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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES AND EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 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
(Name of Small Business Issuer as specified in its charter)
Nevada 88-0361144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25550 Hawthorne Boulevard
Suite 207
Torrance, CA 90505
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 375-2266
Securities to be registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock ($.01 Par Value)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] YES [_] NO
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The following officers, directors, and beneficial owners of 10% or more of
the Company's Common Stock were delinquent in filing an Annual Statement of
Changes in Beneficial Ownership on Form 5: Michael G. Todd, and David R. Paes.
State the issuer's revenues for its most recent fiscal year. $852,569.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked price of such, as of a specified date within the past 60 days.
$114,001 based on the average of the bid and asked obtained from the National
Quotation Bureau, Inc. ("NQB") on December 15, 2000.
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 4,230,361 common stock shares,
as of December 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format YES [_] NO [X}
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TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS .............................. 4
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PART I
ITEM 1. DESCRIPTION OF BUSINESS...................... 4
ITEM 2. DESCRIPTION OF PROPERTY...................... 13
ITEM 3. LEGAL PROCEEDINGS............................ 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS............................. 25
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................... 25
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION............................ 26
ITEM 7. FINANCIAL STATEMENTS......................... 36
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 36
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a)OF THE EXCHANGE ACT............. 36
ITEM 10. EXECUTIVE COMPENSATION....................... 38
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................ 40
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................. 40
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............. 41
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FORWARD-LOOKING STATEMENTS
In addition to historical information, this Report contains forward-looking
statements. Such forward-looking statements are generally accompanied by words
such as "intends," "projects," "strategies," "believes," "anticipates," "plans,"
and similar terms that convey the uncertainty of future events or outcomes. The
forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in ITEM 6 of this
Report, the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION --Factors That May Affect Future Results and Market Price of Stock."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof and
are in all cases subject to the Company's ability to, (1)reorganize under
Chapter 11, its wholly-owned subsidiary which controls substantially all of the
Company's assets, (2) cure its current severe liquidity problems and (3) to
raise sufficient capital to overcome uncertainties regarding the availability of
sufficient liquidity to continue operations. If the Company cannot reorganize
its current debt, the Company's status as a viable going concern will remain in
doubt. There can be no assurance that the Reorganization Plan filed with the
United States Bankruptcy Court will be approved or that Company will be able to
raise sufficient capital to cure its liquidity problems and pursue the business
objectives discussed herein. Capitol Communities Corporation undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission, including without
limitation those identified in the "Risk Factors" section of the Company's
Registration Statement filed with the Securities and Exchange Commission (the
"SEC")in September 1996 on Form 10-SB.
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT
Capitol Communities Corporation, a Nevada corporation (the "Company"), was
formed on August 21, 1995. It is the successor-by-merger to AWEC Resources,
Inc., a New York corporation (the "Predecessor Corporation"). Unless the context
otherwise requires, all references to the "Company" in this Report include the
Predecessor Corporation, and all references to the Company's business and
properties include the business and properties of Capitol Communities
Corporation and its wholly-owned subsidiaries discussed in more detail below.
The Predecessor Corporation was incorporated in the State of New York as
Century Cinema Corporation in November 1968.
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On December 20, 1993, the Predecessor Corporation changed its name to AWEC
Resources, Inc. On February 11, 1994, the Predecessor Corporation formed a
wholly-owned subsidiary, AWEC Development Corporation, an Arkansas corporation,
which later changed its name on January 29, 1996, to Capitol Development of
Arkansas Inc. (the "Operating Subsidiary").
In May 1994, the Predecessor Corporation formed a wholly-owned subsidiary,
AWEC Homes, Inc., an Arkansas corporation (the "Home Construction Subsidiary"),
for the purpose of building single family homes. The Home Construction
Subsidiary, which later changed its name to Capitol Homes, Inc. on January 29,
1996, has had no construction operations.
In order to effectuate a change in domicile and name change approved by a
majority of the Predecessor Corporation shareholders, the Predecessor
Corporation merged, effective January 30, 1996, into Capitol Communities
Corporation, a Nevada corporation formed in August 1995 solely for the purpose
of the merger. Under the terms of the merger, each share of Predecessor
Corporation common stock was converted to a single share of Capitol Communities
Corporation common stock (the "Common Stock"), and Capitol Communities
Corporation succeeded to all of the assets, rights, obligations and liabilities
of the Predecessor Corporation.
On July 21, 2000, the Operating Subsidiary, a wholly-owned subsidiary of
the Company that holds substantially all of the Company's assets, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court, Eastern District of Arkansas
("Bankruptcy Court"). Since then, the Company has continued to operate its
business as a debtor-in-possession. As such, the Operating Subsidiary is
authorized to operate its business in the ordinary course, but may not engage in
transactions outside the ordinary course of business without Bankruptcy Court
approval.
Subsequent to the Company's fiscal year-end, on November 16, 2000, the
Operating Subsidiary filed a Disclosure Statement and a Plan of Reorganization
(the "Plan") with the Bankruptcy Court to satisfy its existing debts. The Plan
has not yet been presented to creditors for acceptance or rejection. As of the
date of this Report, the Bankruptcy Court has not scheduled a hearing to
consider confirmation o f the Plan. The Bankruptcy Court has approved the
Operating Subsidiary's Disclosure Statement, but a formal order has not yet been
filed by the Court.
As a result of the Operating Subsidiary's bankruptcy, all creditors were
stayed from collection of then existing debts, liabilities and obligations of
the Operating Subsidiary (collectively, "Pre-petition Indebtedness").
Generally, under the Bankruptcy Code, the Operating Subsidiary does not
make payments on Pre-petition Indebtedness until the Plan is approved by the
Bankruptcy Court. Liabilities and obligations first incurred after the
commencement of the bankruptcy case in connection with the operation of the
Operating Subsidiary's business generally enjoy priority in right to payment
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over Pre-petition Indebtedness and must be paid by the Operating Subsidiary in
the ordinary course of business.
On December 7, 2000, Nathaniel S. Shapo, the Director of Insurance for the
State of Illinois, in his capacity as Liquidator ("Liquidator") of Resure, Inc.
("Resure"), filed a Motion to Dismiss (the Operating Subsidiary's petition for
bankruptcy), or in the alternative, Motion for the Appointment of a Trustee.
If the Plan is not confirmed, the Operating Subsidiary may be forced into
Chapter 7, at which point the Operating Subsidiary would be forced to liquidate
its assets to meet the obligations of the secured creditors and if any funds are
available thereafter to meet the obligations of the unsecured creditors. See
ITEM 3, "LEGAL PROCEEDINGS," and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION."
BUSINESS OF THE COMPANY
The Company is primarily in the business of developing and selling property
from its inventory of 1,433 acres of real property located in Maumelle, Arkansas
(the "Maumelle Property") in order to utilize core assets to restructure the
Company's short-term debt into equity and/or long-term debt or reduce such debt
and improve its severe illiquidity problems. See above, ITEM 1, "DESCRIPTION
OF BUSINESS," and ITEM 2, "DESCRIPTION OF PROPERTY."
GENERAL. During fiscal year ended September 30, 2000, the Company focused
on trying to sell its property in the City of Maumelle, Arkansas, a 5,000 acre
planned community located on the Arkansas River, across from the western Little
Rock area and fifteen miles from downtown Little Rock, Arkansas.
The Company's current liquidity problems prevents the Company from
conducting any meaningful business activities other than selling assets from the
Maumelle Property. Although management anticipates utilizing all or a portion of
the Maumelle Property to satisfy the financial requirements of the Plan and/or
raise equity, there can be no assurance that the Bankruptcy Court will approve
the Operating Subsidiary's Reorganization Plan or that the Company will be able
to raise sufficient capital to meet its financial requirements and cure the
Company's liquidity problems and pursue the business objectives, strategies or
transactions discussed herein. See ITEM 3, "LEGAL PROCEEDINGS," and ITEM 6,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - - Certain Capital
Raising Transactions."
The Company's real estate as of September 30, 2000, consisted of the
remaining unsold portion of the Maumelle Property consisting of approximately
1,433 acres and the Company's 35.16% interest in TradeArk Properties, LLC, an
Arkansas limited liability company ("TradeArk Properties"). See ITEM 2,
"DESCRIPTION OF PROPERTY," ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION - - Certain Capital Raising Transactions," and ITEM 7, "FINANCIAL
STATEMENTS."
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The Maumelle Property is managed by Maumelle Enterprises, Inc. ("Maumelle
Enterprises"), a real estate management firm that is affiliated with certain
officers of the Company. The Company expects that Maumelle Enterprises will
continue in the foreseeable future to manage the Maumelle Property. In other
geographic areas, the Company expects to engage local unaffiliated brokers to
sell or manage any property it may acquire.
PRINCIPAL PRODUCTS AND MARKETS.
MAUMELLE PROPERTIES. The Company's primary business is the development and
sale of land from its inventory of residential and multi-family lots of the
Maumelle Property through the Operating Subsidiary. Management anticipates that
the undeveloped lots will be sold to developers, and apartment building
operators, as appropriate.
The Company will conduct any single-family development and construction
activities in Arkansas, through the Operating Subsidiary and/or the Home
Construction Subsidiary. The Company may develop and construct single-family
homes, and/or apartments on the Maumelle Property that it does not sell.
Management anticipates that if the Company does develop and sell single-family
homes or apartments it will be with joint venture partners. See ITEM 2,
"DESCRIPTION OF PROPERTY--PROGRAM OF DEVELOPMENT."
The Company's initial focus is selling land from its Maumelle Property
inventory to reduce the Company's current short-term debt, or if Company
management determines that a particular property is not appropriate for
development by the Company. Management anticipates that if it does commence
home-building operations with a joint venture partner, it will develop single-
family homes in the $125,000 to $200,000 price range on a portion of the
approximately 3,500 unimproved single-family home lots it owns in Maumelle. The
Company does not expect to operate, manage or lease any of the single-family
homes, and apartment properties it may develop.
During the fiscal year ended September 30, 2000, the Company sold 32 acres
of its real property for an aggregate amount of $707,520. See ITEM 6
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION---LIQUIDITY AND
CAPITAL RESOURCES." Management expects that any Maumelle Property sold probably
will be purchased by other real estate developers, who may compete with the
Company or its joint partners in any development activity undertaken by the
Company in Maumelle.
Based on current sales trends as evidenced by building permits issued,
recent improvement bond refinancing and renewed efforts of the Maumelle City
staff to attract industrial development, Management of the Company believes that
there is substantial unmet demand in the Maumelle area for single-family lots.
There can be no assurance, however, as to the existence of such demand or how
long such demand will continue or that the Company will be able to sell any or
all of its inventory of residential Maumelle Property. See "- - GROWTH
STRATEGIES," below.
MARKETING AND ADVERTISING.
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The Company intends to develop a marketing and advertising plan, with
emphasis on the print media, to promote the sale of its Maumelle Property
inventory and any single-family homes it constructs through TradeArk Properties
or other joint venture partners. The Company has listed four parcels comprising
188 acres of single-family sites of its Maumelle Property for sale with local
real estate brokers.
GROWTH STRATEGIES.
The Company's primary business objective is to increase long-term total
returns to shareholders through appreciation in value of the Common Stock. The
Company intends to achieve this objective by implementing the long-term growth
strategies summarized below. The Company will not be able to implement any of
these strategies if it cannot overcome its present illiquidity and raise
substantial additional capital to commence material development operations, of
which there can be no assurance. See ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION."
DEVELOPMENT OF MAUMELLE PROPERTY. The Company initially intends to focus
--------------------------------
on the sale of single-family lots in Maumelle, Arkansas. The Company believes
that the sale of all or portions of its Maumelle Property inventory will help
the Company to reorganize and restructure its current short-term debt and permit
the Company to commence in activities which would offer the Company significant
growth opportunities. These opportunities may include, but are not limited to,
participating in joint partnerships in the home building industry for the
construction and sale of single-family homes, primarily in Maumelle, Arkansas.
Development of Maumelle Property. The Company's growth strategy with
--------------------------------
respect to the Maumelle Property is to focus on sale of single-family and multi-
family lots. The Company may, through joint venture partners, develop and build
homes on the single-family lots it currently owns in Maumelle, Arkansas and
through its interest in TradeArk Properties.
Of the approximately 5,300 single-family vacant sites in the City of
Maumelle, approximately 1,500 sites are not owned by the Company or TradeArk
Properties. Given the Company's ownership of a majority of available home sites
in Maumelle, directly or through TradeArk Properties, and the fact that under
Maumelle's current Master Land Use Plan little or no new property can be added
to the City of Maumelle without public hearings regarding any proposed
annexation of land by the City and the subsequent approval by the City's Board
of Directors, the Company believes it can achieve a dominant position in the
Maumelle market for the development and sale of single-family home sites and in
the sale of single-family homes.
RESTRUCTURING DEBT. The Company believes that restructuring its current
------------------
short-term debt through the Plan filed with the Bankruptcy Court will be a key
factor in achieving long-term stability and growth. Currently, management is
trying to implement a strategy to utilize the Company's assets to restructure
its short-term debt into equity and/or long-term debt, and raise additional
capital by liquidating portions of its Maumelle Property inventory. Once a
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debt restructuring program is implemented, the Company intends to seek
geographic and product diversification throughout the United States and form
joint ventures with partners in the home construction industry. There can be no
assurances, however, that Bankruptcy Court will approve the Operating
Subsidiary's Plan or that the Company will be able to successfully restructure
its debt, which may severely limit application of the Company's growth strategy.
PRODUCT DIVERSIFICATION. Although the Company's primary focus will be on
-----------------------
the sale of portions of its Maumelle Property inventory, the Company intends to
diversify its portfolio and income sources by developing and building single-
family homes with joint venture partners, including TradeArk Properties.
COMPETITION.
The real estate development industry is highly competitive. In Arkansas
there are numerous large national and regional firms with significantly greater
experience and financial resources than the Company currently possesses. Such
firms will likely compete with the Company in the development and sale of land
for development. TradeArk Properties and any other joint ventures the Company
may form will also have significant competition in the home construction
industry from larger more experienced developers who will compete with the
Company in the acquisition of land, the hiring of sub-contractors, experienced
management personnel, construction workers and other employees, and the sale of
product. The Company also will compete for residential sales with the resale
market for existing homes, multi-family home sales, including townhouses and
condominiums, and with available rental properties.
The Company currently has no material presence or reputation in Arkansas or
any other area in the real estate development industry. Due to the Company's
substantial amount of short-term debt and lack of capital, it may have to sell
portions of its Maumelle Property at less than market value. As a result, there
may be reduced profit margins on the Company's operations which may make it more
difficult for the Company to compete with other land developers or to raise
additional capital and/or equity. Although the Company intends to improve its
ability to compete by selling portions of its Maumelle Property inventory, and
entering into joint venture or similar development agreements with established
real estate developers, there can be no assurance of the success of any such
agreements or that the Company can overcome its present illiquidity.
GOVERNMENTAL REGULATIONS.
The development industry is subject to extensive and complex regulations.
In the sale of its Maumelle Property, the Company, or any joint venture
partners, must comply with various federal, state and local laws, ordinances,
rules and regulations regarding zoning, architectural design, construction,
population, density, availability and installation of utility services, such as
water, electricity, gas, and waste disposal, the
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preservation of the natural terrain, and other related matters, which requires
resources and expertise which, for the most part, the Company currently lacks.
The Company intends to obtain such resources and expertise by raising additional
capital, hiring appropriate sub-contractors, and entering into consulting
agreements and/or joint venture agreements with experienced real estate
developers and other appropriate parties.
The Company's Maumelle Property is subject to the City of Maumelle's Master
Land Use Plan. Under this Plan, approximately 1,433 acres of the approximately
987 acres of the Maumelle Property that was developable land as of September 30,
2000, was already zoned for single-family homes. The current zoning allows the
Company to develop and offer for sale approximately 3,500 single-family home
sites located on this acreage. Although much of the Company's property is
currently zoned for single-family homes, none of the developable land acreage is
subdivided and the Company will be required to incur significant additional cost
to subdivide the property into individual lots. The Company believes it can
satisfy all anticipated governmental requirements involved in the subdivision
process, if it obtains adequate additional funding and expertise.
If the Company forms a joint ventures to construct homes, it must seek
building permits from the City of Maumelle Building Inspector for each home it
builds in Maumelle. The Company must apply for building permits for each multi-
family property it develops in Maumelle from the Maumelle City Planning
Commission and the City's Board of Directors. Although the Company believes it
can satisfy all necessary requirements to obtain building permits, at the
present time, the Company is not seeking building permits and does not intend to
do so until it can obtain an appropriate joint venture partner, restructure its
debt and raise additional capital.
The Company may be required to mitigate any environmental impact on its 446
acres of wetlands in Maumelle that may be caused by the Company's proposed
development activities in Maumelle. Although the Company is not currently aware
of any such mitigation requirements, the Company will be required to obtain
approval from the Army Corp of Engineers of any required mitigation efforts.
The Company may incur additional costs and delays in seeking such approvals and
performing such mitigation. See "--ENVIRONMENTAL LAWS," below.
Delays in obtaining governmental permits and approvals may increase
development costs to the Company. Zoning requirements and restrictions could
become more restrictive in the future, resulting in additional time and money
being spent to obtain approvals for development of the Company's properties.
The Company also may be subject to periodic delays or may be precluded from
developing projects due to building moratoriums or slow-growth or no-growth
initiatives that could be implemented in the future in the areas which it does
business. In addition, governmental authorities could change the zoning of all
or some of the Company's properties, which could result in a decrease in
property values.
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The Company believes that, with adequate funding, it can comply with all
applicable laws regarding its real estate development operations. There can be
no assurance, however, that the Company will be able to comply with all such
laws. The Company expects that the costs of complying with governmental
regulations in regard to the sale of its Maumelle Property. However, any
failure to comply with applicable laws or regulations or the enactment of new
laws or regulations could have a material adverse effect on the Company.
ENVIRONMENTAL LAWS.
The Company is subject to various federal, state and local laws, ordinances
and regulations regarding environmental matters. Under these laws, a current or
previous owner or operator of real property may be required to investigate and
clean up hazardous or toxic substances or petroleum product releases at such
property, and may be held liable to a governmental entity or to third parties
for property damage and the costs of investigation, removal and decontamination
incurred by such parties in connection with contamination. The penalty is
imposed whether or not the owner or operator was aware of, or responsible for
the hazardous or toxic substances, and the liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation or responsibility.
The costs of investigation, removal or decontamination of such substances
could be substantial. If such substances are found on real property or there is
a failure to properly remove or decontaminate the area, the property could be
difficult to sell, rent, develop or use to secure debt financing. Persons who
arrange for the disposal or treatment of hazardous or toxic substances at a
disposal or treatment facility also may be liable for the costs of removal or
remediation of a release of hazardous or toxic substances at such disposal or
treatment facility, whether or not such facility is owned or operated by such
person. In addition, some environmental laws create a lien on the contaminated
site in favor of the government for damages and costs it incurs in connection
with the contamination. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting form
environmental contamination emanating from a site. In connection with its
ownership and operation of real property, the Company potentially may be liable
for the foregoing costs.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to, radon in indoor air, the EPA and the Surgeon General recommend testing
residences for the presence of radon in indoor air, and the EPA further
recommends that concentrations of radon in indoor air be limited to less than 4
picocuries per liter of air (Pci/L) (the "Recommended Action Level"). The
presence of radon in concentrations equal to or greater than the Recommended
Action Level in one or more of the Company's properties may adversely affect the
Company's ability to develop its residential and multi-family properties, as
well as the market value of such property.
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Electric transmission lines are located in the vicinity of the Company's
properties. Electric transmission lines are one of many sources of electro-
magnetic fields ("EMFs") to which people may be exposed. Research into potential
health impacts associated with exposure to EMFs has produced inconclusive
results. Notwithstanding the lack of conclusive scientific evidence, some states
now regulate the strength of electric and magnetic fields emanating from
electric transmission lines, while others have required transmission facilities
to measure for levels of EMFs. In addition, the Company understands that
lawsuits have, on occasion, been filed (primarily against electric utilities)
alleging personal injuries resulting from exposure as well as fear of adverse
effects from transmission lines has been a factor considered in determining
property values in obtaining financing and in condemnation proceedings in
eminent domain brought by power companies seeking to construct transmission
lines. Therefore, there is a potential for the value of a property to be
adversely affected as a result of its proximity to a transmission line and for
the Company to be exposed to damage claims by person exposed to EMFs.
The Company has had a Phase I investigation conducted on the Maumelle
Property, excluding the approximately 446 acres of wetlands. The investigation
found no evidence of soil or ground water contamination on the studied property
and recommended that a Phase II study was not warranted. This Phase I assessment
was carried out in accordance with accepted industry practices and consisted of
non-invasive investigations of environmental conditions at the properties,
including a preliminary investigation of the sites and identification of
publicly known conditions concerning properties in the vicinity of the sites,
physical site inspections, review of aerial photographs and relevant
governmental records where readily available, interviews of knowledgeable
parties, investigation for the presence of above ground and underground storage
tanks presently or formerly at the sites, a visual inspection of potential lead-
based paint and suspect friable ACMs where appropriate, a radon survey, and the
preparation and issuance of a written report. In 1986, an Environmental
Protection Agency ("EPA") representative stated in a letter to a previous owner
of the Maumelle Property, that although part of the Maumelle Property had been
used by the United States government during World War II as a munitions ordnance
facility until 1950, the entire site had been decontaminated by the U.S.
government prior to its sale in 1961. In the letter, the EPA characterized the
property as not having any further environmental concerns.
The Company is not aware of any environmental liability with respect to any
of its real property that the Company believes would have a material adverse
effect on the Company's business, assets, or results of operations.
Nevertheless, there can be no assurance, that the Company's real property does
not contain hazardous or toxic substances, particularly on the property which
has not been subjected to a Phase I investigation, or that the Company will not
incur costs associated with the decontamination of any such substances or
liability arising from any such contamination. No assurance can be given that
the environmental studies conducted on the property reveal all environmental
liabilities or that no prior owner created any material environmental condition
not known to the Company.
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The Company believes that compliance with applicable environmental laws and
regulations may have a material adverse effect on the Company, its financial
condition and its results of operations unless the Company can raise substantial
additional capital to fund its operations. The Company believes that its
properties are in compliance in all material respects with all federal, state
and local laws, ordinances and regulations regarding hazardous or toxic
substances. The Company has not been notified by any governmental authority or
any third party, and is not otherwise aware, of any material noncompliance,
liability or claim relating to hazardous or toxic substances or petroleum
products in connection with any of its present properties.
NUMBER OF EMPLOYEES. As of the Company's fiscal year-ended September 30,
2000, the Company and its subsidiaries had one full-time employees, and no part-
time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
GENERAL
The Company's principal asset is the Maumelle Property, located in
Maumelle, Arkansas, title to which is held by the Operating Subsidiary. At the
Company's fiscal year-end, the Maumelle Property consisted of approximately 976
acres of single-family sites (which included approximately 3,500 home sites),
approximately 11 acres of multi-family sites, and approximately 446 acres of
miscellaneous undevelopable property. The Maumelle Property is currently zoned
under the City of Maumelle Master Land Use Plan for various development uses,
including single-family residences and multi-family units. As of September 30,
2000, the Company's single-family home sites in the City of Maumelle represented
approximately 70% of all available vacant land in Maumelle zoned for single-
family homes, including the single-family lots owned by TradeArk Properties.
The Maumelle Property can be divided into three categories: (1) the Large
Residential Tract, (2) the Multi-Family Lots, and (3) the Miscellaneous Tract
and Property. Each category of Maumelle Property will be discussed separately
below after the following overview of the City of Maumelle.
The Company, through the Operating Subsidiary, owns a 35.16% membership
interest in TradeArk Properties. See discussion below, "-- MAUMELLE PROPERTY--
TradeArk Property."
Except as otherwise noted, the Company believes that its real property
assets are in good condition and are suitable and adequate for the uses
indicated. Although there are no insurable improvements on the Company's
properties, the Company maintains a general liability insurance coverage on its
real property assets.
MAUMELLE PROPERTY
The City of Maumelle. The City of Maumelle is a 5,000 acre planned
community located off Interstate 40 on the Arkansas River. Fifteen miles from
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downtown Little Rock, the capital of Arkansas, Maumelle is patterned after other
"new town" communities such as Reston, Virginia, Irvine Ranch in Orange County,
California and Columbia, Maryland.
Maumelle is a master planned city with about 12,000 residents. Under the
Master Plan, Maumelle cannot add new property to the city for residential
development without public hearings regarding any proposed annexation of land by
the City and the subsequent approval by the City Board of Directors. From
Maumelle's inception in 1966 to 1996, approximately $120 million has been spent
on infrastructure, including sewer and water capacity for a city of up to 25,000
residents and a system of designated common areas, including pathways, parks,
lakes, a golf course and other recreational areas. The City of Maumelle was
incorporated as a city in 1985. It is governed by a mayor and city council and
has police, fire, and emergency services.
The population of Maumelle has grown at a faster rate than that of
neighboring Little Rock, Arkansas. From 1990 through 1996, Maumelle had a 18%
increase in its population; whereas Little Rock did not show any increase. The
community of Maumelle appears to be attracting more highly educated residents
than does Little Rock. The U.S. Department of Commerce and the Little Rock
Metropolitan Planning Commission ("Metroplan"), a government planning agency,
stated that in 1990, 92.6% of Maumelle residents had completed high school, with
38.8% having four or more years of college. During the same period, only 82% of
Little Rock residents had completed high school and 30.3% had four years or more
of college. Maumelle also exceeds the national average for high school and
college attendance. As of 1990, only 75.2% of U.S. citizens had completed high
school and 20.3% had four or more years of college.
Since 1979, Maumelle has attracted some major companies to its industrial
areas, including Molex Inc. (1,154 employees), Target Distribution Center (800
employees), Kimberly Clark (a manufacturing facility with 287 employees), Ace
Hardware Distribution Center (291 employees), and Hanover Direct, Inc. (540
employees). The job growth rate in the City of Maumelle has increased by 7.5%
from 1990 to 1995; during the same period Little Rock had a job growth rate
increase of 14%.
As of June 30, 1997, the average new home permit value in Maumelle was
$138,480 and the average new home price in Maumelle by 1998 was $156,825, and in
Little Rock was $188,812, according to a Metroplan report. The number of
building permits issued by Maumelle has increased 383.9% between 1990 and 1997,
according to Metroplan. During the same period, Little Rock experienced a
decline in building permit issuances of 1.39%. A total of 124 building permits
were issued in Maumelle in 1995, 220 in 1996, 240 in 1997, 263 in 1998, 276 in
1999, and 243 in the first nine months of 2000.
Large Residential Tract. As of the end of the 2000 fiscal year, the Large
Residential Tract was comprised of approximately 976 acres of undeveloped
residential. Under current zoning, the Company believes this land can be
subdivided into approximately 3,500 single-family lots. The Large Residential
Tract currently is zoned for residential development.
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The Operating Subsidiary has fee title to the Large Residential Tract, all
of which is subject to a first-priority mortgage securing a $3,500,000 loan from
Resure Inc. ("Resure Loan"). In February 1997, an Illinois court found that
Resure was insolvent, ordered that Resure be liquidated, and appointed the
Illinois Director of Insurance as Liquidator to oversee the liquidation.
Approximately 701 acres of the Large Residential Tract ("Residential Parcel 1")
is retained by the Liquidator as collateral on the Resure Note, which was
modified pursuant to the terms of the Resure Settlement Agreement, effective
September 30, 1997. The Company has been in default under the terms of the
Resure Note since July 1, 1998 and is subject to a foreclosure action initiated
by the Resure Liquidator on April 19, 1999. Such foreclosure action has been
stayed with the filing by the Operating Subsidiary of a voluntary petition for
bankruptcy under Chapter 11 in the Bankruptcy Court on July 21, 2000. See,
discussion below, and ITEM 3, "LEGAL PROCEEDINGS."
Under the original terms of the Resure Note, quarterly payments of
principal and interest in the amount of $101,591.16 commenced January 1, 1997,
until its maturity date on July 1, 2000. Prior to that date, interest only
payments were required on a quarterly basis. Under the Resure Settlement
Agreement, the Company was to pay quarterly installments of principal and
interest in the amount of $101,591.16 until the modified maturity date on
September 1, 1999. The balance due at maturity, assuming payment of all
scheduled principal and interest payments and no pre-payments, was $3,305,842.
The Resure Note bears interest at a rate of 10% per annum. Under the terms of
the Resure Note may be prepaid at anytime by the Company without incurring
premiums or penalties. As additional consideration for the Liquidator to enter
into the Resure Settlement Agreement, the Company agreed to pay a developer's
fee of $2,000 (the "Developer's Fee") for each lot sold in approximately 701
acres of the Residential Parcel 1, and approximately 344 acres of the Large
Residential Tract ("Residential Parcel 2"). In the event that any portion of
Residential Parcel 1 is sold prior to being subdivided into single-family lots,
the Company will pay $2,853 per acre, and $5,844.20 per acre if Residential
Parcel 2 is sold prior to being subdivided; however, such Developer's Fees shall
not exceed $2,000,000. The Developer's Fee is secured by a written amendment to
the loan mortgage securing the Resure Note, and recorded against the Residential
Parcel 1.
A settlement agreement was entered between the Operating Subsidiary and
Resure and on March 24, 2000, the Chancery Court approved the settlement (the
2000 Settlement Agreement"). Under the 2000 Settlement Agreement, the Operating
Subsidiary would pay a cash payment of $3,987,353,95 for a full release of all
claims by Resure against the Operating Subsidiary. As of the date of this
Report, this settlement payment has not been made.
Under the proposed Plan, the Operating Subsidiary will pay 100% of the
outstanding principal and interest owed on the Resure Note. The Plan proposes
to pay interest in monthly payments at an interest rate of 9% per annum, accrued
from the first day after ten days after the entry of the order by the Bankruptcy
Court confirming the Plan ("Confirmation Order") that is not a Saturday, Sunday,
or "legal holiday," ("Effective Date") for a period of five
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years. Minimum payments of principal in the amount of $250,000 will be due
during each of the one-year periods. All pre-petition mortgages and security
agreements shall remain in full force and effect to secure the Resure note.
Management believes the 2000 Settlement Agreement with Resure is in effect,
and the balance owing on the Resure Note was $3,987,353 in principal and
interest, as of the Company's fiscal year end and $3,987,353, as of the date of
this Report. If the 2000 Settlement is found not to be in effect, the balance
owing on the Resure Note was $4,244,239 as of the Company's fiscal year-end and
$4,319,584 as of December 20, 2000. See ITEM 3, LEGAL PROCEEDINGS."
The Company intends to pay off the liability from proceeds from the sale of
some of its Maumelle Property or by obtaining long-term debt or equity. There
can be no assurance, however, that the Operating Subsidiary's creditors and the
Bankruptcy Court will approve the Company's Plan or that the Company will be
able to raise the funds required. See ITEM 3, "LEGAL PROCEEDINGS," and ITEM 6,
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION-LIQUIDITY AND CAPITAL
RESOURCES."
The remaining 288 acres of the Large Residential Property has no mortgages;
however, the property is used to secure a $1,750,000 line of credit from First
Arkansas Valley Bank ("First Arkansas Line of Credit"). As of September 30,
2000, this line of credit was reduced to $1,295,000 and will continue to be
reduced until the line of credit is paid. The Company cannot withdraw new funds
from the First Arkansas Line of Credit. Interest was payable at a fixed rate of
9.5% per annum and the loan matured on May 27, 1998, but was extended on the
same terms to October 14, 2000. The line of credit has been modified to mature
on October 14, 2001, at which time all principal and interest is due and
payable. The modified line of credit has an interest rate of 11% per annum.
As of September 30, 2000, an aggregate of $1,321,381 in principal and
interest was outstanding on the First Arkansas Line of Credit and $1,015,091 as
of the date of this Report.
Under the proposed Plan, the Operating Subsidiary will pay 100% of the
outstanding principal and interest owed on the First Arkansas Line of Credit and
the Note, securing the line of credit, shall remain in full force and effect.
However, the due date for payment of principal and interest shall be modified to
provide that the Operating Subsidiary will make quarterly payments of interest
commencing 90 days after the Effective Date and thereafter on the same day of
each third month until the obligation is paid in full. The Note shall be
modified to be due five years after the Effective date and a minimum payment of
principal in the amount of $50,000 shall be due during each of the one-year
periods commencing with the Effective Date.
The Company currently has four parcels comprising 188 acres of the Large
Residential Tract listed for sale at a price ranging from $25,000 to $30,000 per
acre. The Company intends to sell these parcels to meet liquidity requirements.
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All property taxes are current and were paid on a timely basis.
Multi-Family Lots. As of the Company's fiscal year-ended September 30,
2000, there are approximately 11 acres of Multi-Family Lots zoned for multi-
family use. The Operating Subsidiary has fee title to these lots, subject to the
liens discussed below.
Approximately, 11 acres of the Multi-Family Lots are subject to a lien in
favor of the Bank of Little Rock as security for a $400,000 line of credit
("Little Rock Credit Line I") and a $200,000 line of credit ("Little Rock Credit
Line II"). As of the Company's fiscal year-end an aggregate of $409,337 in
principal and interest was due on the Little Rock Credit Line I, and $419,090 as
of December 20, 2000. As of the Company's fiscal year-end an aggregate of
$203,913 in principal and interest was due on the Little Rock Credit Line II,
and $208,845 as of December 20, 2000. See ITEM 6, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND CAPITAL RESOURCES--Indebtedness and
Other Liquidity Requirements.
The $400,000 Little Rock Credit Line I bears interest of a fixed rate of
11% per annum. The $400,000 line of credit requires monthly interest payments
and matures on January 10, 2001, when a balloon payment consisting of the entire
principal balance and accrued interest under the line is due and payable. The
$400,000 line of credit is secured by approximately 11 acres of the Multi-Family
Maumelle Property.
The $200,000 Little Rock Credit Line II bears interest at a fixed rate of
11% per annum. The $200,000 line of credit requires monthly interest payments,
until it matures on January 10, 2001, when a balloon payment consisting of the
entire principal balance and accrued interest is due and payable. The $200,000
line of credit is secured by the same 11 acres as the Little Rock Credit Line I.
Under the proposed Plan, the Operating Subsidiary will pay 100% of the
outstanding principal and interest owed on the Little Rock Credit Lines I and II
and the Notes shall remain in full force and effect. However, the Bank of
Little Rock mortgage securing the lines of credit shall be modified to provide
that the due date for payment of principal and interest will be due in quarterly
payments of interest commencing 90 days after the Effective Date and thereafter
on the same day of each month thereafter until the principal obligation is paid
in full. See ITEM 3, "LEGAL PROCEEDINGS, and ITEM 6 MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION - - LIQUIDITY AND CAPITAL RESOURCES-Indebtedness
and Other Liquidity Requirements."
All property taxes and ad valorem taxes on the 11 acres of Multi-Family
Lots owned by the Company are current and were paid on a timely basis.
The Company may sell certain portions of the 11 acres of Multi-Family Lots
to meet liquidity requirements or if the Company's management determines that a
particular property is not appropriate for development by the Company.
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Miscellaneous Tract and Property. The Miscellaneous Tract and Property
consists of approximately 446 acres of wetlands. The Operating Subsidiary has
fee title to the Miscellaneous Tract and Property, which are held free of any
encumbrances or liens. The wetlands property is located in the Arkansas River
and, therefore, is unsuitable for development. Accordingly, the Company has no
development plans for the property.
TradeArk Properties. On June 14, 1999, the Operating Subsidiary
contributed )258 acres of its Maumelle Property, including 192 acres of single-
family lots ("Pine Ridge Tract"); 19 acres of multi-family lots ("Rector
Mountain Tract"); 40 acres of commercial lots ("Tract D"); and 6 acres of
commercial lots(Tract E"), (collectively known as the "Contributed Maumelle
Property") for a 35.16% membership interest in TradeArk Properties. TradeArk
Properties assumed $3,800,000 in debt collateralized by the Contributed Maumelle
Property. The interest in TradeArk Properties is held by the Operating
Subsidiary.
Simultaneously on the Closing Date and pursuant to the terms of the
Contribution Agreement, TradeArk Properties secured a $4,000,000 loan from New
Era Life Insurance Company ("New Era"). The loan has a fixed interest rate of
13% per annum, and matures in 30 months from the date of the loan when all
accrued interest and principal is due. $3,156,581.92 of the New Era loan
proceeds were used to retire loans held by the Company. The New Era loan is
secured by 258 acres of the Contributed Property and by viaticals settlement
contracts with a discounted net present value of $8,300,000 contributed by Trade
Partners for a 64.84% interest in TradeArk Properties.
TradeArk Properties anticipates commencing the development of finished
residential lots on the Pine Ridge Lots in the third quarter of fiscal year
2001, assuming it can raise sufficient capital. TradeArk Properties proposes to
develop 40 acres of Commercial Lots for sale commencing in the third quarter of
fiscal year 2001 and hold 6 acres for resale. It proposes to hold the 19 acres
of Multi-Family Lots for resale. TradeArk Properties is managed by a manger
selected by majority of the membership interest in TradeArk Properties. (See
ITEM 6, MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --LIQUIDITY
AND CAPITAL RESOURCES," and "- - Certain Capital Raising Transactions."
PROGRAM OF DEVELOPMENT.
During the Company's fiscal year ended September 30, 2000, the Company
focused on its primary business of developing and selling property from its
Maumelle Property inventory. During the year, the Company sold 32 acres of
property and listed 188 acres for sale. See ITEM 2, "DESCRIPTION OF PROPERTY,"
and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - -
Certain Capital Raising Transactions."
The Company, however, will not be able to implement any of the following
plans for developing its properties if it cannot overcome its present
illiquidity, and raise substantial additional capital, of which there can be no
assurance. The Operating Subsidiary, which holds substantially all of the
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Company's assets, has filed a voluntary petition for relief under Chapter 11 and
a Reorganization Plan with the Bankruptcy Court. There can be no assurance that
the Operating Subsidiary's creditors and the Bankruptcy Court will approve the
Plan or that if the Plan is approved the Company will be able to successfully
raise the funds required to meet its obligations under the Plan. See ITEM 3,
"LEGAL PROCEEDINGS, and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
Development of Property in Maumelle. The Company intends to develop and
offer for sale portions of its residential lots inventory, as well as portions
of the Multi-Family Lots during fiscal year 2001.
In order to facilitate the development of single-family lots and multi-
family lots the Company Subsidiary intends to form improvement districts, which
will issue bonds and the proceeds from the sale of such bonds will be used to
construct roads, utilities and other infrastructure improvements to the land
necessary for the Company to sell finished lots, with or without homes
constructed on them, or larger tracts of the Maumelle Property to builders and
developers.
If the Company can find an appropriate joint partner, management
anticipates that the Company will begin the development and sale of residential
property on the Large Residential Tract located in Maumelle, and the development
and sale of the Pine Ridge Lots, through its membership interest in TradeArk
Properties.
If the Company develops and builds on all or a portion of the 3,500 single-
family lots in the Large Residential Tract, it anticipates building moderately
priced single-family homes in the range of $125,00 to $200,000, assuming it can
resolve the Resure lawsuit which is seeking to foreclose on approximately 701
acres of the Large Residential Tract and obtain a suitable joint venture
partner. The Company estimates that the cost for building and selling these
homes, inclusive of general and administrative expenses, sales and marketing
expenses, and closing costs, will be in the range of $100,000 to $160,000 per
home.
Because the Company lacks experience in the home construction industry, the
Company believes it may be difficult to obtain conventional credit sources
sufficient to finance the foregoing development activity or to find suitable
joint venture partners that will be able to obtain such financing to pursue the
Company's building program.
There are no current plans for the improvement or development of the
Miscellaneous Tracts and Properties since such properties are wetlands and as
such undevelopable.
Development of TradeArk Properties. TradeArk Properties intends to start
home site improvements on at least one Pine Ridge subdivision in the third
quarter of fiscal year 2001, assuming it is able to obtain necessary capital for
such development.
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The Pine Ridge Lots are fully entitled with a preliminary subdivision plat
recorded with the City of Maumelle. The Pine Ridge Lots are comprised of 487
lots in four subdivisions, averaging approximately 120 lots each. The
improvement district in which the Pine Ridge Lots are located is already
partially improved, with a roughly graded roadway.
Because the Pine Ridge Lots were partially improved prior to TradeArk
Properties' acquisition, management expects the cost to develop an improved lot
will be less in Pine Ridge than on the Company's other Maumelle Property.
TradeArk Properties management estimates that construction costs for single-
family homes built on the acquired lots and on the Pine Ridge Lots will average
approximately $50 to $53 per square foot. TradeArk Properties estimates that
the aggregate cost of building and selling 487 homes on the Pine Ridge Lots,
inclusive of general and administrative expenses, sales and marketing expenses,
will be in the range of $75 to $85 per square foot.
TradeArk proposes to develop 40 acres of Commercial Lots for sale
commencing in fiscal year 2001, and hold the remaining 6 acres for resale. It is
holding the 19 acres of Multi-Family Lots for resale. See discussion above, "-
Development of the Maumelle Property."
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
General. The following is a discussion of investment policies, financing
policies, conflict of interest policies, and policies with respect to certain
other activities of the Company. The policies with respect to these activities
have been determined by the Company's Board of Directors and may be amended or
revised from time to time at the discretion of the Board without a vote of the
shareholders of the Company, except that changes in certain policies with
respect to conflicts of interest must be approved by a majority of the
independent directors and otherwise be consistent with legal requirements.
Investment Policies.
Investments in Real Estate or Interests in Real Estate. The Company
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generally conducted all of its investment activities through the Operating
Subsidiary and its membership interest in TradeArk Properties. The Company
intends to conduct all of its investment activities for the foreseeable future
through the Operating Subsidiary, the Home Construction Subsidiary or through
membership interest in other entities or other joint venture partnerships.
The Company's investment objective is to increase long-term total returns
to shareholders through appreciation in the value of the Common Stock. The
Company's policy is to acquire or develop assets where the Company believes that
favorable investment opportunities exist based on market conditions at the time
of the investment.
The Company expects to pursue its investment objectives primarily through
the direct ownership of properties by the Operating Subsidiary and/or
subsidiaries, or through indirect property ownership opportunities, such as
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its interest in TradeArk Properties. The Company may pursue other indirect
property ownership opportunities, particularly if it is necessary or advisable
to do so in order to acquire the development resources, which the Company now
lacks. The Company intends to develop residential, and multi-family properties
primarily in the Maumelle area, but may pursue the acquisition or development of
residential and multi-family properties in other areas of the United States.
Future development or investment activities will not be limited by the
governing documents of the Company or its subsidiaries to any geographic area,
product type or specified percentage of the Company's assets. It is the
Company's policy to acquire assets primarily for possible capital gain.
Securities of or Interests in Persons Primarily Engaged in Real Estate
----------------------------------------------------------------------
Activities and Other Issuers. The Company also may invest in securities of
----------------------------
other entities engaged in real estate activities or invest in securities of
other issuers, including investments by the Company for the purpose of
exercising control over such entities. No such investments will be made,
however, unless the Board of Directors determines the proposed investment would
not cause the Company to be an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act").
Should management recommend prospective acquisitions in the be the policy to
enumerate a correlation between the strategic objectives of the Company and the
prospective acquisition, or a plan to enhance shareholder value as measured by
future book value or earnings per share.
Investments in Mortgages. The Company has no immediate plans to acquire or
------------------------
warehouse mortgages. The Company may, however, may offer and hold mortgages
generated from the sale of its Maumelle Property inventory.
Financing Policies. The organizational documents of the Company and its
subsidiaries impose no limits on the amount of indebtedness they may incur. The
Company will from time to time determine its borrowing policies in light of
then-current economic conditions, relative costs of debt and equity capital,
market value of the Company's real estate assets, growth and acquisition
opportunities, and other factors.
The Company intends to raise additional capital through equity offerings,
debt financing, or a combination thereof, although there can be no assurance
that the Company will be able to raise such capital on favorable terms or at
all.
The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on the Company's
portfolio as a whole.
Conflicts of Interest Policies. The Board of Directors is subject to
certain provisions of Nevada law that are designed to eliminate or minimize
certain potential conflicts of interest. There can be no assurances, however,
that these policies always will be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made that
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might fail to reflect fully the interest of all shareholders. See ITEM 12,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Under Nevada law, each director is subject to restrictions on the
misappropriation of corporate opportunities to himself or his affiliates of
which he becomes aware solely as a result of his service as a director. The
Company may transact business with one or more of its directors or officers or a
corporation, firm or association in which one or more of its directors or
officers are directors, officers or are financially interested, provided any of
the following requirements are satisfied:
(a) The interested directors or officers must disclose the common
directorship, office or financial interest to the board of directors,
have it noted in the minutes, and a majority of the disinterested
directors must approve or ratify the contract or transaction; or
(b) The interested directors or officers must disclose the common
directorship, office or financial interest to the shareholders, and
the shareholders must approve by a majority vote the contract or
transaction. The votes of the interested director or officer must be
counted in any such vote of the shareholders; or
(c) The common directorship or office or financial interest is not known
to the director and officer at the time the transaction is brought
before the board of directors and therefore is not disclosed; or
(d) The contract or transaction is fair as to the Company at the time it
is authorized or approved.
Certain Policies with Respect to Other Activities. The Company and its
subsidiaries have authority to offer their securities and to repurchase and
otherwise acquire their securities, and they are likely to engage in such
activities. In the future, the Company and its subsidiaries may make loans to
joint ventures in which they participate in order to meet working capital needs.
The Company and its subsidiaries have not engaged in trading, underwriting,
agency distribution, or sale of securities of other issuers and do not intend to
do so. The Company and its subsidiaries intend to make investments in a manner
such that they will not be treated as an investment company under the Investment
Company Act.
Competitive Conditions. The Company's real property is subject to the
highly competitive conditions of the real estate development and sales. In
Arkansas--the geographic area in which the Company holds its real property
inventory and offers such inventory for development and sale--there are numerous
large national and regional firms with significantly greater experience and
financial resources than the Company currently possesses. Such firms will
likely compete with the Company in the marketing and sale of land for
development, Additionally, if the Company forms joint partnership for the
construction of homes, it will compete with such firms for the acquisition of
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land, the hiring of sub-contractors, experienced management personnel,
construction workers and other employees, and the sale of product. The Company
also will compete for residential sales with the resale market for existing
homes, multi-family home sales, including townhouses and condominiums, and with
available rental properties.
The Company believes that its ownership of a substantial majority of the
available undeveloped single-family home properties in Maumelle -- through its
Operating Subsidiary or its interest in TradeArk Properties -- will give the
Company an advantage in selling single-family lots or if it enters the single-
family home construction market in Maumelle, assuming it is able to obtain
sufficient capital to commence construction activities.
The Company currently has no material presence or reputation in Arkansas or
any other area in the real estate development industry and does not have
sufficient capital to commence significant development activities, other than
the liquidation of its existing Maumelle Property inventory. For this and other
reasons discussed herein, the Company may experience difficulties in competing
with established developers.
ITEM 3. LEGAL PROCEEDINGS.
On July 21, 2000, the Operating Subsidiary, a wholly-owned subsidiary of
the Company that holds substantially all of the Company's assets, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court, Eastern District of Arkansas. Since
then, the Company has continued to operate its business as a debtor-in-
possession. As such, the Operating Subsidiary is authorized to operate its
business in the ordinary course, but may not engage in transactions outside the
ordinary course of business without Bankruptcy Court approval.
Subsequent to the Company's fiscal year-end, on November 16, 2000, the
Operating Subsidiary filed a Disclosure Statement and Plan of Reorganization
(the "Plan") with the Bankruptcy Court to satisfy its existing debts. The Plan
will be presented to creditors for acceptance or rejection. Although at least
two-thirds of each impaired class of creditors and more than one-half in number
of the allowed claims of the class members entitled to accept or reject the Plan
have to vote to accept it; the Bankruptcy Court may confirm the Plan if at least
one of the impaired classes votes for it and the Bankruptcy Court finds the Plan
does not discriminate unfairly. As of the date of this Report, the Bankruptcy
Court has not scheduled a hearing to consider confirmation of the Plan. If the
Plan is confirmed, all creditors listed in the petition will be bound by the
terms and conditions set forth in the Plan. If the Plan is rejected, the
Operating Subsidiary may be forced into Chapter 7, at which point the Operating
Subsidiary will be forced to liquidate its assets to meet the obligations of the
secured creditors and if any funds are available thereafter to meet the
obligations of the unsecured creditors.
As a result of the Operating Subsidiary's bankruptcy, all acts to collect
Pre-petition Indebtedness and to enforce other existing contractual obligations
of the Operating Subsidiary were stayed.
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Generally under the Bankruptcy Code, the Operating Subsidiary does not make
payments on Pre-petition Indebtedness until the Plan is approved by the
Bankruptcy Court. Liabilities and obligations first incurred after the
commencement of the bankruptcy case in connection with the operation of the
Operating Subsidiary's business generally enjoy priority in right to payment
over Pre-petition Indebtedness and must be paid by the Operating Subsidiary in
the ordinary course of business.
Under the Plan, the Operating Subsidiary proposes to satisfy in full all
outstanding amounts due to its creditors, but will modify the payment schedule
and due dates. The Plan also proposes for the early release of certain portions
of the Maumelle Property used to secure credit lines and loans; provided minimum
amounts of principal are paid on such liens prior to the release. See ITEM 2,
"DESCRIPTION OF PROPERTY," and ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - - LIQUIDITY AND CAPITAL RESOURCES-Indebtedness and Other
Liquidity Requirements."
Upon filing the voluntary petition for bankruptcy relief under Chapter 11,
the foreclosure action instituted by the Liquidator for Resure on April 19, 2000
against the Operating Subsidiary was stayed. The foreclosure action was filed
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, 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.
A settlement agreement was entered between the Operating Subsidiary and
Resure and on March 24, 2000, the Chancery Court approved the settlement (the
2000 Settlement Agreement"). Under the 2000 Settlement Agreement, the Operating
Subsidiary would pay a cash payment of $3,987,353,95 for a full release of all
claims by Resure against the Operating Subsidiary. The settlement payment was
due not later than April 24, 2000; however, the Operating Subsidiary has not
made this payment and Resure filed a Motion for Summary Judgement in the
foreclosure action on July 13, 2000. The Operating Subsidiary's July 21, 2000,
petition for bankruptcy stayed this action.
On December 7, 2000, the Liquidator for Resure filed a Motion to Dismiss
the Operating Company's petition for bankruptcy under Chapter 11 of the
Bankruptcy Code, or in the alternative, Motion for the Appointment of a Trustee.
In the motion, the Liquidator for Resure alleges that the Operating Subsidiary
should have paid developer's fees to Resure on certain parcels of the Maumelle
Property that were sold subsequent to the bankruptcy petition and that this was
a diversion of funds. The Operating Subsidiary asserts that the 2000 Settlement
Agreement is valid and as such no developer's fees were due Resure. If the
Bankruptcy Court does not grant the Motion to Dismiss the Operating Subsidiary's
petition for bankruptcy, the Liquidator for Resure seeks to have an independent
trustee appointed and remove the Operating
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Subsidiary's management to oversee its day-to-day operations. There can be no
assurance that the Bankruptcy Court will not grant the Liquidator for Resure's
Motion to Dismiss the Operating Subsidiary's petition for bankruptcy or in the
alternative its Motion for the Appointment of a Trustee.
Further, there can be no assurance the Plan will be approved by the
creditors and the Bankruptcy Court. If the Plan is not approved, the
foreclosure action may proceed, and there is no assurance that the Company will
prevail in any such action.
If the Plan is approved, it provides for the Company's charter to be
modified to prohibit the issuance of non-voting stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is listed for trading in the over-the-counter market on
the NASDAQ electronic bulletin board under the symbol "CPCY"; however, the
market for shares of the Common Stock is extremely limited. There can be no
assurance that the present limited market for the Company's common stock will
become more active or even be sustained. In addition, any future sale of the
Company's stock by any of the controlling shareholders may have a substantial
adverse impact on any such public market.
The high and low bid prices for shares of common stock of the Company for
each quarter within the last two fiscal years are as follows:
BID
Quarter Ending High Low
-------------- ---- ---
September 30, 1998 1.937 .625
December 30, 1998 1.375 .781
March 31, 1999 1.00 .375
June 30, 1999 .50 .437
September 30, 1999 .532 .437
December 30, 1999 .375 .250
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March 31, 2000 1.00 .281
June 30, 1999 2000 .510 .125
September 30, 1999 2000 .180 .063
These bid prices were obtained from the National Quotation Bureau, Inc.
("NQB"), and reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not reflect actual transactions.
HOLDERS
The number of record holders of the Company's common stock was 950, as of
September 30, 2000.
DIVIDENDS
During the fiscal year ended September 30, 2000 and the fiscal year ended
September 30, 1999, the Company did not declare any cash dividends with respect
to its Common Stock. The Company does not expect to declare dividends in the
foreseeable future. The future dividend policy of the Company cannot be
ascertained with any certainty, particularly since the Company has decided to
focus on its primary business of developing and selling single-family lots due
to its present illiquidity. There are no material restrictions limiting, or
restrictions that are likely to limit, the Company's ability to pay dividends on
its Common Stock in the future, except that the articles of incorporation of the
Company permit the board of directors to approve the issuance of preferred stock
having such rights as may be designated by the board without shareholder
approval. Such rights may include preferences with respect to dividends as well
as prohibitions against the declaration of dividends on Common Stock under
certain circumstances.
There was no issuance of unregistered securities during the fiscal year
ended September 30, 2000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The following discussion should be read in conjunction with the financial
statements and the notes thereto appearing in Item 7 of this Report (the
"Financial Statements"). As noted below and elsewhere in this Report, if the
Company's Operating Subsidiary cannot reorganize under its petition for
voluntary bankruptcy under Chapter 11, and if the Company cannot cure its
current severe liquidity problems, the Company's status as a viable going
concern will remain in doubt. There can be no assurance, however, that the
Reorganization Plan filed with the United States Bankruptcy Court will be
approved or that Company will be able to raise sufficient capital to cure its
liquidity problems and pursue the business objectives discussed herein.
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Accordingly, some of the amounts presented below may be subject to future
adjustments depending on Bankruptcy Court actions, further developments with
respect to disputed claims, determination as to the security of certain claims
or other events.
RESULTS OF OPERATIONS
Comparison of Year Ended September 30, 2000 to Year Ended September 30,
1999. For the year ended September 30, 2000, the Company experienced a loss of
$2,376,488 compared with a loss of $1,022,694 for the year ended September 30,
1999. The difference in performance resulted primarily from a decrease in
revenues from $9,146,365 in the year ended September 30 1999, to $852,569 in the
year ended September 30, 2000, a decrease of $8,293,796. The cost of sales for
the year ended September 30, 2000, amounted to $191,664, resulting in a gross
profit of $660,905. Despite the decrease in revenues, gross profits as a
percentage of revenues increased from 41.22% in the year ended September 30,
1999 to 76.89% in the year ended September 30, 2000. The gross profit for the
year ended September 30, 1999, was affected by the non-recognition of $1,577,312
of land sales profit. The revenues for the year ended September 30, 2000, were
increased by the recognition of $85,517 of the deferred land sales profit from
1999. During the year ended September 30, 2000, operating expenses decreased to
$1,576,760 from $2,787,761 in the year ended September 30 1999, a decrease of
$1,211,001 or 43.4%.
Sales decreased by $8,387,845 for the year ended September 30, 2000, from
$9,146,365 for the year ended September 30, 1999, as a result of land sales of
Maumelle Property from $9,146,365 in the year ended September 30 1999 to
$758,520 in the year ended September 30, 2000. Gross profit for the year ended
September 30, 2000 was $660,905. Gross profit for the year ended September 30,
1999 was $3,769,713.
From the year ended September 30, 1999 to the year ended September 30,
2000, operating expenses decreased from $2,787,761 to $1,576,760 a decrease of
$1,211,001 or 43.4%. The decrease was primarily attributable to an decreases
in amortization of loan costs. Management expenses decreased from $269,649 for
the year ended September 30, 1999, to $141,444 for the year ended September 30,
2000, a decrease of $128,205. This decrease was the result of an decrease in
expense fees due to Maumelle Enterprises, a related party, from $269,649 for the
year ended September 30, 1999, to $141,444 for the year ended September 30,
2000. For fiscal year ended September 30, 2000, accrued expense fees due to
Maumelle Enterprises increased to $66,329, from $33,463 for fiscal year ended
September 30, 1999. See ITEM 12, "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS-Maumelle Enterprises Inc., Agreement." Amortization of loan fees
decreased to $542,795 in the year ended September 30, 2000, from $1,441,873 in
the year ended September 30, 1999, a decrease of $899,078.
Interest income for the fiscal year ended September 30, 2000, decreased by
$41,794, from $47,916 for the fiscal year ended September 30, 1999, to $6,122 in
fiscal year ended September 30, 2000. Interest expenses decreased by $141,322 to
$1,275,575 during the year ended September 30, 2000 from $1,416,899 during the
year ended September 30, 1999.
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There was no loss from discontinued operations for the year for the year
ended September 30, 2000; however there was a loss from discontinued operations
of $413,025 for the year ended September 30, 1999. During the year ended
September 30, 1999 these operations had sales totaling $1,019,042 with costs of
sales of $258,618 and operating expenses, including interest expenses, of
$1,142,222.
The Company continues to accrue management fees, to the extent possible, to
Maumelle Enterprises, a related party. However actual expenses, which include
overhead and salaries, have been paid to Maumelle Enterprises during fiscal year
ended September 30, 2000. During fiscal year, Mr. Todd was paid $52,256. This
was a portion of the salary Mr. Todd was scheduled to be paid. The remaining
amount of $187,744 has been accrued, bring the balance accrued at September 30,
2000 to $408,671. Mr. Todd was going to accrue one-half or $10,000 of his
$20,000 per month salary, however die to the financial condition of the Company
has accrued more than scheduled.
The Company believes that its results of operations can improve in the
future if it is able to raise sufficient additional capital to restructure or
retire its short-term debt into long-term debt and/or equity, and commence
significant development operations through TradeArk Properties or other joint
venture partners. The Company, through its interest in TradeArk Properties
intends to take advantage of an apparent increase in building activity in the
City of Maumelle in 2000, which is summarized below. There can be no assurance,
however, that such trends will continue or that the Company will be able to
capitalize on these trends.
Two hundred and seventy-six permits were issued by the City of Maumelle for
the construction of new single-family homes during the 1999 calendar year. From
January through September 2000, 243 permits have been issued for the
construction of new homes. Although there can be no assurance that such increase
in activity will continue the Company believes that the level of home
development activity in Maumelle will continue to increase in the future, for
the following reasons:
(1) The Country Club of Arkansas, a golf-oriented development in Maumelle,
has completed improvements and opened its new golf course to the public in the
Fall of 1996. As of September 30, 2000, this development has approximately 342
home sites remaining to be developed. The owner/developer of the Country Club
of Arkansas has placed substantial amounts of advertising and promotion into
local print media which may produce a positive effect for future development
activity in Maumelle.
(2) In 2000, 340 new jobs have been created in the City of Maumelle as a
result of continuing industrial expansion. In the period 1990 through 1998, the
SMSA of the Little Rock/North Little Rock area, which includes Maumelle, has
shown a total increase of 1.8% in new jobs; although there can be no assurance
that the city will continue to see such job expansion.
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The Company does not foresee any significant elements of income or loss
that would arise outside of the ordinary course of business, except for the
losses that would likely arise if the Company becomes unable to (i) liquidate
property, or (ii) has to liquidate its property for less than fair market value,
or (iii) if the Bankruptcy Court does not approve the Operating Subsidiary's
Reorganization Plan. In addition, if the Bankruptcy Court does not approve the
Plan, the foreclosure action against the Operating Subsidiary's approximately
701 acres may proceed and there is no assurance that the Operating Subsidiary
will prove successful in defending the action. See ITEM 3, LEGAL PROCEEDINGS,"
and the discussion below, "LIQUIDITY AND CAPITAL RESOURCES."
Even if the Company can overcome its present illiquidity and restructure it
current short-term debt into equity or long-term debt and raise sufficient
capital to commence meaningful operations, there is no assurance the Company
will be able to attract joint venture partners with home-building expertise.
Current joint venture partners, such as TradeArk Properties, may experience some
seasonal variance in the flow of income from these home-building operations.
Such variances could arise, for example, from the impact of weather on any
construction in progress. Typically, substantial rainfall is experienced in
Central Arkansas from November through March.
Factors That May Affect Future Results and Market Price of Stock. The
factors identified below are believed to be important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward looking statement made by
or on behalf of the Company, whether in this section or elsewhere in this Report
or in any other written or verbal statement of the Company or its officers or
directors. Unpredictable or unknown factors not discussed herein could also
have material adverse effects on forward looking projections. The Company does
not intend to update these cautionary statements.
Liquidity Issues. The Company will not have any short-term debt maturing
----------------
during fiscal year ended September 30, 2001; however, of the $12,211,309 in
short-term debt, approximately $10,312,929 was in default as of September 30,
2000. As of the date of this Report the Company has $11,911,309 in short-term
debt of which $10,916,309 is currently in default. This illiquity may prevent
the Company from realizing or consummating any of its business plans,
objectives, strategies, or transactions, unless its can restructure its short-
term debt into equity or long-term debt and/or raise capital. Except for the
short-term debt, the Company has minimal operating income and its primary source
of funds to meet operating expenses for the last two years has been the
liquidation of its real property inventory. There can be no assurance that the
Company will be able to overcome its present illiquidity, raise sufficient
capital to retire the debt, or generate sufficient revenues to pursue the
business plans, objectives, strategies, or transactions discussed herein. If
the Company has to liquidate portions of its Maumelle Property in the fiscal
year ended September 30, 2001 to satisfy maturing short-term debt, it may be at
less than fair market value. Additionally, if the Plan is rejected, the
Operating Subsidiary could be forced into liquidation under Chapter 7 of the
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<PAGE>
Bankruptcy Code, at which point the Operating Subsidiary would be forced to
liquidate its assets to meet the obligations of the secured creditors, and if
any funds are available thereafter to meet the obligations of the unsecured
creditors.
The improvement of single-family lots and any subsequent home building and
construction is capital-intensive and generally involve a high degree of
leveraging and up-front expenses to improve it, and begin development. The
Company intends to sell unimproved and improved lots from its Maumelle Property
inventory. In order to facilitate the development of single-family lots and
multi-family lots, the Company intends to form improvement districts, which will
issue bonds and the proceeds from the sale of such bonds will be used construct
roads, utilities and other infrastructure improvements to the land necessary for
the Company to sell finished lots, with or without homes constructed thereon, or
larger tracts of land to builders or developers.
The Company also intends to commence home building operations through its
membership interest in TradeArk during the third quarter of fiscal year 2001.
TradeArk intends to obtain a construction loan collaterized by the property,
which is currently is encumbered by a $4,000,000 loan. There can be no
assurance, however, that the Company will be able to obtain such loans. In
addition, the Company will need to enter into joint ventures or other agreements
with well-funded development partners to implement its growth strategies in the
home building industry. There can be no assurance that the Company will be able
to overcome its present illiquidity and raise sufficient additional capital or
enter into joint venture or other development agreements with developers under
terms that are favorable to the Company, or at all. See ITEM 3, LEGAL
PROCEEDINGS," and the discussion below, "LIQUIDITY AND CAPITAL RESOURCES."
Competition. The real estate development industry is highly competitive.
-----------
In Arkansas--the geographic area in which the Company initially intends to sell
residential lots and other property from its Maumelle Property inventory and to
build homes through its interest in TradeArk Properties--there are numerous
large national and regional firms with significantly greater experience and
financial resources than the Company currently possesses. Such firms will
likely compete with the Company in the sale of land and for the sale of single-
family homes, the acquisition of land for development, the hiring of sub-
contractors, experienced management personnel, construction workers and other
employees. See ITEM 2, "DESCRIPTION OF PROPERTY--POLICIES WITH RESPECT TO
CERTAIN ACTIVITIES--Competitive Conditions."
The Company currently has no material presence or reputation in Arkansas or
any other area in the real estate development industry and does not have
sufficient capital to commence significant development activities. For this and
other reasons discussed herein, the Company may experience difficulties in
competing with established developers.
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Lack of Experience. The Company has no operational experience in the real
------------------
estate development industry other than in the sale of property. Such
inexperience may make it difficult for the Company to achieve its business plans
and objectives, particularly given the existence of competition from more
experienced and better capitalized companies.
Interest Rates; Mortgage Financing. Demand for residential lots and homes,
----------------------------------
as well as for multi-family construction, is adversely affected by increases in
interest rates. If interest rates increase, demand for homes and other projects
the Company may develop may be significantly reduced due to prospective buyers'
inability to obtain financing. Any adverse changes in the availability of
Federal Housing Administration or Veterans Administration mortgage financing may
also adversely impact the Company's housing sales.
Many Factors Beyond The Company's Control. The nature of the real estate
-----------------------------------------
development industry is cyclical and is affected by various factors beyond the
Company's control, including changes in the general and local economy,
employment, availability of financing, interest rates, changes in demographics,
housing demands, as well as changes in government regulations. Developers are
subject to a number of other risks, including availability and cost of land,
materials, and labor, weather conditions, construction delays, costs controls,
and increases in real property taxes and local government fees.
LIQUIDITY AND CAPITAL RESOURCES
Indebtedness and Other Liquidity Requirements. The principal amount of the
Company's total debt at September 30, 2000, included, without limitation, the
following (see ITEM 2, "DESCRIPTION OF PROPERTY--MAUMELLE PROPERTY" for
descriptions of encumbered properties referenced below):
. $3,500,000 Resure Note, the amended recourse note, payable to Resure,
matured September 1, 2000, secured by the approximately 701-acre Large
Residential Tract; 10% interest, paid quarterly until October 1, 1996,
then quarterly payments of principal and interest in the amount of
$101,591.15 are required. The Resure Note is currently in default and
a foreclosure action has been instituted against the Company. On July
21, 2000, the Operating Subsidiary filed a voluntary petition of
bankruptcy under Chapter 11 of the Bankruptcy Code. As a result of the
Operating Subsidiary's bankruptcy collection of all then existing
debts, liabilities and obligations, including the foreclosure action
against the Operating Subsidiary were stayed. Management believes the
2000 Settlement Agreement with Resure is in effect, and the balance
owing on the Resure Note was $3,987,353 in principal and interest as
of the Company's fiscal year end and $3,987,353, as of the date of
this Report. If the 2000 Settlement is found not to be in effect, the
balance owing on the Resure Note was$4,244,239 as of the Company's
fiscal year-end and $4,319,584 as of December 20, 2000.
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. $200,000 recourse note payable to Davister Corp. (the "Davister
Note"), matured January 9, 1996, unsecured; 9% interest payable at
maturity. As of the Company's fiscal year-end, $301,151 in principal
and interest was due on the note, and $305,589 as of December 20,
2000. Collection of this unsecured pre-petition note is stayed under
the Operating Subsidiary's bankruptcy petition.
. $6,717,740 in non-secured short-term debt financed by private sources
("Promissory Notes"). The Promissory Notes generally bear interest at
a rate ranging from 10.9% to 14% per annum, with a weighted average as
of the Company's year end of 11.03% per annum, and mature nine months
from the date of issuance of each note. As of the Company's fiscal
year-end, the Company was in default on the entire $6,717,740 short-
term debt, plus $360,029 in interest. As of the date of this Report,
the Company is in default on the $6,717,740 plus interest in the
amount of $536,685.
. $1,750,000 in a commercial revolving line of credit from the First
Arkansas Bank ("First Arkansas Line of Credit"), secured by
approximately 332 acres of the Large Residential Tract of the Maumelle
Property. Interest on the Line of Credit was payable at a fixed rate
of 9.5% per annum and the loan matured on May 27, 1998, but was
extended on the same terms to October 14, 2000. The line of credit has
been modified to mature on October 14, 2001, at which time all
principal and interest is due and payable. The modified line of credit
of $1,295,000 (which does not allow the Company to draw on the credit
line as it is reduced through payments) has an interest rate of 11%
per annum and requires three payments of interest only commencing
January 14, 2001 and continuing at quarterly time intervals
thereafter. As of September 30, 2000, aggregate of $1,321,381 in
principal and interest was outstanding on the First Arkansas Line of
Credit and $1,015,091 as of December 20, 2000. Collection of this pre-
petition obligation is stayed under the Operating Subsidiary's
bankruptcy petition.
. $400,000 in a commercial revolving line of credit from the Bank of
Little Rock (the "Little Rock Credit Line I"), secured by 11 acres of
the multi-family Maumelle Property. The Little Rock Credit Line I
bears interest at a fixed rate of 11% per annum. The $400,000 line of
credit matures on January 10, 2001, when a balloon payment consisting
of the entire principal balance and accrued interest under the line is
due and payable. The balance owing in principal and interest on the
Little Rock Credit Line I as of the Company's fiscal year-end was
$409,337 and $419,090 as of December 20, 2000. Collection of this pre-
petition obligation is stayed under the Operating Subsidiary's
bankruptcy petition.
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. $200,000 in a commercial revolving line of credit from the Bank of
Little Rock (the "Little Rock Credit Line II"), secured by 11 acres of
the multi-family Maumelle Property. The $250,000 Little Rock Credit
Line II bears interest at a fixed rate of 11% per annum. The $200,000
line of credit matures on January 10, 2001, when a balloon payment
consisting of the entire principal balance and accrued interest is due
and payable. As of September 30, 2000, an aggregate of $203,940 in
principal and interest was outstanding on the Bank of Little Rock Line
of Credit II and $208,845 as of December 20, 2000. Collection of this
pre-petition obligation is stayed under the Operating Subsidiary's
bankruptcy petition.
CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S INDEBTEDNESS AND LIQUIDITY
REQUIREMENTS
As of the fiscal year-end, the Company was current on all of the foregoing
debt, except for the following: Resure Note, all of the short the short-term
notes, and the Davister Note. Management has been notified by New England
International Surety Inc.(the "Surety"), the firm that issued the surety bonds
for the Promissory Notes, that it has been served with a class action suit in
federal court. As such, even though the Company has defaulted on the Promissory
Notes, the Surety will not be able to make interest or principal payments to the
noteholders until the action is settled.
As of the date of this Report, the Company is in default on all of the
above debt, except for the First Arkansas Line of Credit. The Operating
Subsidiary has been in default on the Resure Note since July 1, 1998 (see
discussion above). 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 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 March 24, 2000, the Chancery Court approved a
settlement whereas the Operating Subsidiary would pay a cash payment of
$3,987,353,95 for a full release of all claims by Resure against the Operating
Subsidiary. The settlement payment was due not later than April 24, 2000. The
Operating Subsidiary did not meet this payment and filed a voluntary petition
for bankruptcy under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court
on July 21, 2000.
The unsecured Davister Note has matured, and collection on this pre-
petition obligation is stayed under the Operating Subsidiary's bankruptcy
petition.
Subsequent to the Company's fiscal year-end, the Bank of Little Rock Lines
of Credit I and Credit II matured on January 10, 2001. Although the Company did
not meet its obligations under these lines of credit, collection on these debts
is stayed under the Operating Subsidiary's bankruptcy petition.
In addition to the foregoing debt and other liquidity requirements, the
Company will, within six months after the date of this Report, require general
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<PAGE>
working capital to cover overhead and administrative expenses in the amount of
at least $500,000.
The Company's current liquidity problems prevents the Company from
conducting any meaningful business activities other than selling assets from the
Maumelle Property. Although management anticipates utilizing all or a portion of
the Maumelle Property to satisfy the financial requirements of the Plan, if
approved by the Bankruptcy Court, and/or raise equity, there can be no assurance
that the Bankruptcy Court will approve the Operating Subsidiary's Reorganization
Plan or that the Company will be able to raise sufficient capital to meet its
financial requirements and cure the Company's liquidity problems. If the
Company cannot restructure its current debt, the Company's status as a viable
going business concern will be doubtful. See ITEM 3, "LEGAL PROCEEDINGS," and
ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - - Certain
Capital Raising Transactions."
Certain Capital Raising Transactions. During the fiscal year ended
September 30, 2000, the Company obtained capital through the following
transactions:
. The Company sold 32.16 acres of single-family lots of the Maumelle
Property to an unaffiliated third party, for a price of $707,520 with
net proceeds to the Company of $691,700. The terms of the sale was
$250,000 cash at closing and a 90 day wrap mortgage for the balance of
$457,520.
Prospective Sources of Liquidity. Current operating cash flows will not be
sufficient to service the Company's existing debt or the Company's anticipated
operating cash needs. The Company currently has insufficient funds to retire
its short-term debt, most of which will mature within the next six months or is
in default. Due to the Company's inability to meet its short-term obligations,
the Operating Subsidiary, which holds substantially all of the Company's assets,
filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy
Code with the Bankruptcy Court on July 21, 2000. If the Company cannot
restructure this debt and/or raise additional equity or capital, the Company's
status as a viable going business concern will remain doubtful.
The Company presently has listed for sale approximately 188 acres of
single-family lots of the Maumelle Property for a price of between $25,000 to
$30,000 per acre, in order to raise sufficient funds to generate income
necessary to discharge its obligations under the Plan, assuming the Plan is
approved by the Operating Subsidiary's creditors and the Bankruptcy Court. In
addition, to facilitate the development and sale of single-family and multi-
family lots, the Operating Subsidiary intends to form improvement districts,
which will issue bonds and the proceeds of the sale of such bonds will be used
to construct roads, utilities and other infrastructure improvements to the land
necessary to enhance the sale of the lots to builders and/or developers. The
Operating Subsidiary is continuing to solicit buyers for its Maumelle Property
in order to reduce its current debt and for working capital.
34
<PAGE>
The Company is also exploring opportunities to develop and sell portions of
its Maumelle Property with joint venture partners.
With respect to prospective long-term liquidity, the Company intends to
generate the bulk of its cash from operations by developing and selling
residential lots in the City of Maumelle. At present, Management of the Company
believes that the most likely sources of substantial cash flow during the next
two years are 1) the development and sale of single-family lots of the
approximately 3,500 single-family home sites it owns in Maumelle; (2) the
development and sale of single-family homes in Maumelle, Arkansas by TradeArk
Properties; and (3)the liquidation of property which Management considers
unsuitable for the Company's purposes or as required. See ITEM 1, "DESCRIPTION
OF BUSINESS--BUSINESS OF THE COMPANY--GROWTH STRATEGIES."
The Company intends to raise operating capital by selling debt and/or
equity securities to the public or in private transactions. There can be no
assurance, however, that such public or private offerings will be successful.
Comparison of Year Ended September 30, 2000 to Year Ended September 30,
1999. At September 30, 2000, the Company had total assets of $8,631,552, a
decrease of $1,789,759 or 17.2% from the Company's total assets as of the
fiscal year ended September 30, 1999. The Company had cash of $51,932 at
September 30, 2000, compared to $864,381 on September 30, 1999, a decrease of
$812,449 or 94%. This decrease was a result of operating losses for the fiscal
year ended September 30, 2000. See "LIQUIDITY AND CAPITAL RESOURCES" above.
Accounts receivable decreased from $51,554 on September 30, 1999 to
$5,775 on September 30, 2000, a decrease of $45,779 notes receivable current
decreased by $48,000 and notes receivable non-current by $96,000.
Loan origination fees decreased from $544,656 as of September 30,1999, to
$0, as of September 30, 2000, a decrease of $544,656. This was due to the full
amortization of costs associated with the short-term promissory notes.
The carrying value of the Company's real estate holdings decreased by
$184,589 during the year, from $5,552,377 in fiscal year ended September 30,
1999 to $5,367,788 in fiscal year ended September 30, 2000. The net decrease
was a result of the sale of approximately 32 acres of single-family land of the
Maumelle Property to an unrelated third party.
Total liabilities of the Company as of September 30, 2000, were $14,265,306
an increase of $551,729 from the September 30, 1999's total of $13,713,577. The
current liability for notes payable decreased by $476,716 during the fiscal year
ended September 30, 2000, from $12,488,025 to $12,011,309. The decrease was the
result of net payments of promissory notes of $347,099, payment of $105,000 to
First Arkansas Valley Bank, the net payoff of $49,087 to the Bank of Little Rock
and payment of other loans in amounts totaling $4,825.
The Company decreased its short-term debt from the Bank of Little Rock by
$250,000 during fiscal year ended September 30, 2000. The short-term debt
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<PAGE>
was paid from the proceeds of the collection of a Note receivable paid by
Capitol SB Development Corporation in October 1999. Subsequent to that, the
Company borrowed an additional $200,913 from the Bank of Little Rock in January
2000. As of September 30, 2000, the Company has paid $105,000 on the $1,400,000
due under the line of credit from the First Arkansas Valley Bank.
Accounts payable and accrued expenses increased by $619,415, from
$1,225,552 as of September 30, 1999, to $1,844,967, as of September 30, 2000.
Accrued interest increased by $607,872 from $741,578, as of September 30, 1999,
to $1,349,450, as of September 30, 2000, as a result of the non-payment of
interest on the Resure Note and the Promissory Notes.
Shareholders' Equity decreased by $2,341,488 or 71.12% during the fiscal
year. The decrease is a result of a net operating loss of $2,175,371 for the
year ended September 30, 2000.
ITEM 7. FINANCIAL STATEMENTS.
The audited financial statements of the Company are included
in this Annual Report on Form 10-KSB starting at page F1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
The Company has not changed accountants during the last two fiscal years;
nor has the Company had any disagreements with the accountants on any matter of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedures.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Date of Expiration of
Name Age Position Election Director Term
---- --- -------- -------- --------------
<S> <C> <C> <C> <C>
Michael G. Todd 51 Chairman, 7/95 2001 or until
President Successor
and Secretary elected
Robert R. Neyland 45 Director 4/94 2001 or until
successor
elected
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Thomas Blake 67 Director 3/97 2001 or until successor
elected
David R. Paes 46 Vice President, 7/95 N/A
Treasurer and
Assistant Secretary
Raymond Baptista 59 Vice President 10/97 N/A
Of Finance
</TABLE>
The following is a biographical summary of the experience of the directors
and executive officers of the Company:
MICHAEL G. TODD. Chairman of the Board, President and Chief Executive Officer,
and Secretary of the Company. Todd also is the sole Director and President of
the Operating Subsidiary. Todd is a general partner of DeHaven Todd & Co., a
merchant banking partnership he co-founded in 1985 with John W. DeHaven. Todd
has extensive experience in the banking industry, having been the President and
Chief Executive Officer of two Southern California banks, Orange City Bank and
Bay Cities National Bank.
ROBERT R. NEYLAND. Director. Neyland is President and co-founder of Applerock
Funding Corporation, which was organized in 1998 to originate and acquire loans
secured by first liens on manufactured housing lots. He is also a director of
Collins Financial Service, Inc., a private debt collection company, director of
FiData Inc., an Internet technology company, and a director and officer of Iron
Harbor Development Group, LLC, a real estate development company.
DAVID R. PAES. Vice President, Treasurer, and Assistant Secretary. Paes is
Executive Vice President and a controlling shareholder of Maumelle Enterprises,
a real estate management company that currently provides management and
administrative service to the Company. See ITEM 12, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--SERVICES PROVIDED BY AFFILIATED COMPANIES." He has been
involved in real estate development as a chief financial officer of two real
estate land companies since 1977, and is a certified public accountant.
THOMAS BLAKE. Director. Blake is the Director, Business/ Finance, of Glenwood
L. Garvey Associates, an urban planning and consulting firm. As Special Advisor
to Self-Cleaning Environments USA, Inc., a manufacturer of environmentally
friendly waste disposal units, Blake provides consulting services regarding
business planning, financing, and marketing. His the founder and former
principal of Thomas C. Blake Consulting, an advisory service firm, and was Chief
Executive Officer of Interstate Group Administrators, Inc., a benefit services
company. He is a director of West Coast Savings & Loan and formerly was a
director of various other financial institutions.
37
<PAGE>
RAYMOND C. BAPTISTA. Vice President - Finance. Baptista has 25 years
experience in banking and finance, both nationally and internationally. He has
also been actively involved in real estate acquisitions and development and was
president and CEO of a national real estate management company.
SIGNIFICANT EMPLOYEES
The Company's sole significant full-time employee is Michael G. Todd, its
Chairman, President, Chief Executive Officer, and Secretary.
FAMILY RELATIONSHIPS
There are no family relationships between any directors or executive
officers of the Company, either by blood or by marriage.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, any director, person nominated to become a
director, executive officer, promoter or control person of the Company:
(1) was a general partner or executive officer of any business against
which any bankruptcy petition was filed, either at the time of the bankruptcy or
two years prior to that time; The Company's directors and officers since the
Company's Operating Subsidiary filed for a voluntary petition for bankruptcy
under Chapter 11 on July 21, 2000.
(2) was convicted in a criminal proceeding or named subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; or
(4) was found by a court of competent jurisdiction (in a civil action), the
SEC or the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been reversed,
suspended or vacated.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation that was paid in the 2000 fiscal year to the Company's executive
officers.
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the periods indicated:
SUMMARY COMPENSATION TABLE
38
<PAGE>
Long-Term Compensation
Annual Compensation Awards Payouts
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Name & Year Salary Bonus Other Res- Securi- LTIP All
Prin- or ($) ($) Annual tric- ties Pay- Other
cipal Period Compen- ted Under- outs Compen-
Position Ended sation Stock Lying sation
Options
Michael 9/30/00 $240,000/(1)/ 0 0 0 0 0 0
Todd,
Chairman/
President
David 9/30/00 0 0 0 0 0 0 0
Paes/(2)/
</TABLE>
(1) Michael G. Todd has been employed as President of the Company since
November 1994. During fiscal year, Mr. Todd was paid $52,256, which is deferred
and current compensation for the period October 1, 1999, through September 30,
2000. For the fiscal year, Mr. Todd deferred $187,744. Mr. Todd was suppose to
accrue one-half or $10,000 of his $20,000 per month salary, but to the financial
condition of the Company has accrued more than scheduled.
(2) David Paes has been Vice-President of the Company since July 1995, and
devotes approximately 40% of his time to its operations. Paes has received no
salary from the Company from July 1995 through September 30, 2000.
The Company does not have any qualified or non-qualified stock or option
plans for its employees.
The Company has a five-year written agreement with Todd to perform the
duties of President. Under the agreement, which became effective on October 1,
1995, Todd is to be compensated at a rate of $20,000 per month. The agreement
expired on September 30, 2000. The Company is not party to any other employment
agreements. As of the date of this Report, the Company has not executed a new
employment agreement with Todd.
DIRECTOR COMPENSATION
Outside directors are compensated for their services in the amount of $500
per month. Outside directors Neyland and Blake have agreed to defer such
compensation until the Treasurer of the Company determines that sufficient funds
are available to make such payments. Such compensation has been deferred for
the fiscal year ended September 30, 2000 in the amount of $12,000. Management
anticipates that the outside directors will continue to defer their
compensation.
39
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of shares of Common
Stock as of September 30, 2000, for (i) each person who is known by the Company
to be the beneficial owner of more than a 5% interest in the Company, (ii)
directors of the Company, (iii) the sole "named executive officer" of the
Company, as defined in Item 402(a)(2) of SEC Regulation S-B, and (iv) the
directors and named executive officer of the Company as a group. Unless
otherwise indicated in the footnotes, all such interests are owned directly, and
the indicated person or entity has sole voting and investment power. Addresses
are provided only for 5% or greater owners.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Name and
Title of Class address of Amount and Percent of
beneficial nature of bene- class
owner(1) ficial owner
Common Stock Michael G. Todd(2) 2,897,589 shares 68.59%
Common Stock Robert R. Neyland 0 shares 0%
Common Stock Thomas Blake 0 shares 0%
Common Stock Directors and Executive
Officers as a Group 2,897,589 shares 68.59%
(1) Unless otherwise indicated, the address of the beneficial owner is 25550
Hawthorne Boulevard, Suite 207, Torrance, California 90505.
(2) All of these shares are owned by Prescott Investments, L.P. or Granite
Industries LLC. Michael G. Todd is the sole managing member of Granite
Industries LLC, which is the managing general partner of Prescott LP. Todd
is the sole "named executive officer" of the Company, as defined in Item
402(a)(2) of SEC Regulation S-B. Mr. Todd also has a beneficial interest
in 40,000 shares previously owned by Nine Mile Limited Partnership. See
below, "Note 4," and ITEM 9, "DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERVICES PROVIDED BY AFFILIATED COMPANIES
The Company has paid fees or expects to pay fees to certain affiliated
companies for various types of services, and will continue to do so in the
future. These arrangements are summarized below.
40
<PAGE>
Maumelle Enterprises, Inc. Agreement. The Company has an oral agreement
with Maumelle Enterprises, Inc. to provide management and administrative
services for the Maumelle Property. Currently, Maumelle Enterprises manages the
Company's inventory of property, oversees any sale of property, and manages
administrative matters such as ensuring payment of taxes, mortgages and other
expenditures incurred in management of the property. Maumelle Enterprises also
represents the Company at local and state hearings that may affect the Company's
property. It has no clients other than the Company and DeHaven Todd Limited
Partnership, an Arkansas limited partnership ("DTLP"), which is owned almost
entirely by Michael G. Todd and John W. DeHaven. David Paes and Mary Peyton each
owns 50% of the outstanding shares of Maumelle Enterprises, as of the date of
this Report. Mary Peyton, the President of the Home Construction Subsidiary,
receives a salary of $66,000 per annum as an officer of Maumelle Enterprises.
David Paes, an officer of the Company, receives a salary of $84,000 per annum as
an of officer of Maumelle Enterprises.
Under the oral management and administrative services agreement, payment to
Maumelle Enterprises for management services depends upon the actual services
rendered in a given month and the current liquidity of the Company. If funds are
not available, Maumelle Enterprises has agreed to defer payment of its
management fees to the extent possible. For the fiscal year ended September 30,
2000, the Company paid Maumelle Enterprises $75,115 in expenses, which included
overhead expenses, and salaries and accrued $66,857. No management fees were
accrued or paid to Maumelle Enterprises during the fiscal year ended September
30, 2000.
Subleasing of Office Space. The Company is currently subleasing its
principal office space in Torrance, California from DTC, a California
partnership. The partnership, owned equally by Michael G. Todd and John W.
DeHaven charges the Company $2,144 per month. The Company paid DTC the total of
$25,728 in rental payments for the fiscal year ended September 30, 2000.
The majority of the disinterested board of directors on October 1, 1995,
voted to approve the oral agreement between the Company and DTC for the
subleasing of office space from DTC to the Company.
The Company plans to continue to sublease its office space from DTC
on a month to month basis.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
CAPITOL COMMUNITIES CORPORATION, INCLUDING PREDECESSOR CORPORATION AND
SUBSIDIARIES.
41
<PAGE>
Report of Independent Auditors................................ F-1
Balance Sheet as of September 30, 2000........................ F-2
Statements of Operations for the Years Ended
September 30, 2000 and 1999................................... F-3
Statements of Changes in Stockholders' Equity
September 30, 2000............................................ F-4
Statements of Cash Flows for the Years Ended
September 30, 2000 and 1999................................... F-5
Notes to Financial Statements................................. F-6
<PAGE>
BAUM & COMPANY, P.A.
Certified Public Accountants
1515 University Drive - Suite 209
Coral Springs, Florida 33071
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors and Stockholders
Capitol Communities Corporation, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Capitol
Communities Corporation, Inc. and its wholly-owned subsidiaries as of September
30, 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended September 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
Except as discussed in the following paragraph, we conducted our audit in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
We were unable to obtain sufficient evidence of the carrying value of the
Company's land and real estate holdings of $5,367,788 and its investment in its
Trade Ark Properties Joint Venture of $2,738,811 at September 30, 2000 from an
independent party, nor were we able to satisfy ourselves as to the carrying
value by other auditing procedures. As discussed below in Note 3, the
disposition of the Plan of Bankruptcy may ultimately cause the Company to
realize substantial losses on its assets in liquidation.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to obtain sufficient
evidence of the carrying value of the Company's land and real estate holdings
and its investment in its Trade Ark Properties Joint Venture, the financial
statements referred to in the first paragraph above present fairly, in all
material respects, the financial position of Capitol Communities Corporation,
Inc. and wholly-owned subsidiaries as of September 30, 2000 and the results of
its operations and its cash flows for the years ended September 30, 2000 and
1999 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 of the
financial statements, the Company has incurred losses from operations, has a
significant negative working capital ratio, and has substantial non-productive
assets, which raise substantial doubt about its ability to continue as a going
concern. The company's wholly-owned subsidiary, Capitol Development of
Arkansas, Inc. has filed a Plan of Reorganization pursuant to the provisions of
Chapter 11 of the United States Bankruptcy Code as discussed in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Coral Springs, Florida
January 10, 2001
F-1
<PAGE>
Capitol Communities Corporation
Consolidated Balance Sheet
as of September 30, 2000
<TABLE>
<CAPTION>
<S> <C>
Current Assets
Cash in Bank $ 51,932
Accounts Receivable 5,775
Notes Receivable- current 457,520
Prepaid Assets 1,283
----------
Total Current Assets 516,510
Plant property and equipment
Furniture and Equipment, net of accumulated depreciation of $7,816 8,443
Other Assets
Land and Real Estate Holdings 5,367,788
Investment in Trade Ark Properties 2,738,811
-----------
Total Other Assets 8,106,599
Total Assets $ 8,631,552
===========
Current Liabilities
Notes Payable 12,011,309
Accounts Payable & Accrued Expenses 1,844,967
-----------
Total Current Liabilities 13,856,276
Non Current Liabilities 0
Liabilities of Subsidiary Subject to Compromise 409,030
-----------
Total Liabilities 14,265,306
Shareholders' Equity
Preferred stock-$.01 par value, none issued 0
Common Stock-$.01 par value, 40,000,000 shares authorized 77,700
7,770,050 shares outstanding
Additional Paid in Capital 7,504,513
Treasury Stock (4,795,852)
Accumulated Deficit (8,420,115)
-----------
Total Shareholders' Equity (5,633,754)
Total Liabilities and
Shareholders' Equity $ 8,631,552
===========
</TABLE>
See accompanying Notes to Financial Statements.
F2
<PAGE>
Capitol Communities Corporation
Consolidated Statements of Operations
For the Fiscal Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Revenues:
Sales $ 758,520 $ 9,146,365
Miscellaneous Income 8,532
Recognition of Deferred Land Sale Profit 85,517
Unrecognized Land Sale Profit 1,577,312
Cost of Sales 191,664 3,799,340
----------- -----------
Gross Profit 660,905 3,769,713
Operating Expenses:
General & Administrative
Expenses 1,576,760 2,787,761
----------- -----------
Net Income (Loss) Before
Other Income/Expense (915,855) 981,952
Other Income (Expense)
Operations of Unconsolidated Investments (191,180) (78,214)
Interest Income 6,122 47,916
Interest Expense (1,275,575) (1,416,898)
----------- -----------
Total Other Income (Expense) (1,460,633) (1,447,196)
----------- -----------
Net Income (Loss) from continuing operations $(2,376,488) $ (465,244)
Net Income (Loss) from discontinued operations 0 (413,025)
----------- -----------
Net Income (Loss) before Provision
for Income Taxes (2,376,488) (878,269)
Provision for Income Taxes
Current 0 75,000
Change in valuation allowance 0 69,425
----------- -----------
Net Income (Loss) $(2,376,488) $(1,022,694)
=========== ===========
Basic Net Income (Loss) per share $ (0.568) $ (0.168)
Weighted average shares outstanding: 4,181,348 6,100,537
</TABLE>
See accompanying notes to the financial statements.
F3
<PAGE>
Capitol Communities Corporation
Statement of Changes in Stockholders Equity
For the Year Ended September 30, 2000
<TABLE>
<CAPTION>
Common Additional Treasury Retained
Shares Stock Paid in Capital Stock Earnings
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/30/99 7,630,050 $ 76,300 $ 7,470,913 $(4,795,851) $(6,043,627)
Additional Stock
Issued For Services 140,000 1,400 33,600 0 0
Net Income (Loss) for
the Year Ended 9/30/00 0 0 0 (2,358,218)
--------------------------------------------------------------------------------
Balance at 9/30/00 7,770,050 $ 77,700 $ 7,504,513 $(4,795,851) $(8,401,845)
================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
F4
<PAGE>
Capitol Communities Corporation
Statements of Cash Flows
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(2,376,488) $(1,022,694)
Amortization 758,367 1,474,518
Depreciation 7,602 21,281
Unrecognized Land Sale Profit 1,577,312
Common Stock Issued for Services 35,000 34,761
Forgiven Salaries and fees added to Paid in Capital 4,500
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables 45,779 410,830
(Increase) Decrease in Inventory 0 26,575
(Increase) Decrease in Other Assets 0 382,818
(Increase) Decrease in Real Estate Holdings 184,589 7,027,281
(Increase) Decrease in Investments 105,663 (2,844,474)
(Increase) Decrease in PrePaid Assets 1,802 252,315
Increase (Decrease) in Accrued Expenses 828,445 (532,239)
(Increase) Decrease in Deferred Tax Asset 69,425
----------- -----------
Net Cash Used for Operations (409,241) 6,882,209
Cash Flows from Investing Activities:
Cash used for Acquisitions
Collections of Notes Receivable 383,000 1,437,098
Write off of Note Receivable 144,000
Increase in Notes Recievable (457,520)
Disposal of Furniture and Fixtures 9,568 102,211
Acquisition of Furniture and Fixtures (1,829) (16,945)
----------- -----------
Net Cash Provided (Used) in Financing Activities (77,219) 1,522,364
Cash Flows from Financinging Activities:
Increase in Notes Payable 461,349 9,173,291
Payment of Notes Payable (738,065) (11,625,212)
Loan Origination Fees (203,711) (1,704,681)
Cash used in Divestments (21,018)
Acquisition of Treasury Stock (4,409,593)
----------- -----------
Net Cash Provided (Used) in Investing Activities (480,427) (8,587,213)
Net Increase (Decrease) in Cash (812,449) (182,640)
Beginning Cash 864,381 1,047,021
----------- -----------
Ending Cash $ 51,932 $ 864,381
=========== ============
Supplemental Information:
Operating cash flows from reorganization items:
Professional fees paid for services rendered in connection with
the Chapter 11 proceeding, included in net cash used in operating
activities $ (15,000)
</TABLE>
See accompanying Notes to Financial Statements.
F5
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
A. Background
----------
The Company was originally incorporated in the State of New York on
November 8, 1968 under the name of Century Cinema Corporation. In 1983, the
Company merged with a privately owned company, Diagnostic Medical Equipment
Corp. and as a result changed its name to that of the acquired company. By
1990, the Company was an inactive publicly held corporation. In 1993, the
Company changed its name to AWEC Resources, Inc. and commenced operations.
On February 11, 1994 the Company formed a wholly owned subsidiary AWEC
Development Corp, an Arkansas corporation, which later changed its name to
Capitol Development of Arkansas.
In February, 1994 Petro Source Energy Corporation transferred the majority
of its holdings in the common shares of the predecessor corporation, AWEC
Resources, Inc., to Prescott Investments Limited Partnership and Charlie
Corporation, both of which were then and currently are affiliates of
Michael Todd, Herbert Russell and John DeHaven, the beneficial owners of
the Company. These shares were transferred in consideration for public
relations services provided by Prescott Limited Partnership and Charlie
Corporation to Petro Source. Such services were deemed by Petro Source to
be integral and indispensable to the concurrent acquisition of
approximately 2,041 acres of land in Maumelle, Arkansas by the Company's
Operating Subsidiary. The Company was not a party to the transfer of
shares. The Company did not issue any new shares pursuant to the
acquisition of the land. Accordingly, the transfer of shares did not affect
the capitalization of the Company, and was non-dilutive to all other
shareholders.
In order to effectuate a change in domicile and name change approved by a
majority of the Predecessor Corporation shareholders, the Predecessor
Corporation merged, effective January 30, 1996, into Capitol Communities
Corporation, a Nevada corporation formed in August 1995 solely for the
purpose of the merger. The Company is currently in the business of
developing and selling real estate properties.
On July 21, 2000 Capitol Development of Arkansas, Inc., a wholly owned
subsidiary, filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code.
B. Principles of Consolidation
---------------------------
The Consolidated financial statements include accounts of its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated.
C. Real Estate Holdings
--------------------
Real estate investments are stated at the lower of cost or market.
Acquisition costs are allocated to respective properties based on
appraisals of the various properties acquired in the acquisition.
<PAGE>
D. Income Taxes
------------
In February 1992, the Financial Accounting Standards Board issued Statement
on Financial Accounting standards 109 of "Accounting for Income Taxes."
Under Statement 109, deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. The Company has net operating losses
(NOL's) of approximately $10,600,000 expiring in the years 2006 through
2010.
<TABLE>
<S> <C>
Deferred tax benefit (34% statutory rate) $3,604,000
Valuation allowance 3,604,000
----------
Net Benefit $ 0
----------
</TABLE>
Due to the uncertainty of utilizing the NOL and recognizing the deferred
tax benefit, an offsetting valuation allowance has been provided.
E. Revenue Recognition
-------------------
Revenue is recognized under the full accrual method of accounting upon the
completed sale of real property held for development and sale. All costs
incurred directly or indirectly in acquiring and developing the real
property are capitalized.
F. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
G. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on hand, cash in banks, and any
highly liquid investments with a maturity of three months or less at the
time of purchase.
The Company and its Subsidiaries maintain cash and cash equivalent balances
at several financial institutions which are insured by the Federal Deposit
Insurance Corporation up to $100,000. At September 30, 2000 the company had
less than $100,000 on deposit resulting in no concentration of credit risk
from uninsured bank balances.
H. Earnings/Loss Per Share
-----------------------
Primary earnings per common share are computed by dividing the net income
(loss) by the weighted average number of shares of common stock and common
stock equivalents outstanding during the year. The number of shares used
for the fiscal years ended September 30, 2000 and 1999 were 4,181,348 and
6,100,537, respectively.
NOTE 2 - GOING CONCERN CONSIDERATIONS
----------------------------
The company has incurred significant losses from operations for the current
year, has a substantial accumulated deficit, has non-productive assets and
is highly illiquid. The
<PAGE>
Company is currently in default on a $3.4 million mortgage as well as
$6,717,740 of short term unsecured debt. No claim for payment has been made
for a $200,000 note due January 6, 1996. At the time of this report the
debt due to Bank of Little Rock has matured and not been paid or extended.
Management has begun implementation of plans to make the company more
viable. The ultimate outcome of these plans can not be determined.
The Company's wholly owned subsidiary, Capitol Development of Arkansas,
Inc., which holds substantially all of the Company's assets, filed a
voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court, Eastern Division on
July 21, 2000.
Subsequent to the Company s fiscal year-end, on November 16, 2000, the
Operating Subsidiary filed a Disclosure Statement and a Plan of
Reorganization (the Plan ) with the Bankruptcy Court to satisfy its
existing debts. The Plan has not yet been presented to creditors for
acceptance or rejection. As of the date of this Report, the Bankruptcy
Court has not scheduled a hearing to consider confirmation o f the Plan.
The Bankruptcy Court has approved the Operating Subsidiary s Disclosure
Statement, but a formal order has not yet been filed by the Court.
On December 7, 2000, Nathaniel S. Shapo, the Director of Insurance for the
State of Illinois, in his capacity as Liquidator ( Liquidator ) of Resure,
Inc. ( Resure ), filed a Motion to Dismiss (the Operating Subsidiary s
petition for bankruptcy), or in the alternative, Motion for the Appointment
of a Trustee.
If the Plan is not confirmed, the Operating Subsidiary may be forced into
Chapter 7, at which point the Operating Subsidiary would be forced to
liquidate its assets to meet the obligations of the secured creditors and
if any funds are available thereafter to meet the obligations of the
unsecured.
There can be no assurance the plan will be approved, or if approved it may
not be approved under the terms submitted. Accordingly the Company has
accrued interest through September 30, 2000 on the Resure debt and all
other debt. The company has not adjusted the carrying value of its real
estate assets. In all cases the amount of secured debt exceeds the carrying
value of the land.
NOTE 3 - SUBSIDIARY'S PETITION FOR RELIEF UNDER CHAPTER 11
-------------------------------------------------
As noted above, on July 21, 2000, the Company's subsidiary, Capitol
Development of Arkansas, Inc. (the Debtor) filed a petition for relief
under Chapter 11 of the federal bankruptcy law in the United States
Bankruptcy Court for the Eastern District of Arkansas. Under Chapter 11,
certain claims against the Debtor in existence prior to the filing of the
petitions for relief under the federal bankruptcy laws are stayed while the
Debtor continues business operations as Debtor-in-possession. These claims
are reflected in the September 30, 2000, Balance Sheet as "Liabilities
subject to compromise." Additional claims (liabilities subject to
compromise) may arise subsequent to the filing date resulting from
rejection of executory contracts, including leases, and from the
determination by the court (or agreed to by parties in interest) of allowed
claims for
<PAGE>
contingencies and other disputed amounts. Claims secured against the
Debtor's assets (secured claims) also are stayed, although the holders of
such claims have the right to move the court for relief from the stay.
Secured claims are secured primarily by liens on the Debtor's real
property. Under the American Institute of Certified Public Accountants SOP
90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, the debtors secured debt is not classified as Liabilities
subject to compromise. Under SOP 90-7 secured debt is considered a
Liability subject to compromise if the fair value of the collateral is less
than the allowed liability. It is management's belief that the fair value
of the secured collateral for each debt exceeds the allowed liability.
At September 30, 2000 the summary financial statements of the subsidiary,
without elimination of intercompany accounts are as follows:
<TABLE>
<S> <C>
Cash 14,656
Other Current Assets 490,437
Real Estate 5,367,788
Investment in TradeArk 2,738,811
Other Assets 56,056
Total Assets 8,667,748
=========
Notes Payable 5,293,569
Accounts Payable and Accrued Expenses 911,229
Liabilities Subject to Compromise 636,404
Total Liabilities 6,841,202
=========
</TABLE>
Included above are Intercompany receivables of $50,000. Intercompany
Payables of $227,374. Investment in a subsidiary of $50,000.
<TABLE>
<S> <C>
Revenues, net of cost of sales $ 653,831
Operating Expenses 244,708
Interest 541,310
Loss of unconsolidated subsidiary 191,180
Net Loss (323,367)
=========
</TABLE>
NOTE 4 - LIABILITIES SUBJECT TO COMPROMISE
---------------------------------
As a result of the Operating Subsidiary's bankruptcy petition all then
existing debts, liabilities and obligations of the subsidiary matured and
became due and payable. All acts to collect these debts and liabilities
were stayed. The pre-petition debt is reflected on the Company's
Consolidated Balance Sheet as Liabilities Subject to Compromise. At
September 30, 2000 the Liabilities Subject to Compromise consist of the
following:
<TABLE>
<S> <C>
Accounts Payable $107,880
Accrued Interest Payable 101,150
Notes Payable 200,000
Intercompany Account Payable 227,374
--------
$636,404
========
</TABLE>
<PAGE>
The Intercompany Account Payable is eliminated on the Company's
Consolidated Balance Sheet leaving the balance of $409,030 shown on the
Consolidated Balance Sheet.
NOTE 5 - RELATED PARTY TRANSACTIONS
--------------------------
Currently the Company has an informal agreement with Maumelle, Enterprise,
Inc. (Maumelle). A business owned by an officer of the company, to provide
management, sales and administrative services for the Company Under this
informal agreement payment to Maumelle for such services depends upon the
actual services rendered in a given month and the current liquidity of the
Company.
During the fiscal year ended September 30, 2000, the Company paid Maumelle
a total of $75,115 and owes $66,329 for fees due for fiscal year 2000. As
of September 30, 1999, a balance of $33,463 was overpaid and due back from
Maumelle. This was paid back by Maumelle assuming a $31,000 debt and
making a payment of $3,000.
The Company is subleasing office space from DeHaven, Todd & Co., in which a
principal stockholder and officer of the company is a partner. The monthly
lease payment began on October 1, 1995 and expired September 30, 1998 and
has been continued on a month by month basis.
NOTE 6 - MORTGAGE IN DEFAULT
-------------------
On September 11, 1995, the Company entered into a promissory note with
Resure, Inc. for $3,500,000, bearing interest at 10% per annum, payable in
full on July 1, 2000. Effective September 30, 1997, the Company entered
into a modification of the promissory note with Resure, Inc., with the
maturity date reset to October 1, 1999.
Payments are due in the amount of $101,591 including principal and interest
at 10% per annum, payable quarterly.
As of September 30, 2000, the principal balance due was $3,395,189, and the
company was in arrears on its $101,591 payment since July 1, 1998. The
Company did not pay the Mortgage on its maturity date. Accrued interest
through September 30, 2000 is approximately $849,050. The receiver for the
Resure, Inc. liquidation has filed suit against the Company seeking
judgment in the sum of $5.5 million for amounts due under the promissory
note and a developers fee as per a settlement agreement dated September 30,
1997. The mortgage is secured by 701.3 acres of land in Maumelle, Arkansas,
with cost basis of $3.473 million.
Management had been in discussion with the Resure, Inc. receiver to make
settlement arrangements and had reached an agreement. Under the agreement a
payment of the principal and accrued interest due under the promissory
note, approximately $3.99 million would satisfy the mortgage and developers
fee. The Company was unable to pay the settlement amount by the payment
date specified in the agreement.
<PAGE>
Under the plan of reorganization filed by the Company's subsidiary the
amount to be paid to Resure is previously agreed upon settlement amount of
$3.99 million. Resure has objected to the plan. Resure is taking the
position that the failure to pay the settlement amount by the stated
closing date has voided the settlement agreement. Resure is asking for
payment of the full amount of principal and accrued interest as well as the
$2 million developers fee. Additionally, Resure states that approximately
$309,000 of the developers fee should have been paid in connection with
previous property sales according to the terms of the previous agreement.
Additionally, the Company is currently in default on $6,717,740 of
unsecured short term notes which matured on various dates from November
1999 through September 2000 and an unsecured note for $200,000 which was
due January 6, 1996 and the debt due to Bank of Little Rock has matured and
not been paid or extended.
NOTE 7 - EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
The Company has a five-year written agreement with an individual to perform
the duties of President. Under the agreement, which became effective on
October 1, 1995, he is to be compensated at a rate of $20,000. per month.
The agreement expired on September 30, 2000 and has not been renewed or
extended pending improvement of the Company's financial position. The
Company is not a party to any other employment agreements.
NOTE 8 - NOTES PAYABLE
-------------
Notes payable consist of the following:
<TABLE>
<S> <C>
Note Payable - Bank of Little Rock
Secured Line of Credit, 11.00% per annum;
secured by 11 acres Maumelle, AR
maturing January 10, 2001 $ 399,524
Note Payable - Bank of Little Rock
Secured Note, 11.00% per annum;
secured by 11 acres Maumelle, AR
maturing January 10, 2001 200,913
Note Payable - First Arkansas Valley Bank
Secured Note, 10.50% per annum;
secured by 332 acres residential land Maumelle, AR
maturing October 14, 2000; subsequently renewed
in the amount of $995,000 until October 14, 2001 1,295,000
Note Payable - Davister
Unsecured Note, 9% per annum;
matured January 6, 1996 200,000
Notes Payable - Various
Unsecured notes, interest from 10.90% to 14.00%
with maturities not in excess of nine months all of
which are currently in default, 6,720,683
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Note Payable - Resure Mortgage
Secured 10% per annum due October 1, 1999
secured by 701 acres residential land Maumelle, AR
payable with quarterly payments beginning
1/1/98 for $101,591; mortgage is delinquent 3,395,189
Total Current Maturities 12,211,309
----------
Total Non-Current Maturities -
Total Notes Payable 12,211,309
==========
</TABLE>
The company has not obtained extensions on many of the notes and mortgages
payable that have become due and are in default. The two secured notes to
Bank of Little Rock matured on January 10, 2001. At the time of this
report they have not been paid or extended. The categorization between
current and non current was based on the original maturity date.
NOTE 9 - EQUITY TRANSACTIONS
-------------------
During the year 140,000 shares of common stock, which had been previously
issued were released from escrow. Due to the uncertainty of the
consideration and the anti-dilutive effects, the shares were not considered
as issued and outstanding for financial statement purposes until released
from escrow. The shares were valued at $35,000.
NOTE 10 - UNCONSOLIDATED SUBSIDIARIES
---------------------------
The Company holds a 35.16% interest in TradeArk Properties, LLC. The
investment in TradeArk is accounted for under the equity method. The
Company reports its proportionate share of the investments operating income
or loss and increasing or decreasing the carrying value of the investment
accordingly. In the case of TradeArk, the company also decreased its
carrying value by the amount of the unrecognized land sales profit in
accordance with SFAS 66 . This difference between the carrying value of the
investment and the underlying equity in the investment will be accounted
for as the assets of TradeArk are sold or otherwise disposed. The amount of
unrecognized land sales profit was $1,577,312. During the fiscal year ended
September 30, 2000 TradeArk sold property with a basis of $450,000. Under
the provisions of SFAS 66 the Company recognized $85,517 of previously
unrecognized land sales profit, leaving a balance of $1,491,795 for future
periods.
At September 30, 2000, TradeArk holds Real Estate valued at $7,850,000,
viatical contracts valued at $8,300,000 and other assets of $158,673.
TradeArk liabilities include a mortgage of $3,726,148 and other liabilities
of $616,345. Members Equity is $11,966,180. Operating loss for the 12
months ended September 30, 2000 was $611,242.
NOTE 11 - NOTE RECEIVABLE
---------------
The Company, upon review decided to value this note at zero. At the time of
the write off the note had a principal balance of $144,000 with accrued
interest receivable of $38.847. Of the amount, $17,048 had been previously
recognized as interest income in the current year. Interest income was
reduced by this amount.
<PAGE>
EXHIBITS
The following Exhibits are filed as part of this Report. (Exhibits numbers
correspond to the exhibits required by Item 601 of Regulation S-B for an annual
report on Form 10-KSB,
11. Statement of Computation of Per Share Earnings.
23. Consent of Joel S. Baum P.A.
27. Financial Data Schedule
See Financial Statements starting at F-1, To F-12.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed by the Company during the
fiscal quarter ended September 30, 2000.
During the last quarter of the Company's fiscal year ended September 30,
2000, the Company filed a Current Report on Form 8-K dated July 28, 2000,
reporting the Company's wholly-owned subsidiary, Capitol Development of
Arkansas, Inc., filed for Chapter 11 with the United States Bankruptcy Court,
Eastern District of Arkansas.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, there unto
duly authorized.
CAPITOL COMMUNITIES CORPORATION
Date: January 12, 2001 By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief
Executive Officer
