UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2000
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the transition period from _____ to_____
Commission File No. 0-23450
CAPITOL COMMUNITIES CORPORATION
(Exact name of Small Business Issuer as specified in its charter)
Nevada 88-0361144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25550 Hawthorne Boulevard
Suite 207
Torrance, CA 90505
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (310) 375-2266
Check whether the issuer (1) filed all reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act during the past 12 months (or for
such period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
[X] YES [_] NO
The following officers, directors, and beneficial owners of 10% or more of
the Company's Common Stock were delinquent in filing an Annual Statement of
Changes in Beneficial Ownership on Form 5: Michael G. Todd and David R. Paes.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock ($.01 Par Value) 4,230,361
(Title of Class) Shares Outstanding as of February 14, 2001
Transitional Small Business Disclosure Format: [_] YES [X] NO
CAPITOL COMMUNITIES CORPORATION
Form 10-QSB
QUARTER ENDED December 31, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(Unaudited).................................................... 3
Consolidated Balance Sheet
December 31, 2000........................................... 3
Consolidated Statement of Cash Flows
For the Three Months Ended December 31, 2000 and 1999....... 4
Consolidated Statement of Operations
For the Three Months ended December 31, 2000 and 1999....... 5
Consolidated Statement of Stockholders' Equity
For the Three Months ended December 31, 2000................ 6
Notes to Consolidated Financial Statements December 31, 2000... 7
Item 2. Management's Discussion And Analysis or Plan of Operation............ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 14
Item 3. Defaults Upon Senior Securities...................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................... 16
Signatures..................................................... 16
2
Capitol Communities Corporation
Consolidated Balance Sheet
December 31, 2000
UNAUDITED
Current Assets
Cash in Bank $ 89,283
Accounts Receivable 1,587
Prepaid Assets 736
----------------
Total Current Assets 91,606
Plant property and equipment
Furniture and Equipment, net of accumulated depreciation of $8,361 7,898
Other Assets
Land and Real Estate Holdings 5,367,788
Investment in Trade Ark Properties 2,689,478
----------------
Total Other Assets 8,057,266
Total Assets $ 8,156,770
================
Current Liabilities
Notes Payable 11,710,537
Accounts Payable & Accrued Expenses 2,170,702
----------------
Total Current Liabilities 13,881,239
Non Current Liabilities -
Liabilities of Subsidiary Subject to Compromise 385,771
----------------
Total Liabilities 14,267,010
Shareholders' Equity
Preferred stock-$.01 par value, none issued -
Common Stock-$.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 (8,896,601)
----------------
Total Shareholders' Equity (6,110,240)
Total Liabilities and
Shareholders' Equity $ 8,156,770
================
3
Capitol Communities Corporation
Statements of Cash Flows
For the Three Months Ended December 31, 2000 and 1999
UNAUDITED
2000 1999
---- ----
Cash Flows from Operating Activities:
Net Loss $ (476,486) $ (873,685)
Amortization - 317,613
Depreciation 545 1,831
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables 4,188 (297)
(Increase) Decrease in Real Estate Holdings - (425)
(Increase) Decrease in Investments 49,333 52,695
(Increase) Decrease in PrePaid Assets 547 (1,502)
Increase (Decrease) in Accrued Expenses 325,735 169,265
Liabilities Subject to Compromise (23,259) -
----------------- -----------------
Net Cash Used for Operations (119,397) (334,505)
Cash Flows from Investing Activities:
Collections of Notes Receivable 457,520 347,000
Increase (decrease) in loan fees - (220,707)
----------------- -----------------
Net Cash used in Investing Activities: 457,520 126,293
Cash Flows from Financing Activities:
Increase in Notes Payable 20,000
Payment of Notes Payable (300,772) (497,836)
----------------- -----------------
Net Cash used in Financing Activities: (300,772) (477,836)
Net Increase (Decrease) in Cash 37,351 (686,048)
Beginning Cash 51,932 864,381
Ending Cash $ 89,283 $ 178,333
================= =================
Supplemental Information:
Operating cash flows from reorganization items:
Quarterly Trustee fee paid in connection
with the Chapter 11 proceeding, included in net cash used
in operating activities (500)
4
Capitol Communities Corporation
Consolidated Statements of Operations
For the Three months Ended December 31, 2000 and 1999
UNAUDITED
2000 1999
Revenues:
Sales $0 $0
Miscellaneous Income - 525
Cost of Sales - -
---------- ------------
Gross Profit $0 $525
Operating Expenses:
General & Administrative
Expenses 109,670 528,557
---------- ------------
Net Income (Loss) Before
Interest Income (109,670) (528,032)
Operations of Unconsolidated Investments (49,333) (52,695)
Interest Income 540 7,186
Interest Expense (318,023) (300,144)
---------- ------------
Net Income (Loss) from continuing operations ($476,486) ($873,685)
Net Income (Loss) ($476,486) ($873,685)
========== ============
Basic Earnings (Loss) per share (0.113) (0.214)
========== ============
Weighted average shares outstanding: 4,230,361 4,090,361
========== ============
5
Capitol Communities Corporation
Statement of Changes in Stockholder's Equity
For the Three Months Ended December 31, 2000
Unaudited
Common Additional Treasury Retained
Shares Stock Paid in Capital Stock Earnings
- -------------------------------------------------------------------------------------------------------------------
Balance at 9/30/00 7,770,050 $ 77,700 $ 7,504,513 $(4,795,851) $(8,420,115)
Additional Stock
Issued
Net Income (Loss) for
the Period Ended 12/31/00 (476,486)
Balance at 12/31/00 7,770,050 $ 77,700 $ 7,504,513 $(4,795,851) $(8,896,601)
6
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Background
----------
The consolidated balance sheet at December 31, 2000 and the related
statements of operations and cash flows for the three month period ended
December 31, 2000, include the accounts of Capitol Communities Corporation
and its wholly owned subsidiaries and are unaudited.
All inter-company accounts and transactions have been eliminated in
consolidation.
These unaudited interim consolidated financial statements should be read in
conjunction with the September 30, 2000 fiscal year end financial
statements and related notes. The unaudited interim financial statements
reflect all adjustments which are, in the opinion of management, necessary
for a fair statement of results for the interim periods presented and all
such adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results for a full year.
The Company was originally incorporated in the State of New York on
November 8, 1968 under the name of Century Cinema Corporation. In 1983, the
Company merged with a privately owned company, Diagnostic Medical Equipment
Corp. and as a result changed its name to that of the acquired company. By
1990, the Company was an inactive publicly held corporation. In 1993, the
Company changed its name to AWEC Resources, Inc. and commenced operations.
On February 11, 1994 the Company formed a wholly owned subsidiary AWEC
Development Corp, an Arkansas corporation, which later changed its name to
Capitol Development of Arkansas.
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
7
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.
Revenue Recognition
-------------------
The full accrual method is used to determine the recognition of revenue. In
order to recognize revenue and profit under the full accrual method the
following criteria must be met. The profit from the sale must be
determinable, that is, the collectibility of the sales price is reasonably
assured, or any portion which may not be collectible can be reasonably
estimated. In addition, the earnings process must be complete, with no
significant activities required of the seller after the sale in order to
earn the profit from the sale.
Earnings/Loss Per Share
-----------------------
Primary earnings per common share are computed by dividing the net income
(loss) by the weighted average number of shares of common stock and common
stock equivalents outstanding during the year. The number of shares used
for the three months ended December 31, 2000 and 1999 were 4,230,361 and
4,090,361, respectively.
NOTE 2 -GOING CONCERN CONSIDERATIONS
----------------------------
The company has incurred significant losses from operations for the current
year, has a substantial accumulated deficit, has non-productive assets and
is highly illiquid. The Company is currently in default on a $3.4 million
mortgage as well as $6,717,740 of short term unsecured debt. No claim
8
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.
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 been presented to creditors for
acceptance or rejection. As of the date of this Report, the Bankruptcy
Court had scheduled a hearing to consider confirmation o f the Plan. This
hearing was scheduled for February 21, 2001, but has been continued. The
specific hearing date has not been scheduled. The Bankruptcy Court has
approved the Operating Subsidiary s Disclosure Statement.
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. This motion is scheduled for hearing simultaneously with the
hearing for confirmation of the plan.
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.
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
continued to accrue interest 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.
9
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
--------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward-Looking Statements
- --------------------------
In addition to historical information, this Report on Form 10-QSB contains
forward-looking statements within the meaning of the Private Litigation Reform
Act of 1995. Such forward-looking statements are generally accompanied by words
such as "intends," "projects," "strategies," "believes," "anticipates," "plans,"
and similar terms that convey the uncertainty of future events or outcomes. The
forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in ITEM 2 of this
Report, the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION." 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 (the "Plan") filed
with the United States Bankruptcy Court on November 16, 2000 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 (the "SEC"), including without limitation those identified
in the "Risk Factors" section of the Company's Registration Statement filed with
the SEC in September 1996 on Form 10-SB.
The the following discussion should be read in conjunction with the
unaudited financial statements appearing in Item 1, of this Part 1 ("the
Financial Statements"), and the information provided later in Item 2, of this
Report. As noted below, the Company needs to reorganize its defaulted debt and
raise additional capital to overcome its present illiquidity and commence
significant operations.
10
Financial Condition
- -------------------
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. 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.
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.
The Company is currently negotiating to secure additional debt financing,
however, there can be no assurance that financing can be obtained, or that the
Company will be able to raise the additional capital needed to satisfy long-term
liquidity requirements.(See "LIQUIDITY AND CAPITAL RESOURCES," below).
Change in Financial Condition Since the End of Last Fiscal Year. At
----------------------------------------------------------------
December 31, 2000, the Company had total assets of $8,156,770, a decrease of
$474,782 or 5.50% of the Company's total assets, as of the Company's fiscal year
end of September 30, 1999. The Company had cash of $89,283 December 31, 2000
compared to $51,932 at September 30, 1999, a increase of $37,351.
The current portion of Notes Receivable decreased from $457,520 on
September 30, 2000 by $457,520 to zero on December 31, 2000.
The carrying value of the Company's real estate holdings remained unchanged
during the three months at $5,537,788. The Company's investment in Trade Ark,
decreased from $2,738,811 to $2,689,478 reflecting the Company's portion of the
net loss by Trade Ark, which is accounted for by the equity method.
Total liabilities of the Company at December 31, 2000 were $14,267,010, an
increase of $1,704 from the September 30, 2000 total of $14,265,306. The current
liability for notes payable decreased by $300,772 during the three months, from
$12,011,309 to $11,710,537. This resulted primarily from the payment of a
$300,000 release payment to First Arkansas Valley Bank.
Accounts payable and accrued expenses increased by $325,735. At September
30, 2000 the liability for accounts payable and accrued expenses totaled
$1,844,967. At December 31, 2000 the balance was $2,170,702. Accrued Interest
Payable increased by $279,133 from $1,349,450 at September 30, 1999 to
$1,628,583 at December 31, 2000. Accrued real estate taxes payable decreased
from the September 30, 2000 balance of $22,958 to a balance of $9,856, an
decrease of $13,102 as of December 31, 2000.
11
Shareholders' Equity decreased by $476,486. The decrease results entirely
from the operating loss of $476,486 for the three month period ending December
31, 2000. During the period from September 30, 2000 to December 31, 2000 the
Company did not have any capital transactions.
Results of Operations
- ---------------------
Comparison of the Three Months Ended December 31, 2000 to the Three Months
--------------------------------------------------------------------------
Ended December 31, 1999 For the three months ended December 31, 2000 the
- -----------------------
Company experienced a net loss of $476,486 compared with a loss of $873,685 for
the three months ended December 31, 1999. While there were no sales from
continuing operations during both periods, general and administrative expenses
decreased by $418,887 from $528,557 to $109,670, and interest expense increased
by $17,879, from $300,144 to $318,023 resulting in the decrease in net loss.
General and administrative expenses decreased from $109,670 for the
three months ended December 31, 2000 from $528,557 for the three months ended
December 31, 1999. Management fees totaled $26,719 for the three months ended
December 31, 2000, a decrease of $9,460 from the $36,179 expense for the three
months ended December 31, 1999. Consulting fees of $46,828 for the three months
ended December 31, 1999 decreased to zero for the three months ended December
31, 2000. The major cause of the decrease in general and administrative expenses
was a result Amortization expense which decreased by $317,613 from $317,613 for
the three months ending December 31, 1999 to zero for the three months ended
December 31, 2000.
Interest income decreased from $7,186 for the three months ended December
31, 1999 to $540 for the three month period ended December 31, 2000.
Interest expense increased by $17,879 from $300,144 for the three months
ended December 31, 1999 to $318,023 for the three months ended December 31,
2000.
The operating loss recorded for unconsolidated subsidiaries accounted for
under the Equity method totaled $49,332 for the three months ended December 31,
2000 compared to a loss $52,695. for the three months ended December 31, 1999,
an improvement of $3,362.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents amount to $89,283 or 1.10% of total assets at
December 31,2000, as compared with $51,932 at September 30, 1999. The Company's
liquidity position at December 31, 2000, is not adequate to meet the Company's
liquidity requirements. As of December 31, 2000, the Company has approximately
$10,115,100 in defaulted debt, and $600,437 in short-term debt due within the
next six months. All of the defaulted debts, except for $6,717,740 in short-
term promissory notes ("Bridge Notes") discussed below, are pre-petition
obligations and collection is stayed under the Operating Subsidiary's bankruptcy
petition.
As of the date of this Report, the Operating Subsidiary has been in default
on a note from Resure Inc. (the "Resure Note"), in the amount of $3,500,000 plus
interest, since July 1, 1998. On April 19, 1999, a foreclosure action was
instituted by the Resure Liquidator against the Operating
12
Subsidiary in the Chancery Court of Pulaski County, Arkansas seeking to
foreclose on approximately 701 acres of residential land in Maumelle, Arkansas
(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 "2000 Settlement
Agreement"). 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. This pre-petition obligation is stayed under the Operating
Subsidiary's bankruptcy petition. Management believes the 2000 Settlement
Agreement with Resure is in effect, and the balance owing on the Resure Note is
$3,987,353 in principal and interest, as of December 31, 2000. If the 2000
Settlement is found not to be in effect, the balance owing on the Resure Note is
$4,329,816, as of December 31, 2000. Collection on this pre-petition debt is
stayed under the Operating Subsidiary's bankruptcy petition. See Part II, ITEM
1, "LEGAL PROCEEDINGS."
An unsecured note to Davister Corp. (the "Davister Note") in the amount of
$200,000 has matured, and collection on this pre-petition obligation is stayed
under the Operating Subsidiary's bankruptcy petition.
Subsequent to December 31, 2000, the Bank of Little Rock line of credit in
the amount of $400,000 and a line of credit in the amount of $200,000 matured on
January 11, 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.
As of December 31, 2000, the Company has borrowed $6,717,740 from private
sources, (the "Bridge Loans"). All of these Bridge Loans have matured and are in
default. The Bridge Loans are unsecured, however the Company provided a
guarantee bond through New England International Surety Inc. (the "Surety") to
the Bridge Note holders. However, management has been notified by the Surety
that it has been served with a class action suit in federal court. As such, even
though the Company has defaulted on the Bridge Notes, the Surety will not be
able to make interest or principal payments to the noteholders until the action
is settled.
As of December 31, 2000, the Company owes $995,000 in principal and
interest to the First Arkansas Bank. This line of credit matures on October 14,
2001. However, collection on this pre-petition debt is stayed under the
Operating Subsidiary's bankruptcy petition.
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 filed
with the Bankruptcy Court, if approved by the court, and/or raise equity, there
can be no assurance that the Bankruptcy Court will approve the Operating
Subsidiary's 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 Part II, ITEM 1, "LEGAL
PROCEEDINGS."
13
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 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.
The Company is also exploring opportunities to develop and sell portions of
its Maumelle Property with joint venture partners.
PART II. OTHER INFORMATION
ITEM 1. 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
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. 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.
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.
14
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,
"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
residential land 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 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.
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The Bankruptcy Court scheduled a hearing for February 21, 2001 to consider
confirmation of the Operating Subsidiary's Plan, but the hearing was continued
and the date for a new hearing is pending.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company incorporates by reference the information regarding defaults of
certain debt obligations from Part I, ITEM 2 "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF PLAN OF OPERATION - Liquidity and Capital Resources," and Part II,
ITEM 1, LEGAL PROCEEDINGS."
ITEM 5. OTHER INFORMATION.
The Company incorporates by reference the information in Part I, ITEM 2,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and
Capital Resources."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBITS
The following Exhibits are filed as part of this Report.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
b) REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITOL COMMUNITIES CORPORATION
Date: February 16, 2001 By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief Executive Officer
Date: February 16, 2001 By: /s/ David Paes
Treasurer and Vice President
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