UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] 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
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) 7,969,500
(Title of Class) Shares Outstanding as of April 30, 1998
Transitional Small Business Disclosure Format: [ ] YES [X] NO
CAPITOL COMMUNITIES CORPORATION
Form 10-QSB/A
QUARTER ENDED March 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(Unaudited)................................................. 3
Consolidated Balance Sheet
March 31,1998............................................... 3
Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 1998 and 1997............ 5
Consolidated Statement of Operations
For the Six Months ended March 31, 1998 and 1997............ 6
Consolidated Statement of Operations
For the Three Months ended March 31, 1998 and 1997.......... 7
Consolidated Statement of Stockholders' Equity
For the Six Months ended March 31, 1998..................... 8
Notes to Consolidated Financial Statements
March 31,1998............................................... 9
Item 2. Management's Discussion And Analysis or Plan of Operation... 13
PART II. OTHER INFORMATION
Item 5. Other Information........................................... 23
Item 6. Exhibits and Reports on Form 8-K............................ 24
Signatures........................................................... 24
Index to Exhibits
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Capitol Communities Corporation and Subsidiaries
Consolidated Balance Sheets
March 31,1998 and September 30, 1997
UNAUDITED
March 31, 1998 September 30,1997
-------------- -----------------
Current Assets:
Cash in Bank $ 224,065 $ 227,162
Accounts Receivable 31,643 12,096
Prepaid Assets 405,391 202,674
Accrued Interest 27,392
----------- -----------
Total Current Assets 688,491 441,932
Fixed Assets:
Furniture and Fixtures 77,805 36,260
(Net of accumulated depreciation)
Notes Receivable
Net of Discount of $245,064 2,403,429
Non-Current Assets
Deposits 448,778 62,679
Real Estate Holdings 10,339,724 9,468,637
Loan Origination Fees
(Net of accumulated amortization) 278,804 155,359
Deferred Tax Asset 69,425 69,425
Organization Costs 1,200
----------- -----------
Total Non-Current Assets 11,137,931 9,756,100
----------- -----------
Total Assets $14,307,656 $10,234,292
=========== ===========
Current Liabilities:
Accounts Payable & Accrued Expenses 695,902 516,994
Accrued Interest 209,842 59,810
Notes Payable 6,231,313 2,099,973
----------- -----------
Total Current Liabilities 7,137,057 2,676,777
Non-Current Liabilities
Notes Payable 3,710,297 3,377,048
Deferred Taxes Payable 14,000
Total Liabilities 10,847,354 6,067,825
Shareholders' Equity
Preferred Stock 0 0
Common Stock 7,385 7,312
Additional Paid in Capital 6,988,055 6,620,896
Accumulated Deficit (3,535,137) (2,461,741)
Total Shareholders' Equity 3,460,302 4,166,467
----------- -----------
Total Liabilities and Shareholders' Equity $14,307,656 $10,234,292
=========== ===========
3
Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended March 31, 1998 and 1997
UNAUDITED
1998 1997
----------- ---------
Cash Flows from Operating Activities:
Net Loss $(1,073,396) $(646,717)
Amortization 176,391 42,301
Depreciation 3,337
Adjustments to Reconcile Income
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables (19,547) (1)
(Increase) Decrease in Deposits (386,099)
(Increase) Decrease in Other Assets (11,988) (14,000)
(Increase) Decrease in Real Estate Holdings (871,087) 389,763
(Increase) Decrease in Accrued Interest
Receivable (27,392) (61,753)
(Increase) Decrease in Pre-Paid Assets (202,717) (220,069)
Increase (Decrease) in Accrued Expenses 178,908 (299,514)
Increase (Decrease) in Deferred Taxes Payable (14,000)
Increase (Decrease) in Accrued Interest Payable 150,032 481,570
Other (1,019)
----------- ---------
Net Cash Used for Operations (2,098,577) (328,420)
Cash Flows from Investing Activities:
Acquisition of Notes Receivable (2,490,137) 0
Collections of Notes Receivable 97,496
Acquisition of Furniture and Fixtures (44,882)
0
Loan Origination Fees (299,836) (102,400)
----------- ---------
Net Cash used in Investing Activities (2,737,359) (102,400)
Cash Flows from Financing Activities:
Increase in Notes Payable 5,164,589 514,492
Payment of Notes Payable (700,000)
Issuance of Common Stock 368,250 376,000
----------- ---------
Net Cash used in Financing Activities 4,832,839 890,492
Net Increase (Decrease) in Cash (3,097) 459,672
Beginning Cash 227,162 (185,911)
----------- ---------
Ending Cash $ 224,065 $ 273,761
=========== =========
4
Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Six Months Ended March 31, 1998 and 1997
UNAUDITED
1998 1997
----------- ----------
Revenues:
Sales $ 319,970 $ 287,465
Hotel Revenue 191,310
Miscellaneous Income 13,511
Cost of Sales 198,678 43,701
----------- ----------
Gross Profit $ 326,113 243,764
Operating Expenses:
General & Administrative
Expenses 1,195,744 557,894
----------- ----------
Net Income (Loss) Before
Interest Income (869,631) (314,130)
Interest Income 89,700 62,123
Interest Expense (293,465) (394,710)
Net Income (Loss) $(1,073,396) $ (646,717)
=========== ==========
Basic Earnings (Loss) per share $ (0.146) $ (0.090)
=========== ==========
Weighted average shares outstanding: 7,366,830 7,151,099
=========== ==========
Dividends per Share 0 0
----------- ----------
5
Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31, 1998 and 1997
UNAUDITED
1998 1997
---------- ----------
Revenues:
Sales $ 71,990 $ 68,891
Hotel Revenue 137,506
Miscellaneous Income 10,788
Cost of Sales 49,736
---------- ----------
Gross Profit $ 170,548 68,891
Operating Expenses:
General & Administrative
Expenses 607,140 289,063
---------- ----------
Net Income (Loss) Before
Interest Income (436,592) (220,172)
Interest Income 65,585 370
Interest Expense (187,287) (197,741)
Net Income (Loss) $ (558,294) $ (417,543)
========== ==========
Basic Earnings (Loss) per share $ (0.076) $ (0.058)
========== ==========
Weighted average shares outstanding: 7,384,500 7,188,000
========== ==========
Dividends per Share 0 0
---------- ----------
6
Capitol Communities Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the Six Months Ended March 31, 1998 and 1997
(Thousands of Dollars, except per share amount)
UNAUDITED
Common Stock
$0.01 Par Value Additional
-------------------- Paid-In Retained
Shares Amount Capital Earnings Total
------ ------ ---------- -------- -----
Balance at September 30, 1997 7,312,000 $73 $6,555 $(2,462) $ 4,166
Additional Stock Issued (Net) 72,500 $1 $ 366 $ 367
Net (Loss) for the Six Months
Ended March 31, 1998 $(1,073) $(1,073)
--------- ------ ------ ------- -------
Balance at March 31, 1998 7,384,500 $74 $6,921 $(3,535) $ 3,460
7
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
March 31, 1998
--------------
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
Background
----------
The consolidated balance sheet at March 31, 1998 and the related
statements of operations and cash flows for the six month period
ended March 31, 1998, 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, 1997, 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.
On April 17, 1997, the Company formed Capitol Resorts, Inc., an
Arkansas corporation (the "Resort Subsidiary"), for the purpose of
conducting the
8
Company's proposed Vacation Interval operation. See "Management's
Discussion and Analysis or Plan of Operation."
On July 30, 1997, the Company acquired Capitol Resorts of Florida,
Inc. (the "Florida Resorts Subsidiary"), a newly formed Florida
Corporation pursuant to an Agreement and Plan of Reorganization
between the Company and MLT Management Corp. ("MLT"), a corporation
not affiliated with the Company. See "Management's Discussion and
Analysis or Plan of Operation."
On December 9, 1997, the Florida Resorts Subsidiary acquired the lease
rights to 120 feet of beachfront land and improvements located in
Pompano Beach, Florida (the "Ocean Palms Resort Property") from Ocean
Palms Resort, Inc. ("OPRI"), and Ocean Palms Development Corporation
("OPDC") unaffiliated third parties. The Company also acquired the
interest of the owners in certain other assets of OPRI and OPDC. See
"Management's Discussion and Analysis or Plan of Operation."
On December 9, 1997, the Florida Resorts Subsidiary acquired all of
the issued and outstanding stock of OPV Development, Inc. ("OPV"), an
unaffiliated third party, whose primary asset is the Ocean Villas
property ("Ocean Villas"), located in Pompano Beach, Florida. See
"Management's Discussion and Analysis or Plan of Operation."
On April 30, 1998, the Resort Subsidiary acquired all of the
membership interests of Entry Resorts International, LLC, a New
Hampshire limited liability company ("ERI") and Entry Resorts
Marketing, LLC, a New Hampshire limited liability company("EMI"),
unaffiliated third parties. ERI and EMI are engaged in the
development, marketing and sale of vacation packages and time share
products and services. See "Management's Discussion and Analysis or
Plan of Operation."
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
9
six months ended March 31, 1997, was 7,151,099 and for the six months
ended March 31, 1998, was 7,366,830
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.
In May 1997, one shareholder returned a total of 19,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company
On July 30,1997, the Company issued 100,000 shares of common stock to
an unaffiliated company for the purchase of all of the stock of
Capitol Resorts of Florida, Inc.,under an Agreement and Plan of
Reorganization, dated July 30, 1997.
On July 29, 1997, the Company issued 50,000 shares of common stock to
David Paes, an officer of the Company, in consideration of management
services to the Company.
On July 29, 1997, the Company issued 50,000 shares of common stock to
Mary Peyton, an officer of Capitol Homes, Inc., a wholly-owned
subsidiary of the Company, in consideration of management services to
the Company.
10
On October 20, 1997, the Company issued 20,000 shares of common stock
to Ann Alridge, an officer of Capitol Development of Arkansas, Inc., a
wholly-owned subsidiary of the Company, in consideration of management
services to the Company.
In October 1997, one shareholder returned a total of 19,000 shares of
common stock for cancellation, pursuant to an agreement with the
Company.
In October 1997, a consultant to the Company exercised an option to
purchase 38,000 shares of common stock, pursuant to a consulting
agreement
In December 1997, the Company issued 33,500 shares of common stock to
an unaffiliated company, as well as approximately $868,000 in cash and
the assumption of a $1,158,000 mortgage for the purchase of the Ocean
Palms Resort Property, the Ocean Palms Resort Paper and other rights.
See "Management's Discussion and Analysis or Plan of Operation."
In April 1998, a consultant to the Company exercised an option to
purchase 35,000 shares of common stock, pursuant to a consulting
agreement.
In April 1998, a consultant to the Company exercised an option to
purchase 350,000 shares of common stock, pursuant to a consulting
agreement.
In April 1998, the Company issued 200,000 shares of common stock to
unaffiliated third parties pursuant to the acquisition of ERI and EMI
and granted options for another 100,000 shares to vest over a five
year period, commencing April 30, 1999 and expiring on April 30, 2003.
The options vest at a rate of 20% per year and are exercisable at
$3.34 per share.
11
Item 2. Management's Discussion and Analysis or Plan of Operation.
---------------------------------------------------------
Forward-Looking Statements
- --------------------------
Certain matters discussed in this Form 10-QSB are forward-looking
statements within the meaning of the Private Litigation Reform Act of 1995 and
as such may involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance or achievements of the Company
to be different from any future results, performance or achievements expressed
or implied by such forward-looking statements. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Company's filings
with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
During the last fiscal year, the Company significantly expanded the nature
of its business activities from land sales to real estate development and
vacation interval operations. Although the Company has not yet commenced any
material development or building activity, its primary focus is the development
and sale of residential single-family homes on the more than 1,700 acres it
currently 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
acquisition, renovation, development, sale and financing of vacation ownership
interval interests ("VOIs") and vacation long-term leasehold interests ("LTLs")
of resort, hotel and vacation properties. In its efforts to diversify its
development focus, the Company has purchased approximately 36.3 acres of land
and improvements in Osceola County, Florida, for development as a hotel and a
VOI property. In December 1997, the Company also purchased 16 LTL Units (the
"Ocean Villas" property), as a result of the acquisition of the stock of OPV
Development, Inc. ("OPV"), an unaffiliated third party. In December 1997, the
Company also purchased the lease rights to 120 feet of beachfront land and
improvements in Pompano Beach, Florida ( the "Ocean Palms Resort"). The Ocean
Palms Resort improvement includes a 53 LTL unit complex, all of which have been
sold, with the Company acquiring the promissory notes generated from the sale
(the "Ocean Palms Resort Promissory Notes"), as well as other assets. In April,
1998, the Company acquired sales and marketing expertise, along with management
and operations with the acquisition of the membership interest in Entry Resorts
Marketing, LLC, a New Hampshire limited liability company ("EMI") and Entry
Resorts International, LLC, a New Hampshire limited liability company ("ERI").
ERI and EMI, which engages in the development, marketing and sale of vacation
packages and time share products, nationally and internationally, provides the
Company with the ability to market its own vacation interval properties, instead
of out-sourcing such marketing programs. See "LIQUIDITY AND CAPITAL RESOURCES."
The Company believes that its ability to generate revenues in the future from
real estate development and interval activities will depend in large part on its
ability to restructure, retire or replace its current
12
short-term debt into long-term debt, and raise sufficient capital to commence
meaningful development operations, and the Company's ability to develop or
acquire greater construction and other real estate and interval 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
- -------------------
During the fiscal year ended September 30, 1997, and during the six month
period ended March 31, 1997, the Company continued to focus on expanding its
position in the vacation interval and resort industries by acquiring strategic
assets in these industries. In the six month period ended March 31, 1998, the
Company acquired approximately $2.5 million in the Ocean Palms Resort Promissory
Notes generated from the sale of LTL units in the Ocean Palms Resort and the
sale of LTL units in the Ocean Villas (the "Ocean Villas Promissory Notes"). The
acquisition of the Ocean Villas units increased the Company's real estate
holdings by approximately $500,000. These acquisitions were primarily
accomplished by utilizing cash and short term loans and lines of credit
available to the Company. The Company intends to restructure and to replace the
major of the short-term debt utilized to purchase these properties with more
conventional long term financing. See "LIQUIDITY AND CAPITAL RESOURCES." The
Company believes that results of operations will improve in the future if the
Company is able to raise sufficient additional capital to replace or retire its
short term debt, or convert such debt in to long term debt where appropriate.
Such restructuring will enable the Company to commence significant development
activities in Maumelle and expand its acquisition and sale of vacation interval
interests. There can be no assurance, however, that the Company will be able
to restructure or retire its short-term debt on favorable terms to the Company
or at all.
Change in Financial Condition Since the End of the Last Fiscal Year. At
--------------------------------------------------------------------
March 31, 1998, the Company had total assets of $14,307,656 an increase of
$4,073364, or 39.8% over the Company's total assets as of the Company's fiscal
year end of September 30, 1997. The Company had cash of $224,065 at March 31,
1998, compared to $227,162 at September 30, 1997, a reduction of $3,097. See
"LIQUIDITY AND CAPITAL RESOURCES."
Prepaid assets increased from $202,674 on September 30, 1997, to $405,391
on March 31, 1998, an increase of $202,717. This increase primarily was a
result of the acquisition of the Ocean Palms Resort and Ocean Villas properties,
both of which are located in Pompano Beach Florida (collectively the "Pompano
Beach Properties"). The Ocean Palms Resort had prepaid insurance and a prepaid
ground lease totaling $90,719, as of March 31, 1998, while Ocean Villas had
prepaid insurance and a prepaid ground lease totaling $16,282, as of March 31,
1998. Prepaid contracts also increased prepaid assets by approximately $80,000
in the six month period ended March 31, 1998.
On December 9, 1997, the Company acquired an interest in several Ocean
Palms Resort Promissory Notes resulting from the sale of long term leasehold
Ocean Palms Resort units,
13
together with certain other assets and rights. On the same date, the Company
also acquired the Ocean Villas property, the assets of which included $243,970
in the Ocean Villas Promissory Notes. See "LIQUIDITY AND CAPITAL RESOURCES." The
collective balance due on these notes amounted to $2,403,429, net of a discount
of $245,064, as of March 31, 1998. There was also accrued interest owing on the
notes of $27,392, as of that date. There were no related assets as of September
30, 1997.
Deposits increased from $62,679 as of September 31, 1997, to $448,778 as of
March 31, 1998, an increase of $386,099. This was primarily due to a good faith
deposit of $200,000 related to a potential purchase of property, and option
payment deposits of $122,500 made to Century Realty, Inc. ("Century") to
repurchase 36 acres of commercial property located in Maumelle, Arkansas and
deposits to various mortgage banking firms.
The carrying value of the Company's real estate holdings increased by
$871,087 during the six months ended March 31, 1998, from $9,468,637 to
$10,339,724. One major factor of this increase was the acquisition of Ocean
Villas, discussed above, and related capitalized costs, which resulted in an
increase of $503,027. Other factors were, additional expenditures on the Florida
Bible College Property, in Osceola County, Florida, including capitalization of
interest in the amount of $238,690, capitalized costs of $51,771 added to the
book value of the Maumelle Commercial and Multi-Family Tracts and $63,015 in
capitalized costs added to the book value of the Capitol Lakes Estates property.
These accounted for the majority of the balance of the increase.
Total liabilities of the Company at March 31, 1998, had increased to
$10,847,354, an increase of $4,779,529 over the September 30, 1997 total of
$6,067,825. The liability for accrued interest increased to $209,842 at March
31, 1998, from $59,810 at September 30,1997. This increase of $150,032 reflects
the interest on the debt used to acquire Ocean Palms Resorts and Ocean Villas
properties, as well as the effect of interest due to Resure, Inc. ("Resure") for
one quarter. As of September 30, 1997, the payment due on October 1, 1997, had
been paid. The April 1, 1998, payment, while made on time, had not been paid as
of March 31, 1998. This timing difference resulted in an increase of $85,287 in
accrued interest payable over the September 30, 1997 total. The current
liability for notes payable increased by $4,131,340 during the three months,
from $2,099,973, as of September 30, 1997, to $6,231,313, as of March 31, 1998.
This resulted primarily from using approximately $1,750,000 of the Company's
short-term lines of credit to acquire the Pompano Beach Properties and other
expenses in December 1997. The Ocean Palms Villas was financed with the
assumption of a first leasehold mortgage with a balance of $378,786 as of March
31, 1998, reflected in the increase in long term liabilities and a second
leasehold mortgage of $150,000, reflected in the increase in short term
liabilities. The Ocean Palms Resort leasehold mortgage was assumed, with a
balance of $1,132,480, as of March 31, 1998, and has a renewal or extension
date of April 1, 1999. While the Company expects to renew or replace that
mortgage, the entire balance is considered a current note payable. The Company
increased its other short term debt from Arkansas banks by an additional
$400,000 in the period. The funds were used for general operating purposes. In
addition, as of
14
March 31, 1998, the Company had borrowed $1,620,008 in loans from private
sources (the "Bridge Loans") from private sources. This represented an increase
of $642,302 in the six month period. See "LIQUIDITY AND CAPITAL RESOURCES."
Accounts payable and accrued expenses increased by $ 178,908. At September
30,1997, the liability for accounts payable and accrued expenses totaled
$516,994. At March 31, 1998, the balance was $695,902. The major portion of
the increase, or $157,500 is comprised of accrued officers salaries. Accrued
real estate taxes payable increased by $14,962.
Accrued interest increased by $150,032 from $59,810 as of September 30, 1997, to
$209,842 as of March 31, 1998, as a result of the increase in total debt.
Shareholders' Equity decreased by $706,165 or 3.64%. The decrease results
primarily from the combination of the operating loss of $1,073,396 for the six
month period ending March 31, 1998, which was partially offset by the issuance
of $335,000 of the Company stock as part of the acquisition cost of the Ocean
Palms Resort and $33,250 from the exercise of options for the purchase of stock.
Results of Operations
- ---------------------
Comparison of Six Months Ended March 31, 1998 to the Six Months Ended March 31,
- --------------------------------------------------------------------------------
1997. For the six months ended March 31, 1998, the Company experienced a net
- -----
loss of $1,073,396 compared with a loss of $646,717 for the six months ended
March 31, 1997. The increase is primarily attributed to an increase in General
and Administrative Expenses.
Revenues increased by $237,326 to $524,791 for the six months ended March
31, 1998, from $287,465 for the six months ended March 31, 1997. During the six
months ended March 31, 1998, the sale of the Ocean Villas LTL units, totaled
$294,970. Capitol Development of Arkansas, Inc. (the "Operating Subsidiary"),
sold one parcel of undeveloped land for $25,000, Company also received $191,310
in hotel management revenue from the newly acquired Pompano Beach Properties.
During the six months ended March 31, 1997, sales totaled $287,465, primarily
from the sale of a commercial property tract in Maumelle for $110,000 and timber
royalties of $159,343. The dissolution of the joint venture with the Monterra
Group in California provided sales of $18,122 from the net proceeds of the sale
of lots. The gross profit for the six months ended March 31, 1998 was $326,113,
as compared with $243,764 for the six months ended March 31, 1997. The higher
gross profit in 1997 reflects the low cost basis in the land and timber sold in
the period relative to the sales price.
General and administrative expenses increased by $637,850, from $557,894
for the six months ended March 31, 1997, to $1,195,744 for the six months ended
March 31, 1998. This increase is a result of the increase in operational
activities. Insurance costs increased by $45,603 in the six months ended March
31, 1998, over the same period in 1997, as a result of the acquisition of the
Florida Bible College and the Pompano Beach Properties. Repairs and
15
Maintenance also increased by $50,891 in the six month period ended March 31,
1998, primarily as a result of the same acquisitions. Management Fees to
Maumelle Enterprises, which amounted to $45,000 for the six months ended March
31, 1997, increased to $156,242 in the corresponding period in 1998, an increase
of $111,242. Employee compensation for the Pompano Beach Properties amounted to
$106,658 for the period ended March 31, 1998, with no equivalent expense in the
comparable 1997 period. Officers Salaries for the six month period ended March
31, 1998 amounted to $157,500, an increase of $67,500 over the comparable 1997
period. Majority of the Officers Salaries were accrued by the Company. Lease
expenses increased by $36,120 in the six month period ended March 31, 1998 over
the same period in 1997. Closing Costs and Commissions increased by $24,015 in
the six month period ended March 31, 1998 over the same period in 1997,
primarily as a result of the Ocean Villas LTL unit sales. Amortization expenses
increased by $134,090 for the six months ended March 31, 1998, over the same
period in 1997, primarily as a result of costs associated with the Bridge Loans.
In addition to the operating expenses, an expense of $55,000 was recognized in
the period ended March 31, 1998, when it was determined that deposits paid on
two projects in Florida that the Company had been negotiating to acquire, were
not recoverable. There was no comparable expense in 1997.
Interest income increased from $62,123 for the six month period ended March
31, 1997, to $89,700 for the six month period ended March 31, 1998. Interest
income in 1997 represented interest due on the Resure Debenture, which the
Company no longer owns effective September 30, 1997. Interest income for the six
month period ended March 31, 1998, represented four months of interest
receivables due to the Company from the Ocean Palms Resort Promissory Notes and
Ocean Villas Promissory Notes.
Interest expense decreased by $101,245 from $394,710 for the six months
ended March 31, 1997, to $293,465 for the six months ended March 31, 1998. The
decrease resulted from the fact that despite the overall increase in debt, the
majority of the new debt, primarily the debt for the acquisition of the Ocean
Palms Resort and Ocean Villas properties, occurred in the last month of the
first quarter and later. In addition to the $293,465 expensed for the six month
period ended March 31, 1998, interest of $113,306 was capitalized as part of the
improvement costs of the projects in Orlando, Florida and the Pompano Beach
Properties.
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 unable to extend, replace or retire
its short term debt as it matures.
Comparison of Three Months Ended March 31,1998 to the Three Months Ended March
- -------------------------------------------------------------------------------
31,1997. For the three months ended March 31, 1998, the Company experienced a
- --------
net loss of $558,294 compared with a loss of $417,543 for the three months ended
March 31, 1997. The increase primarily is attributed to an increase in General
and Administrative Expenses which
16
offset a $101,657 increase in gross profits.
Revenues increased by $151,393 to $247,980 for the three months ended March
31, 1998, from $218,574 for the three months ended March 31, 1997. During the
three months ended March 31, 1998, the sale of the Ocean Villas LTL units,
totaled $71,990. The Company also received $137,506 in hotel management revenue
from the newly acquired Pompano Beach Properties. During the three months ended
March 31, 1997, revenues totaled $68,891 from 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, 1998 was $170,548, as compared with
$68,891 for the three months ended March 31, 1997. The higher gross profit as a
percentage of revenues in 1997 reflects the fact that there were no cost of
sales related to the sale of the timber.
General and administrative expenses increased by $318,077, from $289,063
for the three months ended March 31, 1997, to $607,140 for the three months
ended March 31, 1998. This increase is a result of the increase in operational
activities. Insurance costs increased by $36,027 in the three months ended March
31, 1998, over the same period in 1997, as a result of the acquisition of the
Florida Bible College and the Pompano Beach Properties. Repairs and Maintenance
also increased by $36,638 in the three month period ended March 31, 1998,
primarily as a result of the same acquisitions. Management Fees to Maumelle
Enterprises for the three months ended March 31, 1997 increased by $41,689 to
$86,689 in the corresponding period in 1998. Employee compensation for the
Pompano Beach Properties amounted to $80,395 for the three month period ended
March 31, 1998, with no equivalent expense in the comparable 1997 period.
Officers Salaries for the three month period ended March 31, 1998 increased by
$67,500 over the comparable 1997 period. Lease expenses increased by $22,386 in
the three month period ended March 31, 1998 over the same period in 1997.
Amortization expenses increased by $69,484 for the three months ended March 31,
1998, over the same period in 1997, primarily as a result of costs associated
with the Bridge Loans. These increases were partially offset by a decrease of
$84,089 in consulting fees for the three month period ended March 31, 1998, from
a total of $97,840 for the three month period ended March 31, 1997.
Interest income increased from $370 for the three month period ended March
31, 1997, to $65,656 for the three month period ended March 31, 1998. Interest
income for the three month period ended March 31, 1997, represented three months
of interest receivable due to the Company from the Ocean Palms Resort
Promissory Notes and Ocean Villas Promissory Notes.
Interest expense decreased by $10,454 from $197,741 for the three months
ended March 31, 1997, to $187,287 for the three months ended March 31, 1998.
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 unable to extend, replace or retire
its short term debt as it matures. There can be no assurance, however, that the
Company will be able to extend, replace or retire its short term debt on
favorable terms or at all.
17
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents amount to $224,065 or 1.57% of total assets at
March 31, 1998, as compared with $227,162 or 2.23% at September 30, 1997. The
Company's liquidity position at March 31, 1998, is not adequate to meet the
Company's liquidity requirements, which include approximately $6,200,000 in
short term debt.
The Company has, as of March 31, 1998, borrowed $1,620,008 in Bridge Loans
from private sources with net proceeds to the Company of approximately
$1,318,973. The majority of the promissory notes evidencing the Bridge Loans,
(the "Bridge Notes") bear interest at a rate of 10% to 10.9% per annum and
mature nine months from the date of each note. Although the Bridge Loans are
unsecured, the Company has provided a guarantee bond to the Bridge Note holders
at a cost to the Company of $97,200 or 6.0%. The Company has also paid the
investment banking firms that assisted the Company in obtaining the Bridge Loans
a fee of $203,835 or 12.6% of the Bridge Loans. The Bridge Notes mature in the
third and the fourth quarters of 1998 and the first quarter of 1999. The
Company may try to obtain an additional $500,000 in short-term debt financing
from private investors during the first and second quarters of 1998, for general
corporate purposes. There can be no assurance, however, that the Company will be
able to obtain debt financing on favorable terms or at all.
Since the end of the Company's fiscal year ended September 30, 1997, it has
obtained a revolving line of credit with the Bank of Atkins in the amount of
$1,750,000 at a fixed rate of interest of 10% per annum. The revolving line of
credit matures May 27, 1998, at which time the principal and all accrued
interest is due. This line of credit is secured by approximately 344 acres of a
residential tract of the Maumelle Property (the "Large Residential Tract"). As
of April 30, 1998, the outstanding balance of the revolving line of credit was
$1,750,000. The funds were used to complete the acquisition of the Pompano Beach
Properties, to pay off certain accounts payable, and for working capital.
On February 12, 1998, the Company obtained a loan in the amount of $150,000
from the Bank of Atkins at a fixed rate of interest of 10.00%, maturing on May
27, 1998, at which time the principal and all accrued interest is due. This loan
is also secured by the 344 acres of the Large Residential Tract of the Maumelle
Property, as is the revolving line of credit discussed above. The funds are to
be used for general operating purposes. This loan was paid in full on April 15,
1998, from funds advanced under a line of credit from the Transflorida Bank.
On March 31, 1997, the Company obtained a fixed rate commercial revolving
line of credit from the Bank of Little Rock (the "Little Rock Credit Line I"),
in the amount of $400,000, bearing an interest rate of 10.00% per annum, payable
interest only on a monthly basis, and maturing on April 10, 1999. The line is
secured by approximately a 10.799 acre multi-family parcel of the Company's
Maumelle Property. On July 29, 1997, the Company obtained a second commercial
revolving line of credit from the Bank of Little Rock, (the "Little Rock Credit
Line II"), in the amount of $450,000, also bearing interest at the rate of
10.00% per annum, payable
18
principal and interest on demand or at maturity. The current maturity date is
November 5, 1998. This line is secured by approximately a 19 acre multi-family
parcel of the Company's Maumelle Property. As of April 30, 1998, the Company has
drawn a total of $845,524 against the lines of credit. The proceeds were used to
complete the purchase of approximately 35 acres of land and improvements in
Osceola County, Florida, known as the Florida Bible College, discussed below. On
March 10, 1998, the Company obtained a $250,000 loan from the Bank of Little
Rock (the "Little Rock Credit Line III") secured by the 19 multi-family acres of
the Maumelle Property, which also secures the Little Rock Credit Line II,
discussed above. The $250,000 loan bears interest at the rate of 10.00%.
Interest only payments are due monthly, commencing April 10, 1998, and the
entire balance of principal and accrued interest is due and payable on September
10, 1998. As of April 30, 1998, there was a balance of $250,000 owed on the
loan.
On December 9, 1997, Capitol Resorts of Florida, Inc. (the "Florida Resorts
Subsidiary") acquired the lease rights to Ocean Palms Resort, which consist of
120 feet of beachfront land and improvements located in Pompano Beach, Florida,
from Ocean Palms Resort, Inc. ("OPRI"), and Ocean Palms Development Corporation
("OPDC") unaffiliated third parties. The ground lease rights to the Ocean Palms
Resort property is for a period of 99 years, of which 66 years and 3 months
remain (the "Ocean Palms Ground Lease"). The improvements include a 53 LTL unit
complex, and other common area facilities. The Company also acquired the
interest in several long term tenant leases, approximately $2,500,000 in the
Ocean Palms Resort Promissory Notes arising out of the sale of the Ocean Palms
Resort LTL units, and the right to manage and operate the on-going rental of the
LTL units as hotel rooms on behalf of the LTL owners. As of March 31, 1998, the
outstanding book value of the Ocean Palms Resort Promissory Notes amounted to
$2,159,459, net a of discount of $245,064. The Ocean Palms Resort Promissory
Notes are pledged, as additional collateral, to certain debt on the property
assumed by the Company, and discussed below. The Company acquired the Ocean
Palms Resort property, the Ocean Palms Resort Promissory Notes and the other
rights for approximately $868,000 in cash, the issuance of 33,500 shares of the
Company's Common Stock and the assumption of a $1,158,000 mortgage encumbering
the Ground Lease (the "Ocean Palms Resort Note").
On December 9, 1997, the Florida Resorts Subsidiary acquired all of the
issued and outstanding of OPV, an unaffiliated third party. With the stock
acquisition, the Company acquired OPV's primary asset, Ocean Villas, which
consists of two lease rights to a four lot parcel of land and improvements (the
"Ground Leases") located in Pompano Beach, Florida. The First Ground Lease is
for a period of 99 years, of which 65 years and 5 months remain. The Second
Ground Lease is for a period of 93 years and 3 months, of which 65 years and 5
months remain. The Company acquired the 16 LTL unit Ocean Villas, and
approximately $244,000 in the Ocean Villas Promissory Notes, which arose from
the prior sale of 4 LTL units, for approximately $107,000 in cash, and the
assumption of a first mortgage of $375,000 and a second mortgage of $150,000
encumbering the Ground Leases (the "First and Second Ocean Villas Notes"). As
of March 31, 1998, the outstanding book value of the Ocean Villas Promissory
Notes amounted to $243,970. The Ocean Villas Promissory Notes are pledged to
the First and Second Ocean Villas Notes as additional collateral, as discussed
below.
19
Due to the acquisition of the Ocean Palms Resort property and the Ocean
Villas property, the Company's debt now includes the following:
$1,158,000 note ("Ocean Palms Resort Note"), payable to various trusts and
individuals (the "Ocean Palms Mortgagee"), secured by an assignment of the
Ocean Palms Promissory Note and the conditional assignment of the Ocean
Palms Ground Lease; 12.75% interest per annum, with interest only payments
made monthly until May 1, 1998, at which time it is the note is payable
interest and principal each month until it matures on April 1, 1999. The
note can be extended by one additional year upon the payment of a 1%
extension fee of the then outstanding principal balance of the note on or
before March 1, 1999. As of April 30, 1998, the balance of the note
amounted to $1,132,309.
$375,000 note ("First Ocean Villas Note"), payable to Onofrio Biviano and
secured by collateral assignments of the non-recourse installment notes
(the "Ocean Villas Paper"); 10.5% interest, payable interest and principal
monthly until the note matures on September 17, 2001.
$150,000 note ("Second Ocean Villas Note"), payable to Domenick Greco,
Trustee and Leonard Gross, and secured by collateral assignments of the
Ocean Villas Paper; 12% interest, payable interest only per month,
commencing January 9, 1998, until the note matures on December 9, 1998.
As of the date of this Report, the Company is current on the quarterly
payments of $101,591 of principal and interest due to Resure on the
$3,500,000 amended recourse note (the "Resure Note I"), which matures
September 1, 1999, and bears interest at 10% per annum. The Resure Note I
is secured by the approximately 701-acre Large Residential Tract in
Maumelle, Arkansas. As of April 30, 1998, the principal balance on the
Resure Note I is $3,343,791. The next quarterly payment to Resure is due
on July 1, 1998.
As of December 31,1997, the Company was obligated for a $200,000 unsecured
recourse note payable to Davister Corp. (the "Davister Note") which matured
January 9, 1996. Although the Davister Note has matured, the lender has not
demanded payment or instituted collection proceedings. The Company intends
to retire this debt in fiscal year 1998, from debt financing or generated
revenues.
On April 10, 1998, the Resorts Subsidiary obtained a $1,000,000 line of
credit from Transflorida Bank, secured by the 36.3 acres of the Florida Bible
College Property, located in Orlando, Florida. The line of credit is guaranteed
by the Company. The Transflorida Bank credit line bears interest at a variable
interest rate of 1.00% in excess of the prime rate, as determined by the Sun
Trust Banks of Florida, Inc. The initial interest rate is 9.50% and is
adjustable at the
20
time prime rate changes. Interest is payable on a monthly basis until April 1,
1999, when the entire principal balance and accrued interest is due and payable.
As of April 30, 1998, there was a balance of $936,281 owed on the line of
credit.
On April 17, 1998, the Operating Subsidiary exercised its option under the
Century Settlement to purchase the 36 acres of commercial property, ("Tract D");
a 3.8 acre tract of land adjoining Tract D, (the"Corner Lot"); and 700,000
shares of the Company's voting common stock owned by Century, for a total
purchase price of $2,132,057. The Operating subsidiary obtained a $1,900,000
loan, dated April 15, 1998, from First Arkansas Valley Bank to assist in the
purchase. The loan is secured by Tract D, the Corner Lot and the 700,000 shares
of the Company's common stock. The loan bears interest at 10.00% per annum and
matures on October 12, 1998, when the entire principal and all accrued interest
is due and payable. The balance owing on the loan as of April 30, 1998, was
$1,900,000.
On April 30, 1998, Capitol Resorts Inc., (the "Resorts Subsidiary")
acquired all of the membership interests of ERI and of EMI, from three
unaffiliated parties (the "Sellers") for 300,000 shares of restricted common
stock of the Company. At the April 30, 1998 closing, the Sellers received
50,000 shares of common stock, with another 150,000 shares of common stock
issued and retained by the Company. The 150,000 shares of common stock shall
vest to the Sellers, contingent on continued employment, commencing May 1, 1999,
and each May 1 thereafter, at a rate of 20% or 30,000 shares per year until
fully vested. The Sellers have been granted an additional 100,000 shares of
common stock in stock options. The option for the 100,000 shares of common
stock in the Company will vest over a five year period, commencing April 30,
1999 and expiring April 30, 2003. The options vest at a rate of 20% per year
and are exercisable at $3.34 per share. The acquisitions were accounted for
using the purchase method of accounting and, accordingly, the results of
operation of ERI and EMI will be combined and included in the Company's
consolidated financial statements from April 30, 1998. The assets acquired
totaled $263,151, including $167,000 in Membership Lists, $36,164 in net
Accounts Receivable, $26,164 in Inventory and $22,910 in furniture, fixtures and
equipment. Liabilities totaled $191,689 and are comprised primarily of Accounts
Payable, with no significant concentration. Net Assets acquired total
$71,462.The Membership List acquired is comprised of approximately 14,000
members who have purchased 5, 15, or 30 year memberships. The asset value
placed on the List will be amortized over a period between 5 and 10 years. The
purchase price is valued at $167,000, which represents the 50,000 shares of
stock of the Company paid at closing at a price of $3.34 per share. The 150,000
escrowed shares will be accounted for at the closing price of the stock at date
of delivery and recorded as additions to Membership Lists and Goodwill.
The Company is currently negotiating with two mortgage banking firms to
arrange long-term debt financing in the amount of $15,000,000 (the "Debt
Financing Loan"). If the Debt Financing Loan is obtained, the Company will use
the proceeds to retire its short-term debt and for working capital.
21
The Company is also negotiating with two mortgage banking firms to arrange
debt and construction financing in the amount of $15,000,000 (the "Construction
Financing Loan"). If the Construction Financing Loan is obtained, the Company
intends to use the net proceeds to commence operations as a home builder and to
service existing debt. The Company intends to use part of the unsecured potions
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 the
initial stage and there is no assurance that the Company will able to obtain the
Construction Financing Loan on favorable terms or at all.
In addition, the Company is negotiating with a commercial bank and other
institutional investors to obtain a construction loan in the amount of
$18,000,000, to be secured by the Florida Bible College Property (the "Florida
Bible College Construction Loan"). The Florida Bible College Construction Loan
proceeds will be used to construct a 264 room hotel. The Florida Bible College
property was appraised by a third party MAI appraiser on December 5, 1997, at a
value of $4,570,000.
There can be no assurance, however, that the Company will be able to
negotiate terms acceptable to the Company on any or all of these loans, 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, and from the acquisition, development and
subsequent operation of resort and vacation properties and the development and
sale of VOI units and LTL units. This assumes that the Company can obtain the
necessary financial resources to restructure or retire its present short-term
debt and raise sufficient capital to commence development operations and begin
substantial building operations and/or successfully negotiate the acquisition
and sale of leisure properties. There can be no assurances, however, that the
Company will be able to restructure or retire its short-term debt or obtain the
necessary capital, on favorable terms to the Company or at all, to commence
meaningful operations. Even if the Company is able to obtain the necessary
capital required to commence meaningful operations, there can be no assurance
the Company will be able to negotiate acceptable terms for the acquisition and
development of additional properties.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION.
The Company incorporates by reference the information in Part I, Item 2,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Liquidity and
Capital Resources."
22
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
23
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: June 29, 1998 By: /s/ Michael G. Todd
Michael G. Todd, Chairman,
President and Chief Executive Officer
Date: June 29, 1998 By: /s/ David Paes
David Paes
Treasurer and Vice President
24