UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] 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. 001-12171
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
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) 7,131,000
(Title of Class) Shares Outstanding as of
April 30, 1997
Transitional Small Business Disclosure Format: [_] YES [X] NO
CAPITOL COMMUNITIES CORPORATION
Form 10-QSB
QUARTER ENDED March 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).................................. 3
Consolidated Balance Sheet
March 31, 1997.................................................... 3
Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 1997 and 1996.................. 4
Consolidated Statement of Operations
For the Six Months ended March 31, 1997 and 1996.................. 5
Consolidated Statement of Operations
For the Three Months ended March 31, 1997 and 1996................ 6
Notes to Consolidated Financial Statements
March 31, 1997.................................................... 7
Item 2. Management's Discussion And Analysis of Plan of Operation......... 9
PART II. OTHER INFORMATION
Item 1 Legal Proceedings................................................. 16
Item 3 Defaults Upon Senior Securities................................... 16
Item 5. Other Information................................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
Signatures.................................................................. 19
Index to Exhibits
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
--------------------------------
Capitol Communities Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, 1997 and September 30, 1996
UNAUDITED
March 31, 1997 September 30,1996
-------------- -----------------
Current Assets
Cash in Bank $ 273,761 (185,911)
Accounts Receivable 1,057 1,056
Prepaid Assets 226,962 6,893
Accrued Interest 123,893 62,140
----------- -----------
Total Current Assets 625,673 (115,822)
Loan & Origination Fees,
Net of Amortization 271,700 211,601
Other Assets
Deposits 14,129 129
Real Estate Holdings 8,766,594 9,156,357
Investments 3,500,000 3,500,000
----------- -----------
Total Other Assets 12,280,723 12,656,486
Total Assets $13,178,096 $12,752,265
=========== ===========
Current Liabilities
Accounts Payable & $ 809,410 $ 1,108,924
Accrued Expenses
Accrued Interest 733,282 251,712
Notes Payable 2,525,313 1,995,975
----------- -----------
Total Current Liabilities 4,068,005 3,356,611
Notes Payable 6,926,712 6,941,558
----------- -----------
Total Liabilities 10,994,717 10,298,169
Shareholders' Equity
Preferred Stock - -
Common Stock 7,188 7,000
Additional Paid in Capital 5,139,920 4,764,108
Accumulated Deficit (2,963,729) (2,317,012)
Total Shareholders' Equity 2,183,379 2,454,096
----------- -----------
Total Liabilities and
Shareholders' Equity $13,178,096 $12,752,265
=========== ===========
3
Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended March 31, 1996 and 1997
UNAUDITED
1997 1996
---------- ----------
Cash Flows from Operating Activities:
Net Loss $(646,717) $(566,436)
Amortization 42,301 28,616
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables (1) 11,332
(Increase) Decrease in Other Assets (14,000) (10,000)
(Increase) Decrease in Real Estate Holdings 389,763 (113,642)
(Increase) Decrease in Accrued Interest
Receivable (61,753) (121,702)
(Increase) Decrease in Pre-Paid Assets (220,069) (2,251)
Increase (Decrease) in Accrued Expenses (299,514) 316,295
Increase (Decrease) in Accrued Interest
Payable 481,570 277,639
Net Cash Used for Operations (328,420) (180,149)
Cash Flows from Financing Activities:
Increase in Notes Payable 514,492 1,836
Loan Origination Fees (102,400) -
Cash Flows from Investing Activities:
Issuance of Common Stock 376,000 0
--------- ---------
Net Increase (Decrease) in Cash 459,672 (178,313)
Beginning Cash (185,911) 265,703
--------- ---------
Ending Cash $ 273,761 $ 87,390
========= =========
4
Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Six Months Ended March 31, 1996 and 1997
UNAUDITED
1997 1996
---------- ----------
Revenues:
Sales $ 287,465 $ 0
Cost of Sales 43,701 -
---------- ----------
Gross Profit 243,764 0
Operating Expenses:
General & Administrative
Expenses 952,604 689,505
---------- ----------
Net Income (Loss) Before
Interest Income (708,840) (689,505)
Interest Income 62,123 123,069
---------- ----------
Net Income (Loss) $ (646,717) $ (566,436)
========== ==========
Net Income (Loss) per share $(0.090) $(0.081)
========== ==========
Weighted average shares outstanding: 7,151,099 7,000,000
========== ==========
Dividends per Share 0 0
---------- ----------
5
Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31, 1996 and 1997
UNAUDITED
1997 1996
---------- ----------
Revenues:
Sales $ 68,891 $ 0
Cost of Sales - -
---------- ----------
Gross Profit 68,891 0
Operating Expenses:
General & Administrative
Expenses 486,504 305,973
---------- ----------
Net Income (Loss) Before
Interest Income (417,913) (305,973)
Interest Income 370 58,920
---------- ----------
Net Income (Loss) $ (417,543) $ (247,053)
========== ==========
Net Income (Loss) per share $(0.058) $(0.035)
========== ==========
Weighted average shares outstanding: 7,188,000 7,000,000
========== ==========
Dividends per Share 0 0
---------- ----------
6
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MARCH 31, 1997
--------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
Background
----------
The consolidated balance sheet at March 31, 1997 and the related
statements of operations and cash flows for the six month period
ended March 31, 1997 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, 1996 fiscal year end
financial statements and related notes. The unaudited interim
financial statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the
interim periods presented and all such adjustments are of a normal
recurring nature. Interim results are not necessarily indicative of
results for a full year.
The Company was originally incorporated in the State of New York on
November 8, 1968 under the name of Century Cinema Corporation. In
1983, the Company merged with a privately owned company, Diagnostic
Medical Equipment Corp., and as a result changed its name to that of
the acquired company. By 1990, the Company was an inactive publicly
held corporation. In 1993, the Company changed its name to AWEC
Resources, Inc., and commenced operations. On February 11, 1994, the
Company formed a wholly-owned subsidiary, AWEC Development Corp., an
Arkansas corporation, which later changed its name to Capitol
Development of Arkansas Inc., on January 29, 1996. The Company was
formed to develop and sell real estate properties. In May 1994, the
Company formed a wholly-owned subsidiary, AWEC Homes, Inc., an
Arkansas corporation for the purpose of building single-family homes.
The subsidiary's name was changed to Capitol Homes, Inc., on January
29, 1996.
In order to effectuate a change in domicile and name change, approved
by a majority of the Predecessor Corporation shareholders, the
Predecessor Corporation merged, effective January 30, 1996, into
Capitol Communities Corporation, a Nevada corporation formed in August
1995, solely for the purpose of the merger.
Revenue Recognition
-------------------
The full accrual method is used to determine the recognition of
revenue. In order to recognize revenue and profit under the full
accrual method the following
7
criteria must be met. The profit from the sale must be determinable,
that is, the collectibility of the sales price is reasonably assured,
or any portion which may not be collectible can be reasonably
estimated. In addition, the earnings process must be complete, with no
significant activities required of the seller after the sale in order
to earn the profit from the sale.
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
March 31, 1997
--------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
------------------------------------------------
POLICIES (Continued)
--------------------
Earnings/Loss Per Share
-----------------------
Primary earnings per common share are computed by dividing the net
income (loss) by the weighted average number of shares of common stock
and common stock equivalents outstanding during the year. The number
of shares used for the fiscal year ended September 30, 1996 was
7,000,000 and for the six months ended March 31, 1997 was 7,151,099.
NOTE 2 - CAPITAL TRANSACTIONS
--------------------
In May 1993, the Company executed a 15 to 1 reverse stock split.
In September 1993, the Company issued an additional 4,282,126 shares
of common stock to existing stockholders.
In October 1993, the Company issued to Petro Source 6,079,000 shares
of common stock to acquire royalty interests in oil and gas properties
owned by Petro Source Energy Corp.
In July 1995, the Company executed a 5 to 1 reverse stock spilt.
In July 1995, the Company issued an additional 4,772,996 shares of
common stock to existing stockholders.
In October 1996, an individual pursuant to a consulting agreement,
exercised an option to purchase 38,000 shares of common stock.
In November 1996, an individual pursuant to a consulting agreement,
exercised an option to purchase 150,000 shares of common stock.
In April 1997 two shareholders returned a total of 57,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company.
8
Item 2. Management's Discussion and Analysis or Plan of Operation.
---------------------------------------------------------
Although the Company has yet to commence development, its focus is directed
towards the development and sale of commercial and residential real estate
projects on the more than 1,800 acres it owns in the City of Maumelle, Arkansas
("the Maumelle Property"), a 5,000 acre master planned community located fifteen
miles from downtown Little Rock. In addition, the Company has expanded its
focus to include the development and sale of vacation ownership interval ("VOI")
properties and hotel and vacation properties. In its efforts to diversify its
development focus, the Company has entered into an agreement to purchase the
assets of a VOI resort (SunBay Inc.), located in Hot Springs, Arkansas. See
"LIQUIDITY AND CAPITAL RESOURCES" below. The Company believes that its ability
to generate revenues in the future from its real estate development and other
activities will depend in large part on its ability to solve its current
illiquidity problems, the success of the Company's future capital-raising
efforts to overcome its present illiquidity position, and the Company's ability
to develop or acquire greater construction, sales and other real estate
development expertise than the Company now possesses. The following discussion
should be read in conjunction with the financial statements and the notes
thereto appearing in Item 1 of this Part I (the "Financial Statements").
Financial Condition
- -------------------
There continues to be substantial doubt about the Company's ability to
continue as a going concern, due to its current illiquidity and uncured defaults
in most of its secured debt. As discussed in more detail below, the Company
obtained $833,660 in secured short-term debt financing from private sources
during the three month period ended April 30, 1997 ,and has subsequently
obtained an additional $144,046 as of May 14, 1997. The Company is attempting to
obtain up to an additional $300,000 in such financing by the end of the
Company's third fiscal quarter. There can be no assurance, however, that such
additional financing can be obtained, or that it will be obtained in time to
permit the Company to forestall foreclosure on the property securing its
defaulted debt obligations. Even if such financing is obtained, the Company will
require substantial additional capital to satisfy its long-term liquidity
requirements.
Change in Financial Condition Since the End of the Last Fiscal Year.
--------------------------------------------------------------------
At March 31, 1997, the Company had total assets of $13,178,096, an increase of
$425,831, or 3.3% over the Company's total assets as of the Company's fiscal
year end of September 30, 1996. The Company had cash of $273,761 at March 31,
1997 compared to a negative cash position of $185,911 at September 30, 1996, an
improvement of $459,672. This improvement resulted from timber royalties
received during the six month period, sale of land and the secured short- term
debt financing (the "Bridge Loans") discussed later. See "LIQUIDITY AND CAPITAL
RESOURCES" below.
Prepaid assets increased from $6,893 on September 30, 1996 by $220,069 to
$226,962 on March 31, 1997. This increase was due to the prepayment of amounts
owed under two separate financial consulting contracts. One contract extends
through September 30, 1997, while the other
9
contract extends through December 31, 1997. The prepaid portion of these
contracts as of March 31, 1997 was $218,000. The prepayment of these amounts did
not result in a decrease in cash, since no cash was paid. Instead the
consultants were given credits against the exercise price of certain stock
options granted to them pursuant to the consulting contracts.
The carrying value of the Company's real estate holdings declined by $389,763
during the six months from $9,156,357 to $8,766,594. The largest component of
this decrease was the elimination of $208,172 of Special Taxes on certain
Maumelle Property commercial tracts. This cost had previously been capitalized,
so the elimination reduced the carrying value of the property. The Special Tax
reduction occurred as a result of a bond refinancing by the Improvement District
containing the bulk of the Company's commercial land. A second major component
of the decrease was the dismissal of the Holloway lawsuit against the Pine Ridge
District. The Company had accrued a liability of $200,000 which was capitalized
as part of the cost of the tract. Upon dismissal of the suit, this liability was
eliminated and the carrying value of the tract reduced. The sale of a portion
of one of the Commercial sites in December resulted in a net reduction of real
estate holdings of $28,361. This represents the allocated and land improvement
cost of that particular site, which was recognized as part of the cost of sales.
Additions to real estate holdings resulted from expenditures of $31,386 in
connection with the revival of a Purchase Contract for the acquisitions
project. The contract was renewed after an appeal and subsequent reversal of
the Little Rock City Council's prior denial of zoning changes and annexation
into the City. On April 9,1997 the Company paid a fee of $10,000 for a six
month extension on the agreement, to October 14, 1997. Additional capitalized
costs totaling $15,384 were added to real estate holdings primarily for pre-
development/acquisition costs on three different properties in Maumelle and one
in Hot Springs .
Total liabilities of the Company at March 31, 1997, had increased to
$10,994,717, an increase of $696,548 over the September 30, 1996 total of
$10,298,169. The liability for accrued interest increased to $733,282 at March
31, 1977 from $251,712 at September 30,1996. This increase of $481,570 reflects
the addition of $88,219 of interest resulting from the cancellation of the
payment made to Resure at September 30, 1996 due to the Company's inability to
acquire sufficient cash that had been anticipated to be received during October.
The balance of the increase reflects the fact that no interest was paid during
the six months ended March 31, 1997. The current liability for notes payable
increased by $529,338 during the six months, from $1,995,975 to $2,525,313.
This increase included the $412,000 of secured short term loans (the "Bridge
Loans") obtained in the six month period and a $14,846 reclassification of notes
payable to current liability for a principal payment due within one year of
March 31, 1997. The increase also included $89,120 in new borrowings. The
cancellation of the payment due to Resure on October 1, 1996 increased the
liability by $13,372.
Accounts payable and accrued expenses decreased by $299,514. At September
30,1996 the liability for accounts payable and accrued expenses totaled
$1,108,924. At March 31, 1997 the balance was $809,410. Accrued Special Taxes
payable decreased by $208,172. The Special
10
Tax decrease was a result of the bond refinancing by the Improvement District
encompassing the bulk of the Company's commercial land. A decrease in Pine Ridge
District liability of $200,000 resulted from the dismissal of the lawsuit filed
against the District by the plaintiff. As the sole property owner in the Pine
Ridge District, any liability of the District would impact on the Company. These
decreases were partially offset by additional accounts ended March 31, 1997
including an additional $90,000 in officers salary, $9,000 in accrued Directors'
fees and $10,800 in office lease payable. Accrued real estate taxes payable also
increased by $2,579 which represents the difference between a payment made of
$27,417 and accruals of $29,996 in new taxes.
Shareholders' Equity decreased by $270,717 or 11.03%. The decrease results
primarily from the operating loss of $646,717 for the six month period ending
March 31,1997. This was somewhat offset by the issuance of 188,000 new shares of
the Company's common stock at $2.00 per share, pursuant to the Consultants'
stock options discussed above.
Results of Operations
- ---------------------
Comparison of Six Months Ended March 31,1997 to the Six Months Ended March
--------------------------------------------------------------------------
31,1996 For the six months ended March 31, 1997, the Company experienced a loss
- -------
of $646,717 compared with a loss of $566,436 for the six months ended March 31,
1996. The difference in performance was primarily due to an increase in fees
paid to consultants retained in October of 1996. The related expense recognized
in the six months ended March 31, 1997 for these fees and costs totaled
$158,000. The dissolution of the Monterra Group joint venture in California
resulted in an additional $18,122 in fees incurred in the quarter ended December
31, 1996. There were no comparable expenses in the six months ended March 31,
1996.
Sales increased by $287,465 for the six months ended March 31, 1997 from $0
for the six months ended March 31, 1996, as a result of the sale of a commercial
two-acre parcel of the Maumelle Property for a sales price of $110,000 and the
sale of timber from the undeveloped single family portion of the Maumelle
Property in the amount of $159,343. The dissolution of the joint venture with
the Monterra Group provided sales of $18,122 from the net proceeds of the sale
of the lots. The gross profit for the six months ended March 31, 1996 was
$243,764. There was no gross profit for the six months ended March 31, 1996
since there were no sales or costs of sales incurred during that period.
For the six months ended March 31, 1997 and the six month period ended March
31, 1996, general and administrative expenses increased to $952,604 from
$689,505. This increase was due to the payment of the consulting fees
associated with the Monterra Group joint venture in the amount of $18,122 and
the above-mentioned financial consulting fees of $158,000.
The major portion of the general and administrative expenses for the six
months ended March 31, 1997, were accrued by the Company, and include expenses
such as officers' salaries, office lease and directors' fees. Management and
consulting fees for the six months ended
11
March 31, 1997 increased to $240,212 from $36,239 for the six months ended
March 31, 1996. Although fees to Maumelle Enterprises, Inc. ("Maumelle
Enterprises") increased during the period to $45,000 from $36,239 in the prior
period, the bulk of the increase was attributable to the consulting fees noted
above. In addition, legal and accounting fees increased from $47,401 for the six
months ended March 31, 1996 to $91,081 for the same period in 1997. Amortization
expenses increased by $13,385 in the six months ended March 31, 1997.
Comparison of The Three Months Ended March 31, 1997 to the Three Months Ended
----------------------------------------------------------------------------
March 31, 1996 For the three months ended March 31, 1997, the Company
- --------------
experienced a loss of $417,913 compared with a loss of $247,053 for the three
months ended March 31, 1996. The difference in performance was primarily due to
the increase in fees to consultants retained in October 1996 as well as the
decrease in recognition of interest income.
Sales increased by $68,891 for the three months ended March 31, 1997 from $0
for the six months ended March 31, 1996, as a result of the sale of timber from
the undeveloped single family portion of the Maumelle, Arkansas property. The
gross profit for the three months ended March 31, 1997 was $68,891. There was
no gross profit for the six months ended March 31, 1996 since there were no
sales or costs of sales incurred during that quarter.
General and administrative expenses increased to $486,804 for the three
months ended March 31, 1997 from $305,973 in the three months ended March 31,
1996. The major portion of the general and administrative expenses for the three
months ended March 31, 1997, were accrued by the Company, and include expenses
such as officers' salaries, office lease and directors' fees. Consulting fees
for the three months ended March 31, 1997 increased to $97,840 from $510 for the
three months ended March 31, 1996. Management fees for the period ended March
31, 1997 amounted to $45,000. Management fees for the period ended March 31,
1996 were waived. Amortization expenses for the three months ended March 31,
1997 amounted to $27,993, an increase of $13,385 over the comparable period in
1996, resulting from costs related to the Bridge Loans obtained by the Company
and described in "Liquidity and Capital Resources" below. Legal and Accounting
costs for the three month period ended March 31, 1996 amounted to $34,762, an
increase of $18,322 over the comparable period in 1996.
Interest income decreased from $58,920 for the three month period ended March
31, 1996, to $370 for the three month period ended March 31, 1997. This resulted
from the Company's decision not to accrue interest due to the company on the
Resure debenture since Resure is in receivership and the interest is not
currently being paid on the Debenture.
The Company does not foresee any significant elements of income or loss that
would not arise from its ordinary course of business, except for the losses that
would likely arise if the Company were to lose the approximately 1,110.76 acres
of land secured by defaulted debt obligations. As set forth elsewhere in this
Report, the Company has no immediate source of cash for bringing its obligations
current, other than the Bridge Loans, discussed below.
12
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents amount to $273,761 or 2.08% of total assets at March
31, 1997, as compared with negative $185,911 at September 30, 1996. The
Company's liquidity position at March 31, 1997, is not adequate to meet the
Company's liquidity requirements, which include approximately $8,600,000 in
defaulted debt. The Company's status as a going concern remains in doubt.
The Company has, as of May 14, 1997, borrowed $977,706 from private sources,
with net proceeds to the Company of $733,279, and is attempting to borrow an
additional $300,000 from private sources by the end of the third quarter of this
fiscal year, with anticipated net proceeds to the Company of approximately
$225,000 (collectively, the "Bridge Loans"). The majority of the promissory
notes evidencing the Bridge Loans (the "Bridge Notes") bear interest at a rate
of 10% per annum and mature nine months from the date of each Note. The Bridge
Loans are unsecured, however the Company is providing a guarantee bond to the
Bridge Note holders at a cost to the Company of approximately 10% of the gross
proceeds received from the Bridge Loans. The Company is further obligated to pay
the investment banking firm that is assisting the Company in obtaining the
Bridge Loans a fee equal to 15% of Bridge Loans gross proceeds received and 15%
on any additional Bridge Loans obtained by the firm.
There can be no assurance that the Company can obtain the additional $300,000
in Bridge Loans. Even if the Company is able to obtain such financing, the
Company will need to obtain additional funds to reinstate or refinance its
defaulted loans, meet its operating costs, and commence substantial development
activities. There can be no assurance that the holders of the Company's
defaulted secured debt will cooperate with the Company in its efforts to cure
its current loan defaults.
The Company is currently in default under most of its debt obligations. A
$1,400,000 recourse note to Century Realty Inc. ("Century) secured by
approximately 36 acres of commercial lots (the "Century Note I"), matured
January 9, 1996, and remains unpaid. Based on cross-default provisions in a
Century $350,000 unsecured recourse note ("the Century Note II"), Century claims
that the Century Note II is also now in default. Century filed a foreclosure
complaint against the Company with respect to this debt on August 12, 1996. On
September 16, 1996, the Company filed an answer and counterclaim against Century
claiming the Century Note I and the Century Note II were usurious. There can be
no assurance, however, that the Company will prevail in this litigation.
Although the Company has continued to negotiate with representatives of Century
to settle the suit, the Company has been unable to meet Century's proposed terms
due to its lack of liquidity.
The Company did not make the $101,591 October 1, 1996 payment due to Resure,
Inc. ("Resure"), under a $3,500,000 recourse note secured by approximately
1,111-acre large residential tract of the Maumelle Property (the "Resure Note
I"), but was granted an extension until April 1, 1997 (the "extension payment")
in consideration of a pledge of 200,000 shares of
13
the Company's common stock by two of the Company's major shareholders, Charlie
Corporation and Prescott Investments Limited Partnership (the "Pledge
Agreement"). The Company has not made the $101,591 quarterly payment due January
1, 1997, the quarterly payment of like amount due April 1, 1997, nor the
$101,591 extension payment that was due April 1, 1997. Due to Resure's own
financial and liquidity concerns, a liquidator, Mark Boozell, Director of
Insurance of the State of Illinois, was appointed and confirmed by the court for
Resure. The Company is currently negotiating with the liquidator to bring the
debt current. The Company currently does not have sufficient liquidity to retire
the Resure debt, however it intends to make the January 1 payment, the April 1
payment and the extension payment by June 1, 1997 from the proceeds of the
Bridge Loans. However there can be no assurance that the Company will be able to
make one or all of the defaulted payments by June 1, 1997 or at all. Resure has
agreed to release the 67 acres of the Company's Maumelle property, pledged as
partial consideration under the Resure NoteI, in order that the Company may
complete the sale of the residential property currently under contract (See Real
Estate Contract discussed below). In exchange for the release of the property,
the Company has agreed to provide Resure with $675,100, to be placed in a
Restricted Cash Collateral Account by Resure.
Until the Company is able to cure its default on the Resure Note I payments,
the Company will remain in default on a $3,500,000 non-recourse loan to Resure,
secured by approximately 410 acres of the large residential tract of the
Maumelle Property (the "Resure Note II"), due to cross-default provisions in the
Resure Note I. As of May 14, 1997, Resure has not instituted any proceeding or
action against the Company, nor has it exercised its right to foreclose on the
200,000 shares pledged for the extension payment. However, Resure has formally
notified the Company of its default. There can be no assurance that Resure
will not institute further proceedings if the Company is not able to bring the
defaulted payments current and remain in compliance under the terms of the
Resure Note I agreement.
Under the terms of the Resure Note I, if the payment is not current Resure
may withhold the semi-annual interest payments payable to the Company under the
Resure Debenture (a debenture issued to the Company in return for the Resure
Note II). As of May 14, 1997, Resure has not paid the January, 1997 payment of
$123,507 due on the Debenture and the Company is currently in default on the
January, 1997 Resure Note II payment in the same amount. The Company is
negotiating to bring the payment current upon the sale of the 67 acres.
The Company continues to be in default on a $200,000 unsecured recourse note
payable to Davister Corp. (the "Davister Note") which matured January 9, 1996.
To retire or refinance the above defaulted debt obligations, service other
existing debt and meet the Company's anticipated future operating cash needs,
the Company must raise additional operating capital. There can be no assurance,
however, that such capital can be raised.
The Company is currently negotiating with a mortgage banking firm to arrange
debt and construction financing in the amount of $15,000,000 (the "Construction
Financing Loan"). If the
14
Construction Financing Loan is obtained, the Company intends to use the net
proceeds to begin operations as a home builder and to service existing debt.
The Company intends to use part of the unsecured portions of the Maumelle
Property to secure $10,000,000 of the loan, with the remaining $5,000,000 to be
secured by home construction. Such negotiations remain in their initial stage,
however, and there can be no assurance that the Company will be able to obtain
the Construction Financing Loan on good terms or at all.
The Company has contracted to acquire the assets of SunBay, Inc., a vacation
interval resort located on 20 acres in Hot Springs, Arkansas (the "SunBay
Agreement"). The property consists of approximately 6,000 VOIs of which
approximately 400 remain available for sale as of March 31, 1997. The purchase
price for the project is $2,750,000. The Company's ability to complete this
acquisition is dependent upon its ability to obtain 100% financing for the
project. To this end, the Company is holding discussions with several lenders
whose business it is to provide capital to the time share industry. To obtain
this financing it may be necessary for the Company to provide the lender with
additional collateral. This additional collateral could be a security interest
in other assets of the Company. There can be no assurances that the Company will
be able to obtain the financing it requires, at terms acceptable to the Company,
or at all.
The Company has liquidated part of its assets through the sale of portions of
the Maumelle Property to obtain operating funds and pay debt and may liquidate
additional parcels of the Maumelle Property during the 1997 fiscal year for such
purposes. The Company raised $110,000 from a sale of a 2-acre parcel of its
Maumelle Property commercial lots, which closed on December 31, 1996. However,
the Company's sale of an 11 acre parcel of Maumelle Property commercial lots
which was expected to close on or before March 31, 1997 was canceled because the
buyer was unable to obtain the financing it required. The Company has no present
plans to sell this property.
In order to service existing debts and meet operating expenses, the Company
has entered into a Real Estate Contract for the sale of a 67 acre single-family
parcel of the Maumelle Property for a price of $1,552,730. The Company expects
the sale to be completed no later than May 28, 1997. As discussed above,
$675,100 of the proceeds from the sale will be placed in a Restricted Cash
Collateral Account as substitute collateral for Resure. The Company may also
decide to sell a 19-acre multi-family parcel of the Maumelle Property.
Management believes that the sale of both properties could provide the Company
with gross proceeds of approximately $2,600,000. There can be no assurance,
however that the Company will be able to sell the property for this amount or at
all.
In respect to prospective long-term liquidity, the Company intends to generate
the bulk of its cash from operations by building and selling homes initially on
the Maumelle Property, as well as the acquisition, development and subsequent
operation of hotel and vacation properties and the development and sale of
vacation ownership intervals ("VOI"). This assumes that the Company can obtain
the necessary financial resources to overcome its present illiquidity and begin
substantial building operations and successfully negotiate the acquisition of
leisure
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properties such as SunBay Resort Inc. There can be no assurances that the
Company can obtain the necessary resources, or negotiate acceptable terms for
the acquisition and development of the properties, or at all.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 13, 1997 the Company's subsidiary, Capitol Development of Arkansas,
Inc., as Intervenor was granted a Summary Judgement in the Case of Robert D.
Holloway, Inc., plaintiff, vs. Pine Ridge Additional Residential Property Owners
Multi-Purpose Improvement District NO. 9, Defendant, in the Chancery Court of
Pulaski County, Arkansas, Second Division. The Pine Ridge lots owned by the
Company have been indentured to pay any taxes levied by the Pine Ridge
Improvement District. The Plaintiff has filed a Notice of Appeal to the Supreme
Court of Arkansas. It has 90 days to file its brief and may be granted a 90 day
extension if it is requested. The Company's attorneys believe that the lower
court's decision will be upheld.
.
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."
Item 5. OTHER INFORMATION.
The Company incorporates by reference the information regarding the SunBay
Agreement and the Real Estate Contract from Part I, Item 2 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and Capital Resources."
The Company has an option agreement (the "Option Agreement") to purchase
approximately 192 acres located in Little Rock, Arkansas for $1,190,945. The
Company has paid the owner a fee of $10,000 to extend the option period from
April 16, 1997 to October 15, 1997. The Company further has the option to extend
the expiration date to April 15, 1998 upon payment of another extension fee of a
like amount.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBITS
The following Exhibits are filed as part of this Report. (Exhibits numbers
correspond to the
16
exhibits required by Item 601 of Regulation S-B).
2.1.1 Articles of Merger, filed with State of Nevada, dated November 29,
1995, merging AWEC Resources into Capitol Communities Corporation.*
2.1.2 Agreement of Merger, filed with State of Nevada, dated November 15,
1995, between AWEC Resources, Inc., and Capitol Communities
Corporation.*
2.2 Certificate of Merger, filed with State of New York, dated January
5, 1996, merging AWEC Resources, Inc., into Capitol Communities
Corporation.*
3.1.1 Articles of Incorporation of Capitol Communities Corporation, dated
August 18, 1995.*
3.1.2 Certificate of Amendment of Articles of Incorporation of Capitol
Communities Corporation, dated February 6, 1996.*
3.2 Bylaws of Capitol Communities Corporation, dated August 22, 1995.*
10.1 Contribution Agreement, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.2 Subordinated Surplus Debenture, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.3 Non-Recourse Promissory Note, dated September 11, 1995, between AWEC
Development Corporation and Resure, Inc.*
10.4 Non-Recourse Mortgage, dated September 11, 1995 between AWEC
Development Corporation and Resure, Inc.*
10.5 Security Agreement, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*
10.6 Environmental Indemnity Agreement, dated September 11, 1995, between
AWEC Development Corporation and Resure, Inc.*
10.7 Loan Agreement, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*
10.8 Promissory Note, dated September 11, 1995 between AWEC Development
Corporation and Resure, Inc.*
10.9 Mortgage, dated September 11, 1995 between AWEC Development
Corporation and
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Resure, Inc.*
10.10 Environmental Indemnity Agreement, dated September 11, 1995, between
AWEC Development Corporation and Resure, Inc.*
10.11 Agreement for Refinance of Secured Note, dated September 11, 1995
between Century Realty, Inc., AWEC Resources, Inc., and AWEC
Development Corporation.*
10.12 Promissory Note, dated September 11, 1995, between AWEC Development
Corporation and Century Realty, Inc. in the amount of $1,400,000.*
10.13 Mortgage, dated September 11, 1995, between AWEC Development
Corporation and Century Realty, Inc. in the amount of $350,000.*
10.14 Promissory Note, dated September 11, 1995, between AWEC Development
Corporation and Century Realty, Inc.*
10.15 Guaranty, dated September 11, 1995, between AWEC Development
Corporation and Century Realty, Inc.*
10.16 Stock Option Agreement, dated September 11, 1995, between Century
Realty, Inc., and AWEC Development Corporation.*
10.17 Release Deed, dated September 9, 1995, between Century Realty, Inc.,
and AWEC Development Corporation.*
10.18 Employment Agreement, dated July 14, 1995 between the Company and
Michael G. Todd.*
10.19 Olsen Consultant Agreement, dated October 7, 1996 between the Company
and Jens Olsen.**
10.20 Purchase Agreement, dated October 24, 1995, between John L. Burnett,
Trustee for Wood Heath Joint Venture and the Company.***
10.21 Asset Purchase Agreement effective February 21,1997, between Capitol
Communities Corporation and SunBay Inc. for the purchase of the SunBay
Resort.
10.22 Real Estate Contract effective February 28, 1997, between Capitol
Communities Corporation and Steve Hockersmith as agent for an
unidentified buyer for the sale of 67.51 acres of land in Maumelle,
Arkansas.
11 Statement re: computation of per share earnings
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27 Financial Data Schedule
* Exhibit(s) incorporated by reference from the Registration on
Form 10-SB of the Company, Registration No.915636 filed on
September 16, 1996.
** Exhibit incorporated by reference from the Current Report on
Form 8-K, Commission File No. 915636 filed on October 18, 1996.
*** Exhibit incorporated by reference from the December 31,1996
Quarterly Report on Form 10-QSB filed on February 19,1997.
b) REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CAPITOL COMMUNITIES CORPORATION
Date: May 15, 1997 By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief Executive Officer
Date: May 15, 1997 By: /s/ David Paes
Treasurer and Vice President
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