender has not demanded payment or instituted
collection proceedings.
As of June 30, 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
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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."
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, or in the alternative sell the property to another buyer, in order
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 June 30, 2000, the Company defaulted on an additional
$758,920 in Bridge Notes that matured, and on $399,524 from the Bank of Little
Rock line of credit, secured by 11 multi-family acres of the Maumelle Property
which was due July 10, 2000.
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.
On July 16, the Company announced that this sale was delayed. The buyer
could not meet a key term of the sale, a fully executed and ratified lease
agreement with a tenant for its commercial properties. MACANUSA had reached an
impasse in the negotiations with the tenant. In its notice to Capitol, MACANUSA
reiterated its desire to purchase the Arkansas property and was confident it
could reach agreement with another tenant for the projects.
Subsequent to the announcement that the MACANUSA sale was delayed, the
Resure Liquidator stated he was unwilling to delay or postone the July 24, 2000
foreclosure hearing against the Operating Company on the Resure Note, secured by
701 acres of the Maumelle Property. On July 21, 2000, the Operating Company
filed for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court, Eastern District of Arkansas, case number
0043142M. The Operating Subsidiary holds the majority of the Company's assets,
including approximately 1,000 acres of the Maumelle Property. See ITEM 1, "LEGAL
PROCEEDINGS."
The Company is presently negotiating with other parties to sell all or
portions of the
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Maumelle Property. There can be no assurance, however, that the Company will be
able to successfully complete the MACANUSA transactions or sell all or portions
of the Maumelle Property to another purchaser or purchasers.
On July 20, 2000, the Company completed a sale for 32.16 acres of the
residential Maumelle Property for a sale price of $707,520 The terms of the sale
were $250,000 in cash as closing and a 90-day wrap mortgage for the $457,520
balance. Approximately $1170,000 of the cash proceeds were applied to the senior
mortgage secured by the sold property and held by First Arkansas Valley Bank.
The $117,000 payment represented interest of $67,000 and a principal reduction
of the loan of $50,000. The Company will make an additional $300,000 payment to
First Arkansas Valley Bank from the proceeds of the wrap mortgage, at which time
the Company's remaining obligation to the bank will be $995,000, secured by
approximately 288 acres of the Maumelle Property.
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 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.
A foreclosure hearing was scheduled for July 24, 2000, which the Liquidator
stated that he was unwilling to postone or delay. Accordingly, on July 21, 2000,
the Operating Subsidiary, a wholly-owned subsidiary of the Company, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code with the United States Bankruptcy Court, Eastern District of Arkansas, case
number 0043142M. The Operating Company holds majority of the Company's assets,
and the Resure Liquidator is one its primary creditors.
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The Operating Subsidiary remains debtor in possession of its assets and
business operations, with Michael G. Todd, president and sole director of the
Operating Subsidiary, named as the authorized agent to represent it.
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.
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: August 10, 2000 By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief Executive Officer
Date: August 10, 2000 By: /s/ David Paes, Treasurer and Vice President
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